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BUS 5117-01 - AY2025-T3
Written Assignment Unit 5
Choose an organization that you have not chosen so far having challenges
related to cost and provide a background of the company. Reflect on the
challenges of the organization as they relate to costs. Analyze the costs and,
using specifics, develop a cost-centered business strategy for
the organization to move forward as a profitable firm. Devise a tactic to
differentiate the firm and to support the cost-focused strategy you
developed. How can the tactic be implemented within the scope of the
overall strategy?
Read the General Guidelines for Case Studies and the Case Study
Rubric before beginning this paper.
Submit at least a 3-4-page case analysis, (independent of the title page and
reference page) double-spaced in Times New Roman (or its equivalent) font
which is no greater than 12 points in size. Paper and all citations should be in
APA format.
Cost Challenges and Strategic Solutions for Southwest Airlines
Background of Southwest Airlines
Southwest Airlines is one of the largest low-cost carriers (LCCs) in the United States, known
for its customer-friendly policies, point-to-point flight model, and no-frills service.
Established in 1967 and headquartered in Dallas, Texas, Southwest Airlines has built its
reputation on affordable airfare, rapid turnaround times, and a strong focus on customer
satisfaction. However, in recent years, Southwest Airlines has faced significant cost-related
challenges that threaten its competitive advantage and long-term profitability.
Cost Challenges Facing Southwest Airlines
Despite its long-standing cost-leadership strategy, Southwest Airlines has encountered
several financial and operational difficulties that have increased its overall costs:
1. Rising Fuel Costs: Fuel expenses represent a significant portion of an airline’s
operating costs. Fluctuations in global oil prices have impacted Southwest's cost
structure, making it more difficult to maintain its low-fare model.
2. Labor Costs: Southwest has historically maintained strong labor relations, but
increasing wages and benefits for pilots, flight attendants, and ground crew have
driven up personnel expenses.
3. Maintenance and Fleet Modernization: Southwest operates a single aircraft type—
Boeing 737s—to minimize maintenance costs. However, aging aircraft require more
frequent and costly repairs, and fleet renewal with more fuel-efficient models requires
substantial capital investment.
4. Operational Inefficiencies Post-COVID-19: The airline industry faced unprecedented
challenges during the COVID-19 pandemic, leading to revenue losses and staffing
shortages. Even as demand rebounded, Southwest struggled with flight cancellations,
outdated scheduling systems, and customer service disruptions, leading to increased
operational costs.
5. Increased Competition from Ultra-Low-Cost Carriers (ULCCs): While Southwest
remains a low-cost carrier, new entrants like Spirit Airlines and Frontier Airlines have
further pushed cost-cutting strategies, putting downward pressure on ticket prices and
eroding Southwest’s market share.
Cost Analysis
Southwest Airlines’ cost structure is primarily divided into four key areas:
1. Fuel Costs (30-35% of Operating Costs):
o Southwest has historically hedged fuel prices to manage volatility, but
unpredictable market trends have made fuel procurement more expensive.
2. Labor Costs (25-30% of Operating Costs):
o Competitive salaries, benefits, and union agreements have driven up personnel
expenses, accounting for a substantial portion of operating costs.
3. Aircraft Maintenance and Depreciation (15-20% of Operating Costs):
o While Southwest’s use of a single aircraft type reduces complexity, its aging
fleet incurs higher maintenance expenses.
4. Airport and Operational Costs (15-20% of Operating Costs):
o Landing fees, gate rentals, and technological investments have increased,
impacting overall efficiency and cost management.
Cost-Centered Business Strategy
To ensure profitability and regain a competitive advantage, Southwest Airlines must
implement a cost-centered business strategy focusing on the following areas:
1. Fuel Efficiency and Sustainable Aviation Fuel (SAF) Investments:
o Southwest should expand its fuel hedging strategy while increasing investment
in SAF. Partnering with biofuel producers and gradually integrating more fuel-
efficient aircraft (e.g., Boeing 737 MAX) will help manage fuel costs.
2. Labor Productivity Enhancements:
o The airline can optimize scheduling and crew utilization through automation
and AI-driven workforce management tools. Implementing AI-powered
predictive maintenance will also reduce aircraft downtime and unnecessary
labor expenditures.
3. Fleet Modernization and Lease Optimization:
o Southwest should expedite the retirement of older 737 models while leasing
next-generation fuel-efficient aircraft to minimize capital expenditures and
lower maintenance costs.
4. Operational and IT Infrastructure Improvements:
o Investing in more robust scheduling and logistics management software can
prevent large-scale disruptions, reduce unnecessary delays, and optimize
turnaround times.
5. Ancillary Revenue Expansion:
o Southwest has traditionally avoided add-on fees, but introducing optional
services such as priority boarding, Wi-Fi packages, and extra baggage fees in a
customer-friendly manner can enhance revenue while maintaining a cost-
effective pricing structure.
Differentiation Tactic to Support Cost Strategy
To differentiate itself while supporting a cost-centered approach, Southwest Airlines can
implement a tiered pricing model with value-added services:
Basic Economy: Passengers receive the most affordable fare with minimal frills,
encouraging price-sensitive travelers.
Standard Fare: Includes priority boarding and complimentary Wi-Fi.
Premium Flex: Provides additional baggage, free ticket changes, and extra legroom.
By maintaining core cost-cutting strategies while offering structured service options,
Southwest can attract a broader customer base without compromising profitability.
Implementation of the Tactic within the Overall Strategy
To seamlessly integrate the tiered pricing model into the cost-centered strategy, Southwest
Airlines should take the following steps:
1. Data-Driven Customer Segmentation:
o Use AI and customer analytics to identify passenger segments most likely to
upgrade their tickets and tailor marketing campaigns accordingly.
2. Strategic Pricing Adjustments:
o Conduct dynamic pricing experiments to optimize fares and maximize revenue
per available seat mile (RASM).
3. Incremental Rollout Across Markets:
o Introduce the tiered pricing structure in select domestic routes before
expanding internationally, ensuring adaptability and minimizing risks.
4. Employee Training and Operational Alignment:
o Equip customer service teams with knowledge of the new pricing model to
ensure smooth adoption and passenger satisfaction.
In conclusion, Southwest Airlines must address its rising costs through a multi-faceted
strategy focused on fuel efficiency, labor productivity, fleet modernization, and IT
infrastructure enhancements. By implementing a tiered pricing model as a differentiation
tactic, Southwest can balance cost optimization with revenue growth. This approach allows
Southwest to maintain its core low-cost advantage while providing customers with flexible
pricing options, ensuring long-term profitability and competitive positioning in the airline
industry.
References
Kennedy, R. (2020). Strategic management. Virginia Tech Publishing. Retrieved from
[Link]
Bain & Company. (2023). Purpose, Mission, and Vision Statements. Retrieved from
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MBA Knowledge Base. (n.d.). Stakeholder engagement. MBA Knowledge Base. Retrieved
January 31, 2025, from
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