Why airfares stay so low while airlines struggle (1)
I am a person who loves traveling, so that’s why the article titled “Why airfares stay so low while airlines struggle” caught my attention. The article explains about how Southwest Airlines is able to keep their prices so low in comparison to other carriers. One of the most important reasons that the article explores is the fact that Southwest had hedged 75% of its fuel. This enables it to pay approximately $1.20 a gallon, whereas most other carriers pay $2, and thus making profit. This is an excellent resource!
This situation must be very interesting in different ways, depending on whose side are you standing: Southwest’s side, or the other carriers’ side. When we apply Porter’s Five Forces Model, we realize that Southwest was able through successful hedging and historical operational excellence and efficiency to raise the barrier of entry for potential entrants. The company’s structure pressurizes other airline carriers to keep their prices low, thus forcing them to struggle in costs recovery. This unpleasant situation automatically discourages potential players from entering the industry along with high capital requirements; -which is another source for entry barrier-.
Also, due to what the author calls the “Southwest effect”, it is implied that the rivalry as it stands is very intense among existing competitors. Players in the airlines industry incur high fixed costs for their operations. Players in the industry also face high exit barriers, so once a company enters the industry, due to a number of factors including high investment costs.
Another way of looking at this article is to analyze it through Barney’s “Gaining and sustaining competitive advantage” framework. Southwest’s resource and capability of operational efficiency is definitely valuable because it enables it to exploit the environmental opportunities of serving price-sensitive customers. Their resource aids in increasing their revenue. This takes us to the question of rareness. Since Southwest hedged successfully the fuel, whereas other airline carriers aren’t covered, this capability is considered rare. We would need to use a time machine to enable the companies to have a similar resource. Therefore, since not many companies have this resource, then it is considered rare.
Rolling to the question of imitation, I can see that it would be hard for companies to imitate the resource of hedging the fuel that Southwest has, because it’s not possible to go back in time. However, companies may learn the trick and hedge for the future coming years. All in all, as the situation stands in the present, it is not possible for competitors to gain this resource.
It was hard to answer from the article solely the question of organization, however, historical information about the company can help answer the question. Southwest has been a role model for its innovative ways for operational efficiency and effectiveness. This implies that the organization is structured well to allow it exploit full potential of its resources and capabilities.
To be Continued...
This situation must be very interesting in different ways, depending on whose side are you standing: Southwest’s side, or the other carriers’ side. When we apply Porter’s Five Forces Model, we realize that Southwest was able through successful hedging and historical operational excellence and efficiency to raise the barrier of entry for potential entrants. The company’s structure pressurizes other airline carriers to keep their prices low, thus forcing them to struggle in costs recovery. This unpleasant situation automatically discourages potential players from entering the industry along with high capital requirements; -which is another source for entry barrier-.
Also, due to what the author calls the “Southwest effect”, it is implied that the rivalry as it stands is very intense among existing competitors. Players in the airlines industry incur high fixed costs for their operations. Players in the industry also face high exit barriers, so once a company enters the industry, due to a number of factors including high investment costs.
Another way of looking at this article is to analyze it through Barney’s “Gaining and sustaining competitive advantage” framework. Southwest’s resource and capability of operational efficiency is definitely valuable because it enables it to exploit the environmental opportunities of serving price-sensitive customers. Their resource aids in increasing their revenue. This takes us to the question of rareness. Since Southwest hedged successfully the fuel, whereas other airline carriers aren’t covered, this capability is considered rare. We would need to use a time machine to enable the companies to have a similar resource. Therefore, since not many companies have this resource, then it is considered rare.
Rolling to the question of imitation, I can see that it would be hard for companies to imitate the resource of hedging the fuel that Southwest has, because it’s not possible to go back in time. However, companies may learn the trick and hedge for the future coming years. All in all, as the situation stands in the present, it is not possible for competitors to gain this resource.
It was hard to answer from the article solely the question of organization, however, historical information about the company can help answer the question. Southwest has been a role model for its innovative ways for operational efficiency and effectiveness. This implies that the organization is structured well to allow it exploit full potential of its resources and capabilities.
To be Continued...
posted by Nothing is crystal clear at
10:18 PM
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