1. Introduction
This report investigates whether and how the low-cost strategy deployed by Southwest Airlines
(NYSE: LUV) has led to superior performance in the US airline industry. More specifically, the
report will discuss the successfulness of Southwest matching its external opportunities with its
internal strengths to achieve strategic fit. Since its inception in 1967, Southwest Airlines has
become the largest US airline company in terms of domestic enplanements by adopting a lowcost strategy. With more than 3,600 flights a day serving 96 destinations across the United States
and six other countries, the company has managed to carry approximately 136 million passengers
in 2014 with its total of 679 Boeing 737 aircrafts.
The historically low profitability of the airline
F igure 1.1: Profitability of Selected US industries
(Average ROIC, 1992-2006)
industry, both in the US and elsewhere,
intrigued us to discover more about it. As can
be observed in Figure 1, the historical average
US airline industry ROIC (return on invested
capital) was just 5.9% in the period of 1992 to
2006, at the very bottom when compared to
other US industries over the same period and
below its cost of capital, as will be discussed
later in the report. Therefore, this report will
investigate how a low-cost carrier such as
Southwest Airlines has been able to be
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profitable through a series of strategic choices.
2
After all, with 2014 net income of $1.1 billion, Southwest has reached its 42nd consecutive year
of profitability, an unmatched accomplishment in the US airline industry which translated into a
surge of 125% of its stock price in 2014, making it the best performer in the S&P500.
Thus, the objective of this paper is to investigate how a series of strategic choices by Southwest
Airlines has led to a match between the...