Business Strategy:

Competitive advantage is the position (beneficial) that a firm occupies in its competitive landscape. There are 6 common ways firms secure competitive advantage:

1. Being the first mover/first entrant into the market
2. Niche dominance
3. Cost Leadership
4. Product/Service Differentiation
5. Market Share
6. Government Protection

Unfortunately, most forms of competitive advantage cannot be sustained for any length of time because the benefits attract competitors to duplicate the competitive advantage.

In light of airlines crisis in the recent weeks (four airlines filed for bankruptcy: Frontier, Aloha, ATA and Skybus) I will examine competitive advantage of Southwest Airlines. I believe there are two main points in the CA of Southwest:

1. Low Cost leadership – Despite the recent pressure on expenses, Southwest's cost per available seat mile (CASM) is still the lowest of the large airlines. The low cost reflects the airline's high productivity of assets and labor, and no-frills, point-to-point service. The company operates a fleet of one aircraft type (Boeing 737s), which limits crew training and maintenance costs. Southwest also has a highly motivated and productive work force and benefits from relatively good labor relations, which offsets pay levels that are now among the highest in the industry. Southwest's pilots are now among the highest paid in the industry, although benefit costs are lower because there is no defined-benefit pension plan and productivity is higher because of more flexible work rules. Unlike many other airlines, the company's operations have not been strained by labor unrest thus far. In addition, Southwest's cost structure benefits from a fuel-hedging program that is the most extensive and successful in the U.S. airline industry, if not globally. Since mid-2005, with the price of oil averaging $60-$70 a barrel, Southwest has hedged more than 85% of its fuel requirements at around $26 a barrel and more than 70% of its 2006 fuel requirements at about $36 per barrel. While the company has continued its hedging program through 2012, the prices (averaging $50-$60 a barrel) are much higher than those realized in the 2005-2006 period.

2. Leading Market Share – Southwest Airlines is the original and largest low-cost airline in the U.S. Currently Southwest has no international routes. Southwest serves 64 cities in 32 states. It has a market share of approximately 60% on its largest 100 routes; with dominant shares in the intra-California and intra-Texas markets, and at Chicago's Midway International Airport, and a strong presence in the Northeast to Florida corridor and at Baltimore, Phoenix, and Las Vegas. The company has entered several new markets over the last three years, including Philadelphia, Pittsburgh, Denver, and San Francisco, taking advantage of competitors' weaknesses. Southwest expects to have international booking capability by 2009, which could allow Southwest to fly to international destinations.

Although, Southwest experiences increasing pressures on its revenues and expenses due to rising fuel prices, strong competition, and economic downturn, it is still clearly a leader in the airline business.