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| Source: Wikipedia |
This week, Southwest Airlines announced a major strategy shift. Alison Sider of the Wall Street Journal reported that, "Southwest Airlines plans to start charging for checked bags, a seismic shift that will boost revenue but potentially give its fiercely loyal passengers a reason to shop around. 'Bags fly free' was a policy so sacrosanct that Southwest trademarked the phrase and devoted a section of a book celebrating its 50th anniversary to it." She also reported that, "Southwest is adding a bare-bones fare similar to its rivals’ basic economy tickets, with restrictions galore, including no advance seat assignment." This latest change comes after other major changes including the move away from open seating, announced in July, as well as the decision to sell tickets on platforms such as Expedia. Southwest has made these changes after pressure from an activist investor, Elliott Investment Management. The firm pressed Southwest to add five new board members in October.
The stock market reacted positively to the news of the strategy changes at Southwest. Sider reported that, "Shares in Southwest surged more than 8% Tuesday, on a day when several airlines tempered their financial outlooks for the first three months of the year." I understand that the changes likely will result in new revenue and improved profitability in the short term. For that reasons, investors are cheering. However, I would offer a cautionary word on this strategic shift. Abandoning many of the classic elements of Southwest's strategy means that the firm has lost of much of its distinctiveness. What sets it apart now from other airlines? In the past, we could articulate a whole host of distinctive features of the Southwest model. Now, it looks more and more like any other airline. In the long run, becoming less distinctive will make it more difficult to achieve superior profitability. Competitive advantage typically does not derive from me-too strategies.
Two research papers are relevant to this question about Southwest's strategy. First, in 2013, Jost Daft and Sascha Albers published a paper titled "A conceptual framework for measuring airline business model convergence." They studied the European airline industry and measured the extent to which the strategies of competitors converged over time. They found a remarkable amount of convergence, with one glaring exception. They wrote:
“A comparison of the business models of the 26 [European] airlines in 2004 and 2012 revealed a decrease of distance of nearly 19 percent. This considerable and statistically tested reduction of differentiation is [an] indicator of the convergence of airline business models…Ryanair, which is known to be fundamentally focused on its initial cost-saving business model design, is the only airline that was able to even increase the average distance to all other airlines.”
What's interesting about the one outlier in their study? Ryanair. The Irish airline, run by brash CEO Michael O'Leary, has been one of the most profitable airlines in Europe for the past two decades. Controversial? Yes. Profitable? Definitely.
A second paper that warrants attention here was published by Stewart Thornill and Roderick White. The paper, published in Strategic Management Journal in 2007, was titled "Strategic Purity: A Multi-Industry Evaluation of Pure vs. Hybrid Business Strategies." They examined data regarding the question of whether a pure strategy does better than a hybrid one, referring to Michael Porter's concept of pure "low cost" vs. "differentiation" strategies. In other words, is being "stuck in the middle" a big risk, or can many firms pull of this hybrid approach? Here is what they found:
"Does strategic purity pay? Most theorists believe strategic purity—the extent to which a business pursues one type of generic strategy over another—contributes to better performance. By defining the strategy space consistent with the theory, and employing improved design and methods, our study of 2,351 businesses finds a significant relationship between strategic purity and performance. Purity does appear to pay."
In short, the distinctive, low-cost position at Southwest produced competitive advantage and superior profits for many years. They lost their cost advantage over the years, and now they are eroding their distinctiveness. Are they at risk of trying to be all things to all people? Other than price, what will attract customers to Southwest moving forward? Will it be superior customer service? According to JD Power's 2024 airline industry results, "Southwest Airlines ranks highest in customer satisfaction in the economy/basic economy segment for a third consecutive year." Can that result be sufficient to set Southwest apart in the cut-throat airline industry? Will these changes affect that service ranking? These are the key questions that management must confront moving forward. The company has many positive attributes and a tremendous history on which to build. It will be quite interesting to see how it navigates these choppy waters in the years ahead.
