Saturday, June 2, 2012

Southwest Analyzing the Competition

This past week, Southwest Airlines won the right to begin making renovations to Houston's Hobby Airport to allow for international flights to Mexico, the Caribbean, and South America beginning in 2015.  Of course, United Continental is vehemently opposed to this plan since Houston's Bush Intercontinental Airport is its biggest hub and the company fears that Southwest will displace numerous international flights.  The main reason Southwest received approval for the plan from the city of Houston is that Southwest will finance a $100 million expansion to Hobby Airport, at no additional cost to the city of Houston.  United Continental has been suggesting that Southwest's plan will result in the loss of thousands of jobs for current United Continental employees in Houston; so, in retaliation of Southwest's plan being approved, United Continental announced that is prepared to cut 1,300 Houston jobs, according to the Washington Post article linked below.

Southwest's attack on United Continental's dominance of the Houston-based international flight market is a great example of a company's use of competitor analysis to enter a new market.  The two most relevant components in this example of competitor analysis, as described in the Marketer's Toolkit, are positioning and the 'aggression factor.'  United Continental's main focus is on its positioning in the international flight market, namely in Houston.  The emergence of Southwest in this market presents a direct threat to United Continental's grip on the Houston area, especially since Southwest's business model is predicated on offering the lowest fares because it has the lowest costs.  Although Southwest will not, at least initially, offer flights outside of the Americas, it is natural to think that it will seize a majority of the fares from price-sensitive travelers visiting Mexico, the Caribbean, and South America.

Southwest acted very opportunistically, yet aggressively, in securing the approval for its plan in Houston.  The Washington Post article notes that when United acquired Continental in 2010, the merged company based its organization in Chicago, home of United, rather than in Houston, home of Continental.  This may have been the opportunity Southwest was waiting for to pounce on the Houston market, because it seems that leaders in Houston may have felt the city was passed over and needed to look towards new ventures for the future.  However, Southwest will pay a heavy fee to enter the Houston market, as the $100 million expansion plan will include a new international terminal with "five gates to support as many as 25 Southwest round trips a day and facilities for U.S. Customs," according to the Bloomberg article. 

By seeing an opportunity and attacking it, Southwest has demonstrated that it has carefully measured its competition and decided that it should try to capture some of United Continental's market dominance in Houston.  Perhaps the most positive outcome for Southwest in all of this is that United Continental seems to be directing its retaliation upon the city of Houston rather than on Southwest.  By terminating 1,300 jobs in Houston several years before it appears necessary to do so, United Continental is only taking out its wrath on the city of Houston, not Southwest.  Furthermore, Houston may even be better off in the end, since, as the Bloomberg article states, "Southwest’s plan would create an annual economic benefit to the region of $1.6 billion, create 10,000 jobs and attract 1.5 million passengers."  At this point, Southwest appears to be the clear winner in this competition, thanks in large part due to its accurate analysis of United Continental's strategy in the Houston market.

It will be interesting to see if the $100 million investment and longer flight times will force Southwest to deviate from its standard low-cost/low-fare business model to recoup these additional costs.

Washington Post article:
http://www.washingtonpost.com/lifestyle/travel/united-airlines-to-cut-1300-houston-jobs-after-southwest-wins-right-to-international-flights/2012/05/31/gJQAfQXB5U_story.html

Bloomberg Businessweek article:
http://www.businessweek.com/news/2012-05-23/southwest-to-pay-for-100-million-air-terminal-in-houston

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