Currently, the U.S. Airline Industry starts to regain itself from the damages brought by the World Trade Center Bombing in 2001 (Bachman, 2006). The number of airline passengers starts to increase as the “trust” of the passengers to the security level of various international and domestic airports in the US has been revived which enables the airline companies including Southwest Airlines to once again receive profits from their operations.
With the increase in the demand of airline passengers in the market, I believe that it is best for the Southwest Airlines to increase their investment to further improve their revenue inflow. Although this would costs much, but this strategy would bring benefits to the company in the long run through maximization of their profits. Moreover, since the U.S. economy is again booming, there is an opportunity for the influx of great number of business trips in the market.
By expanding the operation of Southwest Airlines, they would now be able to serve more customers and thus giving them more revenue. Remember, that the quantity of customers is positively related to the total revenue of any firm. In other words, by increasing the operation of Southwest Airlines the number of customer would also increase which in turn raises the total revenue of company. In this market situation, the increase in the operation of Southwest Airlines is tantamount to the increase of their total revenue. Although their net profit during the first few years would not improve that much since they spend in increasing their operation. But in the long run, their net profit will increase and this would stabilize their financial condition.
Moreover, with the good financial condition that they will have, there is a possibility for them to attract more investors (Grubbs-West, 2005). The price of their stocks would start to increase as an effect of the raise in the demand of stock investors. As we all know, having more stockholders would enable Southwest Airlines to have more funds to finance their operation or to further expand their business.
Since they are the second largest in the airline industry, and the market is booming, it is really best for Southwest Airlines to expand their operation to gain more market dominance and influence to the market. Through this, together with other top airline companies in the market, Southwest Airline could act as “Oligopolists” to take advantage of their current market power and high demand from the airline passengers.
With regards to the issue of merging with other companies, I think Southwest Airline should do this strategy if they do not have enough capital for expansion. But if there is other possible solution to back up their expansion plan, then, the company should give more priorities on it than with merging. The reason why merging is of least priority here, is due to the fact that it causes negative effects to the company. One of these is the mismatch in the managerial component of Southwest Airline and the company where it will be merged. Another would be the fitness of the merging with the current policies being imposed by the government. One possible solution to support the expansion plan of Southwest Airline is to encourage more investors to invest to their company. By this, they could generate the financing needed to support their expansion plan. Another would be applying for a loan to international or local banks if the terms and agreements are in good position.
What basically the above statement implies is that we should put merging into the bottom of the lists of possible ways to back up financially the operational expansion of Southwest Airlines to avoid its internal and external side effects to the company. Southwest Airline ranked first in the U.S. in terms of the number of passengers that it carries every year and ranked second in the world for international operation (Muse, 2002). With this good reputation and performance track of the company, I think it would be inappropriate to give priority to merging as a means of generating funds to support the company’s plan of expanding their operation.
As for the government policies that could affect the plan of expanding the operation of Southwest Airline, I believe that one of the problems that the company would face is the current policies of the government regarding the pollution in the air. Airline industry is among those industries that contribute much to the air pollution. There may be policies that encouraging the airline companies to limit their operation into some level to minimize the pollutants that it releases to the air. The government could impose higher taxes for those companies that would not comply with the number of prescribed operations that the company has. Another would be the government could impose subsidies for those airline companies that will comply with their policy so as to motivate them in following the rules and regulation of the authorities. Subsidy could offset the possible loses that Southwest could get from abiding to the said policy of the government.
Another policy of the government that could affect the plan of Southwest Airline to expand their operation would be the government terms and agreements with the company regarding the imported raw materials needed to increase the number of planes that the company has to support its operational expansion. There is a possibility of high tariffs being imposed by the government for imported raw materials in making planes and this could add to the total costs of expanding of operation. In short, Southwest Airline should take into consideration the current international trading terms of the government for the imported materials that they will need.
There are still other aspects of government policies that could affect the expansion plan of Southwest Airline. It would be very helpful for them to conduct thorough market analysis and feasibility study to assess the condition fully.