Many changes have occurred and are occurring in the airline industry, which pose a potential threat to Southwest Airlines. The airline industry has traditionally had many airlines receive annual loses on their income statements. This trend is still continuing today as many airlines stand in financial trouble. Some of these financial troubles arise from changes brought upon them from the ever-changing governmental regulations.
The most recent change in governmental regulations that will have the largest effect on Southwest Airlines is the change in the federal ticket tax in 1997 on flight routes that are one thousand plus miles. This new tax system replaces a percentage tax with a tax that includes a flat segment fee that will cause conflict with the low-fare carriers. This is causing Southwest to make some changes in their strategy, which will cause them to lose some of their cost advantage.
Their largest cost advantage over their current rivals is in the flights, which are five hundred miles (59% cost advantage). Their cost advantage is much smaller for the larger flights, which are one thousand five hundred miles (35% cost advantage). This already has caused Southwest to change their strategy by making their nonstop flights longer with over 16% of their flights longer than one thousand miles. Another threat that Southwest Airlines is facing is the mimicry by other airlines.
Other airlines are copying Southwests strategy in order to enter the low-fare, short-haul market. Delta Airlines has built a low-fare regional carrier service and has acquired a minority stake in three regional airlines. United Airlines is also making a serious entry into the same market. United is doing this with United Express, which will feed passengers from regional carriers into the United system, and United Shuttle, which provides over 450 short-haul flights in the western states.
The opportunity for expansion is limitless for Southwest Airlines. Currently, they operate in only fifty-five cities in the United States. Over one hundred other cities have asked Southwest to start servicing their airports. This is largely due to the fact that their low fares and frequent flights will allow more people to fly to and from the new markets. Southwest can demand tax breaks and other incentives from these new markets, which will help them increase their competitive advantage over other airlines.