Introduction of Southwest Airlines

The southwest airline industry is experiencing a record number of passengers flying and analysis shows record 965 million passengers that use commercial airlines in the United States. Fact is that southwest airlines is adjusting the competitive stay and facing the growing uncertainty and risk. The company is growing due to the higher number of travelers and recently 157 million customers flew with Southwest airlines. The airline is taking a number of steps to increase market shares from competitors. Southwest airlines are taking a couple of notable actions to improve the services and to refrain from different steps. The company operates with the single model aircraft on their own fleet by the Boeing 737 (Merlo, Eisingerich, Auh, & Levstek, 2018). In order to make decisions, there are certain conditions including random outcomes and uncertain risk analysis. The imperative concepts include variance that is a deviation from the mean and expected value on the basis of the mean. The southwest airlines are taking actions on the basis of expected value for each option and determines deviation from the means. The variance depends on values of deviation, the CEO of Southwest Airlines, Gary Kelly stated that Southwest would be lost $1 billion on an annual basis if it imposed checked bag fees (Jirjahn, 2018). Some of the strategies are adopted by the company to deal with the risks. The present study includes detailed examples of Southwest Airlines and it deals with the incentives, asymmetric information, and risk. In this process, suggestions and recommendations are included for risk management, moral hazard, suggested ways, principle-agent problems, and actual adverse selection (Callister, 2018).

Strategies to deal with the risk and uncertainties

1.      There are multiple outcomes for managing and handling the issues. The southwest airlines are adopting new strategies to handle a wide range of issues associated with risks and uncertainties. Foresight events are used to handle different incidents (Merlo, Eisingerich, Auh, & Levstek, 2018).

2. The company is cultivating higher reputation from different extreme scenarios. The company is ensuring quick response of team members even on the arrival of customers and departure of the customers. The team members are getting training to work efficiently in the shortest period of time and to Salvage the situation before it becomes worst.
3. Southwest Airlines uses analytical techniques to measure the higher level of accuracy in services.
4. The company identifies and rely on the predictable elements of the situation. The airline responds to different incidents in an effective way.
5. The focus of the company is on the evaluation of inputs and concentration of the output. This strategy minimizes the occurrence of these events (Merlo, Eisingerich, Auh, & Levstek, 2018).

Offer advice for improving risk management of Southwest Airlines

There are different possible strategies that Southwest Airlines can use to leverage risk management. For instance, financial hedging, flexible, benchmarking, and operational hedging strategies. The present work will explain operational hedging strategies that can be implemented in Southwest Airlines. The company can adjust business and operational processes for improvement in revenues and to change the risk factors and uncertainty issues (Merlo, Eisingerich, Auh, & Levstek, 2018). According to the chairman of Economic Department Richard Friedberg, Southwest Airlines can increase diversity in the operations that can be less sensitive to the risk inherent in the airline industry. For instance, Southwest Airlines can improve the business in different Sector such as the food industry for taking advantages of operational hedging. In another strategy, a company can buy more fuel-efficient airplanes to make less financial susceptible in case of increase in fuel prices (Pedersen, Gwozdz, & Hvass, 2018). The risk can be identified as early as possible even at the initiative situation. To improve the risk management in the airline, the possible solution is to create the lesson learned repository where the Project leader can identify issues and their circumstances. With the advancement in technology, the competitor companies are working on the improvement of Technology in services similarly Southwest Airlines can also implement different innovative technologies in the services. The response strategy can be implemented to improve and maintain the levels of risk management (Pedersen, Gwozdz, & Hvass, 2018).

1.      Tolerate: the company can acknowledge task and conscious decision to accept the actions.

2.      Terminate: in this level of risk management, the main process is to remove all the exposure or adjusting the constraints and business requirements.

3.      Treat: conduct different activities that mitigate the risk.

4.      Transfer: this step deals with assigning the risk to the third party by purchasing insurance. In this situation, the risk is transferred to another stakeholder according to the contract and the stakeholders are willing to accept the risk.

5.      Monitor: the process of monitoring includes tracking the of all the changes in the environment and to identify the effect of potential risk.

All the set strategies mentioned in the above process are associated with an appropriate estimate for the level of risk and can be used to conduct situation analysis (Merlo, Eisingerich, Auh, & Levstek, 2018).

Examine an Adverse Selection Problem Southwest May Face

After having a complete review of business model development Southwest Airlines, one can analyses that company is marketing itself as a cheap alternative to other major airlines. The services and offers provided to the customers are at lower prices only for the flights in the United States. Currently, the airline continues to grow, and it is increasing International routes in the services. It is given that services are attracting a wide range of Traveler around the world to have first class accommodation in the airline. In the case of down Economic Times, the people with lower incomes tend to seek for cheapest services (Jirjahn, 2018). Such Travellers would sink into Southwest passenger pool. Another adverse selection that airline faces issues can be flying of Boeing 737. Maintenance cost and leverage on pilot training is another risk faced by the company. From the analysis, it is evident that Southwest Airlines have limited international flight expansion and the Planes are not designed with the capacity for higher and Intercontinental flights. In fact, due to the limitation in aircraft Southwest flights are not able to have coast to coast Services within the United States (Pedersen, Gwozdz, & Hvass, 2018). Therefore, the passengers looking for international flight select another alternative service such as a delta, American, and United to flight companies. Southwest Airlines are not able to offer assigned seating setup for full sitting groups. The company is not able to provide inflight meals so again the airline is attracting unlimited passengers who are willing to pay low fares and uses lower services. These limitations could lead to roadblocks for the future market expansion of Southwest Airlines. In order to address these issues, Southwest Airlines can initiate different marketing strategies for full services. The company must deal with asymmetric information about the customers and service users (Merlo, Eisingerich, Auh, & Levstek, 2018). It is also observed that the company does not advertise or sell their services through other sites they only use its own website. It shows that passengers may not have even basic information about the services and travel arrangements provided by Southwest airline. Therefore, the company should use some advertisement strategies. In this process, the airline may also acquire a wider range of routes and destination along with different types of fare options. The main problem associated with the services of South West Airlines is to convince the existing as well as new passengers about the services and options. There is some hidden information about customers and services that include the cheap option (Merlo, Eisingerich, Auh, & Levstek, 2018).

Determine Ways Southwest May Deal with a Moral Hazard

One of the particular hazards faced by Southwest Airlines is abusing during to check bags fly free policy. The company does not charge any additional fee for 1st two checked bags as long as the weight of these bags is less than 50 pounds each. The charges for luggage become $75 if the weight exceeds the limit. However, passengers can take additional luggage with the flight if they can pay a fee. This policy is a hidden action policy of Southwest Airlines perspective and the information remains between passenger and airline on each transaction. It is a direct way to deal with fuel cost caused by additional luggage weight on the air flight. To deal with potential moral hazards, Southwest airline strictly enforcing the weight limits of luggage, average fees, and incentives for the passengers traveling without any checked bags (Merlo, Eisingerich, Auh, & Levstek, 2018).

Identify a Principal-Agent Problem Southwest May Have

The principal-agent problem arises in the case of two actors with asymmetric information existence. In the case of Southwest Airlines, the company is minimizing the training cost and maintenance cost for Boeing 737 aircraft. The company is operating more than 700 Boeing 737 aircraft with an average age fleet of about 11 years. If the company uses a huge amount on the maintenance and material cost of Boeing this can eventually eat up the company advantages and savings. Recently company demonstrated its commitment with Boeing 737 aircraft by purchasing additional 40 crafts and these larger planes can fit with 189 seats. The company could alleviate such type of potential issues by having grantees and negotiation with service providers of Boeing 737 (Merlo, Eisingerich, Auh, & Levstek, 2018).

Examine the Organizational Structure of Southwest

The company is using different approaches depending upon the structure of the organization and incentives with divisional profit margins. The dynamic concept of transfer pricing depends upon the information of structure and transfer pricing concept. The company allows division managers to set their service prices and product. Consider if there are two relative divisions in which one provides freight transportation flight while the other provides commercial passenger flight. The charges of the services depend upon the type of services (Merlo, Eisingerich, Auh, & Levstek, 2018). If the Freight Division charges marginal cost and markup then it will have higher prices for the consumers. This concept is basically related to determining the transfer price and marginal cost of the company. The Southwest airline company can look for different opportunities for maximization of profit. The bottom line is that the division managers of Southwest Airlines can set different prices for their services to maximize the profits and to make the marginal revenue equal to marginal cost (Merlo, Eisingerich, Auh, & Levstek, 2018).

Conclusion on Southwest Airlines

In order to accomplish the suggested solutions Southwest Airlines, have to avoid conflicts and should be concerning about the decisions and transferring information to decision makers. The company can evaluate and compressed the services according to the requirements of the customers. The present work deals with different suggestions to Trigger mechanism of increasing funding and to install the controlling system in the company. Several functions can be organized in the company to improve the needs of customers and current staffing levels.

References of Southwest Airlines

Callister, L. (2018, 07 15). 10 things you should be doing to improve risk management at work. Retrieved from www.skillcast.com: https://www.skillcast.com/blog/10-things-you-should-be-doing-to-improve-risk-management-at-work

Jirjahn, U. (2018). The adoption and termination of profit sharing for employees: does management’s attitude play a role? Applied Economics, 50(02), 108-127.

Merlo, O., Eisingerich, A., Auh, S., & Levstek, J. (2018). The benefits and implementation of performance transparency: The why and how of letting your customers 'see through' your business. Business Horizons, 61(01), 73-84.

Pedersen, E. R., Gwozdz, G., & Hvass, W. (2018). Exploring the relationship between business model innovation, corporate sustainability, and organisational values within the fashion industry. Journal of Business Ethics, 149(02), 267-284. Retrieved from Journal of Business Ethics.