Southwest Airlines Risk Asymmetric Information and Incentives

Document Type:Research Paper

Subject Area:Economics

Document 1

The company set out a comprehensive program of 30 days inspection of its entire of engines to ensure that all the engines are in the best conditions to guarantee safe flights. According to Berg, Prakya and Ranganathan (2018), the response has been termed by a majority of Airlines consultants as quick and professional and one of the best in industry. On top of the swift response of inspecting all the engines, Southwest Airlines reportedly handed out 5000 dollar checks to all the passengers. The step aligns well with the company’s mission of not only offering the best affordable flight prices but also caring for customers as well. Coincidentally, this move helped the Airlines in dealing with the uncertainty of possible suits by the passengers and it hit majority as a surprise as majority expected the company to sit back and wait for the passenger lawyers to file suits.

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Besides the Southwest Airlines entered into a merger and acquired AirTran Holdings, Inc. (AirTran) which has heavily reduced competition in the market. Conversely, Southwest Airlines has acquired more efficient planes which consume less fuel notably the Boeing 737; one the widely used jets in the world. Currently, Southwest Airlines has more a fleet of more than 700 Boeing 737 planes. Selection Problem Facing Southwest Airlines The major adverse selection problem facing Southwest Airlines is regulatory requirements. Moral Hazard Problem Facing Southwest Airlines Southwest Airlines practices a unique slogan specifically tailored to promote its mission “Employees come first, Customers second. ” The slogan is built on the belief that if the employees are treated right, the chances of moral hazard problems occurring will be greatly reduced.

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As a result, the employees will feel bound to reciprocate the treatment to the customers which in return increases customer loyalty and attract more customers. This is a win-win situation for all the stakeholders who get good returns on their investment, the employees who receive “handsome” remuneration and the customers who feel the value of their money from the esteemed treatment they are accorded. Additionally, Southwest Airlines practices monitoring and enforcing covenants to make sure that each and every employee of the company is discharging his/her duties diligently and as expected (Oster Jr, Strong & Zonn, 2013). As such, Southwest Airlines need to keep abreast of the new developments in the industry that are likely to influence their operations and integrate new training techniques aimed at making the employees of the Airlines to be sufficiently equipped in mitigating the possible risks that the Airlines may face.

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Berg, Prakya and Ranganathan (2018) notes that the new training methods should emphasize on operational efficiency and adjustment of the risk scores. In addition, the Southwest Airlines can benchmark its risk management practices with the global Airlines that have been accredited to have best risk management practices and develop strategies for enhancing their risk management to that level. The principal-Agent Problem Facing Southwest Airlines The major principal-agent problem facing Southwest Airlines is lack of trust between the Airlines and the internet service providers. It is important to note that Southwest Airlines in its quest of establishing as a unique and convenient Airlines has encouraged customers to get information about flights and even book aircraft from the comfort of their mobile phones or personal computers (Rampini, Sufi & Viswanathan, 2014).

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Ashkenas et al (2015) points out that under this level of management, there are the vice presidents (VP) that fall under the 6 key management areas of the company who report directly to the superiors (chief officers). Lastly there lies the third level of management that comprises of the ordinary employees of the Southwest Airlines. Secondly, the functional organization structure of Southwest Airlines exposes the company to difficulties in interdepartmental coordination. A company’s profit can be greatly increased if all the departments are pulling in the same direction which eliminates clash of ego and too much focus on departmental goals which may lead to a limited focus on the bigger picture (Gittell, 2013). The functional organization structure may no doubt facilitate smooth coordination with the department but on the platform of interdepartmental coordination, problems arise due to the fact some chief officers may demand bigger roles play and bigger budget allocation.

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Usually, when employees feel they have a stake at the major decisions of the company, they get committed and dedicated to the success of the company because of the perception that the company’s success is their own success too (Ashekenas et al, 2015). As such, the organizational structure needs to be adjusted to promote decentralization in the decision-making so that even the air hostess and air ticket officers can feel empowered that their opinions do matter in the overall decisions of the company. References Ashkenas, R. , Ulrich, D. , Jick, T. The Southwest Airlines way: Using the power of relationships to achieve high performance. New York: McGraw-Hill. Lim, S. H. , & Hong, Y. Rampini, A. A. , Sufi, A. , & Viswanathan, S. Dynamic risk management.

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