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The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
The Most Successful Airline in The World!
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The Most Successful Airline in The World!

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The Most Successful Airline in The World!

The Most Successful Airline in The World!

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  • 1. Success breeds Success - The Case of Southwest Airlines Success breeds Success Page | 1 The Case of Southwest Airlines Few industries have experienced the turmoil faced by the US domestic airline business during the past two decades. Once characterized by high wages, stable prices and choreographed competition, the industry changed swiftly and dramatically when deregulation took effect in 1978. Several of the strongest and greatest airlines (e.g., Pan Am, Eastern) disappeared through mergers or bankruptcies. Strikes and disruptions interfered with companies attempts to reduce costs. New competitors aggressively swooped into the marketplace; the majority failed. In fact, in 1992, industry losses for the year surpassed cumulative profits since the industrys inception. The industry is again in a period of high demand and expanding profitability. Despite the volatile conditions and many organizational failures, one carrier grew and prosperedAugust 4, 2009 throughout this entire period -- Southwest Airlines. Southwest was controversial from its inception. Although the Texas Aeronautics Commission approved Southwests petition to fly on February 20, 1968, the nascent airline was locked in legal battles for three years because competing airlines -- Braniff, Wali Memon | wali.memon@gmail.com
  • 2. Success breeds Success - The Case of Southwest Airlines TransTexas, and Continental -- fought through political and legal means to keep it out of the market. Through the efforts of Herb Kelleher, a New York University law school graduate and the airlines current chief executive officer, Southwest finally secured the support of Page | 2 both the Texas Supreme Court and the United States Supreme Court. Southwest emerged from these early legal battles with its now famous underdog fighting spirit. The company built its initial advertising campaigns around a prominent issue of the time as well as its airport location. Thus "Make Love, Not War" became the airlines theme, and the company became the "Love" airline. Fittingly, LUV was chosen as the companys stock ticker symbol. Southwest went on to see successful growth through three distinct periods. The "Proud Texan" period (1971-1978) saw the establishment of a large city- service network within its home state of Texas. Because it did not engage in interstate commerce, the fledgling carrier was not subject to many federal regulations, particularly those imposed by the Civil Aeronautics Board (CAB). The second phase, "Interstate Expansion" (1978-1986), was characterized by the opening of service to fourteen other states. Interstate expansion was made possible by, and thus coincided with, the deregulation of the domestic airline industry. The most recent phase, "NationalAugust 4, 2009 Achievement" (1987-1997), has been a time of considerable growth, distinguished recognition and success. Despite its past success, Southwest Airlines now faces new challenges that raise concerns about its continued ability to grow. Ironically, many of these concerns are a result of Wali Memon | wali.memon@gmail.com
  • 3. Success breeds Success - The Case of Southwest Airlines changes brought about by Southwest itself. Some of them are external, such as imitation by competitors who are becoming more efficient and the limited size of the shorter haul flight markets in which Southwest developed a core competency. Others are internal, including Page | 3 the emergent problems of managing a larger, more complex organization, and a culture that may be too dependent on the charisma of a single individual or that may not play well to the new audiences needed for future growth. Will Southwest Airlines be able to continue its remarkable success or will emerging conditions seriously threaten Southwests future prosperity? The Airline Industry The competitive environment in which Southwest operates can be subdivided into different value-added stages, customer and service segments, and competitor groups. Airlines engage in several value-adding activities. These include aircraft procurement, aircraft maintenance, reservation systems, schedule and route planning, in-flight services, and after-flight services. Competitors may differ in their involvement in these activities. For example, Southwest performs some in-house maintenance but offers no post-flight services. By contrast, American Airlines owns and markets its own reservation system, andAugust 4, 2009 Allegis, as United Airlines was known briefly in 1987, at one time operated a car rental agency (Hertz) and two hotel chains (Hilton and Westin). Airlines compete for three primary types of customers: travel agents, corporate travel managers, and individual travelers. The two major categories of passengers are leisure Wali Memon | wali.memon@gmail.com
  • 4. Success breeds Success - The Case of Southwest Airlines travelers, who tend to be quite price-sensitive, and business travelers, who are more concerned with convenience. To satisfy the different needs of some or all of these groups, airlines present a wide variety of services, depending on their strategy. Page | 4 Passenger service can be categorized along a number of dimensions. For example, airlines differ by geographical coverage; some specialize in short-haul service while others provide a vast network of interconnected long-haul and short-haul flights on a global basis through a network of strategic alliances. They also differ in how their routes are structured within the territories they serve. The two extremes are point-to-point and hub-and-spoke. The former is characterized by direct service between two points. The latter is characterized by complex, coordinated routes and schedule structures that channel passengers from numerous far-flung airports (the spokes) through a central airport (the hub). The hub itself has many costly infrastructure requirements (baggage handling systems, large terminals, maintenance facilities and parts inventories). To address the pricing complexity created by multiple traffic flows through a hub, hub-spoke carriers conduct complicated yield and inventory management calculations. The result of this complexity is that the hub- spoke pricing structure is systematically different from point-to-point pricing. TheseAugust 4, 2009 added complexities allow a carrier to offer flights between more "city-pairs" than it could under a point-to-point network. For a company that relies on a network, like an airline or telephone company, competitive advantage accrues from economies of scope, i.e., the geographic reach of that network. Economies of scope do not necessarily complement Wali Memon | wali.memon@gmail.com
  • 5. Success breeds Success - The Case of Southwest Airlines economies of scale, and in fact are often achieved at the expense of scale economies and vice versa. Thus, although the hub-and-spoke system is driven by economies of scope, each strategy, hub-and-spoke or point-to-point, has its own inherent cost and organizational Page | 5 implications. Passenger service can also be characterized in terms of breadth. An airline may choose to provide a broad gamut of services including meals, advance seat assignments, and frequent flier programs (full service), or it can offer only Spartan services (no-frills). A further differentiation is the number of service classes offered. Most airlines have two classes of service, First and Coach. Some offer three classes, First, Business and Coach (United and American on select flights), others offer only Coach (Southwest), and a few offer only First Class (Midwest Express). In addition to the direct cost of providing differentiated service, amenities such as First Class seating and in-flight meals indirectly affect the cost structure of an airline by limiting the number of seats its aircraft can hold. Because Southwest does not currently offer meals or First Class service, its 737-300 holds 137 seats whereas a United Airlines 737-300 holds only 128 seats. US airlines can be categorized into three major competitor groups based on geographicalAugust 4, 2009 coverage. First are the "major" national airlines. They include: America West Airlines, American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, United Airlines, USAir, Southwest Airlines, and TWA. Second are the regionals, which include Reno Air, Airtran (formerly ValuJet), Frontier Airlines, Alaska Airlines, Horizon Airlines, Western Wali Memon | wali.memon@gmail.com
  • 6. Success breeds Success - The Case of Southwest Airlines Pacific Airlines, Inc., Kiwi International, Air South, and many others. Third is the commuter or "feed" carriers, most of which operate as extensions of the majors. These carriers use mostly turboprop or regional jet equipment and fly routes that are generally less than 500 Page | 6 miles. Some of these carriers include Atlantic Coast Airlines, which operates as United Express, Atlantic Southeast Airlines, which operates as Deltas Business Express, Comair Holdings, another Delta commuter, Mesa Air Group, which operates its own flights as well as feeder flights for United, Mesabi Holdings, Inc., SkyWest, Inc., and numerous others. Competitive Environment. The Airline Deregulation Act of 1978 redefined the industry by eliminating the ability of the Civil Aeronautics Board (CAB) to set fares, allocate routes, and control entry and exit into markets. Unfortunately, most airlines were hamstrung by high cost structures, including exorbitant labor costs, and highly inefficient planes and infrastructure facilities. In the aftermath of the complete removal of entry and price controls by 1980, competition intensified considerably as new entrants cherry-picked the large carriers most profitable routes. This led to an extended period of severe industry shakeout and consolidation. Structural characteristics. The industrys structural characteristics make it a tough place toAugust 4, 2009 be very profitable. The overall industry is not highly concentrated, although it has become more concentrated since deregulation. Nevertheless, most discrete markets are served by a limited number of carriers. In the oligopolistic markets in which most airlines compete, the pricing actions of one company affect the profits of all competitors. Intense price wars Wali Memon | wali.memon@gmail.com
  • 7. Success breeds Success - The Case of Southwest Airlines have been a frequent event in the industry. Because competition varies from route to route, a carrier can dominate one market, be dominated in another and face intense rivalry in a third. As a result of the hub-and-spoke system, airlines face head-to-head competition Page | 7 with more carriers in more markets. Suppliers tend to have relatively high bargaining power. Certain unions are in a position to shut down airlines. Airplane manufacturers (Boeing, Airbus) have considerable power in altering the terms of purchase for planes. Furthermore, the business is capital intensive and requires very large expenditures for airplanes and other infrastructure. Despite difficult economics, the industry is still attractive to new entrants. There are few substitutes for long-haul air travel. In addition, most of the incumbents have high cost structures that are exceedingly difficult to improve significantly. Carrier failures and downsizing have also created a large supply of relatively new "used" aircraft and the cost of acquiring aircraft is reduced further by the practice of aircraft leasing. Given high debt levels and low profitability in comparison to other industries, most airlines, including Southwest, have begun to lease their planes rather than purchase them. In light of high debt and low profits, the depreciation tax shield is not as valuable to the airlines. ByAugust 4, 2009 leasing, carriers can "sell" that tax shield to the leasing company, actually creating value for the carrier. As a result, entry barriers are not as high as one would expect in other capital- intensive industries. Furthermore, new entrants generally gain significant cost advantage by securing lower Wali Memon | wali.memon@gmail.com
  • 8. Success breeds Success - The Case of Southwest Airlines labor costs because they are not burdened by the unfavorable union contracts that affect many older airlines. Many of the union contracts agreed to by the major airlines call for higher pay and contain work rule provisions that reduce labor productivity. In addition, Page | 8 new entrants are sometimes able to gain favorable terms by purchasing excess capacity of other airlines, such as training and maintenance. Profitability. In order to survive and profit in this tough environment, airlines attempt to manipulate three main variables: cost, calculated as total operating expenses divided by available seat miles (ASM); yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM); and load factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization. Thus, profitability, defined as income divided by ASM, is computed as: Profitability = [yield X load factor] - cost The major airlines have faced intensive competition from low price airlines in the 1990s. While these low priced airlines expanded the market for air travel they also placed great downward pressure on the prices of the majors, thereby reducing their yields. To compete, the majors engaged in great cost cutting efforts. Delta announced the goal of reducing itsAugust 4, 2009 cost/ASM to 7.5 cents by June 1997. It fell from 9.6 cents in April 1994 to 8.75 cents in March 1997. While this resulted in significant savings, it did not prevent Deltas stock price from falling after the company announced earnings well below Wall Streets expectations. Strains arose between Delta CEO Ronald Allen and the board as a consequence of the Wali Memon | wali.memon@gmail.com
  • 9. Success breeds Success - The Case of Southwest Airlines damage done to Deltas reputation for stellar service, due in part to the cost cutting. This apparently contributed to the boards decision in May 1997 to replace Allen. Capacity. JP Morgan analysts believe that the most important factor influencing pricing in Page | 9 the long-term will be the falling industry cost curve. They point out that low-cost airlines have already lowered and inverted the traditionally downward sloping industry cost curve. "With it they have pressured fares industry-wide, but particularly in short-haul markets where their impact on costs have been most dramatic...the airlines that are increasing capacity are those lowest on the industrys cost curve.1 This shift has occurred because of the growth in low-cost, short-haul travel. Outlook. Lehman Brothers analysts concluded in 1996 that the US airline industry was entering a mature and more stable phase, as the major restructuring it required was largely accomplished. In their view, this restructuring was driven by two key developments. First was the retrenchment of the majors into their core hubs. Second was technology diffusion, which occurred when the weaker airlines upgraded their systems technology regarding pricing and yield management and eliminated many disparities among major carriers. Arenas of competition have also shifted. Low-cost carriers, including Southwest AirlinesAugust 4, 2009 and Shuttle by United, dominate short-haul capacity in the west. Expansion of the low-cost carriers seems to be slowing, and competition appears to be stabilizing. Meanwhile the East Coast is still dominated by high-cost carriers such as USAir. Consequently, it is not surprising that the low-cost airlines have targeted the east as a major arena for expansion. Wali Memon | wali.memon@gmail.com
  • 10. Success breeds Success - The Case of Southwest Airlines Southwests invasion of Florida and Providence, RI is a noteworthy example. In the Northeast, capacity reduction by high-cost competitors such as American, USAir, and Continental has also enhanced the opportunities for low-cost airlines. As carriers learn to Page | 10 adapt the low-cost formula to the geographic, climatic, and market intricacies of the Northeast, low-cost operations will likely continue to expand. Southwest Airlines’ Mission and Objectives Southwest Airlines mission focuses to an unusually large degree on customer service and employee commitment. According to its annual report, the mission of Southwest Airlines is "dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit." Indeed, Southwest proudly proclaims, "We are a company of People, not planes. That is what distinguishes us from other airlines and other companies." In many respects, the vision that separates Southwest from many of its competitors is the degree to which it is defined by a unique partnership with, and pride in, its employees. As stated in its Annual Report: At Southwest Airlines, People are our most important asset. Our People know that because thats the way we treat them. Our People, in turn, provide the best CustomerAugust 4, 2009 Service in the airline industry. And thats what we are in business for - to provide Legendary Customer Service. We start by hiring only the best People, and we know how to find them. People want to work for a "winner," and because of our success and the genuine concern and respect we have for each of our Employees, we have earned Wali Memon | wali.memon@gmail.com
  • 11. Success breeds Success - The Case of Southwest Airlines an excellent reputation as a great place to work. As a result, we attract and hire the very best applicants. Once hired, we train, develop, nurture, and, most important of all, support our People! In other words, we empower our Employees to effectively make Page | 11 decisions and to perform their jobs in this very challenging industry. The airlines goal is to deliver a basic service very efficiently. This translates into a number of fundamental objectives. A central pillar of its approach is to provide safe, low price transportation in conjunction with maximum customer convenience. The airline provides a high frequency of flights with consistent on-time departures and arrivals. Southwests employees also aspire to make this commodity service a "fun" experience. Playing games is encouraged, such as "guess the weight of the gate agent." The fun spirit is tempered so that it is never in poor taste and does not alienate business travelers. Long-term financial objectives include a 15% operating margin, 7.5%-8.0% net margin, return on equity (ROE) of 15%, and a debt/equity ratio below 60%. Southwest Airlines’ Strategy Southwest Airlines is categorized as a Low Fare/No Frills airline. However, its size and importance have led most analysts to consider it to be one of the major airlines despite itsAugust 4, 2009 fit in the low fare segment. In a fundamental sense Southwests business level strategy is to be the cheapest and most efficient operator in specific domestic regional markets, while continuing to provide its customers with a high level of convenience and service leveraged off its highly motivated employees. Essentially, Southwests advantage is that it is low-cost Wali Memon | wali.memon@gmail.com
  • 12. Success breeds Success - The Case of Southwest Airlines and has a good safety reputation. Cost Leadership. Southwest operates the lowest cost major airline in the industry. The airline devised a number of clever stratagems to achieve this low-cost structure. For Page | 12 example, by serving smaller, less congested secondary airports in larger cities, which tend to have lower gate costs and landing fees, Southwest can maintain schedules cheaply and easily. Southwests approach is also facilitated by its focus on the southwest and other locations with generally excellent weather conditions, which leads to far fewer delays. Moreover, by following a point-to-point strategy, Southwest need not coordinate flight schedules into connecting hubs and spokes, which dramatically reduces scheduling complexity and costs. Route Structure. Historically, Southwest has specialized in relatively short-haul flights and has experienced considerable threat from providers of ground transportation (cars, trains and buses) because the buyers of these short-haul services tend to be quite price sensitive. Southwest has widened the market for air travel by attracting large numbers of patrons who previously relied on ground transportation. For example, before it entered the Louisville to Chicago market, weekly traffic totaled 8,000 passengers. After SouthwestAugust 4, 2009 entered the market, that number grew to over 26,000. This increase in traffic is now recognized as "The Southwest Effect." Emphasis on short-haul flights has also allowed them to pare costly services such as food, which passengers demand on longer flights. Passengers are provided with only an "extended snack" -- cheese, some crackers and a Wali Memon | wali.memon@gmail.com
  • 13. Success breeds Success - The Case of Southwest Airlines Nutri-Grain bar. Turnaround Time. Its route structure has helped Southwest to experience the most rapid aircraft turnaround time in the industry (15-20 minutes vs. an industry average of 55 Page | 13 minutes). Interestingly, Southwests "10 Minute Turnaround" can be traced directly to the carriers first days of operation in Texas when financial pressures forced the company to sell one of the four Boeing 737s it had purchased for its initial service. Having only three planes to fly three routes necessitated very rapid turnaround. Rapid turnaround time is essential for short-haul fights because airplanes are airborne for a smaller percentage of time than on long-haul flights. Faster turnaround also allows Southwest to fly more daily segments with each plane, which in turn increases its assets turnover. Fleet Composition. Southwest has the simplest fleet composition among the major airlines. The company only flies Boeing 737 planes and has committed to fly the 737 exclusively through 2004. Southwest will add a fourth variation when it introduces the 737-700, the newest generation 737. In choosing the fuel efficient 737, Southwest developed a close relationship with BoeingAugust 4, 2009 that enabled it to develop comparatively favorable purchase terms. Although Southwest flies a number of model variations of the 737, the cockpits of the entire fleet are standardized. Therefore, any pilot can fly any plane and any plane can be deployed on any route. In addition to helping capture scale economies at a much smaller size than its larger Wali Memon | wali.memon@gmail.com
  • 14. Success breeds Success - The Case of Southwest Airlines competitors, the homogenous fleet composition reduces the complexities of training, maintenance and service. It is difficult to calculate the large savings associated with this approach but they exist in almost all operating areas including scheduling, training, aircraft Page | 14 deployment and use, wages and salaries, maintenance and spare parts inventories. Travel Agency Exposure. Southwest sells only 60% of its tickets through travel agents (compared to 80-85% for the majors), thereby saving the 10% commission paid to travel agents. This also alleviates the need to participate in many of the travel agent reservation systems. While this reduces the companys breadth of distribution, it helps to reduce commission payments and Computer Reservation System (CRS) fees, which are approximately $2.50 per flight segment. Gates. Access to gates is often a constraining factor in the ability of airlines to expand because major airports have limited numbers of gates and most are already taken by other airlines. Access to gates is often a constraining factor in the ability of airlines to expand because major airports have limited numbers of gates and most are already taken by other airlines. An emphasis on less crowded secondary airports has alleviated this problem forAugust 4, 2009 Southwest. Southwest purchases or leases gates at airports, as opposed to renting the gates of other airlines, which enables the airline to use its own ground crews. Connections. Southwest does not offer connections to other airlines, which simplifies its ground operations. However, this also limits access for many passengers, particularly from Wali Memon | wali.memon@gmail.com
  • 15. Success breeds Success - The Case of Southwest Airlines international flights. Fare Structure. Southwest also controls costs through its simplified fare structure. While Southwests major competitors have complex fare structures and use computers and Page | 15 artificial intelligence programs to maximize passenger revenues, Southwest offers no special business or first-class seating. Rather, they generally offer a regular coach fare and a limited number of discounted coach fares. Labor. Labor is the largest cost component of airlines despite the heavy capital investment demanded in the industry. In 1996, Southwests labor costs were 30.6% of revenue and 32.7% of operating expenses. About 85% of Southwests employees are unionized. Given the ability of unions to bring carrier operations to a halt, it is not surprising that they wield considerable power. The International Association of Machinists and Aerospace Workers (IAM) represents customer service and reservation employees; the Transportation Workers Union of America (TWU) represents flight attendants; the Southwest Airline Pilots Association (SWAPA) represents pilots; and the International Brotherhood of Teamsters (IBT) represents aircraft cleaners, mechanics, flight training instructors, and others. There are also some other smaller unions.August 4, 2009 What is unique in the industry is Southwests partnership between its management and its unions. Southwests strategy has been a combination of profit sharing and participation. In 1992 employees owned 10% of stock and in 1995 pilots were granted options to purchase 14.5 million shares of stock (an additional 10.1% of outstanding common stock). Pilots will Wali Memon | wali.memon@gmail.com
  • 16. Success breeds Success - The Case of Southwest Airlines be eligible for profit bonuses of up to 3% of compensation in three of the first five years and in two of the second five years of the recently signed 10-year contract. In an industry where unions and management have often been at war -- and where unions Page | 16 have the power to resist essential changes -- the quality of their relationship is a crucial issue. Perhaps one of the best examples of this is the 1994 agreement between Southwest Airlines and SWAPA. The pilots agreed to keep pay rates at existing levels for five years, with increases of 3% in three of the last five years of the 10-year deal (five-year base term, with an additional five years unless it is terminated by the union.). As mentioned, pilots can earn additional pay based on company profits. The pilots also obtained options to acquire up to 1.4 million shares of company stock in each of the ten years, in accord with market prices on the date of the deal. Pilots hired between 1996 and 2003 obtain lesser amounts of options at 5% over the then market value of the stock. Customer Service. Southwests approach to customer service is one of its core strategies. Its "Positively Outrageous Service" (POS) is different from the customer service associated with other major airlines. Service is provided with friendliness, caring, warmth and company spirit --staff go out of their way to be helpful. This approach to service leveragesAugust 4, 2009 off Southwests outstanding relationship with its employees. However, this stellar customer service does not include costly amenities like reserved seats or food service, and only offers very limited automatic baggage re-checking. By emphasizing flight frequency and on-time performance, Southwest has redefined the concept of quality air service. This Wali Memon | wali.memon@gmail.com
  • 17. Success breeds Success - The Case of Southwest Airlines unusual approach has allowed Southwest to differentiate its service while maintaining its cost leadership strategy. Culture. Perhaps one of the most unique aspects of Southwests strategy is the degree to Page | 17 which it has used its unique culture as a major strategic weapon. An atmosphere of cooperation and team spirit characterizes the culture. Workers believe that Southwests management cares about them, and management tries hard to ensure that personnel are treated properly. This culture provides much of the basis for Southwests labor relations, customer service and organizational flexibility. Marketing. Marketing savvy also plays a key role in Southwests strategy. Since Southwests inception, the major elements of the product offering have been price, convenience and service. As a Texas native serving mostly Texas markets, it has played the role of the hometown underdog, fighting against the majors. Now, when Southwest enters a new market, they use a sophisticated combination of advertising, public relations, and promotions in the belief that once people fly Southwest they will be hooked. Growth. Despite its remarkable growth in what had been until recently a relativelyAugust 4, 2009 moribund industry, Southwest has not emphasized growth as an objective. In fact, Herb Kelleher expresses a "go-slow" philosophy. For example, Southwest will not enter markets unless it perceives favorable conditions, which range from the wishes of the local community to the availability of an appropriate labor supply. Given its record of success Wali Memon | wali.memon@gmail.com
  • 18. Success breeds Success - The Case of Southwest Airlines and its reputation it is not surprising that there are many communities that want Southwest to serve their markets. After all, good air service is considered by most communities to be an essential aspect of economic development. However, Southwests Page | 18 policy prohibits accepting monetary subsidies or other incentives that cities and airports offer to gain air service. Southwest has also demonstrated a remarkable ability to manage its growth, an essential commodity in an industry known for its complexity. The inability to manage rapid growth has been blamed for the failure of many carriers, including Braniff, PeopleExpress and ValuJet. Organization Structure. Southwest, like most airlines, is a formal and centralized organization. Organizationally Southwest is structured according to functions, as illustrated in Exhibit1. The nature of operations in the airline business is quite mechanical. That is, airline operations naturally aim for efficiency and consistency. They are not spontaneous -- they value clock-like behavior. Planes must be in certain places at certain times and must be operated safely and efficiently. Safety itself requires following very rigorous procedures to ensure proper maintenance and training. The reputation of an airline can be seriouslyAugust 4, 2009 damaged by only one or two serious accidents. Therefore, the organization of Southwest is characterized by a high degree of formalization and standardization. Reporting to Chief Executive Officer (CEO) Herb Kelleher are three Executive Vice Presidents. Perhaps the most influential is Colleen C. Barrett who is in charge of such key Wali Memon | wali.memon@gmail.com
  • 19. Success breeds Success - The Case of Southwest Airlines functions as marketing, sales, advertising, human resources, customer relations and governmental affairs. John G. Denison is Executive Vice President in charge of Corporate Services, which includes finance, legal, facilities, reservations, revenue management Page | 19 (pricing) and systems (including computer services and telecommunications). Gary Barron is Executive Vice President and Chief Operations Officer. His responsibilities include schedule planning, flight operations, fuel and administrative purchasing, ground operations, in-flight services, and maintenance and engineering. There is one other Vice President reporting to Kelleher, Al Davis, who is in charge of internal auditing and special projects. For operations controller functions he reports to Gary Barron. How has Southwest Airlines maintained high levels of customer and employee satisfaction in the context of a functional organization? The company uses a number of mechanisms to allow employee participation. The fundamental concept is the notion of a "loose-tight" design. Within the context of tight rules and procedures, employees are encouraged to take a wide degree of leeway. The company maintains rather informal job descriptions and decentralizes decision making regarding customer service. So while there is very high standardization regarding operations, it is low with respect to customer service.August 4, 2009 Employees are empowered to do what is necessary to satisfy customers. Flight attendants are allowed to improvise cabin instructions and employees play practical jokes on each other and customers. Positively Outrageous Service in action! The company management operates with an informal open door policy that allows employees to circumvent the Wali Memon | wali.memon@gmail.com
  • 20. Success breeds Success - The Case of Southwest Airlines formal hierarchy. Employees are encouraged to try things, knowing they will not be punished. Southwests organization is considerably simpler than its major competitors. Most of its Page | 20 competitors must manage the spatial complexity of far flung international operations and contend with the added intricacies of hub-and-spoke systems. These large international carriers are also involved in complex alliances with other airlines in foreign markets to augment the scope of their services. They manage code sharing arrangements with small regional domestic carriers. In short, the large carriers are complex networks, with more complicated organizational management issues. Size. Southwest operates in approximately 51 cities in 25 states and employed 22,944 people. This consisted of 6,228 flight personnel, 1,049 maintenance workers, 13,148 in ground customer service, and 2,519 in management, marketing, accounting, and clerical positions. The company has become such a popular employer that in 1995, 124,000 people applied for 5,500 jobs. Southwest is still a relatively small company compared to the other major airlines. It ranks 8th in revenues and 5th in passenger boardings. Southwests Available Seat Miles (ASMs) total less than a quarter of American Airlines, and it operates aAugust 4, 2009 fleet of only 243 aircraft compared to Americans 635. Nevertheless, Southwest is the largest carrier in a significant number of the markets in which it flies and the dominant airline in the short-haul niche of the airline business. Adaptability. Southwest has been a very nimble organization, quick to take advantage of Wali Memon | wali.memon@gmail.com
  • 21. Success breeds Success - The Case of Southwest Airlines market opportunities. For example, when American Airlines and USAir scaled back their California operations, Southwest quickly took over the abandoned gates, acquired more planes, and now has 50% of the California market. Another example is Southwests Page | 21 expansion into the Chicago Midway market following the collapse of Midway Airlines. Much of this flexibility stems from the companys remarkable labor relations. In addition, although Southwest is still purely a domestic carrier, it is developing a strategic alliance with Icelandair, a small North-European Carrier. Human Resource Management. At Southwest Airlines the human resource function is called the People Department. According to the departments mission statement: "recognizing that our people are the competitive advantage, we deliver the resources and services to prepare our people to be winners, to support the growth and profitability of the company, while preserving the values and special culture of Southwest Airlines." The crucial importance of human resources to the strategy of Southwest has made the People Department more organizationally central to the company than its counterparts are at its competitors. Given Southwests reputation as a great place to work it is no wonder that so many people apply for each job opening. This allows the company to be extremelyAugust 4, 2009 selective in its hiring and to look for applicants who are a good "fit." In fact, the company rejects about 100,000 applicants a year and the turnover rate is less than half of most other airlines. As Kelleher has said, "We draft great attitudes. If you dont have a good attitude, we dont want you, no matter how skilled you are. We can change skill levels through Wali Memon | wali.memon@gmail.com
  • 22. Success breeds Success - The Case of Southwest Airlines training. We cant change attitude." A new hires first six months at Southwest are a period of indoctrination and mentoring. These six months are also used to weed out anyone who does not mesh with the culture. Page | 22 In an organization where attitudes, culture and fit are so important it is natural that the company places such a great emphasis on socialization and training. McDonalds has its Hamburger University, Southwest has its University for People. Everyone at Southwest has a responsibility for self-improvement and training. Once a year, all Southwest employees, including all senior management, are required to participate in training programs designed to reinforce shared values. Except for flight training, which is regulated and certified, all training is done on the employees own time. Nonetheless, the training department operates at full capacity, seven days a week. The fun spirit of Southwest emerges in graduates very early. For example, a class of new pilots stumbled into Kellehers office wearing dark glasses and holding white canes. The importance of labor relations cannot be underestimated in a company that is almost 85% unionized. Here again Kellehers unusual abilities emerge. Somehow he has been able to convince union members and officials to identify with the company.August 4, 2009 It is also noteworthy that in an era when chief executive pay has escalated to huge amounts, Kelleher, in 1994, was named one of the lowest-paid chief executive officers in Dallas on a performance-adjusted basis. Furthermore, company officers do not get the perks often enjoyed by their counterparts in comparable organizations -- no cars or club Wali Memon | wali.memon@gmail.com
  • 23. Success breeds Success - The Case of Southwest Airlines memberships -- and they even stay in the same hotels as flight crews. Southwest has refused to compete for executive talent based on salary. This is not to suggest that Kelleher is impoverished. Like many Southwest employees, he has become wealthy from its stock. Page | 23 Culture and Control. The most distinguishing feature of Southwest Airlines is its culture. When competitors and outside observers describe Southwest, they tend to focus on its cultural attributes. Herb Kelleher has made the development and maintenance of culture one of his primary duties. The culture permeates the entire organization and sends clear signals about the behavior expected at Southwest. To promote employee awareness of the effects of their efforts on the companys bottom line, LUV Lines (the company newsletter) reports break-even volumes per plane. The newsletter informs employees not only of Southwests issues, but competitor news as well. The belief is that informed employees are better equipped to make decisions. One of the shared values is the importance of having fun at work. Humor is a significant aspect of the work environment. Such attributes are believed by senior management to enhance a sense of community, trust, and spirit and to counterbalance the stress and pressures of the mechanistic demands of airline operations.August 4, 2009 Another characteristic is the cooperative relationship among employee groups. This can be an advantage in functional structures, which are notorious for generating coordination problems. In other airlines, work procedures clearly demarcate job duties. However, at Southwest everyone pitches in regardless of the task. Stories abound of pilots helping with Wali Memon | wali.memon@gmail.com
  • 24. Success breeds Success - The Case of Southwest Airlines baggage and of employees going out of their way to help customers. In one particularly bizarre story, an agent baby-sat a passengers dog for two weeks so that the customer could take a flight on which pets were not allowed. Employee cooperation impacts the Page | 24 bottom line. When pilots help flight attendants clean the aircraft and check in passengers at the gate, turnaround time, a cornerstone of the low-cost structure, is expedited. Because of its team-oriented culture, Southwest is not stifled by the rigid work rules that characterize most competitors. As a result, Southwest has tempered the stringent demands of a functional structure with the liberating force of an egalitarian culture. One excerpt from Southwests "The Book on Service: What Positively Outrageous Service Looks Like at Southwest Airlines" is rather instructive: "attitude breeds attitude... If we want our customers to have fun, we must create a fun-loving environment. That means we have to be self-confident enough to reach out and share our sense of humor and fun -- with both our internal and external customers. We must want to play and be willing to expend the extra energy it takes to create a fun experience with our customers. Just as the words its not my job can take away the source of life for a consumer-August 4, 2009 oriented business, the words its just a job are equally as dangerous. Positively Outrageous Service cannot be learned from a book or manual; it cannot be artificially manufactured; and it is not required by law. It is born and bred in each individual according to his or experiences, attitude, and genuine desire to succeed -- both Wali Memon | wali.memon@gmail.com
  • 25. Success breeds Success - The Case of Southwest Airlines personally and professionally. Service does not start at the beginning of each work day, nor does it end when you go home. It is a very real part of you...its your company; your success; your future." Page | 25 This approach certainly contributes significantly to the lowest employee turnover rate in the industry (7%) and the highest level of consumer satisfaction. Despite all of the freedom that the culture permits, in some areas the company also employs very stringent controls. Perhaps the best example is that Herb Kelleher himself must approve all expenditures over $1,000! Forged over 26 years, Southwests culture has been a source of sustainable competitive advantage. A Bankers Trust analyst put it this way: "Southwest has an indefinably unique corporate culture and very special management/employee relationship that has taken years to cultivate. Employees have long had a significant stake in the company; employee ownership and employee contribution to wealth creation are not ideas that are alien to the workforce of Southwest Airlines since it is emphatically not just a job. Then, too, the relationship is not merely spiritual-the employees have come to trust the only company that has aAugust 4, 2009 record of 23 consecutive years of earning stability combined with an impressive record of stock appreciation unmatched by virtually any company...within or beyond the airline industry. The pilots are well compensated relative to the industry average, and they understand that. The challenge was to find creative ways to tie together the Wali Memon | wali.memon@gmail.com
  • 26. Success breeds Success - The Case of Southwest Airlines fortunes of the company with those responsible for it without risk or destruction of shareholder value...and, unlike the employee groups at other major airlines, the Southwest pilots understand that."2 Page | 26 Management. There is no doubt as to who is in charge at Southwest. In this respect Southwest is like most of the other airlines, centralized with a very strong, if not dominating CEO. What sets Herb Kelleher apart is his charismatic nature. His friendly, participative, deeply involved, and caring approach is revered throughout the organization. A very large number of employees know the CEO and he is reputed to know thousands of them by name. Nonetheless, it is also known that behind the scenes he can be extremely tough, implying that his public and private personae can be quite different. Herb Kelleher, age 67, started Southwest with a former client, Rollin King, who is still a member of the Board of Directors. King supposedly presented his idea for a low-cost Texas- only airline based on the success of Pacific Southwest Airlines in California to Kelleher over dinner at the St. Antony Club in San Antonio. The original "Love Triangle," the foundation of Southwests strategy, was drawn on a cocktail napkin. Kellehers management style, which has been described as a combination of Sam WaltonsAugust 4, 2009 thriftiness and Robin Williamss wackiness,3 seems to have been consistent right from the beginning. Direct, visible, and, some would say, even bizarre, he has attended company parties dressed in drag and appeared in a company ad as Elvis. Known for constantly showing the flag in the field and interacting with large numbers of employees and Wali Memon | wali.memon@gmail.com
  • 27. Success breeds Success - The Case of Southwest Airlines customers, Kelleher is reputed to have engaged people in conversations for hours, at all hours, about company and industry issues, often with a drink in his hand. He almost always seems ready for a party, and this fun-oriented atmosphere pervades the Page | 27 organization. The company newspaper, LUV Lines, has a column, "So, What Was Herb Doing All This Time?" recounting the CEOs activities. Kelleher regularly works 16-hour days and seven-day weeks. Following his example, Southwest employees are well known for going the extra mile. Among the stories of such behavior is that of a customer service representative who stayed overnight at a hotel with an elderly woman who was afraid to stay alone when her flight was grounded due to fog. The agent "knew" that was what Herb would have done. Kelleher has replaced formal strategic planning with "future scenario generation," arguing that "reality is chaotic, and planning is ordered and logical. The meticulous nit-picking that goes on in most strategic planning processes creates a mental-straight jacket that becomes disabling in an industry where things change radically from one day to the next."4 One of the most powerful departments is the Customer Department headed by Colleen Barrett, Executive Vice President, and Kellehers right-hand. She is the senior female in theAugust 4, 2009 airline industry, and provides the organizational balance for Kelleher. While he is reputed to have a chaotic style, she is known to be a stickler for details. She plays another unofficial role, acting as an ombudsman for customers and as an internal management expert. In the early 1990s Barrett set up a company culture committee, comprised of people from Wali Memon | wali.memon@gmail.com
  • 28. Success breeds Success - The Case of Southwest Airlines all geographic areas and levels of the company. The committee, which meets four times a year, is charged with preserving and enhancing the company culture. One of the committees successes is illustrated by the company organization. It is well known that Page | 28 functional structures such as Southwests are designed to promote specialization and scale economies, but often at the expense of teamwork and coordination. As these organizations grow they become even more difficult to operate in an integrated manner. The committee developed a number of initiatives to improve cross-functional cooperation. One example is that all company officers and directors have to spend one day every quarter in the field -- working a real "line job." Technology. Like all airlines, Southwest is a very heavy user of computer-related technology. This technology supports all activities from scheduling to reservations to general operations support. The network is built on four superservers and a reservations subsystem that connects more than 5,000 PCs and terminals across the country. Remote locations communicate with the servers using TCP/IP across Novell LANs. This network supports a reservation system that has enabled Southwest to be the first carrier to offer ticketless travel on all of its flights. They now average more than 15,000August 4, 2009 ticketless passengers per day, according to Robert W. Rapp, Vice President of Systems. The ticketless system offers significantly improved customer service by eliminating lines at ticket counters. The system also reduces costs; it is estimated that it costs an airline from $15 to $30 to produce and process a single paper ticket. Wali Memon | wali.memon@gmail.com
  • 29. Success breeds Success - The Case of Southwest Airlines Customers using the Southwest ticketless system can purchase a seat on a Southwest flight by telephone or on the Internet. Customers receive a confirmation code, which is traded for a boarding pass at the airport. The concept of ticketless travel originated at Morris Air, Page | 29 a Salt Lake City airline acquired by Southwest in 1993. Although policy and operational differences prevented Southwest from adopting the Morris system, the company was able to accelerate the development of its own system with the assistance of Evan Airline Information Services, a consulting firm that helped to develop Morris Airs system. The first ticketless passenger boarded a Southwest plane only four months after development began. All Internet activities are concentrated under Kevin Krone, Manager of Marketing Support. Marketing activities explicitly build on the Internet as a primary marketing channel. Krones activities are closely coordinated with the requirements and support facilities of Rapps department. Southwest was the first carrier to host a web site, WWW.IFLYSWA.COM, which was deemed "Best Airline Web Site" by Air Transport World. It recently launched a joint venture with Worldview Systems to enhance its Internet presence.August 4, 2009 Performance There are many different criteria that can be used to evaluate Southwests success in achieving its basic objectives. Certainly Southwests different constituencies look at its performance in different ways. Southwest takes particular pride in the following Wali Memon | wali.memon@gmail.com
  • 30. Success breeds Success - The Case of Southwest Airlines accomplishments: • 30 years of safe, reliable operations; • Five consecutive years of Triple Crown Customer Service; Page | 30 • Five consecutive years of record profits and 24 consecutive years of profitability; • Recognition as one of the top ten places to work in Robert Levering and Milton Moscowitzs book, The Best 100 Companies To Work For In America; • Top ranking in the Airline Quality Survey conducted by The National Institute for Aviation Research for two of the last three years; • Launch customer for three different Boeing airplanes, providing thousands of jobs in the aerospace industry; and • A route system that has grown to 52 airports in 25 states, carrying more than 50 million customers on 243 Boeing 737 aircraft. No issue is more important than safety. One need only to study the checkered history of ValuJet or Air Florida to see what one catastrophic crash can do to an airline when the airline is perceived to have been at fault. Meanwhile, Southwest maintains a 26-year safetyAugust 4, 2009 record and is generally acknowledged to be one of the worlds safest airlines. Of course, Southwests customers remain one of the companys main constituencies. Despite its "no-frills" orientation, Southwest consistently receives the highest rankings for customer satisfaction. This is achieved through the successful management of customer Wali Memon | wali.memon@gmail.com
  • 31. Success breeds Success - The Case of Southwest Airlines expectations. By emphasizing low price and consistency, Southwest has successfully redefined the concept of quality airline service. For example, the "Triple Crown Award" goes to the airline, if any, which has the best on-time record, best baggage handling and Page | 31 fewest customer complaints according to statistics published in the Department of Transportation (DOT) Air Travel Consumer Reports. First won by Southwest in 1988, the airline has won the award every year since 1992. No other airline has ranked on top in all three categories for even a single month. Given its mission, employee satisfaction is another important indicator of company success. Personnel are a crucial determinant of organizational performance throughout the industry. Labor costs are about 40% of operating costs in the industry, while at Southwest they are considerably lower. As noted, labor relations is an important determinant of company survival. Southwest has one of the lowest personnel turnover ratios in the industry. It began the first profit sharing plan in the industry, and employees now own more than 10% of the stock. Fortune has named Southwest as one of the best companies for attracting, developing and keeping talented people. In 1997 Fortune ranked Southwest first on its list of the "100 Best Companies to Work For in America."August 4, 2009 Southwest has had generally peaceful and cooperative labor relations throughout most of its history. One salient result of management-labor harmony is that Southwest employees are the most productive in the industry. A single agent usually staffs gates, where competitors commonly use two or three. Ground crews are composed of six or fewer Wali Memon | wali.memon@gmail.com
  • 32. Success breeds Success - The Case of Southwest Airlines employees, about half the number used by other carriers. Despite the lean staffing, planes are turned around in half the time of many rivals. Southwest pays its pilots wages that are comparable to the major carriers, but pilot productivity (e.g., number of flights per day, Page | 32 number of hours worked) is considerably higher. Despite its low-cost structure, Southwest is not able to control all costs. Perhaps the most important uncontrollable element is fuel, which has varied from 21.8% of operating expenses in 1990 to 14.0% in 1995 (it is estimated at 15.3% in 1996). One advantage that larger, broader scope carriers have is a more limited exposure to fuel price volatility. Broader scope allows them to take advantage of geographic differences in fuel prices and deeper pockets allow them to hedge against future price increases. However, Southwest does have the advantage of a younger and more fuel-efficient fleet than its larger competitors. Southwest has also performed well on many financial criteria. The companys net earnings were $207.3 million in 1996 compared to $182.6 million in 1995, capping five consecutive years of record profits and 24 consecutive years of profitability. This record includes 1991 and 1992, when every other major airline lost money. It has an "A" rating on unsecuredAugust 4, 2009 debt, and its debt to equity ratio is one of the best in the industry (.25 versus .6 industry average). Its interest coverage is one of the best (6.75 versus an industry average of 2). Market share is another indicator of an organizations performance. By this criterion, Southwest also ranks at the top of the industry. For example, it consistently ranks first in Wali Memon | wali.memon@gmail.com
  • 33. Success breeds Success - The Case of Southwest Airlines market share in 80-90 of its top 100 city-pair markets, with a passenger share of 60-70%. Because of the "Southwest Effect," the carrier gains this share by growing the size of each of its markets -- this is achieved by a fare structure that is on average $60 lower than the Page | 33 majors. The Challenges Ahead Southwest Airlines is no Johnny-come-lately. Its basic strategy of consistent low-cost, no- frills, high frequency, on-time air transportation with friendly service is a recipe that has been refined throughout the companys 30-year life. It has worked for the company in periods of catastrophic losses for the industry as well as in times of abundance. Southwest has been able to compete successfully both with the major airlines and those that have been formed to copy its formula. Opportunities for Growth. Southwest apparently recognizes the potential saturation of its historic markets, and the limited number of attractive short-haul markets. Therefore, it has expanded into some longer-haul markets. Longer-haul not only provides avenues for future growth, but also provides potentially higher margins. On average, the companys cost per ASM is just below 7.5 cents. However, on its longer routes costs are as low as 4August 4, 2009 cents per ASM. Furthermore, as mentioned, the 10% ticket tax has been replaced with a combination ticket tax and takeoff fee. This increases the attractiveness of longer-haul flights. Analysts see growth directions in the invasion of new markets, such as Florida, as well as in Wali Memon | wali.memon@gmail.com
  • 34. Success breeds Success - The Case of Southwest Airlines the addition of new city-pairs to Southwests point-to-point network. In 1996, Southwest entered four new markets: Tampa, Ft. Lauderdale, and Orlando, Florida, and Providence, Rhode Island. At year-end 1996, 22 percent of the carriers ASMs were deployed on the Page | 34 west coast; 33 percent in the remainder of the western region (west of Texas); 19 percent in the heartland region (Texas, Oklahoma, Arkansas, and Louisiana); 16 percent in the Midwest region; and ten percent on the east coast (Providence, Baltimore, and Florida). Southwest is adding longer routes, such as the recently inaugurated Albuquerque to Orlando route, and operations from Nashville all the way to the west coast. Seven new nonstop flights from Nashville International Airport began in April of 1997 and two additional departures became effective in June. The new nonstop routings are Nashville to Detroit, Los Angeles, Oakland, and Columbus, and enhanced nonstop service from Nashville to Las Vegas and Tampa. Southwest began service to Jacksonville, Florida on January 15, 1997. Southwest is now flying into Islip, Long Island in New York. Limits to Growth. As critics have noted, there are many challenges on the horizon. Southwest will eventually saturate its historic niche. The company currently flies into more than 52 airports with an average of 2,600 flights per day. Its old strategy of focusingAugust 4, 2009 on good climates and smaller, less congested airports has contributed to Southwests low costs. Many believe that poor weather conditions can affect Southwests ability to maintain on-time performance and can significantly impact down-line operations. This is magnified by a schedule based on a rapid turnaround, which leaves little leeway for flight delays. Wali Memon | wali.memon@gmail.com
  • 35. Success breeds Success - The Case of Southwest Airlines Southwest entered and then left the Denver market when bad weather forced an unacceptable number of delays and canceled flights. This puts a limit on growth because there are only a finite number of markets that can Page | 35 satisfy these criteria. Thus, Southwest has begun to enter markets in poorer climates and to introduce longer-haul flights. Providence, RI, one of the newer locations, is not a good weather location. There are about 56 airports in good weather locations with populations of over 100,000. Southwest currently serves 36. It is unclear how much demand for point- to-point service exists in the remaining 20. If Southwest decides to introduce food services as an amenity for longer haul flights it would require galleys and onboard services that would significantly boost the cost of operation of those airplanes. Longer flights also result in fewer flights per day and may serve to drive down yield. A mixture of galleyed and non-galleyed aircraft will also make fleet scheduling less flexible. Furthermore, there will be a greater need for functions in the organization responsible for new elements such as national marketing, the frequent flyer program, interline agreements, new geographic operations and possibly food services. People and culture also are major concerns to further expansion. Southwest is highlyAugust 4, 2009 selective, it consequently needs a large pool of applicants in order to find a few people good enough for the culture. With labor shortages across the country, it may be difficult to attract large pools of applicants. Without the selectivity, Southwest may not be able to get the human resources it needs in order to differentiate itself from others. The unique Wali Memon | wali.memon@gmail.com
  • 36. Success breeds Success - The Case of Southwest Airlines culture of Southwest helps make the company really fly. As companies expand, particularly in geographic location, the often find that it becomes increasingly more difficult to maintain the same culture. This is particularly true if the culture is built around the persona of one Page | 36 major leader such as Herb. Competition. During the last several years, the gap between Southwest and the rest of the majors has narrowed as other carriers have attempted to emulate Southwests formula. Larger airlines have developed lower cost short-haul divisions. Continental, United and Delta have all introduced an "airline within an airline" to lower costs for short-haul flights, and American is likely to follow. These separate divisions may hire their own pilots and ground support at much lower cost under separate contractual relations with unions. Under these arrangements pilots can often be employed for less than half the cost of the parent airline. This, not surprisingly, has led to some bitter disputes between management and unions. For example, at American Airlines the unions have seen this as a management tactic for shifting their members from high to low paying jobs with the same duties. At the same time, Southwest has adopted many of the features that the majors use to support their large networks. As Southwest has grown in scope, it has introduced nationalAugust 4, 2009 advertising, including NFL sponsorship; a frequent flyer program, including a branded credit card; and interline and marketing agreements with international carriers. Southwests operations at Nashville are developing into a hub. The carriers average stage length has also increased over the last several years. Southwest has now expanded into Wali Memon | wali.memon@gmail.com
  • 37. Success breeds Success - The Case of Southwest Airlines geographic markets and climates that are not as compatible with its original fair-weather, low-congestion strategy. Its flights now compete head to head with some of the major carriers. Page | 37 Succession. Few CEOs are more closely identified with company success than Herb Kelleher. As the company gets larger, and as he gets older -- and by the way, he boasts of his passion for bourbon (Wild Turkey) and cigarettes (five packs a day) -- will organizational weaknesses begin to emerge? For example, Southwests boast about hard working employees provoked 92 percent of its flight attendants to reject a new contract in June 1997. As Paul Sweetin, the flight attendants union chief stated: "After being told for a long time that they were the best employees in the business, flight attendants are saying Well show me Im the best in terms of compensation."5 Analysts worry about the degree to which Southwests future is dependent on one person -- although the company claims that this is not the case. In fact, articles in Fortune and The New York Times Magazine have identified the issue as an obstacle to the companys long- term success. Although Kelleher says he wont retire until about 2010, Rollin King, a board member and close friend, predicts he will likely retire at the end of his five-year contract inAugust 4, 2009 2003.6 Board members, concerned about his health, cut back on the number of people reporting to Kelleher several years ago and have questioned him about succession planning. However, he still does not have a clear second in command. To some extent, the board also sees his Wali Memon | wali.memon@gmail.com
  • 38. Success breeds Success - The Case of Southwest Airlines lack of an apparent successor as a virtue, claiming that it keeps contenders from leaving. As a safeguard, Southwest has also put in place a Culture Committee of more than 100 corporate missionaries who have been charged with institutionalizing Kellehers influence. Page | 38 Still, invoking the case of Walt Disney, analysts wonder whether Southwests greatest risk after Kelleher is gone might be letting that influence grow too strong.7 Whoever will lead Southwest in the coming years will need to deal with significant challenges: a set of increasingly able competitors, potentially weakened labor relations, and the strain of national growth that will accompany Southwests departure from previously successful strategies. Southwest is committed to introducing "safe, affordable, Triple Crown service to even more Americans in order to allow them to go, see, and do things never before dreamed possible." In effect, this means doing for the United States what the high- speed rail network did for Western Europe. To keep this dream from turning into a nightmare, the companys management will need to think very carefully about the challenges ahead and the actions that will be critical for future success.August 4, 2009 Wali Memon | wali.memon@gmail.com
  • 39. Success breeds Success - The Case of Southwest Airlines APPENDIX Glossary of Terms ASM Available Seat Mile. One ASM is one sellable seat, Page | 39 flown for one mile. For example, a 138 seat Boeing 737 traveling 749 miles from LGA to ORD (LaGuardia to OHare) represents 103,362 ASMs. ASM Available Seat Mile. One ASM is one sellable seat, flown for one mile. For example, a 138 seat Boeing 737 traveling 749 miles from LGA to ORD (LaGuardia to OHare) represents 103,362 ASMs. ARC Airline Reporting Corporation. An organization owned by the airlines that serves as a clearing house for processing airline tickets. Class of The fare level at which a ticket is sold. This does Service not refer to the cabin in which the passenger flies.August 4, 2009 For example, a United Airlines availability display shows the following classes of service for coach: Y B M H Q V. By subdividing coach into classes, Wali Memon | wali.memon@gmail.com
  • 40. Success breeds Success - The Case of Southwest Airlines airlines can control inventory and manage yield. Code Share An interline agreement by which two carriers are able to apply their flight numbers to the same Page | 40 plane. This often includes an interline connection. For example, American Airlines and South African Airlines code share on SAAs flight to JHB (Johannesburg). The flight has an AA flight number and an SAA flight number. AA can sell it as an American Airlines flight. CRS Computer Reservation System. Allows airlines and travel agents to reserve and sell seats on airline flights. CRS companies include Apollo, Sabre, System One and Worldspan. Direct Any flight designated by a single flight number. Flight Direct flights can include multiple stops and evenAugust 4, 2009 changes of aircraft. For example, Pan Am Flight 1 at one time made 11 stops as it flew "round the world" direct from LAX to JFK. Wali Memon | wali.memon@gmail.com
  • 41. Success breeds Success - The Case of Southwest Airlines Full Fare Designated as "Full Y." The undiscounted first, business, or coach fare. For domestic fares, this is used to calculate the level of discounted fares. Full Page | 41 Y is rarely paid for domestic flights, but is common on international flights when inventory is scarce. IATA International Air Transport Association. Organization which regulates the relationships between carriers. Interline Refers to various agreements between carriers. Agreement Common interline agreements concern the transfer of baggage, the endorsement and acceptance of tickets, and joint airfares (for example, a passenger flies USAir from Albany to JFK and then SAS to Copenhagen). Inventory The number of seats available for each class ofAugust 4, 2009 service for a given flight. For example, a USAir flight may have no K inventory available (seats to sell at K class fare levels) although higher priced H Wali Memon | wali.memon@gmail.com
  • 42. Success breeds Success - The Case of Southwest Airlines seats may be available. Both seats are in coach. Load The percentage of ASMs that are filled by paying Factor passengers. Can be calculated by dividing RPMs by Page | 42 ASMs. RPM Revenue Passenger Mile. One passenger paying to fly one mile. For example, a passenger who pays to fly from LGA to ORD represents 749 RPMs. The class of service and fare paid are not considered in calculating RPMs. O&D Origin and Destination. Refers to the originating and terminating airports of an itinerary segment. Connection points are not counted in O&Ds. This is different from city-pair, which refers to the origination and termination of a flight segment. For example, for a passenger traveling on NW fromAugust 4, 2009 HPN (White Plains) to SMF (Sacramento), the O&D market is HPN-SMF. The city-pairs flown will be HPN-DTW and DTW-SMF (White Plains-Detroit, Detroit-Sacramento) Wali Memon | wali.memon@gmail.com
  • 43. Success breeds Success - The Case of Southwest Airlines Restricted Any fare that has restrictive rules attached to it. Fare Common restrictions include Saturday Night Stayover, Advance Purchase, Day/Time of Travel, Page | 43 Non-Refundability, and Class of Service. Generally, lower fares have greater restrictions. Stage The length of a flight segment. The stage length Length between LGA and ORD is 749 miles. Unrestricte A fare with no restrictions. Often, this is not the full d Fare fare. For example, Americans Y26 fare is an unrestricted fare, but still lower than the full Y fare. Yield Measured as revenue per RPM.August 4, 2009 Wali Memon | wali.memon@gmail.com
  • 44. Success breeds Success - The Case of Southwest Airlines Exhibit 1 Page | 44August 4, 2009 Wali Memon | wali.memon@gmail.com
  • 45. Success breeds Success - The Case of Southwest Airlines ENDNOTES 1 JP Morgan, Short-haul Competitive Update (April 16, 1996) 3; Wendy Zellner, “Southwest’s New Direction,” Business Week, February 8, 1999. Page | 45 2 Vivian Lee, "Impacts of Deregulation and Recent Trends on Aviation Industry Management," Bankers Trust Research (August 30, 1996): 16. 3 A. R. Myerson, "Air Herb," New York Times Magazine, (November 9, 1997): 36. 4 J. Freiberg and K. Freiberg, NUTS! Southwest Airlines Crazy Recipe for Business and Personal Success. (Bard Books, 1996). 5 Allen R. Myerson, "Air Herb," p. 39. 6 Ibid. 7 Ibid. Also see Ken Brooker, “Can Anyone Replace Herb?” Fortune, April 17, 2000.August 4, 2009 Wali Memon | wali.memon@gmail.com

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