integrate, analyze, and synthesize the concepts that you have gained from this class in a case analysis.
Instructions:
First, carefully read both Appendix 1 and Appendix 2 in your Coulter text. Second, apply Coulter's
guidelines to analyze the the Southwest Airlines case on pages 250-253 of your Coulter text. Be sure to
follow all of Coulter's guidelines for case analysis with three exceptions. These are that the case
must be updated to present day, the financial analysis must conform to the guidelines on page
232 of your course text, and the ethical implications of your recommendations must always be
adequately discussed. In addition, either bullet or paragraph forms of writing are equally acceptable.
Your cases must be submitted only to the designated drop location and must be double-spaced with
appropriate citations. Exam length should be approximately eight pages.
Submission Instructions:
The TurnItIn Dropbox for assignment will be located below.
Grading Rubric:
The paper will be evaluated according to the following (equally weighted) criteria:
1. Concept applications
2. Research and support
3. Persuasive strength of recommendations – no organization is perfect and you must make
suggestions for improvement, based on critical analysis
4. Ethical implications of recommendations
5. Writing mechanics and clarity – including proper grammar, syntax, and punctuation
Also, you must follow Coulter's guidelines in Appendices 1 & 2 or lose between 10 to 20 points from your
overall test grade.
"Southwest Airlines
Simple, fun, and profitable. These three words sum up Southwest Airlines. Yet, behind these
words lies the heart and soul of a company’s strategies that have helped it achieve an enviable record in
the intensely competitive airline industry—39 consecutive years of profitability. As Southwest continues
to do what it’s in business to do, can it maintain that commitment to simplicity, fun, and profitability?
Background
Southwest Airlines began service in June 1971, with three planes flying between three Texas
cities: Houston, Dallas, and San Antonio. Herb Kelleher, the colorful character who cofounded the
company and who now serves as chairman emeritus, recalls, “A lot of people figured us for road kill at
that time.” Why? Because the company’s strategic approach was unlike anything the other major
airlines were doing at that time. Air service in the early 1970s could best be characterized by high
airfares, inconvenient flight schedules, complicated ticketing, and long and inconvenient flying
experiences (from driving to the airport, parking, and finally reaching your destination). Southwest
wanted to change that! It began with a simple notion—get your passengers to their destinations when
they want to get there, on time, at the lowest possible fares, and make sure they have a good time
doing it. To deliver this type of service, Southwest’s strategy was to fly short-haul routes where the fares
were competitive with driving. In these short-haul markets, speed and convenience would be essential
to marketplace success. Therefore, Southwest’s overall strategy was to minimize total travel time for
customers, including ticketing and boarding, and to provide service out of airports convenient to doing
business or vacationing in a city. Simple, yet effective, even today. Southwest has had a dynamic and
impressive corporate history. The company has earned the respect of other airline competitors as well
as other businesses around the world. An entertaining description of various highlights in the company’s
history can be found on its Web site [www.southwest.com].
Current Operations
Southwest Airlines bills itself as the nation’s low-fare, high customer satisfaction airline. It
serves primarily short- and medium-haul routes with single-class service targeted at business and leisure
travelers. Its approach has been to focus primarily on point-to-point, rather than hub-and-spoke, service
in markets. This point-to-point system provides for more direct nonstop flights for customers and
minimizes connections, delays, and total trip time. Approximately 79 percent of Southwest’s customers
fly nonstop, with an average passenger trip length of about 658 miles. Despite the challenges facing the
airline industry—high fuel costs, uncertain economic conditions, and enhanced security measures—
2011 was another year of accomplishments for Southwest, including its 39th consecutive year of
profitability (an airline-industry record) and continued leadership in customer satisfaction as it once
again received the fewest customer complaints of all airlines. Several strategic factors can be identified
as the keys to Southwest’s success.
Low-Cost Advantage
Historically, Southwest has enjoyed a significant cost advantage compared to other
traditional carriers, and low operating costs continue to be one of its competitive strengths. How does
Southwest keep its costs low? One important element is its use of a single type of aircraft—the Boeing
737—that allows for simplified scheduling, operations, maintenance, and training. The planes have
identical configurations, making them easy for crews to operate, maintain, and service. In 2011,
Southwest operated a total of 559 Boeing aircraft with an average age of approximately 11.5 years.
Planes on order through 2024 will replace older ones in the fleet and will add additional capacity as
needed. Each plane flies an average of about six flights per day, with an average daily utilization of about
12-1/2 hours. The company also has outfitted its fleet with fuel-saving, performance-enhancing blended
winglets (appendages on the wings). These winglets extend flight range, save fuel, and reduce engine
maintenance costs and takeoff noise.
For several years, Southwest benefited from fuel hedging in which it paid upfront for the
right to buy fuel at certain (in this instance, lower) prices. Although it still pays less for fuel than its
competitors, Southwest’s average fuel price rose from an average of $2.44 per gallon in 2008 to $3.25 in
the 4th quarter of 2011. (An average 737 plane can hold about 7,000 gallons.) Southwest’s fuel costs
add up to about 37.7 percent of operating profits. To cut fuel costs, the company is power-washing jet
engines to get rid of grime, carrying less water for bathroom faucets and toilets, and replacing passenger
seats with lighter models.
Early in 2012, Southwest’s CEO Gary Kelly announced the delivery of “a game-changer“—
the Boeing 737-800. This aircraft will accommodate more passengers (175), but will require a fourth
flight attendant. It also features a quieter cabin, increased overhead bin space, improved operational
security features, LED reading and ceiling, and more durable/comfortable/eco-friendly seat. This aircraft
is better suited for long-haul flying opportunities and will give Southwest more scheduling efficiency by
“allowing for additional seats per departure in high-demand, slot-controlled, or gate-restricted
markets.“ And this aircraft will allow Southwest to more profitably serve in the future more distant
markets such as Hawaii, Alaska, Canada, Mexico, and the Caribbean. Kelly says, “We are building
Southwest for the future, and the -800 will play a crucial role in getting us there.“
Another operational strategy that has allowed Southwest to keep costs low is the use of
technology, especially automated processes. Early on, Southwest recognized the benefits of automation.
It was the first airline to offer a ticketless travel option (in 1994), eliminating the need to process and
then print a paper ticket. It was the first airline to establish a home page on the Internet. In 2011, some
84 percent of Southwest’s passenger revenues were booked via their Web site [www.southwest.com].
In 2005, Southwest further exploited technology by introducing DING!—a downloadable desktop
application that alerts customers to exclusive deals. And now, Southwest is the first airline to offer this
application on all three mobile platforms (iPhone, Blackberry®, and Android™).
Southwest also has relied on automation to facilitate the implementation of increased
security requirements. It also has invested significant sums in facilities, equipment, and technology to
efficiently process customers, who now have plenty of options to acquire boarding passes and who
don’t have to wait in lines at ticket and gate counters. Baggage tags are computer generated, as are
automated boarding passes, and customers can access both at multiple points throughout the airport.
Southwest also has self-service, rapid check-in boarding pass kiosks where customers can check their
bags and obtain transfer boarding passes. Customers can also check in and get their boarding passes
online at Southwest’s Web site. In 2011, approximately 80 percent of Southwest customers checked in
online or at a kiosk. Not only do such options benefit the customer, they benefit the company as well,
because fewer employees are needed to provide these services. In December 2011, the company
announced that it would be the first U.S. airline to equip ramp employees systemwide with hands-free
wireless headsets that enable the ground crew and pilots to verbally coordinate the pushback of planes
from the concourse gates. These new devices are expected to add another level of safety to potentially
dangerous situations and could potentially help improve departure times and fuel efficiency.
The company’s information technology strategies have benefited it in other ways, as well.
As one of the first airlines to establish a Web site, southwest.com is the third largest travel site and
continues to be the largest airline site in terms of unique visitors. It’s clear that the Web site has been
and will continue to be a vital part of Southwest’s strategy for generating passenger revenue.
Southwest also has chosen to operate out of conveniently located satellite or downtown
airports, which are typically smaller and less congested than other airlines’ hub airports that are usually
located quite a distance from a city’s main business district. This operating strategy allows for high asset
utilization because gate turnaround is quick (currently, Southwest’s turnaround time is approximately 25
minutes), and the planes can get back in the air transporting more customers to their destination. As
Kelleher used to point out, you don’t make money sitting on the ground. Quick turnaround also means
that the company doesn’t need as many aircraft or gate facilities. Southwest has veered away from this
strategy by flying out of New York’s LaGuardia and Boston’s Logan airports. However, this strategic shift
is part of the company’s plan to target new markets. CEO Gary Kelly says, “There are opportunities to
tap that we haven’t taken advantage of.” And with the company’s acquisition of Atlanta-based AirTran
AirWays, Southwest will soon be dealing with the challenges of the busiest airport in the United States,
Hartsfield-Jackson Atlanta International Airport.
Legendary Customer Service
Southwest gives customers what they want—great service at low prices. Southwest isn’t
just attracting large numbers of passengers—according to U.S. Department of Transportation (DOT)
numbers, it’s the largest domestic air carrier in the United States—it’s keeping them happy. For 17 years
running, the American Customer Satisfaction Index has ranked Southwest first among airlines for highest
customer service satisfaction. In 2011, Southwest rated highest among all major airlines in the DOT in
terms of lowest rate of passenger complaints. In addition, another industry survey, the Airline Quality
Rating report, said that Southwest is “consistently the company with the lowest customer complaint
rate in the industry.”
Southwest has formalized its dedication to customer satisfaction by adopting a
comprehensive plan called Customer Service Commitment, which outlines actions the company is taking
to promote the highest quality of customer service. This plan covers the gamut of possible customer
concerns from baggage handling and passenger safety to delays and cancellations and getting a refund.
The company is so committed to customer service that it has a person whose formal job title is senior
manager of proactive customer communications. This person spends his or her “12-hour work days
finding out how Southwest disappointed its customers and then firing off homespun letters of apology.”
The company’s mission (as found on its Web site) establishes the foundation for its
commitment to serving customers: “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.” This mission statement influences the way Southwest employees do their work. It
emphasizes the company’s strong desire to serve its customers and provides guidance to employees
when they make service-related decisions. In fact, employees are continually reminded that Southwest
is in the customer service business—and its business just happens to be airline transportation. The goal
is getting customers from Point A to Point B and doing so in a way that is simple and fun for the
customers and profitable for the company.
Southwest currently flies to 72 destinations in 37 states throughout the United States with
more than 3,300 flights a day. With the high frequencies of flights and extensive route system that’s
continuing to expand, customers have convenience and reliability with lots of options to get where they
want to go, when they want to go. The combination of low fares, convenient and frequent schedules,
and friendly customer service means that Southwest dominates the majority of the markets it serves.
And with the acquisition of AirTran, Southwest immediately and significantly expanded and diversified
its overall route network.
A Black Eye for the Company—Plane Maintenance and Inspection Troubles
In the first quarter of 2008, Southwest faced serious allegations about its plane
maintenance program. Two Federal Aviation Administration (FAA) officials who had noticed problems
with the company’s planes and Southwest’s failure to do required inspections said they were pressured
by Southwest executives to keep the serious problems hidden. In the wake of these allegations, the
company grounded 8 percent of its fleet due to safety concerns until required inspections of the planes
could be completed. In addition, Southwest suspended three employees and pledged to “fix any
deficiencies in its internal controls.” After receiving the results of an internal investigation, CEO Kelly said
he “was concerned with some of our findings related to maintenance compliance.” He went on to say
that he has “insisted that we have the appropriate maintenance organizational and governance
structures in place to ensure that the right decisions are being made.” In March 2009, Southwest
Airlines announced that it had resolved all outstanding issues with the FAA and would continue to work
together with the agency to ensure the highest degree of flight safety for the public.
Southwest’s Culture and People
A major reason behind Southwest’s success has been its culture and its people. Southwest
has one of the most unique cultures among those of all major U.S. corporations. It’s a high-spirited,
often irreverent culture, much like its legendary cofounder Herb Kelleher. At company headquarters, the
walls are covered with more than 10,000 picture frames containing photos of employees’ pets, of Herb
dressed like Elvis or in drag, of flight attendants in miniskirts, and caricatures of Southwest planes
gnawing on competitors’ aircraft. There are teddy bears and pink flamingoes. There’s lots of laughter,
and few, if any, neckties to be found. Even the CEO, Gary C. Kelly, normally a mild-mannered former
accountant, shocked coworkers by showing up at a company Halloween party dressed—makeup and all
—as Gene Simmons, front man for the rock group Kiss. On flights, flight attendants have been known to
dress up as the Easter Bunny or to wear Halloween masks on those respective holidays. They’ve hidden
in the overhead baggage compartments and jumped out at passengers who first opened them.
However, no matter how fun and goofy it may get, no one at Southwest loses sight of the fact that the
focus is on customers. This was plainly evident in the weeks after 9/11 when the laughter stopped. And
it didn’t take a memo from company headquarters to tell employees how to handle themselves during
this difficult period. Employees understood that the normal gags played on passengers and the jokes
and Halloween costumes were inappropriate. However, after about six months, passengers indicated
through e-mails and comments that they were once again ready for Southwest’s brand of fun. But even
now, employees are sensitive to customers’ concerns and know when to tone it down.
On its company’s Web site, the company describes its culture from the perspective of “living
the Southwest way, which involves a warrior spirit, a servant’s heart, and a fun-LUVing attitude.” In
addition, employees are expected to get excellent results by focusing on safety, low costs, and high
customer service and by demonstrating integrity in all actions.
In April 2006, Southwest went where no other airline had gone—the blogosphere. Playing
the role of maverick once again, it launched its blog, Nuts About Southwest, “which allows customers to
take a peek inside the culture and operations of Southwest Airlines.” The corporate blog has employee
bloggers representing a mix of frontline and behind-the-scenes employees—flight attendants, pilots,
schedule planners, mechanics, and more. The blog offers customers a great venue for open dialogue.
Southwest Air’s now-retired president, Colleen Barrett, said, “When we first started the blog, I often told
folks that I considered it to be a great customer service laboratory, if you will, but it has evolved into
much more than that.” Check it out at [www.blogsouthwest.com]. Southwest also has been tweeting
since July 2007 and was recently named one of the Top 10 Best Twitter Brands. The company’s social
media specialist says that success in the micro-blogging arena requires being “honest, real, quick, and
FUN.”
Southwest recognizes that its success is due to its people and emphasizes that its people are
its most valuable asset. The company has deep concern for its employees and seeks to provide fun and
challenging jobs. It also takes care of its employees. Southwest was the first U.S. airline to offer a profit-
sharing plan (in 1974). Employees own approximately 10 percent of the company’s stock. Southwest’s
employees are known for their commitment to the company and to the Southwest spirit, which isn’t
surprising considering that the company has a reputation as a great place to work. The number of
resumés it receives every year (more than 143,000 in 2010) is further proof that Southwest is perceived
as a great place to work. At the end of 2011, Southwest (including AirTran) had almost 46,000
employees with more than 43 percent in flight operations; almost 7 percent in maintenance; more than
44 percent in ground, customer, and fleet service; and 5 percent in management, accounting, marketing,
and office support positions.
The company, of course, wants the best of the best. Job applicants endure a rigorous
interview process that can take as long as six weeks. Once hired, about 20 percent of new hires fail to
make it through the training period. “We don’t keep them if they don’t fit into our culture. A lot of
people think we’re just relaxed, loosey-goosey, but we have a lot of discipline.” Those employees who
do make it are provided the support they need to succeed. Southwest has always had the approach of
trusting employees and empowering them to make decisions effectively as they perform their jobs.
Many people assume that Southwest’s outstanding relationship with its people is because
it’s nonunion but nothing could be further from the truth. More than four out of five employees at
Southwest (approximately 82 percent) are union members. However, even during the times when other
heavily unionized airlines were laying off employees and asking for sizable pay cuts from their
employees, Southwest was negotiating new contracts and trying to keep its strategy of no layoffs and
using employee furloughs as “a last resort.” The company is proud of its reputation as a great place to
work and acknowledges that its people are wonderful. They want to honor them, to treat them with
respect, and to reward their productivity. However, Southwest also understands the importance of
maintaining its low-cost structure. If that is lost, the company’s future could be jeopardized.
Financial Highlights
To achieve 39 consecutive years of profitability in an industry that’s known to be challenging
and competitive is quite an accomplishment. During 2011, revenues were up 29.4 percent to almost
$15.7 billion, but net income was down 61.2 percent to $178 million. (This financial information includes
the operations of AirTran since the May 2, 2011 acquisition date, but only includes the operations of
Southwest prior to that.) Considering the state of the economy, however, the ability to even post a net
income is a testament to Southwest’s strategies. Complete financial information can be found on the
company’s Web site [www.southwest.com].
Company Awards and Recognitions
When you do outstanding work, you get recognized and Southwest Airlines is no exception.
Here are a few of the company’s many awards from 2011 and 2012:
One of the most admired companies in Fortune magazine’s annual ranking of Most
Admired Companies for the 16th year in a row. In 2012, it ranked number ten.
Named the Stevie Award Winner for the Company of the Year—Transportation by the
International Business Awards for outstanding performance and customer service.
Recognized as one of the top 10 safest airlines in the Holistic Safety Rating 2011 by the
Air Transport Rating Agency.
Ranked first in the 2011 Air Cargo Excellence Survey by Air Cargo World in the “up to
199,000 tonnes“ category.
Named the Number One Airline Brand by The Harris Poll in March 2011.
Featured in J.D. Powers list of 2011 Customer Service Champions.
The Airline Industry and Major Competitors
The airline industry is intensely competitive and highly unpredictable. Numerous external
factors influence each competitor’s profitability. One major uncertainty now facing the industry is fuel
prices. Airlines need fuel to operate and are severely impacted by changes in jet fuel prices. Southwest
has substantial fuel-hedging positions until 2013, but the company continues to actively manage its fuel
hedge portfolio to address volatile fuel prices.
Other industry uncertainties included economic conditions in the United States and the
resulting customer demand and continued vulnerability to exogenous events (such as a terrorist attack)
that had the potential to adversely affect air travel. Other characteristics that make the airline industry
vulnerable include:
It is tremendously capital intensive.
There are enormous fixed costs.
It is fuel intensive, and with alternative energy sources unlikely, is subject to global
political events.
It is labor intensive, and there are fewer and less experienced workers available to fill
jobs.
There is no product inventory or shelf life—an unfilled seat on a flight can’t be put in
inventory and sold later.
It is quite cyclical as much of passenger travel demand is discretionary.
It is heavily regulated and taxed.
Competitors continue to nip at Southwest’s wings. JetBlue and Spirit Airlines, especially, are
strong, innovative, and low-cost. Other mainline carriers (e.g., American, Delta, and United) have been
addressing many of their fundamental problems by consolidating with other air carriers. Delta combined
with Northwest in 2008; United and Continental became one in 2011; and American filed for Chapter 11
bankruptcy in late 2011. Although these carriers are large, they still have a long way to go to pose a
major threat.
The Future
Southwest Airlines has been an anomaly among airlines. Its performance has consistently
been among the industry’s best. However, Southwest faces some serious challenges as it seeks to
maintain its competitive leadership position. Severe cost pressures have led the company to implement
some aggressive measures to improve productivity. These measures included no longer paying
commissions on flights booked by traditional travel agents, consolidating its reservations operations
centers, and motivating employees to continue to look for innovative ways to better run the business.
Even though Southwest continues to have some of the lowest costs in the industry, costs continue to
climb. Keeping costs under control and keeping its culture alive are just two of the key challenges facing
Southwest as it continues to consolidate operations with AirTran and to expand and reinforce its role as
a leading prime-time industry player.
Sources: Based on “Most Admired Companies, 2012,” Fortune Online,
[money.cnn.com/magazines/fortune], March 5, 2012; Southwest Airlines [www.southwest.com], March
1, 2012; N. Trejos, “Southwest-AirTran Deal Cuts Service to Some Cities,” USA Today, March 1, 2012, p.
1B+; S. Carey and D. Cameron, “Southwest Takes a Breather,” Wall Street Journal, February 27, 2012, p.
B3; “Southwest Airlines Form 10-K,” EDGAR Online, [www.edgar-online.com], February 9, 2012;
American Customer Satisfaction Index [http://www.theacsi.org], June 21, 2011; S. McCartney, “Can’t
Call Southwest a Discount Airline These Days,” Wall Street Journal, June 2, 2011, pp. D1+; T. W. Martin,
“Southwest Eager for a Seat in Atlanta,” Wall Street Journal, May 10, 2011, pp. B1+; D. Koeni,
“Southwest Takes Aim at Business Travelers,” The Associated Press, Springfield, Missouri, News-Leader,
May 3, 2011, p. 7A; and B. D. Bowen and D. E. Headley, “2011 Airline Quality Rating,”
[http://aqr.aero/aqrreports], April 2011."
