A Corporate Strategy Course Term Paper
Submitted By: Hamza Farooq (BB-4481)
SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
This Term Paper has been submitted as a requirement for the fulfillment for the completion of the course of Corporate Strategy. I would like to take this initiative to thank my Professor who enabled be to grasp a good understanding of this course and made me able to make this term report. The core inception of this term report has been to prepare a comprehensive understanding about the renowned airline, SOUTHWEST AIRLINE and to under their different cultures and strategies so as to link them to course work that we have studies and been taught. This way we can link it to the concepts we have learned and see how are they being applied in this organization.
SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
SOUTHWEST AIRLINES: An Introduction ............................................................................... 3 The Airline Industry.................................................................................................................... 5 Competitive Environment ........................................................................................................... 7 Southwest Airlines¶ Mission and Objectives ............................................................................. 10 Southwest Airlines¶ Strategy ..................................................................................................... 11 Organization ............................................................................................................................. 16 Performance .............................................................................................................................. 25 Situation Analysis ..................................................................................................................... 28 SWOT Analysis ........................................................................................................................ 30 The Challenges Ahead .............................................................................................................. 32 Exhibit 1 ................................................................................................................................... 37 References ................................................................................................................................ 38
In fact.Braniff. stable prices and choreographed competition. a New York University law school graduate and the airline's current chief executive officer. industry losses for the year surpassed cumulative profits since the industry's inception. The "Proud Texan" 3|Page
. Southwest finally secured the support of both the Texas Supreme Court and the United States Supreme Court.Southwest Airlines. LUV was chosen as the company's stock ticker symbol. Although the Texas Aeronautics Commission approved Southwest's petition to fly on February 20. 1968. the nascent airline was locked in legal battles for three years because competing airlines -. Not War" became the airline's theme. TransTexas. Strikes and disruptions New
interfered with companies' attempts to reduce costs. Through the efforts of Herb Kelleher. Despite the volatile conditions and many organizational failures. Pan Am. the industry changed swiftly and dramatically when deregulation took effect in 1978. Southwest went on to see successful growth through three distinct periods. the majority failed. The company built its initial advertising campaigns around a prominent issue of the time as well as its airport location.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
SOUTHWEST AIRLINES: An Introduction
Few industries have experienced the turmoil faced by the US domestic airline business during the past two decades. Southwest emerged from these early legal battles with its now famous underdog fighting spirit. Once characterized by high wages. Several of the strongest and greatest airlines (e.
competitors aggressively swooped into the marketplace. and the company became the "Love" airline. Eastern) disappeared through mergers or bankruptcies. one carrier grew and prospered throughout this entire period -. in 1992. and Continental -fought through political and legal means to keep it out of the market.. The industry is again in a period of high demand and expanding profitability.g. Southwest was controversial from its inception. Thus "Make Love. Fittingly.
was characterized by the opening of service to fourteen other states. Will Southwest Airlines be able to continue its remarkable success or will emerging conditions seriously threaten Southwest's future prosperity?
. "Interstate Expansion" (1978-1986).SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
period (1971-1978) saw the establishment of a large city-service network within its home state of Texas. Southwest Airlines now faces new challenges that raise concerns about its continued ability to grow. more complex organization. Ironically. 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. many of these concerns are a result of changes brought about by Southwest itself. including the emergent problems of managing a larger. the fledgling carrier was not subject to many federal regulations. Despite its past success. Interstate expansion was made possible by. Others are internal. The second phase. particularly those imposed by the Civil Aeronautics Board (CAB). The most recent phase. distinguished recognition and success. Because it did not engage in interstate commerce. Some of them are external. 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. "National
Achievement" (1987-1997). has been a time of considerable growth. and thus coincided with. the deregulation of the domestic airline industry.
American Airlines owns and markets its own reservation system. coordinated routes and schedule structures that channel passengers from numerous far-flung airports (the spokes) through a central airport (the hub). customer and service segments. who are more concerned with convenience. and after-flight services. Competitors may differ in their involvement in these activities. For example. who tend to be quite price-sensitive. By contrast. schedule and route planning. To satisfy the different needs of some or all of these groups. depending on their strategy. corporate travel managers. and
competitor groups. in-flight services. at one time operated a car rental agency (Hertz) and two hotel chains (Hilton and Westin). and individual travelers. For example. airlines differ by geographical coverage. 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. as United Airlines was known briefly in 1987. The latter is characterized by complex. aircraft
maintenance. 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.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
The Airline Industry
The competitive environment in which Southwest operates can be subdivided into different value-added stages. The former is characterized by direct service between two points. Airlines engage in several value-adding activities. Airlines compete for three primary types of customers: travel agents. and business travelers. Southwest
performs some in-house maintenance but offers no post-flight services. The two major categories of passengers are leisure travelers. and Allegis. airlines present a wide variety of services. reservation systems. The hub itself has many costly infrastructure requirements 5|Page
. These include aircraft procurement. Passenger service can be categorized along a number of dimensions.
and frequent flier programs (full service). and many others. Thus. First and Coach. An airline may choose to provide a broad gamut of services including meals. Air South. Passenger service can also be characterized in terms of breadth. Inc. First.
American Airlines. advance seat assignments.. Second are the regionals. competitive advantage accrues from economies of scope. The result of this complexity is that the hub-spoke pricing structure is systematically different from point-to-point pricing.e. Most airlines have two classes of service. each strategy. First are the "major" national airlines. US airlines can be categorized into three major competitor groups based on geographical coverage. and a few offer only First Class (Midwest Express). A further differentiation is the number of service classes offered. For a company that relies on a network. hub-spoke carriers conduct complicated yield and inventory management calculations. others offer only Coach (Southwest). Business and Coach (United and American on select flights). maintenance facilities and parts inventories). the geographic reach of that network. Delta Airlines. Third is the commuter or "feed" 6|Page
. and in fact are often achieved at the expense of scale economies and vice versa. Economies of scope do not necessarily complement economies of scale. Southwest Airlines. which include Reno Air. although the hub-and-spoke system is driven by economies of scope. Kiwi International. United Airlines. Western Pacific Airlines. hub-andspoke or point-to-point. Because Southwest does not currently offer meals or First Class service. Some offer three classes. has its own inherent cost and organizational implications. Horizon Airlines. 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.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
(baggage handling systems. its 737-300 holds 137 seats whereas a United Airlines 737-300 holds only 128 seats. Alaska Airlines. These added complexities allow a carrier to offer flights between more "city-pairs" than it could under a point-to-point network.. Northwest Airlines. To address the pricing complexity created by multiple traffic flows through a hub. like an airline or telephone company. and TWA. In addition to the direct cost of providing differentiated service. Continental Airlines. They include: America West Airlines. Frontier Airlines. USAir. i. Airtran (formerly ValuJet). or it can offer only Spartan services (no-frills). large terminals.
most of which operate as extensions of the majors. Mesa Air Group. The overall industry is not highly concentrated.. In the oligopolistic markets in which most airlines compete. Because competition varies from route to route. another Delta commuter. and control entry and exit into markets. This led to an extended period of severe industry shakeout and consolidation. Unfortunately. the pricing actions of one company affect the profits of all competitors. including exorbitant labor costs. competition intensified considerably as new entrants cherry-picked the large carriers' most profitable routes. Intense price wars have been a frequent event in the industry.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
carriers. most discrete markets are served by a limited number of carriers. a carrier can 7|Page
In the aftermath of the
complete removal of entry and price controls by 1980. These carriers use mostly turboprop or regional jet equipment and fly routes that are generally less than 500 miles. SkyWest. which operates as Delta's Business Express. and numerous others. Inc. and highly inefficient planes and
infrastructure facilities. which operates its own flights as well as feeder flights for United. although it has become more concentrated since deregulation. Structural characteristics. Some of these carriers include Atlantic Coast Airlines. allocate routes. Nevertheless. most airlines were hamstrung by high cost structures.. Comair Holdings. which operates as United Express. Mesabi Holdings. Inc.
The Airline Deregulation Act of 1978 redefined the industry by eliminating the ability of the Civil Aeronautics Board (CAB) to set fares. Atlantic Southeast Airlines. The industry's
structural characteristics make it a tough place to be very profitable.
There are few substitutes for long-haul air travel. such as training and maintenance. the depreciation tax shield is not as valuable to the 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. calculated as total operating expenses divided by available seat miles (ASM). In order to survive and profit in this tough environment. carriers can "sell" that tax shield to the leasing company. 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. Furthermore. the business is capital intensive and requires very large expenditures for airplanes and other infrastructure. the industry is still attractive to new entrants. In addition. calculated as total operating revenues divided by the number of revenue passenger miles (RPM).SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
dominate one market. Suppliers tend to have relatively high bargaining power. Airplane manufacturers (Boeing. have begun to lease their planes rather than purchase them. entry barriers are not as high as one would expect in other capital-intensive industries. airlines face head-to-head competition with more carriers in more markets. Airbus) have considerable power in altering the terms of purchase for planes. actually creating value for the carrier. and load factor. By leasing. most airlines. new entrants generally gain significant cost advantage by securing lower labor costs because they are not burdened by the unfavorable union contracts that affect many older airlines. Profitability. yield. calculated as the ratio between RPMs and ASMs. which 8|Page
. including Southwest. Despite difficult economics. As a result. In light of high debt and low profits. As a result of the hub-and-spoke system. In addition. Given high debt levels and low profitability in comparison to other industries. Certain unions are in a position to shut down airlines. Furthermore. new entrants are
sometimes able to gain favorable terms by purchasing excess capacity of other airlines. be dominated in another and face intense rivalry in a third. airlines attempt to
manipulate three main variables: cost.
Thus. It fell from 9. due in part to the cost cutting. This apparently contributed to the board's decision in May 1997 to replace Allen.the airlines that are increasing capacity are those lowest on the industry's cost curve.1 This shift has occurred because of the growth in low-cost. thereby reducing their yields. To compete. Lehman Brothers analysts concluded in 1996 that the US airline industry was entering a mature and more stable phase. Second was technology diffusion. Arenas of competition have also shifted. it did not prevent Delta's stock price from falling after the company announced earnings well below Wall Street's expectations. Strains arose between Delta CEO Ronald Allen and the board as a consequence of the damage done to Delta's reputation for stellar service. First was the retrenchment of the majors into their core hubs. Low-cost carriers.6 cents in April 1994 to 8. this restructuring was driven by two key developments..SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
measures capacity utilization. profitability. "With it they have pressured fares industry-wide. the majors engaged in great cost cutting efforts.cost The major airlines have faced intensive competition from low price airlines in the 1990s. but particularly in short-haul markets where their impact on costs have been most dramatic.5 cents by June 1997. including Southwest Airlines and 9|Page
. which occurred when the weaker airlines upgraded their systems technology regarding pricing and yield management and eliminated many disparities among major carriers. as the major restructuring it required was largely accomplished. short-haul travel. defined as income divided by ASM. In their view.. Outlook. While these low priced airlines expanded the market for air travel they also placed great downward pressure on the prices of the majors. Delta announced the goal of reducing its cost/ASM to 7.75 cents in March 1997. While this resulted in significant savings. Capacity. is
Profitability = [yield X load factor] . JP Morgan analysts believe that the most important factor influencing pricing in 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.
to provide Legendary Customer Service. and competition appears to be stabilizing. the vision that separates Southwest from many of its competitors is the degree to which it is defined by a unique partnership with. Southwest's invasion of Florida and Providence. People are our most important asset. climatic. and we know how 10 | P a g e
. In the Northeast. According to its annual report.
Southwest Airlines¶ Mission and Objectives
Southwest Airlines' mission focuses to an unusually large degree on customer service and employee commitment. it is not surprising that the lowcost airlines have targeted the east as a major arena for expansion.
"We are a company of People. Expansion of the low-cost carriers seems to be slowing. Our People know that because that's the way we treat them. USAir. and pride in. Meanwhile the East Coast is still dominated by high-cost carriers such as USAir. Our People.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Shuttle by United. low-cost operations will likely continue to expand. As stated in its Annual Report: At Southwest Airlines. RI is a noteworthy example. We start by hiring only the best People. dominate short-haul capacity in the west. and Company Spirit. individual pride." Indeed. its employees. Consequently. provide the best Customer Service in the airline industry." In many respects. and Continental has also enhanced the opportunities for low-cost airlines. and market intricacies of the Northeast. And that's what we are in business for . in turn. friendliness. As carriers learn to adapt the low-cost formula to the
geographic. not planes. the mission of Southwest Airlines is "dedication to the highest quality of Customer Service delivered with a sense of warmth. capacity reduction by high-cost competitors such as American. Southwest proudly proclaims. That is what distinguishes us from other airlines and other companies.
SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
to find them. we attract and hire the very best applicants. we empower our Employees to effectively make decisions and to perform their jobs in this very challenging industry. its size and importance have led most analysts to consider it to be one of the major airlines despite its fit in the low fare segment. Southwest's advantage is that it is low-cost and has a good safety reputation. The airline devised a number of clever stratagems to achieve this low-cost structure.0% net margin. by serving smaller. Once hired.5%-8. Essentially. However. A central pillar of its approach is to provide safe. Southwest operates the lowest cost major airline in the industry. The airline provides a high frequency of flights with consistent on-time departures and arrivals. less congested secondary airports in larger cities. 7. such as "guess the weight of the gate agent." and because of our success and the genuine concern and respect we have for each of our Employees. most important of all. This translates into a number of fundamental objectives. develop. In a fundamental sense Southwest's business level strategy is to be the cheapest and most efficient operator in specific domestic regional markets. return on equity (ROE) of 15%. As a result. we have earned an excellent reputation as a great place to work. Long-term financial objectives include a 15% operating margin. Cost Leadership. and a debt/equity ratio below 60%. The airline's goal is to deliver a basic service very efficiently. while continuing to provide its customers with a high level of convenience and service leveraged off its highly motivated employees. and. we train. support our People! In other words. Southwest's employees also aspire to make this commodity service a "fun" experience. low price transportation in conjunction with maximum customer convenience. People want to work for a "winner. Playing games is encouraged. For example. nurture.
Southwest Airlines¶ Strategy
Southwest Airlines is categorized as a Low Fare/No Frills airline. which tend to have lower gate 11 | P a g e
." The fun spirit is tempered so that it is never in poor taste and does not alienate business travelers.
approach is also facilitated by its focus on the southwest and other locations with generally excellent weather conditions. Passengers are provided with only an "extended snack" -. Turnaround Time. Southwest's "10 Minute Turnaround" can be traced directly to the carrier's 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. Southwest has widened the market for air travel by attracting large numbers of patrons who previously relied on ground transportation. The company only flies Boeing 737 planes and has committed to fly the 737 exclusively through 2004. which passengers demand on longer flights. Faster turnaround also allows Southwest to fly more daily segments with each plane." Emphasis on short-haul flights has also allowed them to pare costly services such as food. by following a pointto-point strategy. an industry average of 55 minutes). This increase in traffic is now recognized as "The Southwest Effect. Having only three planes to fly three routes necessitated very rapid turnaround. Southwest has the simplest fleet composition among the major airlines. before it entered the Louisville to Chicago market.000. that number grew to over 26. Its route structure has helped Southwest to experience the most rapid aircraft turnaround time in the industry (15-20 minutes vs. trains and buses) because the buyers of these short-haul services tend to be quite price sensitive. Southwest need not coordinate flight schedules into connecting hubs and spokes. the newest 12 | P a g e
. which in turn increases its assets turnover. Fleet Composition. Southwest has specialized in relatively short-haul flights and has experienced considerable threat from providers of ground transportation (cars. Rapid turnaround time is essential for short-haul fights because airplanes are airborne for a smaller percentage of time than on long-haul flights. After Southwest entered the market. Route Structure. Southwest will add a fourth variation when it introduces the 737-700. some crackers and a Nutri-Grain bar. Southwest can maintain schedules cheaply and easily. Interestingly. weekly traffic totaled 8.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
costs and landing fees. which dramatically reduces scheduling complexity and costs. Moreover. For example. Historically. which leads to far fewer delays.000 passengers.
which are approximately $2. Travel Agency Exposure. Southwest developed a close relationship with Boeing that enabled it to develop comparatively favorable purchase terms. Southwest purchases or leases gates at airports. Southwest sells only 60% of its tickets through travel agents
(compared to 80-85% for the majors). It is difficult to calculate the large savings associated with this approach but they exist in almost all operating areas including scheduling. Although Southwest flies a number of model variations of the 737. However. as opposed to renting the gates of other airlines. Southwest does not offer connections to other airlines. any pilot can fly any plane and any plane can be deployed on any route. Connections. maintenance and service. 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. training. In choosing the fuel efficient 737. thereby saving the 10% commission paid to travel agents. the cockpits of the entire fleet are standardized. This also alleviates the need to participate in many of the travel agent reservation systems. An
emphasis on less crowded secondary airports has alleviated this problem for Southwest. aircraft deployment and use. it helps to reduce commission payments and Computer Reservation System (CRS) fees. this also limits access for many passengers. Therefore. wages and salaries. While this reduces the company's breadth of distribution. which enables the airline to use its own ground crews. Gates. which simplifies its ground operations. maintenance and spare parts inventories.
13 | P a g e
. In addition to helping capture scale economies at a much smaller size than its larger competitors. 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. the homogenous fleet composition reduces the complexities of training.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
generation 737.50 per flight segment. particularly from international flights.
pilots can earn additional pay based on company 14 | P a g e
.6% of revenue and 32.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Fare Structure. flight training instructors. The pilots agreed to keep pay rates at existing levels for five years. In 1992
employees owned 10% of stock and in 1995 pilots were granted options to purchase 14. the Southwest Airline Pilots' Association (SWAPA) represents pilots. In an industry where unions and management have often been at war -.and where unions have the power to resist essential changes -. the Transportation Workers Union of America (TWU) represents flight attendants. Southwest also controls costs through its simplified fare structure. About 85% of Southwest's employees are unionized. and others.5 million shares of stock (an additional 10. Southwest's labor costs were 30. Southwest's strategy has been a combination of profit sharing and participation. with increases of 3% in three of the last five years of the 10-year deal (five-year base term. In 1996.7% of operating expenses. Perhaps one of the best examples of this is the 1994 agreement between Southwest Airlines and SWAPA. There are also some other smaller unions. Southwest offers no special business or first-class seating. What is unique in the industry is Southwest's partnership between its management and its unions. and the International Brotherhood of Teamsters (IBT) represents aircraft cleaners.1% of outstanding common stock). Pilots will 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.the quality of their relationship is a crucial issue. with an additional five years unless it is terminated by the union. The International Association of Machinists and Aerospace Workers (IAM) represents customer service and reservation employees. it is not surprising that they wield considerable power. As mentioned. While Southwest's major competitors have complex fare structures and use computers and artificial intelligence programs to maximize passenger revenues. Labor is the largest cost component of airlines despite the heavy capital investment demanded in the industry. mechanics. Given the ability of unions to bring carrier operations to a halt. Rather.). Labor. they generally offer a regular coach fare and a limited number of discounted coach fares.
customer service and organizational flexibility. Workers believe that Southwest's management cares about them. Culture. fighting against the majors. Its "Positively Outrageous Service" (POS) is different from the customer service associated with other major airlines. this stellar customer service does not include costly amenities like reserved seats or food service. This approach to service leverages off Southwest's outstanding relationship with its employees.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
profits. Since Southwest's inception. in accord with market prices on the date of the deal. and management tries hard to ensure that personnel are treated properly. Now. and only offers very limited automatic baggage re-checking. An atmosphere of cooperation and team spirit characterizes the culture. Southwest has redefined the concept of quality air service. By emphasizing flight frequency and on-time performance. Perhaps one of the most unique aspects of Southwest's strategy is the degree to which it has used its unique culture as a major strategic weapon.
Marketing. convenience and service. However. This culture provides much of the basis for Southwest's labor relations. when Southwest enters a new market. The pilots also obtained options to acquire up to 1. Pilots hired between 1996 and 2003 obtain lesser amounts of options at 5% over the then market value of the stock. public relations. Southwest's approach to customer service is one of its core strategies. and promotions in the belief that once people fly Southwest they will be hooked. Service is provided with friendliness.4 million shares of company stock in each of the ten years. Marketing savvy also plays a key role in Southwest's strategy. warmth and company spirit --staff go out of their way to be helpful. the major elements of the product offering have been price. it has played the role of the hometown underdog. Customer Service. caring. This unusual approach has allowed Southwest to differentiate its service while maintaining its cost leadership strategy. As a Texas native serving mostly Texas markets.
15 | P a g e
. they use a sophisticated combination of advertising.
Therefore. After all. The nature of operations in the airline business is quite mechanical. Southwest's policy prohibits accepting monetary subsidies or other incentives that cities and airports offer to gain air service. That is. an essential commodity in an industry known for its complexity. Southwest has also demonstrated a remarkable ability to manage its growth. Reporting to Chief Executive Officer (CEO) Herb Kelleher are three Executive Vice Presidents. Organizationally Southwest is structured according to functions. The inability to manage rapid growth has been blamed for the failure of many carriers. Denison is Executive Vice President in charge of Corporate Services. They are not spontaneous -. Barrett who is in charge of such key functions as marketing. Safety itself requires following very rigorous procedures to ensure proper
maintenance and training. Given its record of success and its reputation it is not surprising that there are many communities that want Southwest to serve their markets. For example. airline operations naturally aim for efficiency and consistency.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Growth. good air service is considered by most communities to be an essential aspect of economic development. Herb Kelleher expresses a "go-slow" philosophy. which range from the wishes of the local community to the availability of an appropriate labor supply. Perhaps the most influential is Colleen C. including Braniff. Southwest. PeopleExpress and ValuJet. human resources. Despite its remarkable growth in what had been until recently a relatively moribund industry. the organization of Southwest is characterized by a high degree of formalization and standardization. However. customer relations and governmental affairs.
Structure.they value clock-like behavior. Southwest will not enter markets unless it perceives favorable conditions. Southwest has not emphasized growth as an objective. Planes must be in certain places at certain times and must be operated safely and efficiently. sales. In fact. is a formal and centralized organization. advertising. like most airlines. John G. which includes 16 | P a g e
. as illustrated in Exhibit1. The reputation of an airline can be seriously damaged by only one or two serious accidents.
it is low with respect to customer service. Southwest's organization is considerably simpler than its major competitors. Gary Barron is Executive Vice President and Chief Operations Officer. revenue management (pricing) and systems (including computer services and telecommunications). facilities. employees are encouraged to take a wide degree of leeway. Size. Southwest operates in approximately 51 cities in 25 states and employed 22. who is in charge of internal auditing and special projects. Positively Outrageous Service in action! The company management operates with an informal open door policy that allows employees to circumvent the formal hierarchy.
competitors must manage the spatial complexity of far flung international operations and contend with the added intricacies of hub-and-spoke systems. 17 | P a g e
. Most of its Employees are encouraged to try things. the large carriers are complex networks. ground operations. For operations controller functions he reports to Gary Barron. with more complicated organizational management issues. His responsibilities include schedule planning.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
finance. legal. There is one other Vice President reporting to Kelleher. knowing they will not be punished. Al Davis. reservations. Employees are empowered to do what is necessary to satisfy customers. Within the context of tight rules and procedures. In short. So while there is very high standardization regarding
operations. The fundamental concept is the notion of a "loose-tight" design. They manage code sharing arrangements with small regional domestic carriers. Flight attendants are allowed to improvise cabin instructions and employees play practical jokes on each other and customers. in-flight services. and maintenance and engineering. fuel and administrative purchasing. The company maintains rather informal job descriptions and decentralizes decision making regarding customer service.944 people. 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. flight operations. These large international carriers are also involved in complex alliances with other airlines in foreign markets to augment the scope of their services.
and it operates a fleet of only 243 aircraft compared to American's 635.148 in ground customer service. We can change skill 18 | P a g e
. 124. In addition. Another example is Southwest's expansion into the Chicago Midway market following the collapse of Midway Airlines. Adaptability. Human Resource Management. For example. 1. and now has 50% of the California market." In fact. it is developing a strategic alliance with Icelandair. Much of this flexibility stems from the company's remarkable labor relations. and 2. the company rejects about 100. "We draft great attitudes. we don't want you." 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. At Southwest Airlines the human resource function is called the People Department.500 jobs.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
This consisted of 6. acquired more planes. marketing. 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. Nevertheless. quick to take advantage of market opportunities.000 people applied for 5. when American Airlines and USAir scaled back their
California operations.228 flight personnel. while preserving the values and special culture of Southwest Airlines. If you don't have a good attitude. Southwest quickly took over the abandoned gates. a small NorthEuropean Carrier. to support the growth and profitability of the company. we deliver the resources and services to prepare our people to be winners. The company has become such a popular employer that in 1995.049 maintenance workers. accounting. This allows the company to be extremely selective in its hiring and to look for applicants who are a good "fit. As Kelleher has said. no matter how skilled you are. According to the department's mission statement: "recognizing that our people are the competitive advantage. 13. and clerical positions. Southwest is still a relatively small company compared to the other major airlines. Southwest's Available Seat Miles (ASMs) total less than a quarter of American Airlines. Given Southwest's reputation as a great place to work it is no wonder that so many people apply for each job opening. Southwest has been a very nimble organization.000 applicants a year and the turnover rate is less than half of most other airlines. It ranks 8th in revenues and 5th in passenger boardings.519 in management. although Southwest is still purely a domestic carrier.
This is not to suggest that Kelleher is impoverished. The importance of labor relations cannot be underestimated in a company that is almost 85% unionized. Southwest has its University for People. including all senior management. was named one of the lowest-paid chief executive officers in Dallas on a performance-adjusted basis. all training is done on the employee's own time. These six months are also used to weed out anyone who does not mesh with the culture. they tend to focus on its cultural attributes. Kelleher. the training department operates at full capacity. Everyone at Southwest has a responsibility for self-improvement and training. Culture and Control. Southwest has refused to compete for executive talent based on salary. Once a year. It is also noteworthy that in an era when chief executive pay has escalated to huge amounts.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
levels through training. he has become wealthy from its stock. In an organization where attitudes. Furthermore. When competitors and outside observers describe Southwest. Nonetheless. To promote employee awareness of the effects of their efforts 19 | P a g e
. McDonald's has its Hamburger University. Here again Kelleher's unusual abilities emerge.no cars or club memberships -. The culture permeates the entire organization and sends clear signals about the behavior expected at Southwest. company officers do not get the perks often enjoyed by their counterparts in comparable organizations -. culture and fit are so important it is natural that the company places such a great emphasis on socialization and training. Except for flight training. seven days a week. in 1994. Like many
Southwest employees." A new hire's first six months at Southwest are a period of indoctrination and mentoring. The fun spirit of Southwest emerges in graduates very early.and they even stay in the same hotels as flight crews. The most distinguishing feature of Southwest Airlines is its culture. are required to participate in training programs designed to reinforce shared values. which is regulated and certified. We can't change attitude. all Southwest employees. Somehow he has been able to convince union members and officials to identify with the company. Herb Kelleher has made the development and maintenance of culture one of his primary duties. a class of new pilots stumbled into Kelleher's office wearing dark glasses and holding white canes. For example.
One excerpt from
Southwest's "The Book on Service: What Positively Outrageous Service Looks Like at Southwest Airlines" is rather instructive: "'attitude breeds attitude. Such attributes are believed by senior management to enhance a sense of community.with both our internal and external customers. Southwest is not stifled by the rigid work rules that characterize most competitors.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
on the company's bottom line. is expedited. When pilots help flight attendants clean the aircraft and check in passengers at the gate. Stories abound of pilots helping with baggage and of
employees going out of their way to help customers. Another characteristic is the cooperative relationship among employee groups. LUV Lines (the company newsletter) reports break-even volumes per plane. Because of its team-oriented culture. This can be an advantage in functional structures. work procedures clearly demarcate job duties. The belief is that informed employees are better equipped to make decisions. Humor is a significant aspect of the work environment. In other airlines. but competitor news as well. However. trust. Southwest has tempered the stringent demands of a functional structure with the liberating force of an egalitarian culture. we must create a funloving environment.. One of the shared values is the importance of having fun at work. an agent baby-sat a passenger's dog for two weeks so that the customer could take a flight on which pets were not allowed. As a result. Just as the words 'it's not my job' can take away the source of life for a consumer20 | P a g e
.. turnaround time.' If we want our customers to have fun. Employee cooperation impacts the bottom line. That means we have to be self-confident enough to reach out and share our sense of humor and fun -. We must want to play and be willing to expend the extra energy it takes to create a fun experience with our customers. which are notorious for generating coordination problems. and spirit and to counterbalance the stress and pressures of the mechanistic demands of airline operations. at Southwest everyone pitches in regardless of the task. The newsletter informs employees not only of Southwest's issues. a cornerstone of the low-cost structure. In one particularly bizarre story.
' Then. attitude. Southwest's culture has been a source of sustainable competitive advantage. the Southwest pilots understand that.000! Forged over 26 years. Service does not start at the beginning of each work day.it's your company.both personally and professionally. It is born and bred in each individual according to his or experiences.. nor does it end when you go home. unlike the employee groups at other major airlines.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
oriented business. Despite all of the freedom that the culture permits. 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. the words 'it's just a job' are equally as dangerous.. The pilots are well compensated relative to the industry average. it cannot be artificially manufactured."2
21 | P a g e
. and it is not required by law. and they understand that. and genuine desire to succeed -." This approach certainly contributes significantly to the lowest employee turnover rate in the industry (7%) and the highest level of consumer satisfaction. in some areas the company also employs very stringent controls. Employees have long had a significant stake in the company.. The challenge was to find creative ways to tie together the fortunes of the company with those responsible for it without risk or destruction of shareholder value. It is a very real part of you.
Outrageous Service cannot be learned from a book or manual.. Perhaps the best example is that Herb Kelleher himself must approve all expenditures over $1.within or beyond the airline industry.and. the relationship is not merely spiritual-the employees have come to trust the only company that has a record of 23 consecutive years of earning stability combined with an impressive record of stock appreciation unmatched by virtually any company.. your success. too.. 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. your future.
Kelleher has replaced formal strategic planning with "future scenario generation. at all hours. has a column. Direct. deeply involved. What Was Herb Doing All This Time?" recounting the CEO's activities. it is also known that behind the scenes he can be extremely tough. age 67. He almost always seems ready for a party. and this funoriented atmosphere pervades the organization. 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. There is no doubt as to who is in charge at Southwest. and caring approach is revered throughout the organization. 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. Following his example. if not dominating CEO. Known for constantly showing the flag in the field and interacting with large numbers of employees and customers. and. Rollin King. often with a drink in his hand." arguing that 22 | P a g e
.3 seems to have been consistent right from the beginning. who is still a member of the Board of Directors. even bizarre. What sets Herb Kelleher apart is his charismatic nature.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Management. participative. Kelleher regularly works 16-hour days and seven-day weeks. started Southwest with a former client. he has attended company parties dressed in drag and appeared in a company ad as Elvis. LUV Lines. The agent "knew" that was what Herb would have done. Antony Club in San Antonio. centralized with a very strong. was drawn on a cocktail napkin. visible. His friendly. "So. The original "Love Triangle." the foundation of Southwest's strategy. implying that his public and private personae can be quite different. about company and industry issues. The company newspaper. Nonetheless. Herb Kelleher. In this respect Southwest is like most of the other airlines. some would say. A very large number of employees know the CEO and he is reputed to know thousands of them by name. Kelleher is reputed to have engaged people in conversations for hours. Kelleher's management style. which has been described as a combination of Sam Walton's thriftiness and Robin Williams's wackiness. Southwest employees are well known for going the extra mile.
"4 One of the most powerful departments is the Customer Department headed by Colleen Barrett. The committee developed a number of initiatives to improve cross-functional cooperation. is charged with preserving and enhancing the company culture. One of the committee's successes is illustrated by the company organization. The committee. but often at the expense of teamwork and coordination.000 PCs and terminals across the country. and provides the organizational balance for Kelleher. according to Robert W. She plays another unofficial role. Remote locations communicate with the servers using TCP/IP across Novell LANs. Executive Vice President. Southwest is a very heavy user of computer-related technology. which meets four times a year. This network supports a reservation system that has enabled Southwest to be the first carrier to offer ticketless travel on all of its flights. While he is reputed to have a chaotic style. it is estimated that it costs an airline from $15 to $30 to produce 23 | P a g e
. This technology supports all activities from scheduling to reservations to general operations support. The system also reduces costs. In the early 1990s Barrett set up a company culture committee. and planning is ordered and logical. and Kelleher's right-hand. As these organizations grow they become even more difficult to operate in an integrated manner. The ticketless system offers significantly improved customer service by eliminating lines at ticket counters.000 ticketless passengers per day. Vice President of Systems. she is known to be a stickler for details. One example is that all company officers and directors have to spend one day every quarter in the field -. Like all airlines. The network is built on four superservers and a reservations subsystem that connects more than 5. They now average more than 15. It is well known that functional structures such as Southwest's are designed to promote specialization and scale economies. 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. She is the senior female in the airline industry." Technology. comprised of people from all geographic areas and levels of the company.working a real "line job. acting as an ombudsman for customers and as an internal management expert. Rapp.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
"reality is chaotic.
Krone's activities are closely coordinated with the requirements and support facilities of Rapp's department. Marketing activities explicitly build on the Internet as a primary marketing channel. All Internet activities are concentrated under Kevin Krone. which was deemed "Best Airline Web Site" by Air Transport World. Customers using the Southwest ticketless system can purchase a seat on a Southwest flight by telephone or on the Internet. It recently launched a joint venture with Worldview Systems to enhance its Internet presence.COM. a consulting firm that helped to develop Morris Air's system. which is traded for a boarding pass at the airport. a Salt Lake City airline acquired by Southwest in 1993.
24 | P a g e
. the company was able to accelerate the development of its own system with the assistance of Evan Airline Information Services. Although policy and operational differences
prevented Southwest from adopting the Morris system.IFLYSWA. The first ticketless passenger
boarded a Southwest plane only four months after development began. Manager of Marketing Support. WWW. The concept of ticketless travel originated at Morris Air. Southwest was the first carrier to host a web site. Customers receive a confirmation code.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
and process a single paper ticket.
The Best 100 Companies To Work For In America. providing thousands of jobs in the aerospace industry.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
There are many different criteria that can be used to evaluate Southwest's success in achieving its basic objectives. This is achieved through the successful management of customer expectations. Meanwhile. Recognition as one of the top ten places to work in Robert Levering and Milton Moscowitz's book. Despite its "no-frills" orientation. No issue is more important than safety. reliable operations. carrying more than 50 million customers on 243 Boeing 737 aircraft. y Top ranking in the Airline Quality Survey conducted by The National Institute for Aviation Research for two of the last three years. Southwest has successfully redefined the concept of 25 | P a g e
. y Launch customer for three different Boeing airplanes. and y A route system that has grown to 52 airports in 25 states. Certainly Southwest's different constituencies look at its performance in
different ways. Of course. 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. Southwest maintains a 26-year safety record and is generally acknowledged to be one of the world's safest airlines. Southwest takes particular pride in the following accomplishments: y y 30 years of safe. Five consecutive years of Triple Crown Customer Service. By emphasizing low price and consistency. Southwest's customers remain one of the company's main constituencies. y y Five consecutive years of record profits and 24 consecutive years of profitability. Southwest consistently receives the highest rankings for customer satisfaction.
Ground crews are composed of six or fewer employees. Despite the lean staffing. but pilot productivity (e. developing and keeping talented people. the airline has won the award every year since 1992. planes are turned around in half the time of many rivals. the "Triple Crown Award" goes to the airline. No other airline has ranked on top in all three categories for even a single month. Broader scope allows them to take advantage of geographic differences in fuel prices and deeper pockets allow them to 26 | P a g e
. which has the best on-time record. For example. Perhaps the most important uncontrollable element is fuel. Despite its low-cost structure. if any. 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. First won by Southwest in 1988.8% of operating expenses in 1990 to 14.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
quality airline service. As noted. In 1997 Fortune ranked Southwest first on its list of the "100 Best Companies to Work For in America. labor relations is an important determinant of company survival. Southwest has one of the lowest personnel turnover ratios in the industry. best baggage handling and fewest customer complaints according to statistics published in the Department of Transportation (DOT) Air Travel Consumer Reports." 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.3% in 1996). employee satisfaction is another important indicator of company success. which has varied from 21. Southwest is not able to control all costs. where competitors
commonly use two or three. number of flights per day. about half the number used by other carriers. number of hours worked) is considerably higher. Given its mission. One advantage that larger.g. while at Southwest they are considerably lower. Labor costs are about 40% of operating costs in the industry. A single agent usually staffs gates.0% in 1995 (it is estimated at 15. Personnel are a crucial determinant of organizational performance throughout the industry. broader scope carriers have is a more limited exposure to fuel price volatility. Southwest pays its pilots wages that are comparable to the major carriers.
27 | P a g e
. when every other major airline lost money. Because of the "Southwest Effect. Southwest does have the advantage of a younger and more fuel-efficient fleet than its larger competitors. However.6 industry average). Southwest has also performed well on many financial criteria. capping five consecutive years of record profits and 24 consecutive years of profitability.this is achieved by a fare structure that is on average $60 lower than the majors. By this criterion. and its debt to equity ratio is one of the best in the industry (. Market share is another indicator of an organization's performance. This record includes 1991 and 1992. it consistently ranks first in market share in 80-90 of its top 100 city-pair markets. with a passenger share of 60-70%.25 versus ." the carrier gains this share by growing the size of each of its markets -.3 million in 1996 compared to $182. Its interest coverage is one of the best (6.6 million in 1995. Southwest also ranks at the top of the industry.75 versus an industry average of 2). The company's net earnings were $207.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
hedge against future price increases. It has an "A" rating on unsecured debt.
a first come first serve seating. In 2002 Southwest introduced 250 new ticket dispensing kiosks throughout the airports. This was a great opportunity for Southwest because they now had a chance to increase their market segmentation and create loyalty from these customers and new ones from the value they offer. By providing open seating coupled with a corporate culture of happy employees and spontaneous attitudes Southwest has truly taken the trend of economy flying to the next level. Throughout Southwest¶s history the only roadblock that they have encountered was in 1978 with The Airline Deregulation Act. the goal with these kiosks was to reduce the time spent in line and improve airport experience since September 11 2001.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Industry Analysis Trends Southwest Airlines shines above its competitors as the industry leader in low fare flights. which redefined the industry by eliminating the ability of the Civil 28 | P a g e
. more and more families wanted to travel in state but could not afford the high priced seats that Southwest¶s competitors. which cuts costs for everyone. Southwest Airlines discovered a niche market for air travelers who wanted an easy and affordable way to travel. Continental. Southwest Airlines has come up with a plan to offer its customers no in flight meals. They strive to give their customers that (positively outrageous service) POS that they are known so well for. and outstanding customer service to make the low cost experience feel like your flying first class to your destination. Southwest flies making it easy for customers to travel within the states conveniently without all the hassles of a major airport or many transfer flights. Alaska or United offered. Southwest was established in the time when economy flights were steadily increasing.
and are targeting different target segments. They could take customers from Southwest by creating new ways to innovate this industry. understanding that this will eventually land them in first place among their competitors. This effected Southwest since their business tends to be very cyclical in nature. Customer Profile Southwest Airlines have long since prided itself on a no frill low fare flights. by rewarding being early with a choice seat. This airline is mimicking what Southwest is trying to do with its no frills flights. in addition with their outstanding customer service. Of course these airlines offer a variation on the services to their customers. and control entry and exit into markets. and still offering that POS service. This demographic segmentation allows southwest to offer their target market the best possible service.
29 | P a g e
. allocate routes. This could be concerning to Southwest customer base because they must always be aware of what they are doing in order to hedge against their new offers. and prices.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Aeronautics Board (CAB) to set fares. Competitors Southwest¶s competitors include another low cost airline called Jet Blue. corporate travel managers along with their individual travelers. attracts mainly families and the traveler looking to save a few dollars. A request commonly took up to 6 weeks to be processed. In certain months people are likely to pay more than in other months. The only attempt to raise prices was through a petition to the CAB for a fare raise. United. Companies had no ability to change fares. even if their costs were increasing. Also southwest targets travel agents. Since young families are their main customers
Southwest offers promotional coupon with their flights in order to attract customers going on vacations. Southwest then offered a weekend of skiing on them. Other Airlines that contribute to taking Southwest¶s customer base are Continental. This kind of service. and American airlines. if you chose to fly on their airline. Such as they created an alliance with a Ski resort based in Utah. To fight this new law Southwest averaged their prices and went for a slow and steady growth business model.
there are things that Southwest needs to improve upon in order to continue their plan of slow yet steady growth over the long term. The Boeing 737 is their airplane of choice. However. and amazing customer service. reliable service. Weaknesses Southwest Airlines have managed to be consistently profitable in all of their years in business. labor costs have decreased and those who are left are highly trained and specifically chosen out of thousands of applicants to reflect Southwest¶s customer oriented culture.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Strengths Southwest Airlines is the leader in providing low cost in state flights for its customers. The first thing they need to improve upon is their 30 | P a g e
. the lowest ever in their history. low cost flights. excellent customer service. smaller hubs. they use the strategy of purchasing the same airplane for their entire fleet. have led to Southwest being the leader of its industry. and have been profitable for 33 years. Since every Southwest airplane is operated by only 71 people. Since Southwest airlines has been the leader in low cost flights for the last 36 years. All of these. inviting cabins. It consistently offers frequent flights. and cost cutting techniques. they have chosen to have a single airplane because you only need to have your employees trained on one type of airplane and because of that their efficiency increases.
In addition to the expansion into new hubs across the nation. They have been consistently behind all of their competitors. Their load factor is the amount of people they can get onto their plane to exceed their break even point in revenues. This of course could be due to the much higher frequency of flights on each route. and it would also allow them to decrease their complete dependence on passenger revenues. This would positively impact the company¶s bottom line by improving their range and their flight offerings. This would increase the number of flight they could offer their customers. They could do this by purchasing cheaper. Since they only travel within the United States and not internationally they could potentially be missing out on a whole new market for air travel. they could hedge against the possibility of a decrease in flights by expanding into a air freight business. and also offer more frequent flyer rewards to passengers and businesses who want to save money but still be involved in all aspects of their company state wide. Another thing that Southwest can improve upon is their load factor. Along with this are their limited growth capabilities. Since about 95% of their revenues come from their passengers an empty seat on a plane is revenue lost that can never be retrieved. Southwest should invest in new Boeing 737¶s to expand their fleet to accommodate the increase in flights.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
dependence on passenger revenues. They could offer flight transfers. This would allow for another stream of revenue year long. Since they need to fill a certain number of seats to meet their quota. any decrease in their load could negatively affect their bottom line. especially the business minded people. which they currently do not. Opportunities To compliment their new strategy of steady long term growth. who could be a potential market they have yet to tap in to. Southwest Airlines could consider expanding into new smaller airports. Threats
31 | P a g e
. thus appealing to a broader range of clientele. smaller airplanes that would haul cargo across the states. Since their business operates on a entirely cyclical system.
Its basic strategy of consistent low-cost. but also provides potentially higher margins. On this day air travel as we know it changed. it has expanded into some longer-haul markets. Longer-haul not only provides avenues for future growth. such as Florida. in order to continue to see long term growth. 22 percent of the carrier's ASMs were deployed on the west coast. Already the price for aviation turbine fuel has nearly doubled in the last year with no signs of slowing down. It has worked for the company in periods of catastrophic losses for the industry as well as in times of abundance. and Providence. Another factor that the airline must consider is the past events of September 11 2001.
The Challenges Ahead
Southwest Airlines is no Johnny-come-lately. This could have an effect on Southwest¶s bottom line. Southwest entered four new markets: Tampa. the 10% ticket tax has been replaced with a combination ticket tax and takeoff fee. as mentioned. since a lot of their customers are families with children. on-time air transportation with friendly service is a recipe that has been refined throughout the company's 30-year life.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Due to recent political activities the price of oil has increase to almost thirty six dollars a barrel. Opportunities for Growth. Any wrong move could ruin this great company¶s reputation for quality service that still saves you money. no-frills. Southwest must now come up with a new and innovative way to make their customers feel safe and secure. However. as well as in the addition of new city-pairs to Southwest's point-to-point network. On average.5 cents. This of course decreased revenues and trust in the airlines to keep their passengers safe. Furthermore. 33 percent 32 | P a g e
. Lauderdale. Florida. Southwest apparently recognizes the potential saturation of its historic markets. Ft. Analysts see growth directions in the invasion of new markets. In 1996. At year-end 1996. Rhode Island. high frequency. and the limited number of attractive short-haul markets. Therefore. the company's cost per ASM is just below 7. and Orlando. Southwest has been able to compete successfully both with the major airlines and those that have been formed to copy its formula. on its longer routes costs are as low as 4 cents per ASM. This increases the attractiveness of longer-haul flights. Being involved in the transportation industry during this time is proving to be difficult.
is not a good weather location. and enhanced nonstop service from Nashville to Las Vegas and Tampa.000. As critics have noted. and Louisiana). and ten percent on the east coast (Providence. Southwest is now flying into Islip.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
in the remainder of the western region (west of Texas). Oklahoma. Los Angeles.600 flights per day. Southwest began service to Jacksonville. and operations from Nashville all the way to the west coast. one of the newer locations. Its old strategy of focusing on good climates and smaller. Thus. Oakland. Longer flights also result in fewer flights per day and may serve to drive down yield. 16 percent in the Midwest region. Southwest will eventually saturate its historic niche. Arkansas. 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. It is unclear how much demand for point-to-point service exists in the remaining 20. such as the recently inaugurated Albuquerque to Orlando route. and Florida). which leaves little leeway for flight delays. less congested airports has contributed to Southwest's low costs. The company currently flies into more than 52 airports with an average of 2. Long Island in New York. This is magnified by a schedule based on a rapid turnaround. 19 percent in the heartland region (Texas. 1997. Seven new nonstop flights from Nashville International Airport began in April of 1997 and two additional departures became effective in June. Many believe that poor weather conditions can affect Southwest's ability to maintain on-time performance and can significantly impact down-line operations. Baltimore. RI.
Limits to Growth. Southwest currently serves 36. there are many challenges on the horizon. Florida on January 15. The new nonstop routings are Nashville to Detroit. 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 satisfy these criteria. Southwest has begun to enter markets in poorer climates and to introduce longer-haul flights. and Columbus. 33 | P a g e
. There are about 56 airports in good weather locations with populations of over 100. Providence. Southwest is adding longer routes.
Southwest is highly selective. there will be a greater need for functions in the organization responsible for new elements such as national marketing. particularly in geographic location. Furthermore. At the same time. a frequent flyer program. 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. Southwest may not be able to get the human resources it needs in order to differentiate itself from others. not surprisingly. People and culture also are major concerns to further expansion. These separate divisions may hire their own pilots and ground support at much lower cost under separate contractual relations with unions. Larger airlines have developed lower cost short-haul divisions. it may be difficult to attract large pools of applicants. This is particularly true if the culture is built around the persona of one major leader such as Herb. The carrier's average stage length has also increased over 34 | P a g e
. and interline and marketing agreements with international carriers. United and Delta have all introduced an "airline within an airline" to lower costs for short-haul flights. As Southwest has grown in scope. Southwest's operations at
Nashville are developing into a hub. new geographic operations and possibly food services. and American is likely to follow.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
A mixture of galleyed and non-galleyed aircraft will also make fleet scheduling less flexible. it consequently needs a large pool of applicants in order to find a few people good enough for the culture. Under these arrangements pilots can often be employed for less than half the cost of the parent airline. including a branded credit card. During the last several years. Continental. With labor shortages across the country. the often find that it becomes increasingly more difficult to maintain the same culture. has led to some bitter disputes between management and unions. For example. Competition. As companies expand. interline agreements. Without the selectivity. This. it has introduced national advertising. the frequent flyer program. Southwest has adopted many of the features that the majors use to support their large networks. the gap between Southwest and the rest of the majors has narrowed as other carriers have attempted to emulate Southwest's formula. The unique culture of Southwest helps make the company really fly. including NFL sponsorship.
claiming that it keeps contenders from leaving. To some extent.and by the way. Southwest's boast about hard working employees provoked 92 percent of its flight attendants to reject a new contract in June 1997.6 Board members.'"5 Analysts worry about the degree to which Southwest's future is dependent on one person -although the company claims that this is not the case. a board member and close friend. As a safeguard. the flight attendants' union chief stated: "After being told for a long time that they were the best employees in the business. In fact. Still. Succession.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
the last several years. he boasts of his passion for bourbon (Wild Turkey) and cigarettes (five packs a day) -. Its flights now compete head to head with some of the major carriers. invoking the case of Walt Disney. flight attendants are saying 'Well show me I'm the best in terms of compensation. predicts he will likely retire at the end of his five-year contract in 2003. and as he gets older -. low-congestion strategy.7
35 | P a g e
. analysts wonder whether Southwest's greatest risk after Kelleher is gone might be letting that influence grow too strong. concerned about his health. articles in Fortune and The New York Times Magazine have identified the issue as an obstacle to the company's long-term success. As Paul Sweetin. cut back on the number of people reporting to Kelleher several years ago and have questioned him about succession planning. Although Kelleher says he won't retire until about 2010. Southwest has also put in place a Culture Committee of more than 100 corporate missionaries who have been charged with institutionalizing Kelleher's influence. Southwest has now expanded into geographic markets and climates that are not as compatible with its original fair-weather. As the company gets larger. he still does not have a clear second in command. However. Rollin King. the board also sees his lack of an apparent successor as a virtue.will organizational weaknesses begin to emerge? For example. Few CEO's are more closely identified with company success than Herb Kelleher.
Southwest is committed to introducing "safe. and do things never before dreamed possible.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Whoever will lead Southwest in the coming years will need to deal with significant challenges: a set of increasingly able competitors. Triple Crown service to even more Americans in order to allow them to go. the company's management will need to think very carefully about the challenges ahead and the actions that will be critical for future success. and the strain of national growth that will accompany Southwest's departure from previously successful strategies. To keep this dream from turning into a nightmare. this means doing for the United States what the high-speed rail network did for Western Europe. affordable. potentially weakened labor relations." In
36 | P a g e
SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
37 | P a g e
1996). Wendy Zellner. 1996) 3. Myerson. (Bard Books. Freiberg and K.´ Business Week. Ibid. Ibid. Myerson.
Allen R.SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
JP Morgan. "Impacts of Deregulation and Recent Trends on Aviation Industry Management. Freiberg. "Air Herb. 2000. "Air Herb.
J. R. ³Southwest¶s New Direction. NUTS! Southwest Airlines' Crazy Recipe for Business and Personal Success. 1999. (November 9. April 17. Short-haul Competitive Update (April 16. 39." Bankers Trust Research (August 30. February 8.
A. Also see Ken Brooker. 1996): 16.
38 | P a g e
. 1997): 36. ³Can Anyone Replace Herb?´ Fortune." New York Times Magazine." p.