Case #10 Southwest Airlines in 2014 Culture Values and Operating Practices

CASE 25Southwest Airlines in 2014: Culture, Values, and Operating Practices Arthur A. Thompson John E. Gamble The University of Alabama Texas A&M University–Corpus Christi I n 2014, Southwest Airlines was the market share Houston.1 Over the years, King had heard many leader in domestic air travel in the United States; Texas businessmen complain about the length of it transported more passengers from U.S. airports time that it took to drive between the three cities to U.S. destinations than any other airline, and it and the expense of flying the airlines currently serv- offered more regularly scheduled domestic flights ing these cities. His business concept for the airline than any other airline. Southwest also had the envi- was simple: Attract passengers by flying convenient able distinction of being the only major air carrier schedules, get passengers to their destination on in the United States that was consistently profitable, time, make sure they have a good experience, and having reported a profit every year since 1973. charge fares competitive with travel by automobile. From humble beginnings as a scrappy underdog Kelleher, skeptical that King’s business idea was with quirky practices that flew mainly to “secondary” viable, dug into the possibilities during the next few airports (rather than high-traffic airports like Chicago weeks and concluded a new airline was feasible; he O’Hare, Dallas–Fort Worth, and New York’s Ken- agreed to handle the necessary legal work and also nedy airport), Southwest had climbed up through the to invest $10,000 of his own funds in the venture. industry ranks to become a major competitive force In 1967, Kelleher filed papers to incorporate the in the domestic segment of the U.S. airline indus- new airline and submitted an application to the Texas try. It had weathered industry downturns, dramatic Aeronautics Commission for the new company to increases in the price of jet fuel, cataclysmic falloffs begin serving Dallas, Houston, and San Antonio.2 But in airline traffic due to terrorist attacks and economy- rival airlines in Texas pulled every string they could wide recessions, and fare wars and other attempts by to block the new airline from commencing opera- rivals to undercut its business, all the while adding tions, precipitating a contentious four-year parade more and more flights to more and more airports. of legal and regulatory proceedings. Herb Kelleher Since 2000, the number of passengers flying South- led the fight on the company’s behalf, eventually pre- west had increased from 72.6 million to 115.4 million, vailing in June 1971 after winning two appeals to the whereas domestic passenger traffic had remained flat Texas Supreme Court and a favorable ruling from the or declined at American Airlines, Delta Air Lines, U.S. Supreme Court. Kelleher recalled, “The con- United Airlines, and US Airways—see Exhibit 1. stant proceedings had gradually come to enrage me. There was no merit to our competitors’ legal asser- tions. They were simply trying to use their superior COMPANY BACKGROUND economic power to squeeze us dry so we would col- In late 1966, Rollin King, a San Antonio entre- lapse before we ever got into business. I was bound preneur who owned a small commuter air service, and determined to show that Southwest Airlines was marched into Herb Kelleher’s law office with a going to survive and was going into operation.”3 plan to start a low-cost, low-fare airline that would Copyright © 2014 by Arthur A. Thompson and John E. Gamble. shuttle passengers between San Antonio, Dallas, and All rights reserved. CASE 25 Southwest Airlines in 2014: Culture, Values, and Operating Practices C-341 EXHIBIT 1 Total Number of Domestic and International Passengers Traveling on Select U.S. Airlines, 2000, 2005, 2010–2013 (in thousands) Total Number of Enplaned Passengers1 Carrier 2000 2005 2010 2011 2012 2013 American Airlines Domestic 68,319 77,297 65,774 65,253 65,027 65,070 International 17,951 20,710 20,424 20,887 21,430 19,962 Total 86,270 98,007 86,198 86,140 86,457 85,032 Delta Air Lines2 Domestic 97,965 77,581 90,141 92,864 95,641 98,590 International 7,596 8,359 19,390 19,344 19,568 18,925 Total 105,561 85,940 109,531 112,208 115,209 117,515 Southwest Airlines (domestic only, has no international flights)3 72,568 88,436 106,270 110,624 112,277 115,377 AirTran (Domestic)3 — — — 23,781 20,453 16,146 AirTran (International) — — — 937 1,301 1,534 Southwest Airlines total 135,342 134,031 133,057 United Airlines4 Domestic 72,450 55,173 43,323 39,551 67,629 65,221 International 10,625 10,356 9,727 10,091 23,998 22,209 Total 83,075 65,529 53,050 49,642 91,627 87,430 US Airways5 Domestic 56,667 37,040 45,180 46,208 47,481 50,037 International 3,105 4,829 6,670 6,749 6,794 6,480 Total 59,772 41,869 51,850 52,957 54,275 56,517 1 Includes both passengers who paid for tickets and passengers who were traveling on frequent-flyer awards. 2 Delta Air Lines and Northwest Airlines merged in October 2008; however, combined reporting did not begin until 2010. 3 Southwest Airlines acquired AirTran in late 2010; by year-end 2014, all AirTran flights were scheduled to be rebranded as Southwest Airlines flights. 4 United Airlines acquired Continental Airlines in 2010, and the two companies began joint reporting of passenger traffic in 2012. Prior to 2012, traffic count data are for only United flights. 5 US Airways and America West merged in September 2005, but joint reporting of traffic counts did not begin until 2007; hence, data for 2000 and 2005 do not include America West, whereas the data for 2010–2013 do include the traffic counts of the combined companies. US Airways and American Airlines merged in December 2013 but continued to operate under their separate names through 2014. Source: U.S. Department of Transportation, Bureau of Transportation Statistics, “Air Carrier Statistics,” Form T-100. In January 1971, Lamar Muse was brought in as discounting its price from $5 million to $4 million and the CEO to get operations under way. Muse was an financing 90 percent of the $12 million deal. Muse aggressive and self-confident airline veteran who knew was able to recruit a talented senior staff that included the business well and who had the entrepreneurial a number of veteran executives from other carriers. He skills to tackle the challenges of building the airline particularly sought out people who were innovative, from scratch and then competing head-on with the wouldn’t shirk from doing things differently or uncon- major carriers. Through private investors and an ventionally, and were motivated by the challenge of initial public offering of stock in June 1971, Muse building an airline from scratch. Muse wanted his raised $7 million in new capital to purchase planes executive team to be willing to think like mavericks and equipment and provide cash for startup. Boeing and not be lulled into instituting practices at South- agreed to supply three new 737s from its inventory, west that imitated what was done at other airlines. C-342 PART 2 Cases in Crafting and Executing Strategy Southwest’s Struggle to (Later, when the company went public, it chose “LUV” as its stock-trading symbol.) Gain a Market Foothold • To add more flights without buying more planes, In June 1971, Southwest initiated its first flights with the head of Southwest’s ground operations came a schedule that soon included 6 round-trips between up with a plan for ground crews to off-load pas- Dallas and San Antonio and 12 round-trips between sengers and baggage, refuel the plane, clean the Houston and Dallas. But the introductory $20 one- cabin and restock the galley, on-load passengers way fares to fly the Golden Triangle, well below the and baggage, do the necessary preflight checks $27 and $28 fares charged by rivals, attracted dis- and paperwork, and push away from the gate in 10 appointingly small numbers of passengers. To try to minutes. The 10-minute turnaround became one gain market visibility and drum up more passengers, of Southwest’s signatures during the 1970s and Southwest undertook some creative actions to sup- 1980s. (In later years, as passenger volume grew plement its ad campaigns publicizing its low fares: and many flights were filled to capacity, the turn- • Southwest decided to have its flight hostesses around time gradually expanded to 30 minutes— dress in colorful hot pants and white knee-high because it took more time to unload and load 135 boots with high heels. Recruiting ads for South- passengers compared to a half-full plane with just west’s first group of hostesses headlined “Atten- 60 to 65 passengers. Even so, the average turn- tion, Raquel Welch: You can have a job if you around times at Southwest during the 2000–2013 measure up.” Two thousand applicants responded, period were shorter than the 35- to 50-minute and those selected for interviews were asked turnarounds typical at other major airlines.) to come dressed in hot pants to show off their • In late November 1971, Lamar Muse came up legs—the company wanted to hire long-legged with the idea of offering a $10 fare to passengers beauties with sparkling personalities. Over 30 on the Friday night Houston-Dallas flight. With of Southwest’s first graduating class of 40 flight no advertising, the 112-seat flight sold out. This attendants consisted of young ladies who were led Muse to realize that Southwest was serving cheerleaders and majorettes in high school and two quite distinct types of travelers in the Golden thus had experience performing skimpily dressed Triangle market: (1) business travelers who were in front of people. more time-sensitive than price-sensitive and • A second attention-getting action was to give pas- wanted weekday flights at times suitable for con- sengers free alcoholic beverages during daytime ducting business, and (2) price-sensitive leisure flights. Most passengers on these flights were travelers who wanted lower fares and had more business travelers. Management’s thinking was flexibility about when to fly.4 He came up with that many passengers did not drink during the a two-tier on-peak and off-peak pricing structure daytime and that with most flights being less than in which all seats on weekday flights departing an hour’s duration it would be cheaper to simply before 7 p.m. were priced at $26 and all seats on give the drinks away than collect the money. other flights were priced at $13. Passenger traf- • Taking a cue from being based at Dallas Love fic increased significantly—and systemwide on- Field, Southwest began using the tagline “Now peak and off-peak pricing soon became standard There’s Somebody Else Up There Who Loves across the whole airline industry. You.” The routes between Houston, Dallas, and • In 1972, the company decided to move its flights San Antonio became known as the “Love Tri- in Houston from the newly opened Houston Inter- angle.” Southwest’s planes were referred to as continental Airport (where Southwest was losing “Love Birds,” drinks became “Love Potions,” money and where passengers faced a 45-minute peanuts were called “Love Bites,” drink coupons trip to the city’s downtown area) to the abandoned were “Love Stamps,” and tickets were printed on Houston Hobby Airport, located much closer to “Love Machines.” The “love” campaign set the downtown Houston. Despite being the only car- tone for Southwest’s approach to its customers rier to fly into Houston Hobby, the results were and its efforts to make flying Southwest Airlines spectacular— business travelers who flew to Hous- an enjoyable, fun, and differentiating experience. ton frequently from Dallas and San Antonio found tion) to fly between Houston and New Orleans. Over 75 per. When Congress passed the Airline Deregulation Act in 1978. The local and 1975. The ad announced that South. and Operating Practices C-343 the Houston Hobby location far more convenient. and New Mexico. their protest was based one of Southwest’s major rivals. Southwest found itself siphoned away from DFW. run in the Dallas newspapers. or Smirnoff vodka (or.S. proclaiming the battle as a David versus west out of business—a violation of the Sherman Goliath struggle in which the upstart Southwest Antitrust Act. served and that Southwest’s entry would result in page ad. What Dallas–Fort Worth (DFW) Regional Airport. headlining costly overcapacity. In the year before Southwest initi- west would not only match Braniff’s $13 fare but ated service. sentiment in Texas swung to Southwest’s side. in the 11 months following plimentary fifth of Chivas Regal scotch. Southwest countered that its “Nobody is going to shoot Southwest Airlines out low fares would allow more people to fly and thus of the sky for a lousy $13” and containing copy would grow the market.000 each. government to investigate what it considered corporate controllers began insisting that com. stating that Braniff was trying to run Southwest and its views about low fares expanding the market out of business. In February pany employees use the $13 fare. House of Representa- move its flights from Dallas Love Field. 123. The two airlines pleaded “no contest” did not stand much of a chance against the much to the charges. Oklahoma. Again. company’s headquarters were located at Love Field. located tives. although the percentage Southwest’s operations. out to the newly opened a rash of lobbying and maneuvering ensued. proved accurate. the construction of the airport. which emerged came to be known as the Wright Amend- was 30 minutes from downtown Dallas. Southwest prevailed. for nondrinkers. Southwest retaliated with a two. Local offi. and tested Southwest’s application to begin serving sev- all times. Southwest was prohibited from advertising. predatory tactics by its chief rivals. Arkansas. CASE 25 Southwest Airlines in 2014: Culture.” The Wright . regular-priced ticket for $26 and receiving a com. Crown Southwest’s initial flights. larger and well-established Braniff. the outside the five-state “Wright Zone. signed cease-and-desist agreements. who took the matter to the floor of the House. then battles. its San Antonio–Dallas flights. One battle involved Southwest’s refusal to the majority leader of the U. a leather ice bucket). The ever annual profit in 1973. all days. Southwest cut its A second battle ensued when rival airlines pro- regular $26 fare to $13 for all seats. Braniff and Texas International were indicted national media picked up the story of Southwest’s by a federal grand jury for conspiring to put South- offer. The resulting gains in pas. ment of 1979: No airline may provide nonstop or cials were furious because they were counting on through-plane service from Dallas Love Field to fees from Southwest’s flights in and out of DFW to any city in any state except for locations in Texas.S. or San Antonio. grassroots and were fined a modest $100.000 passengers flew from Harlin- would also give passengers the choice of buying a gen Airport in the Rio Grande Valley to Houston. Believing that Braniff and Texas International cent of Southwest’s Dallas-Houston passengers were deliberately engaging in tactics to harass opted for the $26 fare. Southwest convinced the dropped as the two-month promotion wore on and U. 325. Values.000 passengers flew Royal Canadian whiskey. or checking baggage for had not agreed to do so or been ordered to do so by travel from Dallas Love Field to any city it served the Texas Aeronautics Commission—moreover. Southwest’s posi. and passenger traffic doubled almost immediately. application was vehemently opposed by local gov- ernment officials and airlines operating out of DFW More Legal and Regulatory Hurdles because of the potential for passenger traffic to be During the rest of the 1970s. When Braniff International. 10 minutes from downtown. in an attempt to fill empty seats on tions could remain at Love Field. announced $13 on arguments that these markets were already well fares of its own. to the same three cities. pub- tion was that it was not required to move because it lishing schedules or fares. The opponents solicited embroiled in another round of legal and regulatory the aid of Fort Worth congressman Jim Wright. Dallas. nautics Board (now the Federal Aviation Administra- senger traffic enabled Southwest to report its first. The courts eventually ruled that Southwest’s opera- • In early 1973. at that time eral smaller cities in Texas. Southwest applied to the Civil Aero- All these moves paid off. help service the debt on the bonds issued to finance Louisiana. 800 employ- would most likely have gone under. In cials were instrumental in building Herb Kelleher’s the process. ris Poll. it 2013 revenues of $17. Over The Emergence of a Combative. can-do spirit into the corporate culture:5 gage handling. air carriers during group vice president of marketing services at United the 1995–2013 period. Airlines. those traveling on frequent-flyer awards) in 2013. when Alabama. In 2006. and Best Customer Service and Best Loy- west’s board wanted Herb Kelleher to take over as alty Credit Card. Southwest the Wright amendment beginning in 2014.S. They almost wore him to handling goals in 2013. But Kelleher enjoyed practic. According to Southwest’s porting more than 108 million fare-paying passen- former president. one of Executive truly what created our culture. Colleen Barrett.C-344 PART 2 Cases in Crafting and Executing Strategy amendment was expanded in 1997. the next 20 years. annual revenues of esprit de corps among Southwest personnel and a $5. the board. Exhibit 2 provides a five-year summary of ing law. Market Share Leader. 1981–2013 islation was passed and signed into law that repealed When Herb Kelleher took over in 1981. chairman and CEO. it still led the domestic airline the ground. Crown awards—for best on-time record. Southwest’s rivals. after a heated battle in Congress. regulatory. the obstacles thrown gers and over 133 million total passengers (including in the company’s path by competitors and local offi. Sustained Growth Transforms Mississippi. in 2005. Exhibit 3 on page C-347 provides select operating Southwest’s board appointed Howard Putnam. from InsideFlyer Magazine. is tic Airline for Customer Service. and fewest customer complaints— than any other U. University in Middletown. When Kelleher stepped The legal. over 30. the more industry in customer satisfaction and received other determined Herb got that this airline was going to go awards and recognitions.S. airports. South. With fare-paying passengers annually. the company had 350 Southwest fought in its early years produced a strong planes flying to 58 U. the company won more industry Triple passion for Southwest Airlines and ingraining a com. This time. a and financial data for major U. and 64 million drive to survive and prosper despite the odds. While Southwest fell They would put twelve to fifteen lawyers on a case and short of its on-time performance and baggage- on our side there was Herb. Under the two CEOs who succeeded Kelleher. Had ket share leader in domestic air travel. as Southwest’s president and CEO in July 1978. graduating . Travel Magazine’s Leading Edge awards. Brand of the Year in the Value Airline Category. employees were fully aware that Southwest continued its march to becoming the mar- the airline’s existence was constantly on the line.000 employees. and trans- officials understood well.S. airline. the very fight to survive. But the more arrogant they were. Southwest’s board succeeded in AIRLINE persuading Kelleher to take on the additional duties Herb Kelleher majored in philosophy at Wesleyan of CEO and president. Kelleher got to know many of the company’s personnel and observe them WHO TRANSFORMED in action. Putnam asked Kelleher to become more involved in Southwest’s day-to-day operations. and Kansas were added to the five-state zone. and local government 7 destinations outside the United States. flying 680 planes to 96 airports in 41 states and employees. leg.100 employees. Missouri was added to the Wright Southwest into the Domestic Zone. Connecticut. and competitive battles that down as CEO in mid-2001. was flying 27 planes to 14 destination cities and had $270 million in revenues and 2. from the Har- When Lamar Muse resigned in 1978. newspaper and TV stories reporting Southwest’s dif. he insisted that someone else be CEO. including Best Domes- into the air—and stay there. best bag- bative. Southwest Airlines prospered Can-Do Culture at Southwest under Kelleher’s leadership. growing to the company been forced to move from Love Field. so while he agreed to become chairman of Southwest’s financial and operating performance. ficulties regularly. The warrior mentality.7 billion and 44.6 billion. HERB KELLEHER: THE CEO and over the next three years. Putnam announced his resignation in fall SOUTHWEST INTO A MAJOR 1981 to become president and COO at Braniff Inter- national. an outcome that ees. CASE 25 Southwest Airlines in 2014: Culture.64 15.978.227. diluted $1.1300 $0.3% 76.973.550 Load factor3 80.877 $ 6.0345 $ 0.977 1.875 $ 3.191 $ 2.13 Net income per share.23 $0.336 $ 6.979 97.322 86.100 127.699 $ 17.05 $0.437.465 14.56 (Continued) .883 $ 3.9% 79.312.075.012 106. and Operating Practices C-345 EXHIBIT 2 Summary of Southwest Airlines’ Financial and Operating Performance.228 Revenue passenger- miles (RPMs) (000s)1 104.463 $14.216 102. except per share and operating data) Year Ended December 31 2013 2012 2011 2010 2009 Financial data Operating revenues $ 17.3% 80.23 $0.317.710 Available seat-miles (ASMs) (000s)2 130.34 12.578.874.56 $0.046.0180 $ 0.338.521 101.17 $141.06 $0.116 10.90 $130.104 $ 10.785 1.088 Operating income 1.558 1.582.965 11.088 $ 15.155.56 $0.092 98.30 10.976 109.348.72 $147.62 $0.29 Operating revenue per ASM (cents)5 13.58 13.658 $ 12.350 Operating expenses 16.269 Long-term obligations at period-end $ 2.345 $18.530 78.421 16.61 Passenger revenue yield per RPM (cents)4 16.454 Operating data Revenue passengers carried 108.191.736 98.13 Cash dividends per common share $ 0.0% Average length of passenger haul (miles) 966 941 939 885 863 Average length of each flight (miles) 703 693 679 648 639 Trips flown 1.310. 2009–2013 (in millions.125.229 Enplaned passengers 133. net 69 (62) 370 243 98 Income before taxes 1. basic $1.072 128.759 88.107 $ 2.992 $ 6.99 12.278 623 693 988 262 Other expenses (income).344.12 14.02 15.1% 80.451 1.456.325 Stockholders’ equity at period-end $ 7.0180 Total assets at period-end $ 19.361.114.237 $ 5.967 74.61 $0.110 120.551.27 $114.001.111 Average passenger fare $154.209 685 323 745 164 Provision for income taxes 455 264 145 286 65 Net income $ 754 $ 421 $ 178 $ 459 $ 99 Net income per share.509 103.068 $ 15.72 13. Values.030 133.137.596 $ 18.346.0180 $ 0. 8 Includes leased aircraft and excludes aircraft that were not available for service. Kelleher attended most Rollin King’s small aviation company.51 $2. His style was to listen and observe became a successful lawyer and came to represent and to offer encouragement.65 ¢7. 6 Calculated as passenger revenue divided by available seat-miles. excluding fuel (cents) ¢8. 2013.16 $3. to check on how well the he clerked for a New Jersey Supreme Court justice for planes were running.847 1. excluding fuel and profit sharing (cents) ¢8. Kelleher did not do much managing from his marrying a woman from Texas and becoming enam.97 Fuel consumed. or held for return to the lessor. office. economic $3. where he much as he could.12 $3.764 1.07 ¢7.60 ¢12. After graduation.61 ¢7.392 34.56 ¢12.24 ¢11.30 $3.45 ¢7. again graduating with honors and also serv. graduation ceremonies of flight attendant classes. 4 Calculated as passenger revenue divided by revenue passenger-miles. It represents the average cost paid by a paying passenger to fly 1 mile. 7 Calculated as operating expenses divided by available seat-miles.C-346 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 2 (Continued ) Year Ended December 31 2013 2012 2011 2010 2009 Passenger revenue per ASM (cents)6 ¢12. Source: Company 10-K report.861 45.01 ¢7.29 ¢10. he moved to San Antonio.41 ¢11. Also referred to as unit costs or cost per available seat-mile. including fuel tax. with honors.83 ¢12.831 45. 5 Calculated as operating revenue divided by available seat-miles.09 Operating expenses per ASM (cents)7 ¢12.85 ¢12.12 Fuel costs per gallon.73 ¢7.437 1.” which is a measure of the space avail- able to carry passengers in a given period.98 ¢7. and talking with the flight atten- two years and then joined a law firm in Newark.19 $2. also referred to as “capacity.18 Operating expenses per ASM.28 $3.15 Fuel costs per gallon. He earned his law degree at New York When Herb Kelleher took on the role of South- University.18 ¢8.428 Active full-time equivalent employees 44. west’s CEO in 1981.39 $1.67 ¢10. 2 An available seat-mile (ASM) is one seat (empty or full) flown 1 mile. in storage. this is the average cost of flying an aircraft seat (empty or full) 1 mile. It is a measure of operating revenue production based on the total available seat-miles flown during a particular period. including fuel tax $3. 3 Revenue passenger-miles divided by available seat-miles.901 34. in gallons (millions) 1.726 Aircraft in service at period-end8 680 694 698 548 537 1 A revenue passenger-mile is one paying passenger flown 1 mile. It is a measure of passenger revenue production based on the total available seat-miles flown during a particular period. maintenance personnel. and . held for sale.818 1. preferring instead to be out among the troops as ored with Texas. he made a point of visiting with ing as a member of the law review.29 Operating expenses per ASM.19 $ 2. Upon dants. Bureau of Transportation Statis- tics.470 $ 93.0 666.521.640 Operating profit (loss) (millions) $ 5. I’ve never gotten tired of fighting.283 $ 2.” the when it came to the financial side of the business.6 798.564.0 9.299 $115. and Operating Practices C-347 EXHIBIT 3 Select Operating and Financial Data for Major U. That has been a very powerful com- them out. “Airline Traffic Data” press releases. prompting some people to refer a mental straightjacket that becomes disabling in an to him as the “clown prince” of the airline industry. ‘War is hell and I love it so. While he attended a Southwest employee function. industry where things change radically from one day He once appeared at a company gathering dressed in to the next. owned a tricked-out motorcycle. stomp side customers right.5 1. cover them over.224 538.S. 2000.a. and held in the highest regard by the employees.4 823. and made no tegic plans.300 547.2 738. an abuse of power.” Kelleher wanted Southwest managers to an Elvis costume.2 Load factor (%) 67.1 987.467 531. that’s an spirit at work.’ That’s Another indication of the importance that Kelle- how I feel.6 Kelleher was well known inside demanded prompt responses.344 $ 7. He knew the Kelleher insisted on fiscal conservatism.0 72. ordered and logical.002.0 9. comparatively low levels of debt.8 736.6 992. 2005. busy travel day before Thanksgiving.062. and he had arm-wrestled a South think ahead.0 9. Kelleher was a strong believer in the principle particularly when it came to beating back competi.9 Flights (thousands) 8.0 814.7 994. swarmed like a celebrity. He loved to make jokes and engage in pranks goes on in most strategic planning processes creates and corporate antics.0 9. boot them in the ditch.0 82.3 720.035 $ 7. You’ve got to take the time to listen and move on to the next thing.665 $ 1. planning is secret of his love for smoking and Wild Turkey whis. veteran employees.011. Kelleher had an aversion to Southwest personnel Kelleher had an affinity for bold-print Hawaiian spending time drawing up all kinds of formal stra- shirts. Values. various years. The meticulous nit-picking that key.035. what Patton said. Airline Carriers. have contingency plans. and outside the company for his combativeness.999 $ 427 $ 9. a strong names of thousands of Southwest employees and was balance sheet.978 $114.8 83. he reportedly told a group of You have to treat your employees like your customers.967 562. he said.558 n.4 692. petitive weapon for us.548 Net profit (loss) excluding one-time charges and gains (millions) $ 2. 7.”8 her placed on employees was the message he had While Southwest was deliberately combative penned in 1990 that was prominently displayed in and flamboyant in some aspects of its operations. he was believing strongly in being prepared for adversity. and U.”7 On another occasion. On one occasion. I think it’s part of the Irish in me. Source: Air Transport Association. CASE 25 Southwest Airlines in 2014: Culture. then they will treat your out- to smack us in the face—knock them out.S.5 730. You battles.8 778.7 972. That’s the Southwest to people’s ideas.771 Total employees 546.9 1.4 77.516 $ 12.2 840.161 Revenue passenger-miles (billions) 603. It’s like don’t want to constrain people in their thinking. p. “Reality is chaotic.4 Available seat-miles (billions) 807. “If someone says they’re going When you treat them right. 2010–2013 1995 2000 2005 2010 2011 2012 2013 Passengers (millions) 559. he often helped load bags on “Black Wednesday. and be ready Carolina company executive at a public event in to act when it seemed that the future held significant Dallas for the right to use “Just Plane Smart” as an risks or when new conditions suddenly appeared and advertising slogan.500 $103.6 758.782) $ 3.478.975 $120.0 82.987 679. in my opinion. 2005 Economic Report.622 $ 93.486 ($5.392 $ 360 $ 12. 1995. that employees—not customers—came first:9 tors.284 9. When zealous attention to bottom-line profitability. “I love act of power and.852 $ 6. Department of Transportation.0 11.7 82. If you just tell somebody no.1 Passenger revenues (millions) $69. saying. the lobby of Southwest’s headquarters in Dallas: . stepping down as CEO and vice than 40 years of leadership at Southwest. played a lead role in Southwest’s strategy. of power and responsibilities from Herb Kelleher. morale building. When network members learned about events relations with employee unions belonged to Parker. Southwest’s the company’s strong record of customer service and its strong-culture work climate belonged to Barrett. CEO. Southwest’s of Southwest Airlines. 54. Barrett had put together a network of contacts vice president and general counsel had been rela. Parker said:10 Our thanks—and our love—to the people of South- west Airlines for creating a marvelous family and a There is going to be no change of course insofar as wondrous airline. but he was Southwest’s chief labor nego. Kelleher chairman of the board and also resigning from the retired as chairman (but he remained a full-time company’s board of directors. In May 2008. As executive vice president–customers. responding to anx. Southwest is concerned. the word Parker and Kelleher were said to think much alike. immense goodwill. Southwest’s EXECUTIVE LEADERSHIP AT President. We’re of Southwest’s board of directors and the head of going to stay true to our business model of being a the board’s executive committee. Southwest’s general counsel. 2001–2004 Barrett had been the driving force behind lining James Parker’s association with Herb Kelleher went the hallways at Southwest’s headquarters with pho- back 23 years to the time when they were colleagues tos of company events and trying to create a family at Kelleher’s old law firm. Believing it was impor- Southwest from the law firm in February 1986. Parker retired unexpectedly. across the company to help her stay in touch with tively low.11 She and Kelleher were executive vice president–customers and self-described regarded as Southwest’s guiding lights. seen as an honest. analysts said she was essentially functioning as the became president and chief operating officer. expansion to new cities and aircraft scheduling. he low-cost. that were worthy of acknowledgment. for personal rea- ment and industry affairs. When his appointment as CEO was energy. We’ve all worked together for a long In June 2001. Kelly. and customer service. He was succeeded by Southwest employee until July 2013 and carried the Gary C. There will be evolutionary changes in Southwest. Parker. Barrett had a remarkable ability to give gifts . depending nourished— by our people’s indomitable spirit. Herb Kelleher stepped down as time. 56. tant to make employees feel cared about and impor- Parker’s profile inside the company as Southwest’s tant. since 1978. although he did not have as colorful and sent. and govern. company’s chief operating officer prior to her for- mal appointment as president. had a strong grasp of Southwest’s culture and mar- That legend will continue to grow only so long as it is ket niche and who could be nice or tough. We have a very experienced leadership team. began an orderly transfer ees and spent most of her time on culture building. Parker was what we have become—and of what we will be. after more sons. Colleen Barrett. and much of the credit for Southwest’s good lies. CEO but continued on in his role as the chairman just as there have always been in our history. succeeded were doing and felt empowered to serve the cause Kelleher as CEO. Colleen Barrett. what was happening with employees and their fami- tiator. Much of the credit for James Parker. Barrett had a high profile among Southwest employ- ership succession plans. boundless on the situation. announced. straight-arrow kind of person who Our people transformed an idea into a legend. ious investor concerns about the company’s lead. as chairman. low-fare airline. 2001–2008 Barrett began working with Kelleher as his legal SOUTHWEST: 2001–2014 secretary in 1967 and had been with Southwest In June 2001 Southwest Airlines. in July 2004. and some keeper of Southwest’s pep-rally corporate culture. to two of his most trusted protégés: James to ensure that employees felt good about what they F. her goal was age 70. quickly got to Barrett—the information went into a and Parker was regarded as having a good sense of database and an appropriate greeting card or gift was humor.C-348 PART 2 Cases in Crafting and Executing Strategy The people of Southwest Airlines are “the creators” of flamboyant a personality as Kelleher. Parker moved over to atmosphere at the company. and burning desire to excel. title of chairman emeritus in 2014). and vice president–finance and fares. Kelleher said:13 In 2010. tegic Initiatives are transformative with the potential like they’re guests in our home. In as Jim Parker’s successor. the Southwest fleet. of Southwest’s mission statement and also spear- Kelly assumed the titles of chairman of the board headed a vision statement that called for a steadfast and president. He joined Southwest in 1986 as its controller. The world has changed body else by being safe. low-cost airline throughout the industry and well known. 2004. and Operating Practices C-349 that were individualized and connected her to the • Stay prepared for bad times with a strong balance recipient. Rewards frequent-flyer program.12 sheet. Herb ple. tuned Southwest’s strategy in a number of areas. Barrett retired as presi- dent in July 2008. munities for his excellence. Kelly said: • Hire great people. • Be the safest. to the media. try. Kelly 2001. and Planet”—see Exhibit 4. and • Growing membership in the company’s Rapid worked to maintain the company’s low-cost advan. efficient. tage over its domestic rivals. Kelly initiated a slight revision tive with the retirement of Kelleher and Barrett. In October performer on these four key success factors. Kelly initiated a five-year strategic plan that been accelerated by Jim’s personal decision to retire. In 2008. CEO. focus on a triple bottom line of “Performance. of directors and chief executive officer of Southwest • Offer customers the best overall travel experience. CASE 25 Southwest Airlines in 2014: Culture. Kelly initiated one of the biggest stra- tegic moves in the company’s history: the acquisi- Gary Kelly is one of our brightest stars.S. Kelly saw four factors as keys to Southwest’s In his Letter to the Shareholders in Southwest’s recipe for success:14 2013 annual report. Southwest more competitive. Kelly was • Do all of these things in a way that maintains executive vice president and chief financial officer a low-cost structure and the ability to offer low from 2001 to 2004. most efficient. and make • Keep fares and operating costs lower than any. lots of cash. well respected tion of AirTran Airways. chief financial officer from 1989 to 2001. to drive more revenue. flights and initiating service to new airports). Southwest has achieved the strongest balance sheet in the American airline indus. craft fleet. Southwest’s airline in the world. conian measures. Fortune included Colleen Barrett on its list of had established five strategic objectives for the the 50 most powerful women in American business company:15 (she was ranked number 20). 2004–Present • Offer customers a convenient flight schedule with Gary Kelly was appointed vice chairman of the board lots of flights to lots of places they want to go. Our competitors took dra- ally excellent. Kelly and other • Adding over 100 new Boeing 737-800 aircraft to top-level Southwest executives sharpened and fine. that served 70 airports in the United States. Peo- When Kelly was named CEO in 2004. a low-fare. featured five strategic initiatives: Under Gary’s leadership. As part of our Board’s and the Caribbean (19 of the airports AirTran served succession planning. We believe our five Stra- • Care for our Customers warmly and personally. Prior to that time. • Be the best place to work. • Launching international service and a new reser- continued to expand operations (both adding more vation system. We are now in the fourth year of a bold five-year stra- tegic plan that began in 2011. and investor com. treat ’em like family. In his first two years as CEO. Barrett was the first woman appointed as presi- To guide Southwest’s efforts to be a standout dent and COO of a major U. analyst. in addition to serving as CEO. we had already focused on Gary coincided with airports served by Southwest). and that process has simply 2011. Mexico. the best fuel hedging position in our industry. dramatically since 2000. and operation. In 2008–2009. • Integrating AirTran into Southwest. airline. effective July 15. Values. Kelly. over more than a decade. and a stout fuel hedge. and • Modernizing Southwest Airlines’ existing air- tremendous progress in technology. effec. and most reliable Gary C. reduce unit costs. including massive layoffs and pay . and Planet THE MISSION OF SOUTHWEST AIRLINES The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth. TO OUR STAKEHOLDERS Southwest’s vision for a sustainable future is one where there will be a balance in our business model between Employees and Community. while meeting our commitments to our Employees. Source: Southwest’s “One Report. We have survived • Make it fun to fly on Southwest. but it was necessary. which. and gives back to the Communities in which we live and work. remain the nation’s largest airline in terms of domestic originating passengers boarded. and provide cus- the onslaught of challenges to remain profitable for 41 tomers with a top-notch travel experience. TO OUR COMMUNITIES Our goal is to be the hometown airline of every community we serve.” and fares for seniors (people 65 and older): From day one. when combined with our ability to reuse and recycle material. most flown. and. and caring attitude within the organization that they are expected to share externally with every Southwest Customer. Wanna Get Away fares were always the low- low-price.C-350 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 4 Southwest Airlines’ Mission. In 2014. OUR VISION Become the world’s most loved. individual pride. we will strive to lead our industry in innovative efficiency that conserves natural resources. Employees will be provided the same concern. TO OUR EMPLOYEES We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. 2009. and Fare Structure Strategy operate the largest Boeing fleet in the world. Above all. People. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. to adjust to today’s economic realities and have • Charge fares that were very price-competitive been given new life through the use of federal bank. by its very nature. Southwest has adjusted through incredible Teamwork and unwavering • Create and sustain a low-cost operating structure.com (accessed August 20. service. Using cost-effective and environmentally beneficial operating procedures (including facilities and equipment) allows us to reduce the amount of materials we use and. nary efforts of our Southwest Warriors. No fee was charged for changing specific aspects of the strategy had evolved over the a previously purchased ticket to a different time years. Customers. and one component of our stewardship is efficiency. friendliness. The purchase price was . in some cases. rival airlines were charging. and caring to make those communities better places to live and work. and Company Spirit. and Triple-Bottom-Line Commitment to Performance. three strategic themes had characterized the or day of travel (rival airlines charged a change company’s strategy throughout its existence and still fee of $100 to $175). Southwest’s fares were bundled into four major cat- SOUTHWEST AIRLINES’ egories: “Wanna Get Away. and our Financial Viability. and Stakeholders. cuts. translates to eliminating waste and conserving resources. 2010). 1. the Environment. In order to protect our world for future generations. and because those communities sustain and nurture us with their support and loyalty. embrace each community with the SOUTHWEST SPIRIT of involvement. and most profitable airline.” www.” “Anytime. While requirements. respect. but applicable fare dif- had high profiles in 2014: ferences were applied.” “Business STRATEGY IN 2014 Select. no-frills strategy to make air travel afford. Vision. est fares and were subject to advance purchase able to a wide segment of the population. maintains a creative and innovative workforce. Southwest had pursued a low-cost. appealingly lower than what ruptcy laws.southwest. TO OUR PLANET We strive to be a good environmental steward across our system in all of our hometowns. ture displayed in ways that made it easy for cus- tomers to choose the fare they preferred. resolve to execute our strategic plan. it is vital that we. consecutive years. and Southwest employed a relatively simple fare struc- we made significant and successful progress in 2013. The trans- formation hasn’t been easy. as individuals and in groups. Thanks to the hard work and extraordi. preserves these environmental resources. frequent-flyer point multiplier than other South. Values. savings of flying Southwest rather than paying the 3. Department of Transportation. Anytime fares included a higher ing and stuck with an all-inclusive fare price. that otherwise would have had numerous empty beverage coupon for the day of travel (for cus. priority security and ticket counter access cial fare promotions to stimulate ticket sales on flights in select airports. $3 to $15 to preselect a seat. Senior fares were typically priced between the by fare-paying passengers) for every month from Wanna Get Away and Anytime fares. proving in one market after applicable fare differences were applied. charged for changing a previously purchased Southwest was a shrewd practitioner of the con- ticket to a different time or day of travel. dollar spent as compared to Wanna Get Away Southwest made a regular practice of initiating spe- fares). fees for processing frequent. When Southwest entered the Florida 10 minutes of a flight’s scheduled departure. Frontier Airlines competitively priced economy class fares. CASE 25 Southwest Airlines in 2014: Culture. and average one-way fares fees for checking bags. seats. In 2014. provided than compensate for the revenue erosion associated the tickets were not canceled or changed within with low fares. and one complimentary adult. but funds could sales and the volume of passenger traffic would more be applied to future travel on Southwest. Southwest ran Rapid Rewards frequent-flyer program than did “Bags Fly Free” ad campaigns to publicize the cost Wanna Get Away fares. lion in 1997. No fee was July through December 2009.99 for bottled water and soft drinks on its flights. and funds could be applied toward future travel Southwest.) fuel (which had climbed from about 15 percent of operating expenses in 2000 to 40 percent of operat. 3. more passengers were 65 years of age or older. provided the tickets fees of $20 to $50 for using the overhead bins to were not canceled or changed within 10 minutes store carry-on luggage and other items and fees of of a flight’s scheduled departure. The Business Bags Fly Free ads to combat slack air travel during Select fare had been introduced in 2007 to help much of the Great Recession in 2008–2009 resulted attract economy-minded business travelers. Business Select fares were refundable and change. to more than 330. rival airlines instituted a series of add. passenger counts went from 1. fees for buying a ticket in person success in stimulating higher passenger traffic at air- at the airport or calling a toll-free number to speak ports across the United States via low fares and fre- with a ticket agent to make a reservation. AirTran’s Fare Structure AirTran had a fare ing expenses in mid-2008) and try to bolster their structure that included Business Class fares and operating performance.S. and Operating Practices C-351 nonrefundable. Frontier also charged 2. Business Select fares included moting its policy of not charging a fee for changing additional perks such as priority boarding.5 million in 2000. in company-record load factors (the percentage of all available seats on all flights that were occupied 4. however. a higher a previously purchased ticket to a different flight. The company’s use of special fare sales and tomers of legal drinking age). $20 to $50 fees that rival airlines charged for a first able. AirTran . Anytime fares were refundable and changeable. ent flight. Southwest also ran ads pro- travel on Southwest. The pur- another that the revenue gains from increased ticket chase price was nonrefundable. personnel at the U. but cept of price elasticity. market with an introductory $17 fare from Tampa to Fares for seniors were not displayed on the list Fort Lauderdale. Southwest’s flyer travel awards. New Hampshire. the year prior to Southwest’s entry. chose to forgo “à la carte” pric- on Southwest. Dur- frequent-flyer point multiplier under Southwest’s ing 2009 and periodically thereafter. In Manchester. the number of annual passengers of fare options at the company’s website unless flying the Tampa–Fort Lauderdale route jumped customers checked a box indicating that one or 50 percent. When advance reservations were weak for par- west fares (including twice as many points per ticular weeks or times of the day or on certain routes. and fees for certain in-flight snacks and (See Exhibit 6 for a list of the cities and airports beverages—to help defray skyrocketing costs for jet Southwest Airlines served in July 2014. $1. and funds could be applied toward future or second checked bag. dropped from just over $300 to $129. but the funds could be applied to announced that it would begin charging passengers future travel on Southwest. to on fees—including a fuel surcharge for each flight.1 mil- In 2008.000. fees for quent flights was coined the “Southwest Effect” by changing a previously purchased ticket to a differ. Business ating big peak-valley swings in airport personnel Class upgrades could be purchased within 24 hours workloads and gate utilization—airport personnel of travel for a fee ranging from $69 to $139 (depend. to minimize the time aircraft were at the gate. ticket cancellation ($150 per ticket). Most flights arrived at and frequent-flyer credit. . creating an operationally efficient Striving to Perform All Value Chain Activi- point-to-point route structure. There were three main compo. Exhibit 6 shows the cities and airports served by ing attractive profits by charging low fares necessi. outbound flights. Southwest’s point- son.or second-bag fees. one way. Southwest’s aircraft fleets had consisted only to reduce or at least contain costs were extensive and of Boeing 737 aircraft. bonus location or another hub. cre- and complimentary cocktails onboard. All other AirTran were in full swing and then were underutilized in fares were nonrefundable but could be changed the interval awaiting the next round of inbound and prior to departure for a service fee of $150 per per. Operating only one type ongoing: of aircraft produced many cost-saving benefits: • Sharply rising prices for jet fuel over the past minimizing the size of spare-parts inventories. low-cost operating structure: using a single aircraft type for all flights. AirTran also imposed fees for checked baggage to-point routes permitted scheduling aircraft so as ($25 for the first checked bag and $35 for the sec. rently approximately 25 minutes. Southwest operated the biggest fleet of Boeing 737 aircraft in the world. Southwest could staff its terminal Southwest’s Strategy to Create operations to handle a fairly steady workload across a day. In contrast. Southwest’s average passenger airfare was $154. Southwest management fully understood that earn.5 percent of total operating expenses in 2003 sonnel. prior.72 mercial air service. and striving to perform ties Cost-Effectively Southwest made a point all value chain activities in a cost-efficient manner. and gate areas were very busy when hub operations ing on the length of the flight). with a rela- assorted other services. Going into 2014. These winglets reduced lift drag. including: flights. of flights was more cost-efficient than the hub-and. of scrutinizing every aspect of its operations to find Use of a Single Aircraft Type For many ways to trim costs. 16. improved and-spoke systems involved passengers on many cruising performance. to an outgoing flight to their destination—a spoke oversized seats with additional leg room. and sim. and reduced (and sometimes another hub) to a central airport or fuel burn. helped extend engine different flights coming in from spoke locations life and reduce maintenance costs. and the average passenger trip length was nents of Southwest’s strategic actions to achieve a approximately 966 miles. departed from a hub during a two-hour window. Hub. In 2013. in 2014. Southwest in mid-2014. Furthermore. advance seat assignments. reach higher flight levels quicker. and otherwise be required. Southwest tated the use of strategy elements that would enable had nonstop service between 524 airports. thereby reducing ity boarding. whereas hub-and-spoke operators had to staff and Sustain Low-Cost Operations their operations to serve 3 to 4 daily peak periods. 12 years that caused fuel expenses to rise from plifying the training of maintenance and repair per. starting to upgrade its aircraft fleet with Southwest’s Point-to-Point Route Structure newly designed split-scimitar winglets—see Strategy Southwest’s point-to-point scheduling Exhibit 7. ticket booking through the customer the number of aircraft and gate facilities that would call center.C-352 PART 2 Cases in Crafting and Executing Strategy Business Class fares were refundable and change. west’s planes beginning in 2007 and then. In 2013. Exhibit 5 pro. hub within a short span of time and then connecting able and included such perks as priority boarding. The company’s strategic actions years. sim. the company to become a low-cost provider of com. allowed aircraft to climb more steeply and spoke systems used by almost all rival airlines. no first. tively even flow of incoming and outgoing flights and gate traffic. expenses since 2006 had prompted a number of plifying the task of scheduling planes for particular projects to increase fuel efficiency. • Installing “blended winglets” on all of South- vides information about Southwest’s aircraft fleet. improving the proficiency and speed with to between 28 and 38 percent of total operating which maintenance routines could be done. cur- ond checked bag). ticketless travel 74 percent of Southwest’s revenues in 2009 and accounted for more than 95 percent of all ticket 80 percent of all company bookings in 2013. into and out of airports in medium-sized cities tomers to make reservations and purchase tickets and less congested airports in major metropolitan . • Using auto-throttle and vertical navigation at the company’s website (thus bypassing the procedures to maintain optimum cruising need to pay commissions to travel agents for speeds.com (accessed May 7. Boeing 737-500 15 122 22 Southwest was Boeing’s launch customer for this model. As of April 2013. all were equipped with satellite-delivered broadband Internet- reception capability. accounting for process paper tickets). with an average duration of 1 hour and 59 minutes Average aircraft utilization per day Nearly 6 flights and 10 hours and 43 minutes of flight time Fleet size: 106 1990 224 1995 344 2000 537 2009 Firm orders for new aircraft: 33 2014 19 2015 31 2016 225 2017–2024: Source: Information at www. handling the ticketing process and also reduc- • Introducing new engine start procedures to ing staffing requirements at Southwest’s reser- support using a single engine for runway vation centers). versus $3 to $4 for • Reducing engine aircraft idle speed while on a ticket booked through its own internal reserva- the ground. Boeing 737-800 52 175 1 As of April 2013. by 2007. and Operating Practices C-353 EXHIBIT 5 Southwest’s Aircraft Fleet as of December 31. cost Southwest roughly $1. tion system and as much as $15 each for tickets purchased through travel agents and professional • Southwest was the first major airline to introduce business travel partners. Selling a ticket on its website taxiing. • For most of its history. all were equipped with satellite- delivered broadband Internet-reception capability. Boeing 737-700 425 137/143 9 Southwest was Boeing’s launch customer for this model in 1997. Boeing 737-300 122 137/143 20 Southwest was Boeing’s launch customer for this model. Total 541 Other Fleet-Related Facts Average age of aircraft fleet Approximately 11 years Average aircraft trip length 708 miles. sales. Southwest stressed flights • Southwest was also the first airline to allow cus. 2014). CASE 25 Southwest Airlines in 2014: Culture.southwest. Values. 2013 Average Age Type of Aircraft Number Seats (years) Comments Boeing 717-200 66 117 12 All of these were AirTran aircraft that were in the process of being removed from the Southwest fleet and leased or subleased to Delta Air Lines. Online ticket sales at ticketless travel (eliminating the need to print and Southwest’s website grew swiftly. where landing slots were con- on-time performance and reduce the fuel costs trolled and rationed to those airlines willing to associated with planes sitting in line on crowded pay the high fees. Paul Rochester Mexico City Des Moines Nashville Sacramento Montego Bay El Paso Newark St. Lauderdale–Hollywood). CA Tucson Boise Jacksonville Panama City. MI Omaha Spokane Austin Hartford/Springfield Ontario. DOM Fort Lauderdale New York (LaGuardia) San Antonio San Juan Source: Company 10-K report. 2013. Detroit Metro. Providence. OH Milwaukee Richmond Cancun Detroit Metro Minneapolis/St. FL Tulsa Boston Logan Kansas City Pensacola. FL Washington. Oakland. July 2014 Southwest’s Top-10 Airports. and information at www.southwest. Hartsfield International. DC (Reagan Burbank. TX Midland/Odessa. It further allowed the company to avoid Hobby. TX Oklahoma City Seattle/Tacoma Amarillo Grand Rapids. and Ft. KS Cleveland Manchester. OH Fort Myers/Naples Norfolk San Francisco Albany Greenville/Spartanburg. Louis Nassau Flint. Burbank. however. CA Long Island Pittsburgh National) Charleston Louisville Portland. MI New Orleans Salt Lake City Punta Cana. San costs at such high-traffic airports as Atlanta’s Jose. by Departures Airport/City Daily Departures Gates Nonstop Cities Served Chicago Midway 233 32 64 Las Vegas 210 19 54 Baltimore/Washington 206 28 57 Denver 167 19 56 Houston (Hobby) 161 19 45 Atlanta 165 31 44 Phoenix 162 24 46 Dallas (Love Field) 124 15 18 Orlando 120 20 43 Los Angeles 104 12 23 Other Airports Served by Southwest Airlines Akron. More recently. Houston to land.C-354 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 6 Airports and Cities Served by Southwest Airlines. Manchester. Dallas Love Field. OH Memphis Raleigh-Durham Aruba Corpus Christi.com (accessed April 29. OR West Palm Beach Charlotte Lubbock Portland. 2014). Chicago’s O’Hare. SC Oakland San Jose Albuquerque Harlingen/South Padre Island. and This strategy helped produce better-than-average Dallas–Fort Worth. ME Wichita. TX Reno/Tahoe Cabo San Lucas Dayton. NH Providence International Columbus. hav- taxiways or circling airports waiting for clearance ing already initiated service to almost all of the . CA Tampa Birmingham Indianapolis Orange County. areas (Chicago Midway. Baltimore-Washington paying the higher landing fees and terminal gate International. DC (Dulles) Buffalo Little Rock Philadelphia Washington. Denver. South. to book such tickets through either travel agents or senger a specific number within the passenger’s the connecting airline). and sat in any seat that was vacant when transfer services to other carriers—passengers with they got on the plane. large metropolitan cities where air traffic conges. fuel Split-Scimitar Winglets: first installations began in 2014. passen. boarding group at the time of check-in. • Southwest did not have a first-class section in any sengers were given color-coded plastic cards of its planes and had no fancy clubs for its fre- marked with the letter A. ing each passenger a reserved seat. cus- Southwest introduced an enhanced boarding tomers connecting to flights on other carriers had method that automatically assigned each pas. In 2002.5% per aircraft fuel savings of about 5% to 5. baggage claim and then getting it to the check-in passengers then boarded in groups according to facilities of the connecting carrier. booked tickets involving only its own flights. ers had cleaning crews come on board to perform • To economize on the amount of time it took ter. CASE 25 Southwest Airlines in 2014: Culture. New otherwise getting the plane presentable for pas- York LaGuardia. savings of about 3. Initially. and Atlanta (when it acquired AirTran). medium-sized cities and less congested airports order. thus bypassing counter check-in west had begun initiating service to airports in (unless they wished to check baggage). Passengers then boarded in groups. of cleaning crews and copying Southwest’s practice.5% per aircraft Source: Southwest Airlines. or C when they quent flyers to relax in at terminals. All passengers could check in online up where there were good opportunities for sustained to 24 hours before departure time and print out growth in passenger traffic and revenues. cost-cutting measures that included abandoning use Southwest dispensed with the practice of assign. and Operating Practices C-355 EXHIBIT 7 Southwest’s Fuel-Saving Blended Winglets and Split-Scimitar Winglets Blended Winglets: first installations began in 2007. checked baggage who were connecting to other doned the use of plastic cards and began printing carriers to reach their destination were respon- a big. Boston’s Logan International. pas. checked in at the boarding gate. according to their card color • Southwest did not provide passengers with baggage and letter. cleaning up trash left by deplaning passengers and les (LAX). a boarding pass. the team of Southwest . In 2007–2008. San Francisco. Rival carri- phia. Southwest aban. • Southwest flight attendants were responsible for tion was a frequent problem—such as Los Ange. or C on the boarding pass when sible for picking up their luggage at Southwest’s the passenger checked in at the ticket counter. • Starting in 2001. this function until they incurred heavy losses in minal personnel to check passengers in and to 2001–2005 and were forced to institute stringent simplify the whole task of making reservations. bold A. B. B. Values. sengers to board for the next flight. (Southwest the letter on their boarding pass. Southwest began converting gers then boarded the aircraft in that numerical from cloth to leather seats. Philadel. and doing $157 million in 2012. both Herb Kelleher and human resource information systems. with a positive flying experience. Since then. converse and joke flows. and fixed-asset systems. During 2009. As of January 2014. trends in Southwest’s operating costs per available pany would have spent had it paid the industry’s seat-mile rather than per passenger-occupied seat. payroll.S. But unexpectedly large declines in jet fuel prices in late 2008 and 2009 Making It Fun to Fly Southwest: resulted in reported losses of $408 million on the The Strategy to Provide a fuel-hedging contracts that the company had in place during 2009.S. an attendant with bunny ears popped and helped improve on-time performance. • Southwest was a first mover among major U. with passengers. the company sonalities. Southwest invested in next-generation repertoires to amuse passengers varied from flight technology and software to improve its ticketless crew to flight crew. In out of an overhead bin exclaiming “Surprise!” The 2007–2008. gers. A number of Southwest’s gate personnel had fuel derivative contracts in place for about let their wit and sense of humor show by sometimes 20 percent of its expected fuel consumption in 2014. outgoing per- oil and jet fuel. airline contracts to counteract rising prices for crude oil carriers—see Exhibit 8 for comparative costs per and jet fuel. payroll. entertaining those in the gate area with trivia ques- about 40 percent of its expected fuel consumption tions or contests such as “Who has the biggest hole in 2015. the company service and building a loyal customer clientele was recognized losses on its fuel-hedging activities predicated on presenting a happy face to passen- of $324 million in 2010. and about 35 percent of its expected fuel in their sock?” Apart from greeting passengers consumption in 2016. Southwest’s operating costs airlines in employing fuel hedging and derivative had been lower than those of rival U. accounts pay. enjoyed interacting with customers. while passengers were required to generate optimal crew schedules boarding. the con- conversion concluded that an all-leather interior version was designed to increase data accuracy would be more durable and easier to maintain. and displayed cheery. The company ifying the amount of its future fuel requirements made a special effort to employ gate personnel who that were hedged based on management’s judg. In that made passengers smile. $259 million in 2011. During 2010. On one flight. Exhibit 9 shows savings of about $4 billion over what the com. cash ing how far to go in trying to please customers: . complaint letters were completed an initiative to convert to a new SAP seen as learning opportunities for employees and enterprise resource planning application that reasons to consider making adjustments. and $118 million in 2013. pany’s fuel-hedging activities produced fuel cost airlines during the 1995–2013 period. Employees would replace its general ledger. things in a manner calculated to provide passengers Southwest’s fuel-hedging strategy involved mod. From 1998 through 2008. had good inter- ments about the forward market prices of crude personal skills. were provided the following policy guidance regard- able. electronic ticketing and boarding. and consistency and lower administrative support more than justifying the higher initial costs. revenue passenger-mile among the five major U. costs. system and its back-office accounting. average price for jet fuel. lower costs. On some flights. For many decades. accounts receivable.S. benefits. and received letters from customers complimenting par- revenue accounting systems. displaying a fun-loving attitude. Southwest implemented the use of new dants sang announcements to passengers on takeoff software that significantly decreased the time and landing. coming onto planes and assisting them in finding • Southwest regularly upgraded and enhanced its vacant seats and stowing baggage. Colleen Barrett had made a point of sending con- the company replaced or enhanced its point. it ticular Southwest employees. Southwest’s approach to delivering good customer fective in reducing fuel expenses. and During their tenure. flight attendants management information systems to speed data were encouraged to be engaging. atten- 2001. gratulatory notes to employees when the company of-sale. improve operating efficiency.C-356 PART 2 Cases in Crafting and Executing Strategy employees that investigated the economics of the management. and go about their tasks in ways and upgrade its customer service capabilities. the com. the company’s Top-Notch Travel Experience fuel-hedging activities had continued to be inef. 19 C-357 (Continued ) .42 0.53¢ 1.21 2013 1 .70¢ 1.15 1.28 0.18¢ 0.93 4.31 0.35 1 .95 1. and Operating Practices Southwest Airlines 1995 0.26 0.25¢ 2000 1 .08 1 .23 1.95 3.66 15.95 4.38 0.07¢ 13.28 0.23 11 .94¢ 5.10 0.16¢ 0.73 1.32 14.85 2005 0.17 0.47 0.53 0.57 1.14 0.03 12.04 1.51 0.88 5.57 5.31 0.11 4.21 1.91 4.35 15.12 0.91 3.48 0.70 19.15 0.91 2005 1 .15 4.28 0.51 0.44 1.33 0.42 0.32 0.71¢ 0.87 6.68 17 .37 4.59 5.46 0.30¢ 0.22 0.41 0.12 1.S.14 1.61 19.35 4.13 1.85 0.31 0.57 0.86 4.64 6.30 14.27 5.27 5.15 0.72 18.77 1.98 1.91 4.56¢ 10.26 17 .46 0.87 2012 0.65 3.29 1.54 0. Values.29 0.51 1.16 5.67 1.27 5.48 2005 0.10 0.13 0.23 0.53 2011 0.96 10.59¢ 1 .77 2.70 1. Major U.22 0.68 6.10 1.37 4.31 0.16 0.84 6.28 0.42 1.43 2013 1.41 2011 0.94¢ 1 . 2010–2013 CASE 25 Costs Incurred per Revenue Passenger-Mile Total Salaries and Fringe Benefits (in cents) Total All Fuel Landing General and Other Operating Operating Pilots and Copilots Employees and Oil Maintenance Rentals Fees Advertising Administrative Expenses Expenses American Airlines 1995 0.35¢ 0.65 Southwest Airlines in 2014: Culture.66 6. Airlines.41 0.23 3.07 19.92 0.59¢ 0.43 0.82 4.89 5.90 Delta Air Lines 1995 1 .97¢ 1 .91¢ 2000 0.18 4. 2005.74 3.30 0.82 5.82 0.23 2011 1.68 1.23 0.57 5.26 0.27¢ 4.92¢ 3.26 1.97 4.82 1.17 6.68 18.56¢ 1.83 1 .21¢ 0.50 2012 1.EXHIBIT 8 Comparative Operating Cost Statistics per Revenue Passenger-Mile.41 0.61 2013 0.34 0.13 0.54 7 .13 0.79¢ 0.48 0.34¢ 0.22¢ 0.86 0.18 4.10 0.70 2.69 2010 0.97 1.39 5.41¢ 1 .38 18.58 3.99 5.53¢ 2000 1 .90 0. 1995.91 0.85 20.65 2012 0.58 0.38 1.65¢ 14.43¢ 4.18 0.31 3.18 2010 0.22 1 .90 4.63 1.73 1 .35 0.09 19.94 1.22 0.28 0.52 0.42 0. 2000.14 0.71 6.14¢ 3.47 0.87 0.21 2010 1 .19¢ 1.86 5.01 16.45 0.99 4.76 1.47 0.09¢ 1 . 78 1 .47 21.08 1 .73¢ 4.02 1 .06 0.17 0.” Form 298C.24 2012 0.35 2010 0.34 4.72 3.44 2.09 0.09 14 .60 2.07 6.13¢ 0.69 0.30 0.02 7 .59 2.93 6.69 4.09¢ 1 .36 7 . “Air Carrier Statistics.60 0. and P-52.74 US Airways 1995 1 .27 0.10 21.75 1 .65 2005 0.07 20.66 7 .38 0. and joint reporting of their operating costs began in late 2007.06 Cases in Crafting and Executing Strategy Note 1: Cost per revenue passenger-mile for each of the cost categories in this table is calculated by dividing the total costs for each cost category by the total number of revenue passenger-miles flown.44 0.31 5.10 4.68 2005 0.97 0.51¢ 0.09 1 . data for Delta Air Lines include the combined operating costs of Delta and Northwest Airlines.32¢ 17 .56 1 .58¢ PART 2 2000 1 . Note 2: US Airways and America West started merging operations in September 2005.96 2011 0.53 1 .28 0.29¢ 0.55¢ 7 .86 0.38 5.75 4.02 1 .24 17 .03 1 .71 5.38 6.28 0.21 0.72 3.73 0.96 5.53¢ 1 .74 4. the merger of these two companies became official in October 2008. .67 4. Department of Transportation.68 21.01 5. United Airlines acquired Continental Airlines in 2010.82 1 . P-12.84 20.70 0.57 5.78 3.15 5.49 2010 0.98 1 . where a revenue passenger-mile is equal to one paying passenger flown 1 mile.16 0.82 1 .30 0.03 4.EXHIBIT 8 (Continued ) C-358 Costs Incurred per Revenue Passenger-Mile Total Salaries and Fringe Benefits (in cents) Total All Fuel Landing General and Other Operating Operating Pilots and Copilots Employees and Oil Maintenance Rentals Fees Advertising Administrative Expenses Expenses United Airlines 1995 0. Costs incurred per revenue passenger-mile thus represent the costs incurred per ticketed passenger per mile flown.09 15 .74 3.35 0.05 1 .90¢ 0.76 3.28 0.69 2013 0.S.59 1 .32 0.35 0.84 0. Schedules P-6.97 1 .72 0.41 0. P-51.50 1 .53¢ 2.62 3.14 0.36 0.59¢ 2.19 1 .73¢ 2000 1 .06 1 .73¢ 1 .46 1 .76 4. Effective January 2010.17¢ 0.74 4.93 0.29¢ 0.05¢ 0.34 2012 0.29 0.81 19.10 1 .30 7 .92¢ 12 .26 18.86¢ 4.60 5.35 0. Source: U.” and Form 41.29 5.31 0.30 2013 0. and the two companies began joint reporting of operating expenses in 2012.06 0.57 1 .36 2011 0.51¢ 1 .02 1 .93 19.95 5.38 6.06 0. all for various years.32 0. Bureau of Transportation Statistics.20 5.27 0.19 20.24 1 . “Summary Data.89 1 . 41 1. about our Customer. power stations with stools.05¢ 7.66 . potential equipment failures requiring repairs that passengers traveling on a Southwest airplane at the gate.68 3. In recent years.66 . Most with power outlets.64 . The addition of in-flight make connections but also the oft-encountered delays Internet service. 75 percent of its total aircraft fleet. The makeover included adding (1) When you empower People to make a positive a business-focused area with padded seats.”18 of Southwest’s fleet.79 .59 .42 4.62¢ 3.29¢ 8. our airplanes satellite-based Internet service on all of its 737-700 and routes can be copied.60¢ 12. representing over 75 percent our customer service. whereas the cost figures in this exhibit are based on cost per available seat-mile. including ing not only the added built-in travel time needed to stops and connections). coupled with the free wireless ser- associated with connecting flights (late incoming vice available in all of Southwest’s gate areas.86¢ 3. and Operating Practices C-359 EXHIBIT 9 Southwest Airline’s Operating Costs per Available Seat-Mile.58 1.43 Acquisition and integration . Costs per revenue passenger- mile represent the costs per ticketed passenger per mile flown. to competitive advantage. Southwest was the only car- major contributor to providing customers with a top. But we pride ourselves on and 737-800 aircraft. As one Southwest man.45 1. and benefits 3. Southwest began offering in-flight ager put it. whereas costs per available seat-mile are the costs per seat per mile flown (regardless of whether the seat was occupied or not).40¢ Fuel and oil 4. Southwest invested in an “extreme ment and good old common sense when trying to accom.14 . In 2007.44 . We follow a large-screen TV with news programming and (2) the Golden Rule and try to do the right thing and think a family-focused area with smaller tables and chairs. “Our fares can be matched.83 .82 .01 Maintenance materials and repairs .28 .07¢ Note: The entries in this exhibit differ from those for Southwest in Exhibit 8 because the cost figures in Exhibit 8 are based on cost per revenue passenger-mile. thereby cutting total trip time and avoid.76 . 1995–2013 Costs per Available Seat-Mile (in cents) Expense Category 2013 2012 2011 2010 2005 2000 1995 Salaries.63 1. to control the pricing of in-flight Internet service tinations.18 .52 .60 Aircraft rentals .33 .44 Depreciation . rier currently offering gate-to-gate connectivity on notch travel experience. In 2013–2014.85¢ 12.28 . you allow them to decide.63 .61 1.11 — — — — Other operating expenses 1. Later. and late departures).53 .71 1. Southwest’s arrangement with Southwest’s emphasis on point-to-point flights its Internet service provider enabled the company enabled many passengers to fly nonstop to their des. tables difference everyday. and kid-friendly TV programming.73¢ 7.68 1.17 power stations for charging electrical devices. meant flights.07 . Southwest Southwest executives believed that conveying a added free wireless Internet service for passengers friendly.81¢ 2.16 of customers. and guidelines are written to be broken as long as the Employee is leaning toward the Customer.26 . Source: Company 10-K reports and annual reports. equipped with satellite Internet service had gate- about 72 percent of Southwest’s passengers flew to-gate connectivity for small portable electronic nonstop to their destination—nonstop travel was a devices—in early 2014.56 1. (which in 2014 was $8 a day per device. gate makeover” to improve the airport experience modate a Customer—no matter what our rules are.19 .80 .47 Landing fees and other rentals .88 .41¢ 11.69¢ 3. CASE 25 Southwest Airlines in 2014: Culture.85 . .81 . wages. bonuses.76 3.72 Total 12.55 .47 . No Employee will ever be punished for using good judg.78 4. various years. fun-loving spirit to customers was the key waiting in its gate areas. Values.34 1.27¢ 2. • Approximately 65 percent of AirTran employ- to-point operation to capture the efficiencies ees had been converted to Southwest employees. destinations where more flights were needed to thereby enabling customers of both Southwest and serve the growing numbers of people choosing to AirTran to book connecting itineraries between fly Southwest Airlines. . Integrating Southwest’s and AirTran’s Oper. with approximately half of its was scheduled to occur when AirTran’s flights flights historically originating or terminating to seven international destinations were redesig- at its hub at Hartsfield-Jackson Atlanta Interna. the two carriers and fly between any of the com- bined 96 Southwest and AirTran destinations on a • A total of 52 of AirTran’s Boeing 737-700 air- craft had completed the process of being con- single itinerary. The optimization effort involved using to give customers free access to 17 live channels a set of Southwest-developed tools for manag- and 75 on-demand recorded episodes from various ing revenues and profitability to (1) discontinue TV series at no additional charge. in all AirTran cities not currently served by South- west in preparation for rebranding all AirTran Strategic Plan Initiatives. Southwest grating Southwest’s and AirTran’s unionized work- had made excellent progress in merging and opti. in December 2013. movies on-demand. AirTran operations in several airports had been ations The process of integrating AirTran into rebranded as Southwest. verted to the Southwest fleet. and ground staff. final stages. Headed into 2014. Southwest and AirTran flight schedules would Southwest had completed a number of integration produce significant cost savings.C-360 PART 2 Cases in Crafting and Executing Strategy In 2013. • In addition to converting AirTran’s flight sched. nated as Southwest flights. (3) establish point-to-point flights offerings. Southwest joined with DISH Network schedules. its entertainment offerings and. AirTran’s flight attendants. The transfer of all remaining AirTran employees. Passengers did not have to pur. • Southwest had made considerable headway in inte- ules into a point-to-point operation. (2) adjust the frequencies and arrival-departure became the first airline to offer a messaging-only times of Southwest and AirTran flights to airports option for $2 a day per device. Converting AirTran’s flight net. Conversion of • Because AirTran utilized mainly a hub-and-spoke AirTran’s remaining 35 Boeing 737-700 aircraft network system. already. Southwest added a selection of movies tinations was discontinued in 2011–2013) and on-demand (currently priced at $5 per movie) to redeploy the aircraft to other routes and markets. forces. functionality. related to the scheduling of aircraft. 2011–2015 operations and activities as Southwest. Shortly 15 AirTran destinations and 4 Southwest des- thereafter. tional Airport. including all stops served by both Southwest and AirTran (to avoid and connections. or the messaging. including flight crews and dispatchers whose work into a point-to-point operation was in the transitions were aligned with aircraft conversion. was scheduled for 2014. from airports currently served only by AirTran only service. having too many unsold seats and better optimize chase in-flight Internet service to access television profitability). to select destinations currently served only by In 2013. and free up aircraft for redeployment either to new • Connecting capabilities between AirTran and destinations that looked appealing or to existing Southwest flights had been fully deployed. The app enabled passengers to begin Southwest had established a Southwest presence using mobile boarding passes. Southwest management Southwest’s operation began in 2013 and was expected expected that optimization and alignment of the to be completed by year-end 2014. This promotion service to unprofitable destinations (service to was later extended through the end of 2014. Southwest had begun gradually transitioning AirTran’s Atlanta hub into a point. and (4) establish point-to-point flights redesigned Southwest mobile website and app for from airports currently served only by Southwest iPhone and Android that had more features and to destinations currently served only by AirTran. enable more milestones: efficient scheduling of airport employees. represented by mizing the combined Southwest-AirTran flight the Association of Flight Attendants–CWA (AFA). flight crews. Southwest introduced a completely Southwest. and 12 ing the space inside the plane. (2) improve schedul- The company did not want to keep Boeing 717-200 ing flexibility and more economically serve high- planes in its aircraft fleet because of the added main. along age age of 12 years) from its fleet over the next five with more climate-friendly and cost-effective mate. One effort. 516 were to continue at the rate of about three aircraft per owned and 164 were leased. 122 seats and an average age of 22 years). Deliveries to from third parties rather than be purchased—of the Delta began in September 2013 and were scheduled company’s current fleet of 680 aircraft. increased fuel efficiency. an additional 36 planes). even bigger additions of that were transferred to Southwest’s fleet at year-end new planes were scheduled for future delivery. 15 Boeing 737-500 aircraft (with that weighed less than the prior seats. In addition. and ing 737-300 aircraft (with 143 seats and an average more durable. CASE 25 Southwest Airlines in 2014: Culture. and 200 737-MAX aircraft Furthermore. The cabin refresh fea. Values. The agreement with ing the Boeing 717 aircraft capacity with Boeing AFA applied to AirTran flight attendants until 737 capacity provided incremental revenue oppor- they transitioned to Southwest by the end of 2014 tunities because the latter had more seats per aircraft and automatically became members of the Trans. ing Capital Corp. gate-restricted. (2) acquiring used cally fly long-haul routes (the number of short-haul Boeing 737 aircraft from other sources. referred to by South. 56 Boeing 737-700 aircraft to be deliv- when they became a part of the Southwest fleet in ered in 2016–2018 (with options to take delivery on the second half of 2014. years and replace them with new Boeing 737-700s rials. Moreover. Incorporating Larger Boeing Aircraft into Southwest’s Fleet Modernization Initiative Southwest’s Fleet Starting in 2012. By maximiz. was Boeing’s launch customer for the 737-MAX). replac- agreement with Southwest. Of the rience while improving fleet efficiency and being 680 active aircraft in Southwest’s fleet at year-end environmentally responsible. and (3) the flights throughout the domestic airline industry had forthcoming deliveries of new Boeing 737 aircraft. While Southwest had 737-800 aircraft entering the company’s fleet had added 54 new Boeing 737-700 and 737-800 planes the Evolve interior. Southwest retrofitted 78 of its 737-300 air. the company had plans to remove 122 Boe- tured recyclable carpet. been declining since 2000). reduced maintenance require- of the Evolve program was to enhance customer ments. Inc. LED reading and ceiling lighting. personal space. aircraft that had greater seating capacity. and the capabil- comfort. Southwest’s flight attendants. month. demand. Southwest aircraft with a new generation of Boeing west as Evolve—The New Southwest Experience. The seating capacity of the AirTran Boeing Southwest expected that the new Boeing 737-800 717-200 planes was being replaced by (1) extend. ity to fly longer distances without refueling. west began a long-term initiative to replace older ize its aircraft fleet. Southwest was divesting AirTran’s to be delivered during 2017–2024 (with options to fleet of Boeing 717-200 aircraft. ecofriendly. Southwest had placed firm orders and the remaining 35 AirTran 737-700 aircraft were for 52 Boeing 737-800 aircraft to be delivered in scheduled to be refreshed with the Evolve interior 2014–2015. to lease or sublease AirTran’s Plans called for some of the new aircraft to be leased 88 Boeing 717-200 aircraft to Delta. a quieter entailed retrofitting and refreshing the cabin interior interior. a brighter color scheme. 737-800s (175 seats). slot-controlled airports by tenance and repair costs associated with having a adding seats to such destinations without increasing . South- Southwest had multiple efforts underway to modern. and comfortable seats age of 20 years). and 737-MAX craft through Evolve in 2013. The 17 AirTran 737-700 aircraft to its fleet in 2012–2013. It had negotiated take delivery on an additional 83 planes—Southwest an agreement with Delta Air Lines. yet cost approximately the same amount to fly on a portation Workers of America union representing per-trip basis as the smaller Boeing 717 aircraft. and the overall travel expe. As 2013 were refreshed with the new Evolve interior.. and Boe. of early 2014. The goal security features. and 737-MAX aircraft would significantly enhance ing the retirement dates for a portion of Southwest’s the company’s capabilities to (1) more economi- 737-300 and 737-500 aircraft. Evolve allowed for Boeing 717-200 aircraft (with 117 seats and an aver- six additional seats on each retrofitted aircraft. improved of its fleet of 425 Boeing 737-700 planes. (143 seats). 2013. and Operating Practices C-361 had voted to ratify a new collective bargaining second type of plane in the fleet. the new aircraft (up to 189 seats). thus giving them access to the benefits of the on the fare and fare class purchased. cruises. Holders of Launching International Service and a New Southwest’s cobranded Chase Visa credit card could Reservation System In January 2014. more distant destina. the current Rapid Rewards reservation system with a comprehensive domestic program had exceeded management’s expectations and international system. the num- Growing Southwest’s Rapid Rewards ber of Southwest’s cobranded Chase Visa credit card Frequent-Flyer Program Southwest’s current holders added. In 2014. to Jamaica (Montego Bay). standby priority. Mexico. Rapid Rewards members could also efficiency to reduce overall costs. Boeing 737-MAX planes would have the lowest earned 2 points for every dollar spent on purchases of operating costs of any single-aisle commercial air. linked free-travel awards to the num. Likewise. members who flew 100 qualifying During this first phase of Southwest’s international flights or earned 110. launched in partners. linked to and accessible from www. Southwest tickets and on purchases with Southwest’s plane on the market. the amount spent per member on airfare. the number of points sold to business Rapid Rewards frequent-flyer program. AirTran continued service between endar year automatically received a Companion Pass. Southwest with respect to the number of frequent-flyer mem- chose Amadeus IT Group to be the vendor for this bers added. on any day. and other items. and they could purchase points. The most active mem- com) and began selling tickets for its inaugural inter- bers of Southwest’s Rapid Rewards program quali- national daily nonstop service on Southwest aircraft fied for priority check-in and security lane access beginning July 1. and free in-flight the Bahamas (Nassau). and Cabo San Lucas. 2014. In addition. earn points through qualifying purchases with South- the aircraft would enable Southwest to profitably west’s Rapid Rewards Partners (which included car expand its operations to new. rental agencies. accounting for approxi- redeemed for a flight was based on the fare and fare mately 9. Additionally. which had an annual fee of $99. fare products (like Business Select) earning more In 2013. purchased by program members. Southwest management expected that the new Visa credit card. South- redeem credit card points for items other than travel west launched an international reservation system on Southwest.C-362 PART 2 Cases in Crafting and Executing Strategy the number of flights. the amount of points required to be 5. the number of flights taken by members. Dominican Republic. (where available). who opted to obtain a Southwest cobranded Chase bean. event tickets. Members as Hawaii. WiFi. to create and support its international as long as the Rapid Rewards member had points- reservation service. car rental and hotel partners. multiyear project. and retail loca- tions (including extended routes over water).000 qualifying points in a cal- conversion plan. on any Southwest worked with an outside vendor. combined programs. points for any available seat. Amadeus flight. as well as flights to and from one year to any destination available via Southwest Cancun. including international flights on other separate from its domestic reservation system (but airlines. Alaska. and Punta Cana.southwest. AirTran Rewards member. and the number of frequent-flyer points March 2011. Mexico City. Mex- for a designated companion of the qualifying Rapid ico. ber of points members earned purchasing tickets to Southwest allowed both its Rapid Rewards mem- fly Southwest (the previous version of the Rapid bers and the members of AirTran’s A1  Rewards Rewards program had tied free-travel awards to the frequent-flyer program to transfer their loyalty rewards number of flight segments flown during a 24-month between the Southwest and AirTran frequent-flyer period). Canada. service to all these destinations was scheduled to be Rapid Rewards members could redeem their converted to Southwest in the second half of 2014. hotel stays. hotels. and the Carib.5 percent of the revenue passenger-miles . members of the Southwest and AirTran points than lower-fare products (like Wanna Get frequent-flyer programs redeemed approximately Away). The amount of points earned was based programs. Atlanta and Nassau and between Chicago Midway which provided unlimited free round-trip travel for and Montego Bay. in May 2014. planning stages of replacing its existing domestic Headed into 2014. with higher. and they earned 1 point on every dollar spent everywhere else. gift cards. rental cars. and (3) boost overall fuel class purchased. Points did not expire IT Group.4 million flight awards. with no blackout dates. Southwest was in the earning activity during the most recent 24 months. such tions). restaurants. and Aruba (Oranjestad). S.S. carrier. Hence.” “Phoenix Phrequently. depending on and Promotion Strategies the mix of final destinations the customers departing Southwest was continually on the lookout for novel from a particular airport were flying to.P. Midway Airport. Values. In 2014. beset with financial difficulties. the airports Southwest served.A. and international destinations.” and “L. A.0 percent Southwest had quickly moved in with more flights of the revenue passenger-miles flown) and the 2011 of its own. According to The Nielsen from Denver was initiated) to 79 daily departures in Company.5 million flight had cut back flights to cities that Southwest served. Southwest imme- diately increased the number of its flights into and Southwest’s Growth Strategy out of both locations. and 167 Southwest boosted its ad spending by 20 percent to daily departures in 2014. CASE 25 Southwest Airlines in 2014: Culture. This was significantly higher than the 2012 On a number of occasions.8 million free-ticket adding flights on routes where rivals cut their offer- awards in both 2007 and 2008. Many of its print ads and billboards were being served. during the first six months of 2009.A. when rival airlines redemptions of approximately 4. it was clear that Southwest intended to pick up the ties were always emerging for Southwest to cap. opportunities entailed adding flights to a broader selection of Southwest destinations. for example. opportunities entailed adding more flights to one or more of the same destinations.6 percent operations in November 1990. hammer home its “bags fly free” message. and Operating Practices C-363 flown. Southwest initiated service to Den- and airports to its route schedule. ver when United. places like Hawaii the airports already being served. When Midway Airlines ceased awards (accounting for approximately 8.7 million flight more passengers. Southwest had four representative ads. Southwest was a first mover in ticket awards during 2009 and 2. Fresh advertising cam- there and saw opportunities to add more flights paigns were launched periodically—Exhibit 10 shows over time—in Denver. Southwest’s overnight and quickly instituted flights to Chicago’s Rapid Rewards members redeemed 2. of (1) adding more daily flights to the cities and air. Southwest did not initiate a “Christmas card” ad on TV featuring children and service to a city and/or airport unless it envisioned their families from the Ronald McDonald Houses the potential for originating at least 8 flights a day and Southwest employees. Each holiday season since 1985 Southwest had run As a general rule. fun- its route schedule annually. and strike a chord in the minds of air more daily flights to cities and airports currently travelers. particu- ture additional revenues by adding more flights at larly larger metropolitan airports. When US Airways trimmed Southwest’s strategy to grow its business consisted its flight schedule for Philadelphia and Pittsburgh. 2008.” ran late. and sometimes the Marketing. ways to tell its story. Passenger . 129 daily departures in May 2010. pace in adding service to more locations. Previous campaigns Southwest looked for city pairs that could generate had promoted the company’s performance as “The substantial amounts of both business and leisure Low-Fare Airline” and “The All-Time On-Time Air- traffic. deliberately unconventional and attention-getting to tice to add one or more new cities and airports to create and reinforce the company’s maverick. awards (accounting for approximately 9. It was normal for customer traffic to grow at cut back operations at its big Denver hub. and combative image. loving. In selecting new cities.4 million free. it had long been Southwest’s prac. Advertising. make its distinctive persona To spur growth beyond that afforded by adding come alive. One of the com- flights flying the same routes appealed to business pany’s billboard campaigns touted the frequency of travelers looking for convenient flight times and the the company’s flights with such phrases as “Austin ability to catch a later flight if they unexpectedly Auften. believing its lower fares would attract redemptions of approximately 3. opportuni. boosted the number of daily departures from 13 in Southwest tended to advertise far more heavily January 2006 (the month in which service to and than any other U. Management believed that having numerous line” and its Triple Crown awards. Southwest moved in of the revenue passenger-miles flown). When American Airlines closed its hubs in Nashville and San Jose. Southwest promptly boosted its flights into and out ports it currently served and (2) adding new cities of those airports. Sometimes these and Alaska. ings following 9/11. C-364 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 10 Four Samples of Southwest’s Ads . and Hiring Whereas the litany at many companies was that cus- tomers come first. access to 17 live channels hired. They have built a unique and powerful culture that demon- tomer to check one stroller and one car seat free strates that the only way to accomplish our mission to of charge. Fly to their fellow Americans. They take pride in doing Moreover. the company periodically Keep employees happy—then they will keep cus- launched national and local advertising and pro. while pas. and increase revenues. is to keep our costs low and Cus- fee for customers to change their travel schedules. with job security. fuel surcharges. senior man- believed were important points of differentiation agement explained why employees were the com- between Southwest and rival airlines. and plentiful Profit- • Being the only major U. CASE 25 Southwest Airlines in 2014: Culture. ferentiating features—along with the company’s pride in team accomplishments. tomer Service quality high. hiring great People with winning attitudes. well for themselves by doing good for others. and telephone reservations. network size. snacks. we provide a nurturing and supportive work and episodes of 75 different television series. and on numerous occasions: “Our People are our single $237 million in 2011.” The high strategic priority placed We can train people to do things where skills are con- on employees reflected management’s belief that cerned. in addition to the two free checked make air travel affordable for others. Gary Kelly advertising and promotional expenditures totaled had echoed the views of his predecessors. . tomers happy. and Operating Practices C-365 traffic at Southwest subsequently rose. and messaging). satisfaction that keep our Culture and Southwest friendly customer service. motional campaigns to highlight what management In Southwest’s 2000 annual report. such as seat selection. Once flight Internet service.S. packages. passenger traffic on Southwest flights. environment that gives our Employees the freedom movies on-demand. Southwest allowed each ticketed cus. SOUTHWEST’S PEOPLE Later. and enhanced job low fares. Screening. airline not to impose a sharing for ourselves.S. AND CULTURE Recruiting. $223 million in 2012. numerous nonstop flights. at Southwest the operative prin. pany’s greatest asset: entiating features included: Our People are warm. and Rapid Rewards Spirit alive and why we continue to produce winning program—had been instrumental in helping grow seasons. saying $208 million in 2013. our People are our greatest assets. But there is one capability we do not have and . build mar- ket share. Nor did Southwest impose additional fees for items At Southwest. to be creative. which is why we devote so much time and energy to curbside check-in. it’s our Employees’ sense of ownership. have fun. lots of People want to work for Southwest. Because we are well known as an excellent place to work • Offering a wide range of in-flight entertainment with great career opportunities and a secure future. caring and compassionate and • Being the only major U. The company’s Since becoming the company’s CEO. Values. it was renamed the People and Leadership MANAGEMENT PRACTICES Development Department. . ample profitability. and make a positive differ- ence. while ensuring bags.”19 The company changed the personnel depart- ment’s name to the People Department in 1989. these expenditures were greatest strength and our most enduring long term included in “Other operating expenses” in Exhibit 9. These differ. . airline not to charge willing to do whatever it takes to bring the Freedom to additional fees for first and second checked bags. Herb Kelleher explained:20 come second. job security. delivering superior service required employees who senger volumes went in the opposite direction at not only were passionate about their jobs but also Southwest’s largest competitors—all of which had knew the company was genuinely concerned for recently introduced or increased fees for checked their well-being and committed to providing them baggage. competitive advantage. Southwest’s thesis was simple: During 2010–2013. Although we offer competitive compensation Southwest management believed that these dif. options and conveniences for passengers (in. Southwest hired employees for attitude and trained ciple was that “employees come first and customers them for skills. that treating them warmly and courteously was the and have a passion for Customer Service.” For instance. So we prefer an Colleen Barrett elaborated on what the company unskilled person with a good attitude . walk through the door. . Attention Elvis. When our new hires west was that superior. and have a Fun-LUVing attitude. employees who themselves were fun-loving and All job applications were processed through the spirited. Servant’s Heart. We hire the best. with a “whistle while you work” attitude. we have the lowest employee turnover rate in was drawn to candidates whom it thought would be the industry.southwest. to capture the attention of people thought to possess and doing their jobs. work harmoniously with jobline or send your resume. We inely believed that customers were important and hire People who fight to win. We are not interested qualifications? It helps to be outgoing. who are Work In A Place Where Elvis Has Been Spotted. and Behaviors That Southwest Wanted Employees to Possess and Display Living the Southwest Way Warrior Spirit Servant’s Heart Fun-LUVing Attitude • Work hard • Follow the Golden Rule • Have FUN • Desire to be the best • Adhere to the Basic Principles • Don’t take yourself too seriously • Be courageous • Treat others with respect • Maintain perspective (balance) • Display a sense of urgency • Put others first • Celebrate successes • Persevere • Be egalitarian • Enjoy your work • Innovate • Demonstrate proactive Customer Service • Be a passionate team player • Embrace the SWA Family Source: www. . our message to them is you are loving spirit flowed from the heart and soul of starting the flight of your life. lead with a service came from having employees who genu. work hard. involved personal contact with passengers. Attitudes. a Cultural fit. extroverted and had a good sense of humor.”23 In addition to seeking individuals a bit off center. The belief at South. ad showed Herb Kelleher impersonating Elvis Pres.com (accessed August 18. who liked their jobs and the company People and Leadership Development Department. not from training employees to act hire People if something about their behavior won’t be like customers are important. They must possess a Warrior Spirit.  [to] a highly looked for in screening candidates for job openings:22 skilled person with a bad attitude. EXHIBIT 11 Personal Traits. they worked for. 2010). as opposed to delivering the kind Southwest’s “personality profile. who focus on other people. It tried ings.C-366 PART 2 Cases in Crafting and Executing Strategy that is to change a person’s attitude. We hire People to live the Southwest Way [see Exhibit Management believed that delivering superior 11]. career fairs. one of service that came across as being forced or taught. just phone our likely to exercise initiative. the com- Southwest recruited employees by means of pany looked for people-oriented applicants who were newspaper ads. and who were also confident and empowered to do their jobs as they saw fit (rather Screening Candidates In hiring for jobs that than being governed by strict rules and procedures). and be community-spirited. Maybe even in navel gazers. being around passengers. nies to work for in America and because they were empathetic manner. co-employees. and Internet job list. a number of candidates applied because of to identify candidates with a knack for reading peo- Southwest’s reputation as one of the best compa. Southwest wanted employees impressed by their experiences as a customer on to deliver the kind of service that showed they truly Southwest flights. The motivated to help other people. We won’t right thing to do. ples’ emotions and responding in a genuinely caring. Kelleher elaborated: “We are interested in people ley and had the message:21 who externalize. Recruitment ads were designed enjoyed meeting people. If this sounds good to you. are dedicated. Southwest After all. . hospitable service and a fun. And be prepared to stay for a while. Southwest received The OnBoarding Program for Newly Hired 329. corporate culture. And there were courses behaviors. customer employees ample time to prepare five-minute pre- service. process for all company personnel. Those who stone offerings. trust. hours in training sessions of one kind or another Southwest received 90. enjoying the stories being told.S. stress To test for unselfishness. a consensus on whether to recommend or drop the Southwest employees spent over 1. New managers attended a two-and-a- attendant positions were put through such a presen- half-day course on “Next-Level Leadership. training activities at Southwest were tions. From time got through the group-presentation interviews then to time supervisors and executives attended courses had to complete a three-on-one interview conducted on corporate culture. employees. Southwest inter- management.043 résumés and hired in 2013 (see the table at the top of the next page). and motivations that jobholders riculum included courses for new recruits. empowering. CASE 25 Southwest Airlines in 2014: Culture. Rather.24 831 new employees in 2009. that each employee should be an “intentional learner. Altogether. and Operating Practices C-367 Southwest did not use personality tests to Training screen job applicants. during the presentations ship and sustainability.200 résumés and hired 4.200 new employees. received customer care training. and a Southwest flight attendant. on written communications. and strategically. Department of Transportation. and behaviors provided good clues about their future other government agencies. and encourag- to be team players than those who were focused on ing. and whether a management career was for them and members of the People and Leadership Develop- courses for high-potential employees wanting to ment Department. leadership. and employee relations to help in an informal. All applicants for flight regulations. the three-person panel tried to reach pilots. performance viewing teams typically gave a group of potential appraisal. public speaking. Flight attendant candidates who pursue a long-term career at Southwest. needed and then tried to find candidates with the and managers. the hiring staff at Southwest analyzed designed and conducted by Southwest Airlines Uni- each job category to determine the specific behav- versity (formerly the University for people). Values. interviewers employees advance their careers. building teams. In 2007. In exploring an applicant’s aptitude classes taken at Southwest Airlines University but also for teamwork. thinking ing attentively. career development.” a trait deemed critical for pilots and flight attendants looking to grow and develop not just from occasional was judgment. harmony. All employees ment. Learning was viewed as a never-ending desired traits—a process called targeted selection. intended to help instill. and nurture such cultural themes as team- of the People and Leadership Development Depart- work. the U. decision making. “What requirements of the Federal Aviation Administration was your most embarrassing moment?” The thesis (FAA). environmental steward- sentations about themselves. the here was that having applicants talk about their past Occupational Safety and Health Administration. The cur- iors.” There tation exercise before an interview panel consist- were courses for employees wanting to explore ing of customers. experienced flight attendants. including this interview. by a recruiter. following who came into contact with customers. New supervisors attended a four- were emotionally engaged in hearing the presenters week course “Leadership Southwest Style” that and giving encouragement were deemed more apt emphasized coaching. nor did it ask them what they Apart from the FAA-mandated training for certain would or should do in certain hypothetical situa- employees. employees to meet the safety and security training Another frequently asked question was. rather than supervising or enforcing rules and looking good themselves. tell them about a time in a prior job when they went Southwest Airlines University conducted a variety out of their way to help a co-worker or to explain of courses offered to maintenance personnel and other how they had handled conflict with a co-worker. and diversity. prior to the onset of the Great Recession. a supervisor from the hiring section ingrain. knowledge. interviewers often asked applicants to from his or her everyday on-the-job experiences. watched the audience to see who was absorbed in Leadership development courses that focused polishing their presentations and who was listen- on developing people.4 million candidate. and being a change leader were key- applauding the efforts of the presenters. the expectation was A trait common to all job categories was teamwork. Employees Southwest had a program called . conversational setting. 400 Approximately 80 to 90 percent of Southwest’s supervisory positions were filled internally. Leaders”) received training in every department of ees. mating the new employee to his or her job and to In 2013. Airlines. Southwest offered sor received training from Southwest’s Onboarding full-time and part-time Southwest and AirTran Team in what was expected of a sponsor. During Southwest’s pay scales and fringe benefits were their first year of employment. new hires were quite attractive compared to those of other major invited to attend a “LUV@First Bite Luncheon” in U. peers. existing Southwest employee who had volunteered Its benefit package was the best of any domestic to sponsor a new hire and be of assistance in accli. United Airlines. Flight attendants 109. airline in 2013.800 embraced the company’s cultural values. attendants ranged from as little as 12 percent An additional element of the Onboarding pro. Living the Southwest Way.S. and sick leave.” The culture introduction included a video continued to perform their current jobs. Employees could either apply for super- full-day orientation course that covered the com. and US ties to network with other new hires and talk with Airways. Compensation and Benefits tion—to learn more about the company. each volunteer spon.450 Pilots 193. and subordinates.C-368 PART 2 Cases in Crafting and Executing Strategy the indoctrination of new employees into the com- Amount of Training pany’s culture was done by the volunteer sponsor. paid holidays. Job Category (hours) co-workers. try and the competitive challenges that Southwest Employees being considered for managerial faced. had on their jobs (at many Southwest gatherings. reflect- ing management’s belief that people who had “been there and done that” would be more likely to appre- OnBoarding “to welcome New Hires into the ciate and understand the demands that people under Southwest Family” and provide information and them were experiencing and. also. new employees were expected to access an inter- active online tool—OnBoarding Online Orienta. in addition to providing vacation time. higher to as much as 38 percent higher than the gram involved assigning each new employee to an pay of their counterparts at those same rivals. an introduction to Southwest’s culture and positions of large operations (“Up and Coming management practices. these luncheons were pay for pilots in 2013 was between 31 and 92 percent held on the same day as Leadership’s Messages to higher than the average pay for pilots at American the Field. Southwest made active use of a one-year proba- Maintenance and support personnel 145. there were opportuni.25 safety training. personnel in the People and it was common for a group of employees to do the Leadership Development Department analyzed the Southwest Shuffle. the expectations of employ. more likely to assistance from the time they were selected until enjoy the respect of their peers and higher-level the end of their first year. All new hires also received each candidate. Southwest’s average the city where they worked. All new hires attended a managers. Anytime during their first 30 days. an overview of the airline indus. at these luncheons. airlines (see Exhibit 12). and the new employee’s supervisor.600 Promotion Ground operations personnel 911. with the remaining attendees feedback in deciding on the specific assignment of cheering and clapping). At the end called Southwest Shuffle that featured hundreds of of the six-month period. visory positions or be recommended by their present pany’s history. supervisor. Much of employees a benefit package that included: . and demonstrations on “Living the Southwest the company over a six-month period in which they Way.100 tionary employment period to help ensure that new employees fit in with its culture and adequately Customer support and services personnel 57. candidates were provided Southwest employees rapping about the fun they with 360-degree feedback from department heads. Delta Air Lines. the average pay for Southwest’s flight senior leaders. 118 Average benefits per employee: 2005 $26. and pro- • Flight privileges visioning employees.559 41. 2. Southwest’s contribution negotiators to research their pressing issues and . and 1.465 110.000 45.S.547 2013 34.789 $128.889 $57.460 $39.037 $35.269 72.028 32.460 $49.675 68.075 $24. 2013).277 52.191 $40.056 2009 176.045 $46.420 $137.552 Source: Information at www.196 153. CASE 25 Southwest Airlines in 2014: Culture.516 28.airlinefinancials. another • Employee stock purchase plan local of the Transportation Workers of America rep- • Wellness program resented baggage handlers.268 Average flight attendant wage/salary: 2005 $42.734 $155. In 2013.5 million shares in 2013 at • Vision coverage prices equal to 90 percent of the market value at the • Dental coverage end of each monthly purchase period.948 125.2 million • Mental health chemical dependency coverage shares in 2012.624 62.820 30.873 2009 75. • A 401(k) retirement savings plan to the profit-sharing plan represented about 6 percent • A profit-sharing plan of each eligible employee’s compensation.000 employ- • Accidental death and dismemberment insurance ees belonged to a union.573 27.7 million shares in 2011.com (accessed May 22. profit-sharing plans totaled $1.279 22.945 47. 2005.588 38.225 137.122 $57. 2009.960 68. The Teamsters Union repre- sented Southwest’s stock clerks and flight simulator • Dependent care flexible spending account technicians.161 40.74 billion during the Management encouraged union members and 2009–2013 period. ground crews. Values.222 26.786 119. and • Early retiree health care the Aircraft Mechanics Fraternal Association repre- Company contributions to employee 410(k) and sented the company’s mechanics.450 $35.595 2013 229. Airlines.902 2009 46.030 58.534 2013 81.863 $48. a local of the Transportation Workers • Health care flexible spending account of America represented flight attendants.532 $114.239 55.896 All-employee average wage/salary: 2005 $62. • Adoption assistance • Mental health assistance Employee Relations • Life insurance About 83 percent of Southwest’s 45.379 $20.980 $14. the International Association • Health care for committed partners of Machinists and Aerospace Workers represented customer service and reservation employees.266 174.961 56.080 2013 61. and Operating Practices C-369 EXHIBIT 12 Employee Compensation and Benefits at Select U.749 13.638 32. Employ- • Medical and prescription coverage ees participating in stock purchases via payroll deduc- tions bought 1.839 50.933 39.607 2009 23.056 59. and 2013 Southwest Airlines American Airlines Delta Air Lines United Airlines US Airways Average pilot wage/salary: 2005 $157.482 137. An in-house union—the • Long-term disability insurance Southwest Airline Pilots Association—represented • Dependent life insurance the company’s pilots.290 144. and listen- thought that was shortsighted. a multi. Southwest management viewed the Operation Kick Tail initiative as a means to better engage and The No-Layoff Policy incentivize employees to strengthen their display of the traits in Living the Southwest Way (and achieve Southwest Airlines had never laid off or furloughed a competitive edge keyed to superior customer any of its employees since the company began service). and that is force practices. You are supposed to be setting your people up to be win- Operation Kick Tail ners. . you should be there listening to them and available to them in person. . ager?” Our theory is. . and flight attendants could pick up Gary Kelly saw this aspect of Operation Kick trash and make plane cabins more presentable for Tail as a way to foster the employee attitudes and passengers boarding the next flight. if you have to put up a box so peo- out offers as a better approach to workforce reduc. and nurturing the negotiation. It breeds a sense of trust. It breeds a Southwest’s terminal managers:27 sense of security. proud of the company they worked for and its work- Nobody has ever been furloughed here. For the most part.” That allows us the unions representing its employee groups were to provide a personal. Southwest management launched an inter. In 2007. not via a suggestion box. Southwest’s contracts with the unions Southwest culture. when needed. To do that. All of the tive difference in a customer’s travel experience or contracts allowed any qualified employee to per. but I always observing firsthand what was going on. . We could have furloughed at various times and been more profitable. “Sure—why don’t you put up a suggestion box right here by avoiding layoffs. It’s certainly helped negotiate ing around the facilities under their supervision. The company’s no-layoff policy was seen as integral to how the company treated its Management Style employees and to management’s efforts to sustain and nurture the culture. walk- huge strength of ours. One of Southwest’s rituals is finding and develop- tions in 2000–2001. operations in 1971. almost immediately.C-370 PART 2 Cases in Crafting and Executing Strategy to conduct employee surveys before each contract service. management strived to do things in a manner that would make Southwest employees Nothing kills your company’s culture like layoffs. one of our managers mentioned to me that he wanted will with its employees and unions over the years to put up a suggestion box. It’s been a least one-third of their time out of the office. A former director of people development at them just to get a little more money in the short term. you are not doing what you are supposed to be doing. and exhibiting the values in Living the Southwest Way gate personnel could help load and unload baggage (Exhibit 11). According to Kelleher:26 At Southwest. this at Southwest. even though there were sometimes spirited disagree- ments over particular issues. Southwest’s relationships with ing People who are “built to serve. I think that most people employed here year call to action for employees to focus even know that they can call any one of our vice presidents on more attention on providing high-quality customer the telephone and get heard. While I was out in the field visiting one of our stations. maintaining low costs. Managers were expected to spend at unprecedented in the airline industry. in the life of a co-worker or otherwise stood out in form any function—thus pilots. You want to show your ing to employees and being responsive to their con- people you value them and you’re not going to hurt cerns. warm level of service that is harmonious and nonadversarial for the most part— unmatched in the airline industry. I responded by saying that. Southwest told of a conversation he had with one of Not furloughing people breeds loyalty. our union contracts. ticket agents. Both senior management and on this wall and then admit you are a failure as a man- Southwest employees regarded the three recent buy. commitment needed to provide “Positively Outra- Except for one brief strike by machinists in the geous Customer Service”. ple can write down their ideas and toss them in. Southwest had built up considerable good. One component of this initia- representing its employees were relatively free of tive involved giving a Kick Tail award to employees restrictive work rules and narrow job classifications when they did something exemplary to make a posi- that might impede worker productivity. I think we have a very good sense of nal initiative called Operation Kick Tail. it means tion than involuntary layoffs. he explained: early 1980s and some unusually difficult negotia. loving attitude. they can just go ahead and do it on Southwest executives believed that the company’s their own. CASE 25 Southwest Airlines in 2014: Culture. and Fun-Loving Attitude.” Managers and executives had commonly appeared on banners and posters at com- an open-door policy. and frequent company-sponsored the company $1 million. Over the years. saving pranks and jokes. LUV and red hearts we call him Gary. ring theme in Southwest’s advertising campaigns. Southwest’s employees enjoyed substantial author. We will continue to expect our people to live what we describe as the From time to time.’ which is to have a Warrior Spirit. Our leanness requires people to be comfortable in consistently display the traits and behaviors set forth making their own decisions and undertaking their own in Living the Southwest Way. employees tickets and shifting to e-tickets. of frontline employees and managers at which oper- Servant’s Heart. Those ating problems and issues between or among work- three things have defined our culture for 36 years. and that’s when we have gotten in trouble at Values—LUV and Fun Southwest—when we can no longer be responsive to Two core values—LUV and fun—permeated the our flight attendants or customer service agents. According to one Kelleher:28 manager. The Corporate Culture Committee South- ance and rapid problem resolution were seen as west formed its Corporate Culture Committee in managerial virtues. Company executives were very approachable. Another frontline employee had sug. “We’re kind of a big family here. it relin. the ongoing themselves for half the price of a new PC. South. and suggestions for reducing was expected toward customers and other employ- costs and improving efficiency. when work environment at Southwest. At new word for treating individuals—co-employees and employee orientations. Kelly. actively listening to employee pany facilities. Employ- west’s pilots had been instrumental in developing ees who struggled to live up to these expectations new protocols for takeoffs and landings that con. were subjected to considerable peer pressure and served fuel. Halloween between a frontline supervisor and the CEO. in effect. internally and Employee-led initiatives were common. company employees determined in the form of the generally entertaining behavior that they could buy the parts and assemble the PCs of employees in performing their jobs. strating a caring. It was Southwest clerks parties and celebrations (which typically included who came up with the idea of doing away with paper the Southwest Shuffle). externally. were encouraged to dress in costumes. opinions. openly discussed.” are able to.000 annually. ees. parties. and it occurred throughout the company in Albuquerque. LUV grew into Southwest’s code insisting on being called by their first names. things at Southwest won’t change. 1990 to promote “Positively Outrageous Service” and . They can take individual responsibility for growth was primarily a function of the rate at which it and know they will not be crucified if it doesn’t work it could hire and train people to fit into its culture and out. According to tion or another almost every week. there were candid meetings ‘Southwest Way. saving an estimated $250. and fam- We’ve tried to create an environment where people ily members have fun together. usually were asked to seek employment elsewhere if gested not putting the company logos on trash bags. Values. and resolved. Practicing the Golden Rule. LUV was much they can’t gain access to somebody who can give them more than the company’s ticker symbol and a recur- resources and answers. In many cases. There were There were only four layers of management charity benefit games.29 Informal problem avoid. people were told. and other special events of various kinds at one loca- ity and decision-making power. On holidays. bypass even the fairly lean struc- tures that we have so that they don’t have to convene Culture-Building Efforts a meeting of the sages in order to get something done.”30 ers and departments were acknowledged. Southwest’s Two Big Core quishes their responsibility to be accessible to their people. chili cook-offs. and Operating Practices C-371 The suggestion box gives managers an out. Rather than Fun at Southwest was exactly what the word buy 800 computers for a new reservations center implies. “Some efforts. as reminders of the compassion that concerns. new Ronald McDonald House dedications. was expected of all employees. Kelly said. “We do customers—with dignity and respect and demon- not call the company chairman and CEO Mr. they did not soon leave on their own volition. Each major ers. In addition to Kick The Corporate Culture Committee had four Tail awards. and not big on Committees at Southwest. Almost the most important. was sent Culture Committee charged with organizing culture. employees. which In addition. South- commitment to Southwest’s mission and values and west management sought to reinforce the company’s their enthusiasm in exhibiting the Southwest Spirit core values and culture via a series of employee rec- and Living the Southwest Way. As the Plane Turns. the company and share messages from customers. and and storytellers during their two-year term. and reported company celebrations of milestones. “We’re shorthanded or experiencing heavy workloads. service. contests. to all facilities to keep employees up to date on com- building activities and nurturing the Southwest pany happenings. nizing their hardworking efforts and/or exemplary . and ingrain the traits and behaviors embedded in Other culture-supportive activities included the Living the Southwest Way—examples included CoHearts mentoring program. spotlighted in all of the company’s training manuals ning Spirit Parties at various locations. Spirit magazine Star of the Month awards. but of the periodic Culture Exchange meetings to celebrate the committees we do have. More recently. operational excellence. display of the Southwest Spirit. The concepts of LUV and fun were coordinating the yearly Messages to the Field. Members came from ognition programs to single out and praise employ- a cross-section of departments and locations and ees for their outstanding contributions to customer functioned as cultural ambassadors. in which volunteers from around and showing up at a facility to serve pizza or ice the system traveled to work two weekend shifts at cream to employees or to remodel and decorate an other Southwest facilities that were temporarily employee break room. lines Gratitude (SWAG) initiative. the primary function of culture service. writing com. employees. and LUV Reports whereby one frequently. and support. Kelleher indicated. the team’s duties included training courses. that could be shown to ensuring that the culture of Southwest Airlines at company events all over the system and used in remained alive and well. Corporate Culture Committee. This tool also allowed the employee acting as a liaison between the local office and the to send commendations to other employees. or more employees could recognize other employ- sored and supported hundreds of ways to promote ees for an outstanding performance or contribution. in which employees spent time working in embody the spirit of Southwest employees caring another area of the company’s operations. there were “Heroes of the Heart” all-day meetings annually. the Help- about each other and Southwest’s customers ing Hands program. Spirit within its unit. which included a tee had the resources needed to foster the culture at software tool that enabled each employee to set up a its location. mendations and congratulatory notes to employees Southwest’s monthly employee newsletter often exhibiting outstanding performance. the Day in the Field promoting the use of red hearts and LUV to program. the committee had spon. in Southwest’s executive office dedicated solely such as Keepin’ the Spirit Alive. that were formed throughout the year met more President’s awards. plan. organizing the spotlighted the experiences and deeds of particular company’s Annual Awards Banquet. ambassadors was to nurture the Southwest Spirit In 2012. and videos. planning and coordinating departmental profile that listed all the recognitions and awards she celebrations and employee appreciation events. the Culture Committee is Southwest Spirit and company milestones. The company had published a book departments and largest geographic locations called for employees that described “outrageous” acts of culture ambassador. recog- corporate office on culture-related matters. Over the years. reprinted letters of praise from custom- ing the Corporate Culture Committee. The committee was com. provide clips of special events. Southwest launched the Southwest Air- by helping ensure that the Local Culture Commit. ad hoc subcommittees awards.”31 every event at Southwest was videotaped. and the cultural ambassadors.C-372 PART 2 Cases in Crafting and Executing Strategy devise tributes. department and geographic operating unit had a Local A quarterly news video. created a new position in each of its major operating and executives. missionaries. there was a Culture Services Team provided footage for creating multipurpose videos. cost efficiency. and or he received. and celebrations intended Efforts to Nurture and Sustain the South- to nurture and perpetuate the Southwest Spirit and west Culture Apart from the efforts of the Living the Southwest Way. the Local Culture posed of 100 employees who had demonstrated their Committees. excellence. 2014). and flight proactive in offering suggestions for improving attendants hustled to perform all the tasks required to Southwest’s practices and procedures.com (accessed a timely manner to safely slow or stop the airplane May 22. or President’s air travelers were more likely to fly Southwest if its awards were credited with SWAG points that could flights were reliable and on time. Employees who won Kick Tail. had culture. and Operating Practices C-373 performance. proce. of around 45 minutes. The company had do aircraft maintenance. various media reported that Southwest Airlines dures. contained thousands of items and enabled employ. after landing” was the probable cause. When a Southwest flight pulled up agers and employees in all positions and ranks were to the gate. meaningful. killing one of the occupants. 2013 2013 which a Southwest plane landing in a snowstorm with a strong tailwind at Chicago’s Midway airport Southwest Airlines 2. In 2013. which agers constantly monitored arrivals and departures. crashing Delta Air Lines 1. suggestions turn the plane around quickly—employees took pride with merit were quickly implemented. and to improve the percentage but it continued to fly the planes until the work was . One initiative to help minimize weather and opera- tional delays involved the development of a state-of- Employee Productivity the-art flight dispatch system. and people management followed Kelleher’s lead in pushing for operating practices fostered high labor productivity and con. Gary Kelly. Under Herb Kelleher. Believing that of the Heart. Heroes of on-time arrivals and departures. going into 2008.412 66 was unable to stop before overrunning a shorter-than- American Airlines 1. Belated Aircraft Inspections Further Tar- System Operations nish Southwest’s Reputation In early 2008. Southwest’s current CEO. The First Significant Blemish on South- Productivity Measure west’s Safety Record While no Southwest plane had ever crashed and there had never been a Passengers Employees Enplaned per per Plane. Exhibit 13 presents data comparing ity compared quite favorably with its chief domestic Southwest against its four domestic rivals on four competitors: measures of operating performance. to make voluntarily notified the Federal Aviation Administra- baggage handling more efficient and baggage trans. Management was convinced the company’s strategy.038 127 22 of the passengers on the plane.775 98 portation Safety Board investigation concluded that “the pilot’s failure to use available reverse thrust in Source: Information at www. and support systems that promoted operating had. A National Trans- US Airways 1.S. there was an incident in 2005 in Employee. One of Kelly’s strategic objectives for tributed to Southwest having low labor costs in com. Much time and effort over the years early detection of fuselage-fatigue cracking on 46 had gone into finding the most effective ways to of its older Boeing 737-300 jets. to operate safely.airlinesfinancials. and injuring United Airlines 1. Southwest’s labor productiv. just as had been the was widely regarded as the best operator among case for many years. was considered to have one of the most competent mance. tion about the lapse in checks for fuselage cracks. Southwest’s man- be redeemed in the company’s SWAG Shop. making inquiries when many flights ran behind and ees to reward themselves in ways they found most searching for ways to improve on-time performance. CASE 25 Southwest Airlines in 2014: Culture. Southwest’s turnaround times were in the and thorough aircraft maintenance programs in the 25-to-35-minute range.” Southwest man- rivals (Exhibit 8). Southwest was “to be the safest. gate personnel. excellence had become a tradition and a source of knowingly failed to conduct required inspections for company pride. most efficient. and parison to the labor costs at its principal domestic most reliable airline in the world. ground crews. versus an industry average commercial airline industry and.461 96 usual runway and rolled onto a highway. Values. Star of the Month. passenger fatality. airlines. over a period of several months in 2006 and 2007. Southwest in doing their part to achieve good on-time perfor. esprit de corps. instituting practices. fers more accurate.553 107 into a car. U. 8 85.01 0.3 76.49 0.44 4.99 Delta Air Lines 1.0 83. none impaired ter closed as of April 2007.3 US Airways 72. Boarding Denials due to Oversold Flights.41 0.3 83.02 Delta Air Lines 3.75 0.8% 78. and promptly re-inspected lines.5 84.36 Delta Air Lines 0. 12.61 0.55 Complaints per 100.01 1.14 3. “South.21 4. “Air Travel Consumer Report.64 6.S.43 0.49 2.87 3.000 Passengers (in May of each year) Airline 2000 2005 2010 2011 2012 2013 American Airlines 5.52 Involuntary Denied Boardings per 10.7 79.71 4. 2005.21 0.42 2. The belated inspections all potentially affected aircraft in March 2007.52 Southwest Airlines 1.14 2.3 86.7 76.89 US Airways 1.9 79.2 77.00 0.75 0.2 80.29 0.9 81.7 United Airlines 71.22 2.36 3.5 Mishandled Baggage Reports per 1.06 0.47 2.08 0.13 4.99 1.52 1.90 2.36 United Airlines 5.1 76.4 77.14 0.86 1.79 0. Southwest canceled 4 percent of its flights and .28 2.92 3.63 0.9% 77.27 Source: Office of Aviation Enforcement and Proceedings.59 3.59 0.” Nonetheless.70 0.20 0.91 1. Airlines.0 79.72 0.17 0.42 1. faced about Southwest not meeting inspection dead- disclosed it to the FAA.8% 76.76 0.87 1.000 Passengers due to Oversold Flights (January–March of each year) Airline 2000 2005 2010 2011 2012 2013 American Airlines 0. 2010–2013 Percentage of Scheduled Flights Arriving within 15 Minutes of the Scheduled Time (during the previous 12 months ending in May of each year) Airline 2000 2005 2010 2011 2012 2013 American Airlines 75.25 3.97 3.44 1.78 0.56 0.47 US Airways 4.29 0.C-374 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 13 Comparative Statistics on On-Time Flights.91 0. done—about eight days.93 1.07 0.37 US Airways 0. shortly after the reports in the media sur- west Airlines discovered the missed inspection area.72 United Airlines 6. 2000.66 United Airlines 1.87 0.00 4.5 81. According to CEO Gary Kelly.6% 77.5 Southwest Airlines 78. on March flight safety.73 3.000 Passengers Boarded (in May of each year) Airline 2000 2005 2010 2011 2012 2013 American Airlines 2.46 4.23 2.6 79.15 Southwest Airlines 4.91 1.4 82.77 1.58 4.4 79.87 1.90 0.79 0. Mishandled Baggage.0% 79. 2008.08 3.80 1.74 0.60 0. and Passenger Complaints for Major U.8 85.53 Southwest Airlines 0. The revealed tiny cracks in the bodies of six planes.6% Delta Air Lines 78.75 0.” various years.30 0.15 1.14 1.94 1. FAA approved our actions and considered the mat- with the largest measuring 4 inches.57 9. Organizational Capabilities to Competitive Board Looks Back. NUTS! Speech to Business Today International Quick. NUTS! p. 6 28 Ibid. “How Fun Flies at Southwest Air- 3 17 Katrina Brooker. 524. www.southwest. “How Fun Flies at Freiberg and Freiberg. An air travel snafu ensued. “Crafting an Organizational Struc- Southwest Airlines’ Crazy Recipe for Business Conference. The FAA subsequently gressional investigation. Sunoo. www. 64. Linking Employee Needs Satisfaction and 8 Quoted in Brooker. 2001. NUTS! p. personnel at Southwest and the other affected air- It is and always has been our number one priority to lines. including a con- put three employees on leave. because of allegedly cozy relationships with tained that same dedication for more than 37 years. high-level FAA officials were apparently aware of doing. routine safety inspections were not being conducted In the days following the public revelation of in accordance with prescribed FAA procedures.southwest. carriers testified before Congress that senior FAA one of the safest operations in the world. May 28. NUTS! p.15. 42. 11 Speech at Texas Christian University. . 72. www. tators. 21 (accessed September 8. cating that.” Fortune. www. Fun Flies at Southwest Airlines. Southwest Airlines. www. 70.southwest. 2008). of monitoring the inspections conducted by airline We’ve got a 37-year history of very safe operations. 2007. no.” Human Resource Management 9 Ibid. 165. Southwest’s “2013 One Report. 72. January 22.2 million for its transgressions. in some cases. 2004. NUTS! p. 2014). 2014). Texas.com (accessed Septem. “How 13 Company press release.” p. Moreover. Speech to Business Today International 2001. March no. 26–27. “The Chairman of the Board Looks 4 Freiberg and Freiberg.” p. “Southwest Airlines: A Case Study 19 20. and Operating Practices C-375 grounded 44 of its Boeing 737-300s until it verified inspections for early signs of fuselage fatigue at that the aircraft had undergone required inspections. 2007. 6 (June 1995). the investiga. Brooker.com (accessed September 8. p. ENDNOTES 1 15 23 Kevin Freiberg and Jackie Freiberg. 10 20 30 As quoted in The Seattle Times.com since 2009.com (accessed May 16. As cited in Freiberg and Freiberg. posted on www. 31...com ics 21. 2 25 Ibid.com (accessed May 16. 2007. p.com (accessed September 5. prompting Southwest to performed. 26 Looks Back. April 23. pp. “The Chairman of the southwest. he form the inspections for fuselage skin cracking at the said: scheduled times and chose not to strictly enforce the From our inception. Kelly publicly apologized for the company’s wrong.com (accessed September 8. 1998). 4 (Winter 1996). www.” p.. and we’re officials frequently ignored their reports that certain safer today than we’ve ever been. lines. “Craft. Freiberg and Freiberg. Southwest Airlines has main. . www. 7 29 As quoted in Dallas Morning News. 64–65. ture.” p. Back. planes flew for 30 months In an effort to help restore customer confidence. the FAA issued more stringent ing of its reputation. no. March 20. CASE 25 Southwest Airlines in 2014: Culture. 76.” Organizational Dynam. C3. July 15. 288. p. Brenda Paik Sunoo. 2001. 66. 163. and the failure of Southwest and other airlines to per- reasserted the company’s commitment to safety. 72. Shortly thereafter. p.. promised that it would not occur again. Hallowell. southwest. 51. Values. NUTS! p. 16–18. 24 and Personal Success (New York: Broadway southwest. 16 Books. 246–247. 2008). an industrywide audit by the procedures to ensure that aircraft safety inspections FAA revealed similar failures to conduct timely were properly conducted. pp. Statement in the Careers section at www. Where Elvis Has Been Spotted”.. southwest. after the inspection deadlines had passed.” pp. 2008). p. Southwest’s maintenance lapse and the tarnish. Sunoo. 35. 273.southwest. Further public scrutiny. November 20.southwest El Paso. with Gary Kelly then initiated an internal review of the over a thousand flights subsequently being canceled company’s maintenance practices. Ibid. “The Chairman of the Board Speech by Colleen Barrett on January 22. pp.” Personnel Journal 74. due to FAA-mandated grounding of the affected tion raised “concerns” about the company’s aircraft aircraft while the overdue safety inspections were maintenance procedures. turned up documents indi- fined Southwest $10. 31 September 13. As quoted in James Campbell Quick. November 20. 14 22 Speech to Greater Boston Chamber of Speech to the Paso Del Norte Group in Commerce. p.com (accessed September 5. 2008). 2008).” p. 2 (Autumn 1992). inspection deadlines—according to some commen- tained a rigorous Culture of Safety—and has main. 2008. p. 5 18 27 Ibid. p. five other airlines. ber 5. at Southwest Airlines. Southwest’s ad entitled “Work in a Place 12 Freiberg and Freiberg. 52. Kelly’s statement has been continuously Advantage. ing an Organizational Structure: Herb’s Hand Conference. Disgruntled FAA safety supervisors in charge ensure safety. 2007. 2007. 2008).