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    Airlines: Southwest Corporation

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    Bob Billy
    Southwest Airlines has achieved 32 consecutive years of profitability through a low-cost, point-to-point route structure and focus on customer satisfaction. It focuses on efficient operations through initiatives like hedging fuel costs, quick turnaround times, and hiring flexible, unionized employees. Southwest also emphasizes a fun, people-focused culture where employees are highly satisfied, through initiatives like peer interviews, profit sharing, and recognition of personal initiative. This unique approach has made Southwest the most admired airline in the world for customer satisfaction and employee relations.

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    Airlines: Southwest Corporation

    Uploaded by

    Bob Billy
    133 views3 pages
    Southwest Airlines has achieved 32 consecutive years of profitability through a low-cost, point-to-point route structure and focus on customer satisfaction. It focuses on efficient operations through initiatives like hedging fuel costs, quick turnaround times, and hiring flexible, unionized employees. Southwest also emphasizes a fun, people-focused culture where employees are highly satisfied, through initiatives like peer interviews, profit sharing, and recognition of personal initiative. This unique approach has made Southwest the most admired airline in the world for customer satisfaction and employee relations.

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    Southwest Airlines

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    Southwest Airlines has achieved 32 consecutive years of profitability through a low-cost, point-to-point route structure and focus on customer satisfaction. It focuses on efficient operations through initiatives like hedging fuel costs, quick turnaround times, and hiring flexible, unionized employees. Southwest also emphasizes a fun, people-focused culture where employees are highly satisfied, through initiatives like peer interviews, profit sharing, and recognition of personal initiative. This unique approach has made Southwest the most admired airline in the world for customer satisfaction and employee relations.

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    © All Rights Reserved
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    133 views3 pages

    Airlines: Southwest Corporation

    Uploaded by

    Bob Billy
    Southwest Airlines has achieved 32 consecutive years of profitability through a low-cost, point-to-point route structure and focus on customer satisfaction. It focuses on efficient operations through initiatives like hedging fuel costs, quick turnaround times, and hiring flexible, unionized employees. Southwest also emphasizes a fun, people-focused culture where employees are highly satisfied, through initiatives like peer interviews, profit sharing, and recognition of personal initiative. This unique approach has made Southwest the most admired airline in the world for customer satisfaction and employee relations.

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    of 3

    114 Part One The Management Control Enuironment

    Case 3-1

    Southwest Airlines Corporation


    By January 2005, Southwest Airlines Corporation's (Southwest) year-end
    results marked 32 consecutive years of profitability, a record unmatched in the
    airline industry. Southwest, which was incorporated in Texas, commenced cus-
    tomer service on June 18, 1971-, with three Boeing 737 afuctaft serving three
    Texas cities: Dallas, Houston, and San Antonio. ln 2004, it boasted a fleet of
    417 Boeing 737 jets and provided service to 60 airports in 31 states throughout
    the United States. Southwest was well entrenched as the nations'low-fare,
    high customer satisfaction airline. (Refer to Exhibit 1- for five-year financial
    highliehts.)
    Southwest had the lowest operating-cost structure in the domestic airline
    industry and consistently offered the lowest and simpiest fares. In 2004, the
    airline had 31,000 employees and generated total operating revenues of
    $6.5 billion from a passenger load factor of 69.5 percent. Its stock exchange
    symbol was LLIV, representing Southwest's home at Dallas Love Field, as well
    as the theme of its employee and customer relationships.
    In 2005, for the ninth year in a row, Fortune magazine recognized Southwest
    Airlines as the most admired airline in the world and among all industries,
    listed Southwest Airlines as number five among America's Top Ten most
    admired corporations. Since 2002, Business Ethics magazine listed Southwest
    Airlines in its "l-00 Best Corporate Citizens", a list that ranks public companies
    based on their corporate service to various stakeholder groups. In 2005, The

    EXHIBIT 1 Comparative Financial Data on Selected Companies


    Five-Year Average: 1 999-2OO4
    Southwest United American Delta f etBlue
    Return on equity (percentage) 10.91 NA NA -8s.33 NA
    Sales growth (percentage) 6.64 1.88 '1.01 NA
    -1.14

    2004 Data
    Sales ($B) 6.5 16.4 14.3 18.6 1.3
    As percentage of sales:
    Cost of goods sold 68.8 77.3 98.1 81.1 63.3
    Cross margin 29.2 22.7 1.9 18.9 33.s
    Operating income 8.5 -5.2 -23.3 -0.8 9.0
    Net income 4.8 -10.5 -36.4 -4.1 3.8
    Return on equity (percentage) 6.6 NA NA NA 5.3

    This case was written by Professor Vijay Covindarajan, Julie B. Lang (T'93) and Suraj Prabhu (T'06) of
    the Tuck School of Business at Dartmouth. @ Trustees of Dartmouth College.
    Sources: www.southwest.comi "What Management ls: How lt Works and Why lt's Everyone's
    Business," by.f oan Magretta, @ 2002 The Free Press. NUIS/ Southwest Airlines'Crazy Recipe for Business
    ond Personal Success, by Kevin Freiberg and Jackie Freiberg, @ 1996 Bard Press, lnc.; Southwest Aims East
    (Condensed), case study written by Steven Sullivan under the supervision of Paul W Harris, University of
    Virginia Darden School, Case no. UVA-M-0464. "The Talent Myth," The New Yorker, July 22,2002.
    Chapter 3 Behauior in Arganizations ll5

    American Customer Satisfaction Index (ACSI) recognized Southwest Airlines


    as leading the industry in customer satisfaction and InsideFlyer magazine
    awarded Southwest airlines for best Customer Service, best bonus promotion,
    and best award redemptions in 2004.

    The Southwest Difference


    Southwest did not employ the "hub-and-spoke" approach used by other major
    airlines, such as United, American, and Delta. Instead, its approach was short
    haul and medium haul and point-to-point (e.g,, Dallas to Houston, Los Angeles
    to Phoenix). As a result about 80Vo of its passengers flew non-stop and the
    overall average passenger trip length was 758 miles and an average airfare of
    $91.15. Southwest had no assigned seats, paid its crews by trip, and used less
    congested airports (e.g., Baltimore instead of Washington's Dulles or Reagan;
    Manchester, N.H., instead of Boston, Mass,). About 60Vopercent of Southwest's
    passenger revenue was generated by online bookings via southwest,com.
    PhoCusWrighf reported that southwest.com was the number one airline web-
    site by revenue and Nielsen lNet Rating identified it as the largest airline site
    in terms of unique visitors. In 2005, Southwest continued to push its online
    presence and launched several automation services, including Dingl, a desktop
    application that provided exclusive deals.
    Southwest consistentiy sought out ways to improve its efficiencies and pass
    on the cost savings to its passengers. ln 2004, Southwest had reduced the
    headcount per aircraft Lo 74 fuom 85 in 2003. It hedged about B5o/o of its fuel
    and oil needs and as a result saved about $455 million. It entered new airports
    after a process of diligence and with a sense of commitment to the people it
    served (In its entire history, Southwest has only pulled out offive airports).
    Southwest pilots were among the only pilots of major U.S. airlines who did
    not belong to a national union. National union rules limited the number of
    hours pilots could fly. But Southwest's pilots were unionized independently,
    allowing them to fly far more hours than pilots at other airiines.
    Other workers at Southwest were nationally unionized (total workforce
    unionization was at BLo/o in 2005), but their contracts were flexible enough to
    allow them to jump in and help out, regardless ofthe task at hand. From the time
    a plane landed until it was ready for takeoff took approximately 20-25 minutes
    at Southwest, and required a ground crew offour plus two people at the gate.
    By comparison, turnaround time at UnitedAirlines was closer to 35 minutes and
    required a ground crew of L2 plus three gate agents.
    CEO Herb Kelleher, who founded Southwest, was deeply committed to a phi-
    Iosophy of putting employees first. "If they're happy, satisfi.ed, dedicated, and
    energetic, they'Il take real good care of the customers. When the customers are
    happy, they come back. And that makes the shareholders happy."1 Southwest's
    walls were fiIIed with photographs of its employees. More than 1",000 married
    couples (2,000 employees) worked for the airline. Southwest employees were
    among the highest paid in the industry and the company enjoyed low employee
    turnover relative to the airline industry.

    lf
    oan Magretta, What Monagement ls: How lt Works and Why lt's Everyone's Business (The Free Press,
    2OO2),199.
    116 Part One The Management Control Enuironment

    Southwest's culture of hard work, high-energy, fun, local autonomy, and cre-
    ativity was reinforced through training at its University of People, encourage-
    ment of in-flight contests, and recognition of personal initiative.
    Being in the people business meant a rigorous approach to hiring new em-
    ployees. In 2004, Southwest reviewed 225,895 resumes and hired 1,706 new
    employees. The company's hiring process was somewhat unique: Peers screened
    candidates and conducted interviews; pilots hired pilots, and gate agents hired
    gate agents. Tb better understand what the company sought in candidates,
    Southwest interviewed its top employees in each job function (e.g., pilots, gate
    agents, baggage handlers, glound crew) and identified their common strengths,
    then used these profiles to identify top candidates during the interview process.
    Southwest hired for attitude as much as aptitude. Noted CEO Kelleher, "We
    want people who do things well, with laughter and grace."2
    Southwest initiated the first profit-sharing plan in the U.S. airline industry
    in 1974 and offered profit sharing to its employees every year since then.
    Through this plan, employees owned about 10 percent of the company stock.
    For fiscal 2003, Southwest offered its employees $126Mn in profit sharing.

    Discussion Questions
    1. What is Southwest's strategy? What is the basis on which Southwest buiids
    its competitive advantage?
    2. How do Southwest's control systems help execute the firm's strategy?

    2Kevin Freiberg and


    |ackie Freiberg, NIJTS! Southwest Airlines' Crozy Recipe for Business and Personal
    Success, (Bard Press, lnc., 1996), 65,

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