| Background:Southwest Airlines is the largest airline | | | | airline, at approximately 80%, that contract |
| measured by number of passengers carried each | | | | negotiations between the unions and Southwest are |
| year within the United States. It is also known as a | | | | much shorter in duration than of the other major |
| 'discount airline' compared with its large rivals in the | | | | carriers. This shows the quality of relationship that |
| industry. Rollin King and Herb Kelleher founded | | | | Southwest has with its employees and with the |
| Southwest Airlines on June 18, 1971. Its first flights | | | | unions that represent them.CultureSouthwest was |
| were from Love Field in Dallas to Houston and San | | | | created as a different kind of company and from its |
| Antonio, short hops with no-frills service and a simple | | | | beginnings a unique culture was nurtured. In 1990 |
| fare structure. The airline began with one simple | | | | Colleen Barrett formed the Southwest Culture |
| strategy: "If you get your passengers to their | | | | Committee. This is unique within the industry and |
| destinations when they want to get there, on time, | | | | among all large companies. The committee also has a |
| at the lowest possible fares, and make darn sure | | | | mission statement:"This group's goal is to help create |
| they have a good time doing it, people will fly your | | | | the Southwest spirit and culture where needed; to |
| airline." This approach has been the key to | | | | enrich it and make it better where it already exists; |
| Southwest's success. Currently, Southwest serves | | | | and to liven it up in places where it might be |
| about 60 cities (in 31 states) with 71 million total | | | | "floundering". In short, this group's goal is to do |
| passengers carried (in 2004) and with a total | | | | "whatever it takes" to create, enhance, and enrich |
| operating revenue of $6.5 billion. Southwest is traded | | | | the special Southwest spirit and culture that has |
| publicly under the symbol "LUV" on NYSE.Facts:* The | | | | made this such a wonderful Company/Family."It is this |
| first major airline to fly a single type of aircraft | | | | unique approach to company values that has created |
| (Boeing 737s)* The first major airline to offer | | | | a culture that differentiates itself from others. |
| ticketless travel system wide including a frequent flier | | | | Southwest's culture is the reason why it is |
| program based on number of trips and not number | | | | successful.3. Customer ServiceThe Mission of |
| of miles flown.* The first airline to offer a | | | | Southwest Airlines |
| profit-sharing program to its Employees (instituted in | | | | The mission of Southwest Airlines is dedication to |
| 1973).* The first major airline to develop a Web site | | | | the highest quality of Customer Service delivered |
| and offer online booking. In 2001, about 40 percent | | | | with a sense of warmth, friendliness, individual pride, |
| ($2.1 billion) of its passenger revenue was generated | | | | and Company Spirit.ApproachHerb Kelleher, founder |
| through online bookings at Southwest's cost per | | | | of Southwest, has been quoted as saying that |
| booking via the Internet is about $1, compared to a | | | | "We're in the Customer service business; we just |
| cost per booking through travel agents of $6 to | | | | happen to provide airline transportation".2 Award |
| $8.Key competitive advantages:* Low Operational | | | | winning customer service is a distinguishing |
| costs / High Operational Efficiency* Award winning | | | | characteristic of Southwest and it is referred to |
| customer service* Human Resource practices / Work | | | | internally as "Positively Outrageous Service". It means |
| cultureOperations Analysis - Competitive | | | | that from the top to bottom everyone does |
| Dimensions:Southwest clearly has a distinct advantage | | | | whatever he or she can to satisfy the customer. |
| compared to other airlines in the industry by | | | | This includes Herb Kelleher, who has been known for |
| executing an effective and efficient operations | | | | helping out baggage handlers on Thanksgiving. It is |
| strategy that forms an important pillar of its overall | | | | through emphasizing the customer and employee |
| corporate strategy. Given below are some | | | | that Southwest is able to differentiate itself from |
| competitive dimensions that will be studied in this | | | | others in the airline industry. On a more technical |
| paper.1. Operational Costs and Efficiency2. Customer | | | | level, each employee or group within Southwest has |
| Service3. Employee/Labor Relations4. Technology1. | | | | his or her own customer. This means that every |
| Operational Costs and EfficiencyAfter all, the airline | | | | employee 'serves' in one way or another despite not |
| industry overall is in shambles. But, how does | | | | being directly involved with the passenger. The |
| Southwest Airlines stay profitable? Southwest Airlines | | | | mechanic's customer is the pilot and the caterer's is |
| has the lowest costs and strongest balance sheet in | | | | the flight attendant.ResultsIt can be said that the |
| its industry, according to its chairman Kelleher. The | | | | "Positively Outrageous Service" that is unique to |
| two biggest operating costs for any airline are - labor | | | | Southwest "is not the result of a department, or a |
| costs (approx 40%) followed by fuel costs (approx | | | | program, or a mandate from management. It is not |
| 18%). Some other ways that Southwest is able to | | | | secondary to the product; it is the product." This |
| keep their operational costs low is - flying | | | | approach creates the conditions where Employees |
| point-to-point routes, choosing secondary (smaller) | | | | are more likely to treat customers in ways that |
| airports, carrying consistent aircrafts, maintaining high | | | | distinguish the company from others. There are |
| aircraft utilization, encouraging e-ticketing etc.Labor | | | | numerous accounts of passengers who have |
| CostsThe labor costs for Southwest typically | | | | received exceptional treatment from Southwest |
| accounts for about 37% of its operating costs. | | | | employees.The question that needs to be answered |
| Perhaps the most critical element of the successful | | | | is how Southwest's customer service is different and |
| low-fare airline business model is achieving significantly | | | | why? Is it common for customers of other airlines to |
| higher labor productivity. According to a recent HBS | | | | rave about their special service? The answer is that it |
| Case Study, southwest airlines is the "most heavily | | | | is not. While Southwest does not have a monopoly |
| unionized" US airline (about 81% of its employees | | | | on people who are kind and who are willing to go |
| belong to an union) and its salary rates are | | | | above and beyond to satisfy a customer, such |
| considered to be at or above average compared to | | | | behavior is nurtured at Southwest to a much greater |
| the US airline industry. The low-fare carrier labor | | | | extent.It can then be concluded that the customer |
| advantage is in much more flexible work rules that | | | | service that is inherent to Southwest is a part of its |
| allow cross-utilization of virtually all employees (except | | | | culture. This culture is supported through employee |
| where disallowed by licensing and safety standards). | | | | encouragement to do the extra to satisfy the |
| Such cross-utilization and a long-standing culture of | | | | customer. This approach inspires people who would |
| cooperation among labor groups translate into lower | | | | ordinarily only on occasion go out of their way to |
| unit labor costs. At Southwest in 4th quarter 2000, | | | | help someone, to become consistent performers that |
| total labor expense per available seat mile (ASM) was | | | | offer exceptional service all the time. Southwest |
| more than 25% below that of United and American, | | | | employees are what differentiate its customer |
| and 58% less than US Airways.Carriers like | | | | service from the other airlines.4. |
| Southwest have a tremendous cost advantage over | | | | TechnologySouthwest utilizes technology in many |
| network airlines simply because their workforce | | | | ways to fulfill its business objectives and maintain its |
| generates more output per employee. In a study in | | | | efficient operations. According to its CEO, technology |
| 2001, the productivity of Southwest employees was | | | | equals productivity. Launched in 1996, ticketless travel |
| over 45% higher than at American and United, | | | | was first introduced by Southwest. On May 1st 2000, |
| despite the substantially longer flight lengths and | | | | Southwest Airlines introduces "SWABIZ," a portal |
| larger average aircraft size of these network carriers. | | | | that assists company travel managers in booking and |
| Therefore by its relentless pursuit for lowest labor | | | | tracking trips made through its web site There are |
| costs, Southwest is able to positively impact its | | | | many new technology initiatives being undertaken |
| bottom line revenues.Fuel CostsFuel costs is the | | | | currently and some are in the pipeline.Bar codes in |
| second-largest expense for airlines after labor and | | | | Boarding PassesSouthwest Airlines has invested $12 |
| accounts for about 18 percent of the carrier's | | | | million during the past three years to standardize |
| operating costs. Airlines that want to prevent huge | | | | corporate and terminal operations on about 10,000 |
| swings in operating expenses and bottom line | | | | Dell OptiPlex desktop and Latitude notebook |
| profitability choose to hedge fuel prices. If airlines can | | | | computers according to its company executives. |
| control the cost of fuel, they can more accurately | | | | Southwest wanted to replace its well known, brightly |
| estimate budgets and forecast earnings. With | | | | colored plastic boarding passes with an electronic |
| growing competition and air travel becoming a | | | | system with bar-code paper boarding passes. So it |
| commodity business, being competitive on price was | | | | installed about 350 touch screen ticket readers |
| key to any airline's survival and success. It became | | | | powered by Dell OptiPlex desktops. The bar code |
| hard to pass higher fuel costs on to passengers by | | | | gives Southwest more information to automatically |
| raising ticket prices due to the highly competitive | | | | reconcile the number of boarding passes with the |
| nature of the industry.Southwest has been able to | | | | number of passengers that actually board the |
| successfully implement its fuel hedging strategy to | | | | plane.Although the technology will help Southwest |
| save on fuel expenses in a big way and has the | | | | Airlines remain efficient by consolidating passenger |
| largest hedging position among other carriers. In the | | | | information for the company's 3,000 daily flights, |
| second quarter of 2005, Southwest's unit costs fell | | | | there were concerns it could lengthen the time to |
| by 3.5% despite a 25% increase in jet fuel costs. | | | | get travelers on board. However it was found that |
| During Fiscal year 2003, Southwest had much lower | | | | scanning each bar code on the boarding passes didn't |
| fuel expense (0.012 per ASM) compared to the other | | | | increase or shorten boarding schedules, but it did |
| airlines with the exception of JetBlue as illustrated in | | | | take minutes from administrative processes, such as |
| exhibit 1 below. In 2005, 85 per cent of the airline's | | | | looking up customer records. The new paper bar |
| fuel needs has been hedged at $26 per barrel. World | | | | code system is giving Southwest ticket agents the |
| oil prices in August 2005 reached $68 per barrel. In | | | | ability to match a customer record within having to |
| the second quarter of 2005 alone, Southwest | | | | scroll through and log into multiple software screens. |
| achieved fuel savings of $196 million. The state of the | | | | The process is much more automated. Once the bar |
| industry also suggests that airlines that are hedged | | | | code on the boarding pass is scanned at the terminal |
| have a competitive advantage over the non-hedging | | | | gate it checks off the person from the passenger list |
| airlines. Southwest announced in 2003 that it would | | | | in real time.The old process was manual that involved |
| add performance-enhancing Blended Winglets to its | | | | finding the information, scrolling through several |
| current and future fleet of Boeing 737-700's. The | | | | software screens from reservations to check-in to |
| visually distinctive Winglets will improve performance | | | | boarding. The bar code hardware to scan the |
| by extending the airplane's range, saving fuel, | | | | boarding passes has been deployed. The company is |
| lowering engine maintenance costs, and reducing | | | | in the process of replacing customer service |
| takeoff noise.Point-to-Point ServiceSouthwest | | | | back-office equipment at airports including at its |
| operates its flight point-to-point service to maximize | | | | headquarters in Dallas.Software UpgradesSoftware |
| its operational efficiency and stay cost-effective. | | | | applications, such as those used by clerks to check in |
| Most of its flights are short hauls averaging about | | | | passengers, are being replaced. Southwest Airlines' |
| 590 miles. It uses the strategy to keep its flights in | | | | internally written "Airport Application Suite" is |
| the air more often and therefore achieve better | | | | expected to rollout next year as the company |
| capacity utilization.Secondary AirportsSouthwest flies | | | | transitions from green screens to Window-based |
| to secondary/smaller airports in an effort to reduce | | | | user interface. Similar to Wal-Mart Stores Inc., |
| travel delays and therefore provide excellent service | | | | Southwest Airlines believes in developing in-house the |
| to its customers. It has led the industry in on-time | | | | software that runs its operations. The company uses |
| performance. Southwest has also been able to trim | | | | very little off-the-shelf software. There are between |
| down its airport operations costs relatively better | | | | 75 and 100 projects in the works each year |
| than its rival airlines.Consistent aircraftsAt the heart | | | | supported by approximately 900 IT |
| of Southwest's success is its single aircraft strategy: | | | | employees.RFIDRadio frequency identification |
| Its fleet consists exclusively of Boeing 737 jets. | | | | technology, a favorable alternative to bar-coding for |
| Having common fleet significantly simplifies scheduling, | | | | luggage identification, is also on Southwest's radar. It |
| operations and flight maintenance. The training costs | | | | plans to test RFID technology sometime in 2006. |
| for pilots, ground crew and mechanics are lower, | | | | Even though, Southwest is playing a little catch-up |
| because there's only a single aircraft to learn. | | | | with other airlines such as Air Tran, Alaska and |
| Purchasing, provisioning, and other operations are also | | | | Champion Airlines, in many cases they are able |
| vastly simplified, thereby lowering costs. Consistent | | | | leapfrog to more sophisticated applications easily |
| aircrafts also enables Southwest to utilize its pilot | | | | having waited longer.Challenges:Southwest has |
| crew more efficiently.E-TicketingThe idea of | | | | emerged very successful, despite the most troubled |
| ticketless travel was a major advantage to | | | | times in the airline market. However, it faces new |
| Southwest because it could lower its distribution | | | | challenges in the face of increasing competition from |
| costs. Southwest became electronic or ticketless | | | | other low fare airlines such as JetBlue, ATA airlines, |
| back in the mid-1990s, and today they are about | | | | America West.Reserved SeatingDue to increasing |
| 90-95% ticketless. Customers who use credit cards | | | | security guidelines since September 2001, Southwest |
| are eligible for online transactions, and today bookings | | | | would need to prepare for assigned (reserved) |
| account for about 65% of total revenue. The CEO | | | | seating to track its in-flight passengers. This change |
| Gary Kelly thinks that this idea would grow further | | | | will involve large technology investments and may |
| and that he wouldn't be surprised if e-ticketing | | | | impact its gate operations negatively since the |
| accounted for 75% of Southwest's revenues by end | | | | current way of unassigned seating has helped in quick |
| of 2005. In the past, when there was a 10% travel | | | | gate turnarounds.Passenger DemandThe |
| agency commission paid, it used to cost about $8 a | | | | keep-it-simple philosophy has served Southwest well. |
| booking. But currently, Southwest is paying between | | | | But as its own business grows and grows more |
| 50 cents and $1 per booking for electronic | | | | complex, with plans to purchase dozens of new |
| transactions that translate to huge cost savings.2. | | | | aircraft and an expected upsurge in passenger traffic |
| Employee and Labor RelationsSouthwest has been | | | | to about 80 million boarding's a year, the simplicity |
| highly regarded for its innovative management style. | | | | strategy that has been reflected in the airline's IT |
| It maintains a relentless focus on high-performance | | | | philosophy is evolving. The CIO Tom Nealon says |
| relationships and its people-management practices | | | | that "It's time to adapt our business processes for |
| have been the key to its unparalleled success in the | | | | efficiency. As our airline scales for us to provide the |
| airline industry.Mission StatementTo Our Employees | | | | same kind of high-touch customer service, we have |
| "We are committed to provide our Employees a | | | | to automate a lot of things we've been able to do |
| stable work environment with equal opportunity for | | | | without technology previously. The challenge is doing |
| learning and personal growth. Creativity and | | | | that without conceding the customer touch." |
| innovation are encouraged for improving the | | | | Southwest is also aggressively pursuing customer |
| effectiveness of Southwest Airlines. Above all, | | | | relationship management (CRM) techniques and has |
| Employees will be provided the same concern, | | | | applications to get insight into customer's wants and |
| respect, and caring attitude within the organization | | | | dislikes. According to an interview with its CEO Gary |
| that they are expected to share externally with | | | | Keller, Southwest has its focus on improving in two |
| every Southwest Customer."The Southwest mission | | | | areas - customer's airport experience and in-flight |
| statement shows that the company has a strong | | | | experience.In-Flight EntertainmentIn an overall effort |
| commitment to its employees. The company affords | | | | to improve customer's in-flight experience, in-flight |
| the same respect to its employees that is provided | | | | entertainment is something that Southwest is |
| to its customers. The Southwest mission statement | | | | currently evaluating and which JetBlue has been very |
| is unique in that it recognizes the importance of its | | | | successful at already because of its introduction in its |
| employees within the broader business strategy, | | | | long-haul flights. In comparison, Southwest has 415 |
| which emphasizes superb customer service and | | | | airplanes to consider and that represents an |
| operational efficiency. The employees reciprocate the | | | | investment decision at a whole new dimension. |
| respect, loyalty and trust that Southwest | | | | Additionally, Southwest has to consider how things |
| demonstrates. Southwest employees are known for | | | | may fit into their environment. At this point, 60% of |
| their loyalty, dedication, attitude and innovation. The | | | | its service is still very short haul. Southwest needs to |
| employees are the distinguishing factor between | | | | be mindful of the fact that a certain approach that |
| Southwest and the rest of the airline | | | | has been successful for its competitor may not be |
| industry.HiringSouthwest hiring policy is unique not only | | | | necessarily work to its |
| within the airline industry, but also more broadly, and | | | | advantage.Summary:Southwest has long been |
| revolves around finding people with the right attitude | | | | regarded as a benchmark in its industry for |
| that will thrive in the Southwest culture. Extensive | | | | operational excellence. Southwest Airlines is a fine |
| procedures are employed to hire for positive attitude | | | | example of a company that is committed to its core |
| and dedication. Those who do not posses those | | | | competencies - efficient operations to drive its low |
| qualities are weeded out. Colleen Barrett, a | | | | cost structure, outstanding delivery of customer |
| non-operational officer at Southwest, states | | | | service and innovative HR management practices. We |
| that"Hiring is critical, because you cannot | | | | hope this paper provided a good insight into |
| institutionalize behavior. Instead, you must identify | | | | Southwest operations, as part of its overall strategy, |
| those people who already practice the behaviors you | | | | to achieve success and gain competitive |
| are looking for. Then you can allow Employees to be | | | | advantage.References:1. (Southwest airlines official |
| themselves and make decisions about Customer | | | | web site)2. "Southwest keeps it simple" - Air |
| service based on common sense and their natural | | | | Transport World, April 2005, Pg 363. "Around the |
| inclinations." 1Recruiting and interviewing at Southwest | | | | World on $48 (or So): How High Can Discount Airlines |
| is a two-step process. The first step is a group | | | | Fly?" Strategy Management - Knowledge@ Wharton |
| interview, conducted by employees, where | | | | Newsletter Oct 5, 20054. TechWeb - "Southwest's |
| communication skills of potential candidates are | | | | Strategy for Success: Consolidate!" - Oracle Magazine |
| evaluated. The next steps in this process are one on | | | | (Sept/Oct 2004 edition) "Southwest Airlines: High |
| one interview, where the candidates' attitudes and | | | | Tech, Low Costs" - Eweek.com, April 20057. "Jet Fuel |
| orientation toward serving others are evaluated. | | | | Hedging Strategies: Options Available for Airlines and |
| These hiring criteria apply to all job functions since all | | | | a Survey of Industry Practices" - Kellogg School of |
| Employees at Southwest play a customer service | | | | Management Research Paper, Spring 20048. Winning |
| role. A critical part of Southwest operational strategy | | | | Behavior: What the Smartest, Most Successful |
| is that every job at Southwest is a customer service | | | | Companies Do Differently, Terry R. Bacon and David |
| position, whether it directly applies to the customer | | | | G. Pugh, 20039. Time Magazine, Oct 28th 2002 issue, |
| or whether it is internal.The table below shows that | | | | Vol. 160 Issue 18, p. 4510. "Wings Of |
| even though Southwest is the most heavily unionized | | | | Change",Information Week, March 28, 2005,11. |