Southwest was founded in 1971 with a fleet of three Boeing 737 aircraft. Headquartered at Love Field in Dallas, the airline followed a strategy of low fares, few frills, and excellent customer service. Early on, the airline faced many political and regulatory challenges including the Wright Amendment, which prohibited the carrier from offering direct service into Love Field from any state other than Texas and its four neighboring states. Under the leadership of co-founder and CEO Herb Kelleher, Southwest used these challenges to galvanize their employees, ultimately building a highly successful business with a uniquely committed workforce.
By 1994, the airline’s success had spawned many smaller imitators such as Kiwi and Reno Air. Big carriers like United, USAir, and Continental also sought to duplicate Southwest’s model with an airline-within-an-airline that, like Southwest, offered low fares, few frills, and frequent service. The new competitive threat had driven down the stock price and analysts were asking whether the airline’s advantage was sustainable. On September 17, 1994, Ann Rhoades, a former marketing executive and VP of People for Southwest, was asked to review the company’s current position in light of the new competition and evaluate whether Southwest’s wildly successful human resources practices could be imitated.
Southwest Airlines’ successful and profitable business model has been driven by several strategies including high aircraft utilization, a standardized fleet, charismatic leadership, low fares, excellent customer service, an attractive frequent flier program, innovative marketing, a performance-focused organizational culture, strategic human resources management, and lean operations.
The Southwest fleet is composed exclusively of fuel-efficient Boeing 737 airplanes. By using a single type aircraft, the company can take advantage of a smaller parts inventory while saving on maintenance and training costs, which has contributed to the company’s immaculate safety record. These planes spend an average 11 hours in the air daily compared to an industry average of 8 hours. Similarly, they run an average of 10.5 flights per gate versus the industry average 4.5. Southwest’s strategy of short-haul, point-to-point flights using less congested airports has contributed greatly to the airline’s efficiency.
A significant cost saving factor is the productive and motivated workforce. In 1991, Southwest was notably more efficient than the industry standard as evidenced by fewer employees per aircraft (79 versus 131), more passengers per employee (2,318 versus 848), and more available seat miles per employee (1,891,082 versus 1,339,995). Incorporated and developed under the charismatic and motivational leadership of Kelleher, the airline’s distinctive corporate culture and human resource management practices are an essential part of the business foundation. There are several reasons for the workforce productivity, which include a rigorous selection process, an average compensation package with significant non-monetary awards such as stock options, ongoing training, and an employee development program.
The human resources practices have created shareholder value by means of low turnover, high productivity, and excellent job satisfaction. Southwest has designed cross-functional work coordination such that, once the airline reaches a destination, every member of the flight and ground crew contributes to getting the next flight out on time. Remarkably, 70% of their flights spent an average of fifteen minutes on the ground in 1991. Faster turnaround time reduces labor costs and offers a significant productivity advantage in terms of equipment utilization; fewer delays make flying with Southwest more attractive to the travelers. Southwest has an organizational culture emphasizing “LUV” and “FUN” in a way that is aligned with the airline’s business strategy, creating an additional advantage. “LUV” is the company’s stock symbol and refers to the organization’s core values of respect for individuality and genuine concern for employees.
“FUN” refers to the company’s belief that employees should enjoy themselves at work and its commitment to creating an atmosphere that encourages customers to have fun. The word “Customer” is consistently capitalized in the company’s corporate communications. Southwest’s business model has resulted in consistent on-time performance, low fares, diligent bag handling, and high levels of customer satisfaction. Southwest passengers who experience the airline’s excellent service are loyal and this in turn attracts more business. Southwest has created a successful and profitable product in the tough airline industry year-on-year, resulting in creation of value and high return on investment for its shareholders.
Continental Lite was launched in 1993, immediately after Continental had emerged from its second bankruptcy and before it had become profitable. Employees weren’t thrilled with the extra duties and they’re not making their turnaround times. Its leader, Bob Ferguson, is known as a harsh taskmaster and has been known to alienate management and other executives.
Although he has secured a Southwest alumni as marketing chief for Continental Lite, he concedes that the new business has “had some start-up pains and hasn’t operated very efficiently so far.” United announced the launch of their Shuttle service in 1994, partly to regain market share that Southwest had captured. United’s employee buyout had failed to include flight attendants, the face of the airline. The CEO stepped down, and new CEO with no airline experience has been brought in. Perhaps most telling of United’s precarious position is that employees of the company weren’t confident in the new strategy. Southwest leads its competitors on virtually every measure of service.
It has never had a serious accident and has won the Triple Crown numerous times for on-time performance, the fewest lost bags and the fewest customer complaints. The airline has never had a labor dispute and leads on many financial measures. The company is profitable with a significant increase in net income between 1992 and 1993. Its debt is down and passenger load factor is strong. Most notably, its main competitive advantage, its committed and motivated workforce, is unlikely to be duplicated by the competition. Overall, Southwest is well-positioned to fight off the competition.
It is recommended that Rhoades focus on continued enhancement of Southwest’s already proven strategies, with an eye toward addressing the new challenge from competitors. Maintaining the airline’s culture of employee involvement and enthusiasm that has contributed so substantially to Southwest’s success
should be among the highest goals. Rhoades should immediately take action to include employees in the crusade, which Kelleher has already started with United in his “Commencement of Hostilities” memo. Given the history of trust at Southwest, management should be candid and transparent in order to develop a shared vision of the future. As Kelleher notes, “Anger can be a great motivator.”
Rhoades should channel employee anger through communication, training, and tracking of results metrics. To this aim, she can draw on the airline’s past history with the Wright Amendment to refresh and renew the corporate spirit that has driven the company since its earliest days; develop a program budget for additional training, employee rewards, and other incentives; and identify specific operational and financial goals and metrics associated with the crusade which would be used to judge success and drive reward programs.
Rhoades may suggest a formalized, specialized employee training program to address the challenges posed by the new competition and galvanize employees as “underdogs” forming a united front against the invading airlines. This approach could both enhance existing service characteristics while reinforcing the current state-of-siege mentality. Additionally, the attitude-based hiring criteria could be refined to evaluate candidates’ resourcefulness at developing winning strategies in the face of competition.
The existing corporate culture can be leveraged to address the competitive threat. Rhoades can follow the blueprint of Southwest’s culture committee by creating a competitive committee devoted to promoting the underdog spirit. She can introduce limited-time incentives such as free flights to reward employees who best represent this spirit. Rewards should be closely tied to performance metrics. Rhoads should consider a special bonus or profit-sharing program for meeting metrics such as costs per available seat mile and turnaround time goals. In keeping with the current culture, the competition should be fun with plenty of parties to celebrate milestones.
Finally, Southwest needs to develop a succession strategy to prepare for Kelleher’s eventual departure. Colleen Barrett may be a good choice as she is viewed positively by employees and is seen by many as “the backbone of
the company.” Most importantly, the successor must be committed to employees and embody the principles that have made Southwest so successful to date.
Southwest’s reputation for customer service, low cost and on-time arrivals remains intact. It’s been consecutively profitable for 38 years. Colleen Barrett succeeded Kelleher as president in 2001 and was replaced by Gary Kelly in 2008. Continental dropped its Continental Lite service in 1995 after admitting it was “a $140 million mistake.” United Shuttle failed and was folded back into United in 2001 when it became evident that cost savings had not materialized to justify the separate operation of Shuttle. A later version, TED, was launched in 2003 but was abandoned in 2009.a