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