Southwest Airlines

To: Dr. Wang

Lisa Chang
Phil Huff
Hitesh Shah

MGT-6331
University of Houston - Victoria
Spring 2003




Table of Contents

Executive Summary.. 3

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Company History..
External Analysis..
Industry Description...
Industry Structure
Regulatory Atmosphere..
Competitive Environment...
Competitive Strategy...
Five Forces Model...
Driving Forces
Effect of September 11, 2001 Attacks..
Airlines.
Tourism.
Airplane Manufacturers (Boeing)...
Effects of War
SARS...
Factors that Create and Influence Demand.
Economic Conditions..
Role of Technology..
Factors that Create and Influences Cost Structures
Economic Conditions..
Technology and Economies of Scale
Opportunities and Threats..
Opportunities
Threats
Internal Analysis...
Organizational Description..
Corporate Mission/Vision..
Services..
Organizational Structure.
Strategy..
Communication
Organizational Culture and Values.
Value Chain Analysis.
Primary Activities
Secondary Activities
Employee Relations
Job Satisfaction....
Motivation Techniques
Future Motivation Issues
Strategies and Performance
Strategic Goals.
Definition of Business Strategy.
Internal Capabilities and Skills.
Evaluation of Financial Performance (2001, 2000, 1999)
Southwest Airlines Compared to the US Airline Industry.
Profitability Ratios..
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Net Income.
Return on Sales.
Return on Stockholder's Equity.
Return on Operating Assets...
Price-Earnings Ratio..
Earnings Per Share.
Debt Ratios.
Debt-to-Total Capital - Southwest
Debt-to-Total Asset - Southwest
Debt-to-Equity - Southwest
Debt-to-Total Capital - Industry...
Debt-to-Total Asset - Industry...
Debt-to-Equity - Industry
Liquidity Ratios..
Financial Ratio - Southwest...
Current Ratio - Southwest..
Financial Ratio - Industry..
Current Ratio - Industry.
Strengths and Weaknesses..
Strengths
Weaknesses
Strategic Fit Analysis
Recommendations
Alliance..
Technology Upgrades.
In-Flight Internet Service...
SWA Smart Card..
References..
Appendixes
Appendix A: U.S. Airline Overview..
Appendix B: Domestic Airline Yields
Appendix C: Concentration Among Carriers.
Appendix D: Five Forces Model
Appendix E: Southwest Airlines' Directors and Officers...
Appendix F: Southwest Airlines' Cities Map.
Appendix G: JetBlue's Cities Map.
Appendix H: Alliance Implementation Schedule...
Appendix I: In-Flight Internet Cost/ Expense Schedule.
Appendix J: In-Flight Internet Implementation Schedule..
Appendix K: Smart-Card Cost/ Expense Schedule
Appendix L: Smart-Card Implementation Schedule..


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Executive Summary

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Southwest Airlines Co. is a major domestic airline that provides primarily short-
haul, high- frequency, point-to-point, low- fare service. Southwest was incorporated in
Texas and commenced Customer Service on June 18, 1971 with three Boeing 737 aircraft
serving three Texas cities - Dallas, Houston, and San Antonio. Today Southwest operates
over 350 Boeing 737 aircraft in 58 cities. Southwest has the lowest operating cost
structure in the domestic airline industry and consistently offers the lowest and simplest
fares. Southwest also has one of the best overall customer service records. LUV is the
New York stock exchange symbol, selected to represent Southwests home at Dallas
Love Field, as well as the theme of their employee and customer relationships.
Today Southwest Airlines is synonymous with commuter flights at a competitive
price, while incorporating and maintaining the highest standard of customer friendliness.
Southwest Airlines, the original brainchild of two San Antonio businessmen, has
continued to grow under the watchful eye of Herb Kelleher, the company's Chairman of
the Board. With a sound sense of employee satisfaction, the company as well as its
employees continue to reap the rewards that are the result of the trickle down effect
resulting in customer satisfaction. Employee motivation plays an important role in
keeping Southwest's distinction in the airline industry of being number one in the least
number of customer complaints. Motivation was initially established with the rapport the
current CEO established with the then small bunch of employees. Today however, the
company employs over 35,000 plus people and it is not known if the CEOs
charismatic/flamboyant persona can carry forward to the next generation of employees.
While Kelleher has been able to consistently keep the company on track, it is not known
if the company can continue to insure its reputation of customer satisfaction while

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maintaining and/or keeping up with its own growth. It will take a team with a sense of
duty, constant love and open communication to carry Herb Kelleher's vision into the
future, especially with the impact that September 11, 2001 has had on the airline industry
(Southwest Airlines Home, 2003).
Company History
Southwest Airlines was the brainchild of San Antonio entrepreneur Rollin King
and banker John Parker. In late 1966 King approached Herb Kelleher with the idea of
starting an intrastate airline to serve three major Texas cities of Dallas, Houston and San
Antonio. Kelleher was a San Antonio attorney who had moved to San Antonio from
New Jersey with his wife to continue his law practice and had done legal work for King's
air service. The model for the new company was California intrastate airline Pacific
Southwest Airlines (PSA). Kelleher filed the papers to incorporate Air Southwest Co.
(later Southwest Airlines Co.) on March 15, 1967.
Start up of the new airline was anything but easy. Braniff, Trans Texas (later
Texas International) and Continental airlines served Dallas, Houston and San Antonio
and did not take the new competition lightly. The "air war" between the existing three
airlines and Southwest lasted for almost three years, severely testing Herb Kelleher's
litigation skills. The legal battles Southwest fought in the early days created the esprit de
corps culture for which the airline is so well known. This early "fight- for-survival"
mentality did not just foster a can-do, inventive spirit; it also brought everyone in the
company close together. In order to survive Southwest had to outmaneuver and outthink
Braniff, Texas International and Continental not only in the courtrooms, but also in the
air, on the tarmac, and in the customer service area. Southwest employees were

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determined to provide superior service to the time-sensitive business traveler and the
cost-sensitive leisure traveler (Freiberg, Jackie and Kevin, 1996).
In January of 1971 airline industry veteran, Lamar Muse, came to work for
Southwest as CEO. Muse raised the money, bought the initial airplanes and hired the
right people to forge the company. With some very talented people out of work in the
early 70's, Muse and King were able to put together a senior staff of seasoned
professionals. Muse negotiated a great deal for three brand-new 737-200s that Boeing
had not been able to sell due to overproduction and the airline slump in the early 70's.
This aircraft deal set the stage for Southwest's philosophy of utilizing only one type of
airplane; which simplifies training requirements, reduces parts inventory, simplifies its
record keeping and helps the company negotiate better deals when acquiring new planes.
Southwest Airlines' first public stock was sold on June 8, 1971 and on June 18, 1971
Southwest was finally off the ground at Dallas' Love Field. Hence, the "love fest" began
("Love Is," 1999). All its Houston service was moved from Intercontinental to Hobby
Airport in 1972. This was a gamble that proved to be a huge success. Hobby was close
to downtown and perfectly suited for short- haul, frequent-flying Southwest business
passengers. Southwest has continued to leverage this strategy throughout its 32 year
history by carefully selecting airports to serve that meet the niche Southwest market.
Southwest filed with the Texas Aeronautics Commission to extended its service to
the Rio Grande Valley and started making a profit in 1973, but had another battle to fight
over rights to fly out of Dallas' Love Field in lieu of the newly constructed Dallas-Fort
Worth Regional Airport. Dallas, Fort Worth and DFW officials had counted on the major
airlines to pay off the bonds for the new facility and were expecting Southwest to be a

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substantial part of the payment. This was a life or death battle for Southwest because it
would mean bankruptcy if forced to move from Love Field to DFW. DFW was thirty
minutes from downtown, which didn't make sense for an airline that served business
travelers who wanted to get into and out of the city quickly. Less congested airports and
being closer to downtown areas, such as Dallas' Love Field, is what Southwest prefers.
Congested airports make it difficult to land and get back airborne quickly. A quick
turnaround at the gate (on average only twenty minutes for all Southwest flights today,
which is half the industry average) allows for more flight time, more flights, less required
aircraft and more productive ground crews, equating to a tremendous cost savings.
Southwest ultimately won the right to stay at Love Field after litigation from the cities of
Dallas and Fort Worth and the Regional Airport Board (Freiberg, Jackie and Kevin,
1996).
In 1974 Southwest carried its one- millionth passenger and in 1975 began service
to the Rio Grande Valley with four round trips each business day. 1976 brought Austin,
Corpus Christi, El Paso, Lubbock and Midland/ Odessa into Southwest's base and the
purchase of their sixth Boeing 737.
Southwest Airlines listed its stock on the New York Stock Exchange in 1977 as
"LUV" and 1979 self-ticketing machines were introduced and flights to New Orleans
from Dallas brought the first city outside of Texas into service.
In 1982 Southwest added San Francisco, Los Angeles, San Diego, Las Vegas and
Phoenix to its service areas and Herb Kelleher became permanent President, CEO, and
Chairman of the Board for Southwest Airlines. St. Louis, Missouri and Chicago were
added to the list in 1985 and Southwest announced the Ronald McDonald House as its

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primary charity. Southwest's altruism shines through its contributions to the Ronald
McDonald Houses. The Ronald McDonald House program is the cornerstone of the
Ronald McDonald Children's Charities.
In 1990 the billion-dollar mark was reached and Southwest was declared a major
airline. Service to Baltimore/ Washington International began in 1993, expanding
Southwest to the East Coast. Seattle, Spokane, Portland, Boise and ticketless travel were
added in 1994. In 1995, Southwest reached another milestone in aviation history. Herb
Kelleher negotiated a deal with the pilots to sign an unprecedented ten-year contract with
the company. The pilots agreed to freeze their wages for the first five years in return for
stock options. The pilots' trust in the company and Herb Kelleher is what lead to such an
unprecedented agreement (Freiberg, Jackie and Kevin, 1996).
Florida service was added in 1996 with service to Tampa Bay, Ft. Lauderdale and
Orlando. Later that year service was introduced to Providence, Rhode Island.
Jacksonville, Florida, Southwest's 50
th
city, was added in 1997 and Manchester, New
Hampshire was introduced June 7, 1998.
External Analysis
Industry Description
The growth of commercial air transportation during the second half of the 20th
century has had a significant impact on technical, economic and cultural development
throughout the world. The airline industry is a major economic force, both in terms of its
own operations and its impacts on related industries such as tourism and aircraft
manufacturing, to name a few.

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Only during the period since the economic deregulation of airlines in the United
States in 1978 have issues related to cost efficiency, operating profitability and
competitive behavior become the leading challenges to airline management. With the
U.S. leading the way, airline deregulation has now spread to much of the industrialized
world, affecting both domestic air travel within individual countries and, perhaps more
importantly, the continuing evolution of a highly competitive international airline
industry.
The global airline industry now handles over 1.5 billion passenger enplanements
annually, with U.S. airlines carrying over one-third of the worlds total traffic. The U.S.
airlines industry had 626 million passengers in 1998. The growth of world air travel has
averaged approximately 5% per year over the past 20 years, with substantial yearly
variations due to changing economic conditions, regional differences in economic growth
and major political events such as the Gulf War. As a rule, the annual growth in air travel
has been about twice the annual growth in GDP. It is not unreasonable to expect a
continued 4-5% annual growth rate in global air travel, leading to a doubling of total air
travel during this period, even under conservative assumptions regarding economic
growth over the next 10-15 years ("Industry Still," 2002).
Volatility has dramatically increased since airline deregulation. The volatility of
airline profits and their strong dependence on good economic conditions are a serious
concern for the industry itself and to aircraft manufacturers. Stable profits, often
supplemented by direct or indirect government assistance, were the rule rather than the
exception for most international airlines prior to the 1980s. The total net profits of world
airlines have fluctuated greatly over the past decade. The world airline industry posted 4

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consecutive years of losses totaling over $22 billion from 1990 to 1993, as a result of the
Gulf War and the subsequent economic recession. The turn-around experienced since
then totaled net profits in excess of $25 billion being reported by world airlines from
1995 to 1998 ("Industry Still," 2002).
The average yield of U.S. airlines has risen slowly (in terms of current revenue
dollars) over the past 10 years, as shown in the appendix, despite increasing low- fare
competition at home and abroad. Non-U.S. airlines have been somewhat behind on the
deregulation "learning curve" and have thus not had to face serious erosion of their yields
(average fares paid per passenger-mile) until recently. However, during the past 3 years,
non-U.S. airlines have seen their yield actually decrease, due to the growth of low- fare
competition in both their international and, now, their domestic markets. The recent yield
erosion for non-U.S. airlines, when combined with little or no reduction in their unit
costs, raises serious concerns about their ability to achieve financial stability in the
absence of regulation and, in some cases, the government support to which they had
become accustomed ("Industry Still," 2002).
Residents of small U.S. cities have seen changes in the pattern of air service to
their communities, as smaller regional airlines replaced previously subsidized jet services
by the major carriers. Despite a continuing decrease in the average real fare paid for air
travel in U.S. domestic markets, the difference between the lowest and highest fares
offered by airlines continues to increase, alienating business travelers forced to pay the
higher fares. The development of large connecting hubs by almost all U.S. major airlines
has also raised concerns about the pricing power of dominant airlines at their hub cities.

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Because of these and other concerns about certain aspects of airline competitive
behavior under deregulation have recently led to discussions among government policy
makers of the need for partial re-regulation. Regulatory approaches aimed at preventing
incumbent airlines from responding to the entry of a low-fare competitor into a market
with such practices as predatory pricing and increases in the capacity and frequency of
flights offered by the incumbents are among the alternatives under consideration. Further
reduction of barriers to entry for such low- fare competitors would also be sought.
Cost management and productivity improvements have been a major focus of
U.S. airlines for much of the past twenty years. Non-U.S. airlines have more recently
been forced by competitive realities to face up to this challenge as well. A by-product of
striving for lower costs and increased productivity has been the pursuit of economies of
scale by both non-U.S. and U.S. airlines. In the past, internal growth and/or mergers
were the primary means through which airlines sought to take advantage of scale
economies. With growing government concerns about industry consolidation, further
mergers are less likely. The response of airlines has been to expand their networks and to
achieve at least some economies of scale through partnerships and "global alliances"
designed to offer a standardized set of products and to project a unified marketing image
to consumers.
Industry Structure
The airline industry is an imperfect oligopoly with only few carriers dominating
long- haul passenger traffic, while several dozen small carriers compete for short- haul
flights. The Department of Transportation (DOT) classifies airlines as major, national, or
regional carriers, according to their revenue base.

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Major airlines. To be classified as a major airline, a carrier must have annual
revenues above $1 billion. Major airlines typically operate jet aircraft that have
130 to 450 seats and average stage lengths of about 1,000 miles. The large
aircraft used for international flights can travel 5,000 miles before refueling.
Southwest Airlines is classified as a major airline due to its revenues being greater
than $1 billion. Southwest is unique to the industry due to it being a major airline
with short- haul focus.
National airlines. Carriers whose revenues fall between $100 million and $1
billion are classified as national airlines. Despite this designation, some of these
carriers limit their service to regional markets, while others offer international
service. National airlines' aircraft have about 100 to 150 seats and are usually
smaller than those of the majors. National carriers typically specialize in point-to-
point service and may operate more short-haul flights than the majors.
Regional airlines. Regional airlines are those airlines with revenues of less than
$100 million. These consist of two distinct types of carrier: short-haul/commuter
airlines and start-ups.
Commuter airlines primarily serve low-density, short-haul markets that are
basically regional in scope with average stage length of about 245 miles. They often
provide point-to-point service for flights of up to 400 miles. Most commuter airlines are
partners with major airlines, sharing the majors' gate space at hub airports and their
computer reservation system (CRS) codes. Commuter airlines shuttle passengers to and
from the secondary cities on major airlines' hub-and-spoke systems, often using
turboprop aircraft that seat 20 to 40 persons (though they've recently begun using jets

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with up to 70 seats). There are a few small commuter airlines, however, that operate
independently of the majors and provide service on low-density rural routes.
Start- up carriers are often classified as regional airlines based on their revenues
with an average stage length of 400 to 600 miles. They may initially serve a single
region, although their ultimate goal is typically to offer broader coverage. Few start-ups
stay in the regional category for long as they either quickly grow into the national
classification, such as AirTran Airlines, or they fail. Start-up airlines often cannot obtain
or afford the gate space during peak business travel hours at the major airlines' hub
airports, which is a significant disadvantage. Even if they do get the space, the big
carriers frequently match their discounted fares. Successful start-up airlines choose to fill
niche markets overlooked by the larger carriers. JetBlue is one such start-up airline.
Another form of airline operation is charter, or unscheduled, service. It consists
of transporting passengers on call, much like a taxicab. Charter service is popular with
tour operators, the military, and professional sports teams. Major airlines sometimes
book charter space on other airlines when they have a capacity shortfall. Most airlines
provide some charter service, but only a few specialize in this line. Those airlines that do
may be classified as major, national, or regional carriers. Charters' aircraft type and stage
lengths are similar to those of other airlines.
A new kind of airline is the two-tier operator. Typically, these carriers are major
airlines that service long-haul markets via a hub-and-spoke system, but which also
operate a fully independent, point-to-point air service serving the discount transportation
market. Most routes served by low- fare affiliates are shorter haul and hence use smaller
capacity aircraft. These affiliates also typically operate with separate wage scales. Some

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examples are AMR Corp.'s American Eagle, Delta Air Lines' Delta Express, and
Continental's Continental Express ("Industry Still," 2002).
Regulatory Atmosphere
Federal regulation of domestic airline fares and markets ended with the Airline
Deregulation Act of 1978, the Department of Transportation (DOT) and its affiliated
agency, the Federal Aviation Administration (FAA), continue to regulate the industry
with regard to safety, labor, operating procedures, and aircraft fitness and emission levels.
The FAA promotes safe air travel by monitoring the industry's maintenance and
operating practices. The FAA certifies aircraft and airlines and establishes age and
medical requirements for pilots. One of the agency's chief functions is to operate the
nation's air traffic control system.
The DOT imposes civil penalties on airlines that engage in fraudulent marketing
practices or that violate code-sharing rules. It also oversees compliance with denied
boarding (bumping) compensation rules and makes decisions on airline ownership and
control issues. The DOT also plays a key role in negotiating bilateral aviation treaties
with foreign nations ("Industry Still," 2002).
Competitive Environment
Today airlines obtain revenues primarily from the fares they charge to the
passengers. They also earn revenues by carrying mail and cargo and by selling alcoholic
beverages and in- flight entertainment and services to passengers. Airlines also generate
substantial income by selling frequent- flier credits to hotels, auto rental agencies, credit
card issuers, and other organizations that offer these credits as premiums or as a way to
build good will.

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Many business people use air travel to make sales trips, visit far off businesses
and attend industry conventions. Because many business trips are scheduled within
seven days of the flight, their fares are typically the highest, whether in coach or first
class. Business travelers tend to be relatively price- insensitive because their companies
pick up the price of the ticket.
Corporations have become more cost conscious because business fares have risen
significantly faster than leisure fares in recent years. Some companies are now directing
employees to travel coach or to use low-fare carriers. Corporate downsizing has also left
organizations, with fewer managers and executives authorized to travel. To reduce travel
costs further many companies enter into negotiated travel deals. Under the negotiated
travel deals the companies promise to do most of their travel with a certain airline in
exchange for sharp fare discounts.
Business travel generated about 30% of revenues in 2001, based on Standard &
Poor's estimates, down from as much as 52% in 1981. Business travel represents only
15% of total estimated revenue passenger-miles (RPMs), which highlights its profitability
relative to other categories of traffic ("Industry Still," 2002).
Airlines actively solicit the business traveler and many larger aircraft contain
designated business sections, which offer roomy seats and premium food service.
Airlines have recently expanded their business class sections. Airlines compete for
business passengers by offering priority check- in, expedited baggage handling, luxurious
airport lounges and in- flight amenities such as telephones, faxes and power outlets for
recharging laptop computers. Airlines must provide frequent flights, reliable on-time
performance and top safety records to entice the business traveler.

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At the opposite end of the spectrum to the business traveler is the leisure traveler
who is highly price-sensitive. The cheaper fares resulting from deregulation have
allowed people from all walks of life to travel by air to visit distant friends and relatives
or to take more frequent vacations. Leisure travelers can obtain discount fares in two
ways. First, low fares are available to individuals who book flights at least 21 days in
advance and second, deeply discounted fares are also available (mainly through the
Internet) a few days before departure. As a result, many leisure travelers defer making
any trip arrangements until a fare sale is offered. The result of these patterns is that over
short periods, leisure travel can be erratic. Leisure travel is more cyclical than business
travel, moving together with consumer sentiment and disposable income levels.
Passenger aircraft are also capable of carrying cargo. Most freight tends to be
carried on wide body jets on long stage lengths. Major airlines carry significantly more
mail and cargo in the belly space under the passenger cabin than regional and commuter
airlines. Passenger airlines view freight transport as a byproduct of their main business
and charge discounted rates compared with those charged by specialized air freight
carriers. Airlines often accept freight from only a few air forwarders because they lack
the sales force to pursue this business. Some airlines that have more cargo demand than
belly space lease freighter aircraft to their customers ("Industry Still," 2002).
Airlines also generate revenues from the sale of in- flight alcoholic beverages and
various services and amenities, accounted for as other revenue. This category may also
include income from international code sharing programs. On long- haul flights, most
carriers provide telephone, automated teller machine (ATM), fax, and television and

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entertainment services for a fee. Although these supplementary sales carry high margins,
they account for a relatively small portion of airline industry revenue.
Competitive Strategy
Airlines have a variety of competitors with major airlines facing competition from
other major airlines as well as from national and regional airlines as well. All airlines
compete with other transportation modes, such as buses, automobiles and railroads.
Before 1978, the Civil Aeronautical Board regulated the fares that airlines could charge
and which routes they could fly, which severely limited new entrants into the industry.
Following deregulation in 1978, competition in the airline industry has greatly
intensified. As regulatory barriers to entry were dismantled and risk capital poured in,
established carriers faced an unending parade of aggressive start-up airlines that targeted
the larger carriers' high- margin business. In recent years, competitive pressures have
eased as risk capital has become scarcer for start-ups and established carriers have limited
their geographic horizons.
The automobile industry is the airline industry's number one competitor.
According to the Travel Industry Association (TIA), a travel and tourism trade group
based in Washington, D.C., automobiles, trucks, and recreational vehicles were used for
77% of all trips in 2001; airplanes for 17%; and buses, trains, and other for 6%. For short
trips, airline travel is neither practical nor economical. The TIA reported that 70% of
auto trips are less than 600 miles, compared with only 11% of airline trips. For long
distances travelers prefer flying to driving. 75% of airline trips exceed 1,000 miles,
compared with only 13% of auto trips. Airlines also face competition from intercity
railroads, specifically Amtrak, whose fares were at one time partly subsidized by the U.S.

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government (Amtrak was mandated to reach self-sufficiency by December 2, 2002)
("Industry Still," 2002).
To differentiate themselves from their competitors, airlines may strive to build
brand loyalty through frequent-flyer programs. Frequent- flyer programs let travelers
acquire bonus miles by booking flights or by conducting business with other
organizations that have tie- ins with the airlines and target mainly business travelers.
Bonus miles can be redeemed for free air tickets or service upgrades. Frequent-flyer
programs are designed to promote repeat business for an airline. Members will tend to
not defect to other carriers for minor price savings.
Price competition is a fundamental weapon that airline carriers commonly use to
win a greater share of the leisure market. Fare differentials of just a few dollars can
persuade leisure travelers to select one airline over another or to make their journey by a
different mode of transportation. In contrast, business fares are rarely discounted (offered
at lower prices to select customers) and are not often put on sale (offered at lower prices
to all customers).
To attract leisure travelers, airlines advertise deeply discounted fares. Most
passengers don't get these fares: by law, carriers do not have to offer more than 10% of
the seats on a flight at the discounted rate. This is a significant fact that most people do
not realize. On a given flight, passengers who fly coach may have booked fares at as
many as a dozen different prices. Carriers' fares differ according to the length of time
that the flight is booked in advance. Walk-up fares, paid by passengers at the airport gate
at departure time, are the highest.

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Consumers' level of price sensitivity varies. At one extreme passengers are
willing to make several connections and book 'red eye' flights through online ticket
auctioneers such as priceline.com. Other leisure travelers are willing to pay somewhat
higher fares for direct flights at convenient times.
Airline seats are what one might call perishable inventory. Once a plane is in
flight, its empty seats can no longer be sold. To minimize these losses, the industry has
developed sophisticated computer programs to help determine how much demand there
will be for each route at different times of the day, days of the week, and seasons of the
year. Airlines also attempt to calculate how much of a flight should be booked at any
given point in time through a practice known as yield management. Yield management
alerts the carrier to abnormal booking patterns, which the airline can react by either
cutting or raising fares well before a flight is scheduled to depart. Airlines could now
then fill seats that otherwise would have gone empty. They often do this by offering last
minute, deep-discount sales via the Internet. The down side is that the Internet is making
consumers even more price-conscious, which is exerting some downward pressure on
yields.
Yield management also helps carriers to estimate the number of passengers who
will cancel their flights and how many seats can be overbooked without the risk of having
to bump customers. The industry tries to avoid bumping, since by law they must pay
$400 to passengers involuntarily denied boarding. This is another fact that not everyone
is aware of. Carriers also use computer programs to engage smaller aircraft to routes
where sales are slower than anticipated and put their larger capacity jets into markets that
are more popular.

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Since deregulation, the airline industry has been prone to periodic bursts of
destructive fare wars. Some of the blame lies in the aggressive pricing tactics of start-up
carriers, which operate with substantially lower costs than the major airlines and are
eager to gain a foothold in the market. Recently, Southwest Airlines, though no longer a
start-up, has been the source of much of the fare pressure. Now, JetBlue has entered into
the picture as well.
The industry is generally susceptible to fare wars when capacity levels far exceed
demand. Since airlines have high fixed costs (for equipment and maintenance facilities) relative
to their marginal costs (the cost of flying one additional passenger), fare wars can reach extremes
before order is restored. Fares wars have become less destructive to the airline industry in recent
years. They now tend to be restricted to a few markets at any given time and are rarely seen in
hub markets where a major carrier has a dominant position ("Industry Still," 2002).
Five Forces Model
All organizations are affected by the general components of macro-environments.
Each organization also functions in a closer, more immediate competitive environment.
The competitive environment comprises the specific organizations with which the
organization interacts. There are five competitive forces that determine the profitability
of an industry and so are of greatest importance in strategy formulation. Different forces
take on prominence in shaping competition in each industry. Refer to the Appendix for
the typical five driving forces and their relationships in industry. In the airlines industry,
the key forces driving the industry competition are the threat of entry and industry
competitors.
Southwest Airlines has extreme entrenched cost advantages that typically fend off
new entrants to their niche market. The airline industry continually attracts capital for

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new start-ups, although the failure rate for these companies is high. Of the 43 airlines
launched in the U.S. between 1978 and 1993, only two, America West Holdings Corp.
and Midwest Express Holdings Inc., have survived. The startups' problems will to be
compounded by the aftermath of September 11, 2001 as large losses and lower traffic
levels test their staying power.
Small carriers are foolish to go head to head against a major airline, since they
cannot offer the same frequency of flights. If small carriers offer deep discounted fares
on a particular segment where major airlines operate, then the major airline will match
the price in that segment, while maintaining high fares on all non-competing flights.
More than a dozen low- fare start-up carriers currently operate, and a half-dozen
others are in the planning stages. The current crop hasn't proven to be better managed or
capitalized than their predecessors. One exception is JetBlue Airways Corp., which is
potentially the biggest threat to industry price stability after the birth of Southwest
Airlines. JetBlue initiated services out of New York City's J.F. Kennedy International
Airport in February 2000. The carrier is well capitalized, uses brand new jets, and has
been generating high load factors since its launch.
Competitors: There are three key competitors of Southwest Airlines:
JetBlues Airlines: Fast growing JetBlue Airways is counting on low fares to
keep its ledgers jet-black. Based at New Yorks John F. Kennedy
International Airport, the carrier offers one-class service with leather seats and
live satellite TV to about 20 U.S. cities and Puerto Rico. It has established a
second hub at Long Beach Airport outside Los Angeles. The airline relies
entirely on electronic ticketing and it keeps its turnaround times down by

21

choosing less crowded airports located near larger cities. JetBlue has a fleet
of about 40 aircraft. Billionaire financier George Soros controls about 24% of
JetBlue.
AMR, Inc.: AMR, Inc. knows Americas spacious skies well, its main
subsidiary is American Airlines, the U.S.s number one air carrier. With a
fleet of more than 800 jets and hubs in Chicago, Dallas/Fort Worth, Miami,
and San Juan, Puerto Rico, American Airlines serves about 160 destinations in
the Americas, Europe, and the Pacific Rim. The carrier has expanded by
absorbing the assets of TWA. With British Airways, American Airlines leads
the One-world global marketing alliance. In the airline industry slowdown
that has followed September 11, 2001, attacks on the U.S., American Airlines
is working to reduce its capacity, its fleet, and its workforce.
Delta Airlines: The worlds major airlines are picking teams, and Delta Air
Lines is playing the game. The number three U.S. carrier is expanding its
U.S. regional operations while building a global alliance. With hubs in
Atlanta, Dallas/Fort Worth, Cincinnati, New York City, and Salt Lake City,
Delta flies to nearly 220 U.S. cities and about 45 foreign destinations. It also
serves nearly 120 destinations abroad through code-sharing agreements. In
the U.S., Delta owns regional carriers Delta Express, Atlantic Southeast
Airlines, and Comaire.
Threat of new entrants: New entrants into an industry compete with established
companies. If many factors prevent new companies from entering the industry, the threat

22

to established firms is less serious. If there are few such barriers to entry, the threat of
new entrants is more serious.
The airline industry has many barriers, such as government controls; capital
requirements, brand identifications, economic downturns, war (9/11), diseases (SARS).
Thus, the threat of new entrants for Southwest Airlines in the next few years is minimal.
Threat of substitutes: Although Southwest Airlines has developed strong rivalries
with other airlines, it also competes as a substitute with train and bus companies such as
Greyhound and rental car companies such as Avis. Southwest has gotten its cost base
down to such a low point that it is now cheaper to fly from Los Angeles to Phoenix than
it is to take a bus or to rent a car. This ability shows that substitute products or services
can limit another industrys revenue potential.
Suppliers: Organizations must acquire resources from their environment and
convert those resources into products or services to sell. Southwest Airlines' suppliers
provide the resources needed for production. These suppliers may come in the form of
people (supplied by airospace engineers of Boeing, employees that handle cockpit flight
controls and airport employees of Aviation Department), raw materials (supplied by
wholesalers, and distributors of drinks, peanuts, fuel, etc.), information (supplied by
researchers and consulting firms), and financial capital (supplied by financing
institutions, banks, and other sources such as individual investors).
Suppliers are important to Southwest Airlines for reasons beyond the resources
they provide. Suppliers can raise their prices or provide poor quality goods and services.
Labor unions can go on strike or demand higher wages. Workers may produce defective
work. Powerful suppliers, then, can reduce an organizations profits, particularly if

23

Southwest Airlines cannot pass on price increases to its customers. Southwest is at a
disadvantage if it becomes overly dependent on any powerful supplier. Choosing the
right supplier is one of the most important strategic decisions.
Buyers: Travelers (business travelers and tourists) purchase tickets Southwest
Airlines offers. Buyers are important to Southwest. Buyers can demand lower prices,
higher quality, and special services. They can also play competitors against one another
because they can compare pricing.
Customer service means giving buyers what they want or need, the way they want
it. This usually depends on the speed and dependability with which Southwest can
deliver its services. Actions and attitudes that mean excellent customer services for
Sout hwest include:
Speed of delivering ticket bookings.
Willingness to meet emergency needs.
Readiness to reimburse funds when buyers complaints.
Southwest Airlines emphasizes good customer service, which provides a critical
competitive advantage. The organization is at a disadvantage if it depends too heavily on
powerful customers. Customers are powerful if they can easily find alternative sources.
Driving Forces
It's 100 years since the Wright brothers' first powered flight -- a time to reflect on
the great advances made since then: the jet engine, supersonic flight and space travel, all
powered by man's desire to fly. But there is little time for the airline industry -- plane
manufacturers or airlines -- to celebrate. Over the last two years, many have entered the

24

"emergency room" having been knocked around from one crisis after another the airline
industry awakened from a four- year "party" in 2000 with a "real bad hangover.
The airlines' entire financial structure is based on the premise that business
passengers will pony up far more to fly on the spur of the moment than leisure fliers who
book well in advance. Throughout the booming 1990s, business travelers paid as much
as five times more than leisure travelers for the same seat. While they made up 8 to 10
percent of the major carriers' passengers, they accounted for as much as 40 percent of
their revenues. The entire hub-and-spoke system, developed after deregulation, was
designed to attract and keep business travelers happy by providing more frequent flights
to more destinations. But there was a price. It costs more to run and maintain such a
system than a destination-to-destination structure, the kind low-cost carriers such as
Southwest instituted with great success. It's the only major carrier that has continued to
make money through these tough times.
When the recession first hit in 2000, business travelers started to balk at paying
high prices. They flew far less frequently, and when they did travel, they looked for
lower-priced options, using everything from the Internet to discount airlines to Amtrak's
high-speed train in the Northeast.
The major carriers' revenues plummeted, but they were still left with the higher
costs associated with their network systems. While the carriers experimented with a few
changes to their fare structure and restrictions - such as doing away with the Saturday
night stay on some busy business routes - most have kept their fare structure essentially
the same, hoping that when the economy recovers, business travelers, with their thick
wallets, will be back.

25

The economic impacts of the airline industry range from its direct effects on
airline employment, company profitability and net worth to its less direct but very
important effects on the aircraft manufacturing industry, airports, and the tourism
industry, not to mention the large economic impact on virtually every other industry
affected by the ability to travel by air. In 1998, U.S. scheduled airlines reported almost
$90 billion in total operating revenues, with approximately 500,000 employees and a total
asset value of over $100 billion. The U.S. airline industry operates well over 6,000
aircraft in total, of which 5,000 are large commercial jet aircraft.
The World Travel and Tourism Council in London reported that in 1999, travel
and tourism in the United States is expected to generate $1 trillion of GDP and involve
over 17 million jobs, and worldwide, is expected to generate $3.5 trillion of GDP and
almost 200 million jobs.
U.S. aircraft manufacturers employ 500,000 in the production of large
commercial aircraft and parts, delivering an average of over 400 units annually in recent
years. The export value of U.S.-built commercial aircraft totaled $24 billion in 1997,
resulting in a positive trade balance in this sector for the United States of close to $20
billion. Aircraft manufacturing, and aerospace manufacturing in general, consistently
rank among the two or three largest positive contributors to the U.S. balance of trade.
It is important to note that the net profits of U.S. airlines during this most recent
period of economic prosperity account for upwards of 60% of the world industry total,
despite the fact that U.S. airlines carry less than 40% of world airline traffic (measured in
revenue passenger- miles, or RPMs). The disproportionate profitability of U.S. carriers
can be explained at least in part by their greater experience with deregulated and highly

26

competitive airline markets, compared to most non-U.S. airlines. After some hard
lessons in the first decade of deregulation, U.S. airlines have demonstrated their ability to
respond to increased competition with more sophisticated management tools, cost
reductions and increased productivity. System-wide average load factors (percentage of
available seats filled) for U.S. carriers now routinely exceed 70%, up from an average of
60% at the time of deregulation. The ability of U.S. carriers to fill a greater proportion of
available seats (and perhaps more importantly to reduce the proportion of empty seats) is
the result of airline innovations in capacity planning and fleet assignment, schedule
optimization, as well as pricing and revenue management.
The largest U.S. carriers today have unit costs (operating expense per available
seat- mile, or ASM) that are about one-half of what comparable European international
airlines achieve. The truly remarkable advantage that U.S. carriers enjoy in this respect is
seen over the years of historical data. The downward pressure on unit costs stems from
both the entry of low- fare carriers into domestic markets and the continuing liberalization
of international markets, which also increases the intensity of price competition.
While U.S. domestic air travel continues to grow in line with economic growth,
average real fares have declined since deregulation and continue to decline today.
Several successful new entrant and low- fare airlines have had a great impact both on
airline pricing practices and on the publics expectations of low-priced air travel. And,
despite worries at the time of deregulation that competitive cost pressures might lead to
reduced maintenance standards, there is no statistical evidence that airline safety has
deteriorated.

27

At the same time, deregulation in the United States has certainly not been free of
problems and may have affected certain stakeholders and constituencies in a negative
way. The pressure to cut costs, combined with increased profit volatility, mergers and
the bankruptcies of several airlines have led to periodic job losses, reduced wages and
tense labor- management relations in the industry. Airline labor unions certainly enjoy
much less power than in the early years of the industry. Furthermore, the benefits of
deregulation have not been shared equally by all travelers.
U.S. airlines continue to refine their expertise in terms of schedule optimization,
fleet utilization, pricing and revenue management and non-U.S. airlines will benefit from
adoption of these innovations.
With advances in computer and Internet technologies, alternative channels for
airlines to distribute their products to consumers represent an essentially untapped
opportunity for cost management.
Given that there is little chance of major technological innovation in terms of
aircraft performance over the next decade, the challenge for the global airline industry
will be to achieve sustained profitability through more effective management tools. In
the face of global liberalization of airline markets, disparities between airlines with
respect to their ability to compete effectively will inevitably lead to the demise of weaker
carriers. The number of carriers at risk may increase substantially should the world
economy suffer a significant downturn.




28

Effect of September 11, 2001 Attacks
Throughout history there have been many significant events that have altered the
American economy. Whenever an event occurs that impacts the production, distribution,
exchange or consumption of goods or services the economy will react accordingly. In the
past, occurrences such as the Boston Tea Party, The Great Depression, the attack on Pearl
Harbor and the Gulf War have greatly affected the nation's economy. The September 11,
2001 terrorist attacks on the United States were no different. On this day, American life
changed forever. The American economy had seen an unprecedented expansion during
the 1990s.
However, at the beginning of the 21
st
century, the economy was in a slump.
There were many dot-com companies that went out of business, stocks for companies
such as Cisco Systems and Lucent Technologies began to plummet and other companies
such as Microsoft and AOL Time Warner announced that they would not meet projected
profits. The stock market dropped, with the Dow Jones Industrial Average and the
NASDAQ Stock Market both ending the year 2000 with losses. Soon the rest of the
economy started to weaken. Manufacturing and employment began to decline,
automobile companies shut down plants, and with less business travel the airlines began
to cut back. The terrorist attacks of September 11, 2001 made the country's slumping
economy even worse. After it's reopening, the stock markets suffered a record plunge.
Many anxious investors began selling off their holdings and companies continued to
downsize. As a direct result of the September 11th attacks, the rate of unemployment rose
from 4.9% in September 2001 to 5.4% in October 2001. This was the biggest one- month
rise in 21 years and the highest rate since December 1996 (BBC News, 2001). By

29

looking at the unemployment figures for the end of 2001 as compared to the prior year,
we are able to realize the downward shift in the economic stability of our nation.
Unemployment reached 8.3 million in December 2001, 2.6 million more than in
December 2000 (McGurk, 2002). The effects of this horrific event have been felt by a
variety of industries with the airline industry heading the list along with tourism and
airplane manufacturing. September 11 aftermath has also changed how we view our
national security and the measures our nation will take to ensure it.
Airlines: Since September 11, 2001 Americans have cautiously returned to the
skies. However, the business of flight still remains in a grave economic slump. This past
year the airline industry was severely impacted by the terrorist attacks. According to an
article in the Baltimore Sun, prior to the terrorist attacks, many major Airlines were in
crisis due to the dot-com implosion that wiped out a vast amount of personal fortunes.
Suddenly the once free-spending business traveler, willing to pay $1000 on walk up
fares, vanished. This left the airlines to battle over budget conscious leisure travelers.
These travelers had since then turned to low fare carriers such as Jetblue, AirTran, and
Southwest Airlines. All of which have made money after the terrorist attacks as a result
of their low costs and fiscal discipline (Baltimore Sun, 2002). Like all major disasters,
the terrorist attacks of September 11th resulted in a tragic loss of life, destruction of
property and a disruption of economic activity. One of the hardest hit segments of the
economy was the major airline industry. No other industry saw such a significant drop in
revenue related to this attack. Passenger miles were down 32 percent for domestic flights
and 29 percent for international flights in September 2001 compared to September 2000.
Due to this decrease in demand, airlines decided to cut their routes. This cut resulted in

30

an 18 percent reduction in the number of flights in October 2001 compared to October
2000. In the past year flights have been reduced, planes were grounded and literally
thousands of jobs have been slashed. This decrease in the demand for flying caused
layoffs of up to 140,000 workers in the airline industry just one month after the attacks.
Approximately 80,000 of these layoffs came from the major commercial airline carriers
with the remaining 60,000 from other directly related companies such as Boeing, Sky
Chefs, and airport concessionaires (Ryan Rettman, 2002).
All of the major airline carriers are still being forced to make desperate changes in
order to stay in business. If they aren't able to cut costs and decrease their operations to
match reduced demand, the industry could face a new round of bankruptcies and failures.
The major airlines are measuring their success by trying to avoid bankruptcy after the
September 11
th
terrorist attacks. In August 2002, US Airways sought bankruptcy
protection, American Airlines announced restructuring and cut backs, and United Airlines
warned of possible bankruptcy filing in the fall of 2002 unless its situation improves (Fox
News, 2002). This year Congress passed the Air Transportation Safety and System
Stabilization Act. It has provided a $15 billion emergency assistance package to help
airlines recover from the September 11
th
attacks.
Airlines that can display the ability to cut costs and recapture financial stability
can acquire federal loan guarantees. Once an airline qualifies for this loan, the
government will guarantee to pay back the bank if the airline defaults. For example, U.S.
Airways has been approved for a conditional loan guarantee. United Airlines is making
drastic cuts to qualify for a $1.8 billion loan guarantee and has promised to cut labor
costs by 20 percent over the next six years. The government panel rejected applications

31

from airlines such as Frontier Flying Services, National, Spirit, and Vanguard Airlines
because they aren't convinced that the loan will be repaid. The question is how many
airlines will survive this crisis. According to the Air Transport Association, the airline
industry losses in 2001 were $7.7 billion. They also predict that the losses may exceed
$17 billion by the end of 2003. Passenger traffic still remains extremely weak.
Both airlines and government are working closely to rebuild the public confidence
in a safe and secure U.S. air transportation system. The airline industry can only hope
that the people's need to fly for business and personal reasons will eventually overcome
lingering fears about another terrorist attack. Securing cockpit doors alone cost an
estimated $310 million, while adding federal security employees at airports and new
baggage-screening equipment, which is paid for in part through a $2.50 tax on each one-
way ticket, is costing up to $4 billion a year.
Tourism: The airlines' troubles have had a direct impact on the travel industry.
According to Travel Industry Association of America, more than 500,000 travel workers
lost their jobs nationally due to the September 11th catastrophe (Chicago Tribune, 2002).
The airline's woes also led to losses in other parts of the U.S. economy especially in the
industries that rely heavily on the airline industry such as tourism. Travelers are more
hesitant to fly and, due to a sluggish economy, are more cost-conscious about their travel
plans. The downturn has hit hotels, restaurants and tourist attractions hard. In
Washington D.C. hotel occupancy rates dropped to 25% right after the attacks. In the
year since, the nation's capital's hotel industry has recovered somewhat but occupancy
rates and average room rates are still below pre-September 11th levels (Ramstack, 2002).

32

In fact, the hotel industry in all of the United States has been effected by 9/11 as well as
the slumping economy.
From the beginning of the recession in March 2001 through May 2002, hotel
industry employment declined by 122,000 jobs, or 6.4%. Of those lost jobs, 63,000 were
lost since September 11th. Between September and October 2001 there was a loss of
38,000 hotel jobs, this was the largest single- month job loss during the recession. The
hotel unemployment rate increased from 5.2% to 7.0%, which was more than the rise in
unemployment for all U.S. workers between 2000 and 2001 (Working for America
Institute, 2002). Tourism is a $25 billion dollar industry in New York City. After the
attacks, tourism revenues in the Big Apple declined 15% and hotel occupancy rates
dropped 14% (Daily Herald News Services, 2002).
The once thriving restaurant business in Manhattan also slumped badly leading to
layoffs of 11,900 restaurant workers in the city (Fiscal Policy Institute, 2001).
Attendance at tourist attractions such as the Grand Canyon has been noticeably affected.
In 2001, Las Vegas based Scenic Airlines ferried 250,000 tourists from Las Vegas to the
Grand Canyon. This year that number has dropped almost 50% to 130,000 (Jones, 2002).
The American public still remains apprehensive about traveling despite slashed
airfares and discounted hotel rates. The drop in tourism has had a large effect on local
economies that depend on tourist income to generate much needed tax revenue. Without
this revenue localities are forced to slash services and/or increase property and commuter
taxes. One needs to look no further than New York City to find a real life application of
this. The slump in tourism has also led to deep losses in jobs in the service sector
particularly in travel related industries. Many stocks related to tourism have plummeted

33

due to this slump. Disney, in particular, has seen its stock price and attendance figures
for its four theme parks decrease (Ahrens, 2002). The economic impact of the decline of
the airlines and tourism cannot be overstated.
Airplane Manufacturers (Boeing): Like the airline and tourism industries, the
commercial airplane-manufacturing field has also felt the repercussions of the September
11
th
disaster. Of these various manufacturers, the nation's largest aircraft maker, Boeing,
has most notably felt these effects. Its' workers as well as its bottom line have felt the
reverberations of 9-11-01. On Friday, September 20, 2002 Boeing laid off 500 of its
employees. This brought the total number of commercial airplane workers laid off by
Boeing since the September 11th attacks to 25,400. Shortly after the attacks Boeing
executives had estimated that it would reduce their workforce by 30,000 by the end of
2002 (BayArea.com, 2002). Unfortunately, for its workers, it appears that Boeing not
only will meet but also may exceed this projection.
Boeing executives state that the reason for this dismal forecast is the fact that the
airline industry is rebounding slower than expected from the economic effects of
September 11th. The magnitudes of these layoffs are realized when one considers that on
the morning of September 11, 2001 Boeing employed approximately 93,000 workers in
their commercial airline sector (Linn, 2001). The main cause for the workforce reduction
at Boeing is the effect the September 11th tragedy has had on its profits. On October 16,
2002, Boeing reported its net earnings for the third quarter were $ 372 million, a decrease
of 43% from the $ 650 million it had reported for the third quarter of 2001. For the first
nine months of 2002, net profits were down approximately 37% from the same period in

34

2001, $ 17.3 billion versus $ 27.3 billion (Carpenter, 2002). Boeing's bottom line has
been greatly impacted by the slow recovery of the airline and travel industries.
The fact that fewer people are traveling via airlines has led to a decline in
revenues and profits for the airline carriers. This drop in profits has led to the airlines
cutting back their spending on products and services. The main product they have
curtailed their spending on is Boeing's bread and butter, new commercial aircraft. Boeing
anticipates that it will deliver 380 airplanes to the airlines in 2002, a decrease of 28%
from 2001. The company estimates that between 275 and 285 airplanes will be delivered
in 2003 (Dow Jones Newswire, 2002). It appears that Boeing will feel September 11th's
effects for quite some time.
As we have seen, the events of September 11, 2001 have led to a decrease in the
demand for Boeing's aircraft. This decline in the demand for Boeing's final product has
led to a decline in Boeing's demand for labor. This is a real life application of concept of
"Derived Demand" which means that the demand for labor is derived from the demand
for the final product. In the textbook case, a rise in wages would cause the firm's cost to
rise leading to an increase in the product's price. This increase in the product price would
lead to a decline in demand for the firm's final product and in turn, to a decrease in the
firm's demand for labor. In the case of Boeing, an external event, the September 11th
catastrophe, not an increase in the product's price, led to a decrease in demand for
Boeing's final product.
The events of September 11
th
have led to a decline in the demand for Boeing's
final product, in this case, commercial aircraft. This decline in the demand for the final
product has led to a decrease in Boeing's demand for labor. Because the decline in the

35

demand for the final product is a non-wage factor it has caused a shift in the demand
curve to the left. The decrease in demand for labor has caused a surplus of labor at the
present wage rate of approximately $30 per hour. The approximation of the hourly wage
rate is based on the average annual wage for Boeing production workers being $ 65,000
per year (Washington State Office of Financial Management, 2002). This surplus of
labor has led to the layoffs that Boeing's workers are experiencing. In theory, the surplus
of labor would cause the worker's wage to drop leading to a decrease in the supply of
labor and an increase in the demand for labor. With Boeing, however, we are dealing
with a Unionized Internal Labor Market where adjustments to a labor surplus are dealt
with by hiring freezes, attrition and, in Boeing's case, mostly through layoffs. As a result
of these layoffs naturally the supply of labor at Boeing will decrease.
In addition to the labor supply decreasing, the end result would be that the
worker's wages would also decrease. Boeing's workers, however, are unionized thus a
different effect on their wages will be realized. Most probably, when their contract is due
to be renegotiated their wage increases will be lower than if the tragedy of September 11,
2001 had never occurred.
It could be as late as 2006 before passenger volumes return to levels seen before
the September 11 attacks, according to predictions of officials at the Federal Aviation
Administration. The Bush administration and congressional leaders have made it clear in
recent months that the industry should not count on government bailouts. Taxpayers
already have given the airlines $5 billion in cash and $10 billion in loan guarantees.
Standard & Poor's, which evaluates corporate credit, may downgrade the credit ratings of

36

11 airlines, among them Northwest Airlines Corp., Southwest Airlines Co., Delta Air
Lines Inc., Continental Airlines Inc., British Airways PLC and Deutsche Lufthansa AG.
S&P warned that fuel prices could rise as the war continues with Iraq and demand
for international flights likely will fall. War will cause a further deterioration, particularly
on international routes and for business travel. The airline industry would suffer from
continuing softness in the economy, the lingering fears of terrorist attacks, the hassles
associated with tighter security at airports and improvements in video conferencing and
other alternatives of business trips.
Effects of War
War and another major terrorist event would cause air traffic to plummet by 25
percent domestically and 43 percent on international flights. ATA officials decline to
commit if more of the nation's 15 passenger airlines might be forced into Chapter 11
bankruptcy and possible nationalization under the worst-case scenario. But an industry
analyst predicts that absent dramatic change, Eagan-based Northwest Airlines and three
other big carriers would collapse within two years. We know from the first Gulf War that
there will be serious economic consequences for the airline industry.
Without government action, the outlook for the airline industry is bleak. Industry
beset by plummeting air travel, soaring fuel and secur ity costs and pricing power too
weak to pass along $9 billion in annual taxes to passengers. The repercussions for
airlines of the 1991 Gulf War: an 8 percent decline in U.S. ridership, a doubling of fuel
costs and $13 billion in losses that led to the layoff of 25,000 workers. Seven airlines
declared bankruptcy, and four -- Pan Am, Eastern, Midway and Markair -- were
liquidated.

37

A conflict similar to the United States' 1991 triumph in 43 days, lead to a short-
term decline in air travel and increasing this year's projected industry losses by $900
million, to $7.6 billion.
The most likely scenario of a U.S. victory within 90 days, during which fuel
prices jump 10 cents per gallon to $1.55 and ridership declines by another 52 million
passengers 8.6 percent below 2002 and 17 percent below 2000 levels. Falling fares
would stick airlines with $14 billion in losses, forcing the layoff of about 70,000 workers.
The direst scenario of a 90-day war accompanied by terrorist attacks, resulting in a loss of
75 million passengers, fuel prices rising to $1.90 per gallon, cutbacks in 3,800 flights and
airlines losing $33 billion.
The revenue impact from a war with Iraq will be "somewhat worse" than the 1991
Gulf War. Unless the industry is able to cut costs enough to contend with sliding
revenue, American, Continental, Northwest and Delta will face bankruptcy within two
years and in that order. The industry is not proposing a specific relief package to
Congress. As the carriers do not want more loan guarantees, because their assets already
are more than 93 percent leveraged.
The airlines are interested in relief in four possible categories: an extension of
federal availability of war-risk insurance that would be otherwise unaffordable; federal
assumption of more of the $4 billion in security costs added since Sept. 11; and a "tax
holiday" extending for a year after the war's conclusion for an array of ticket, cargo and
fuel taxes, and help in stabilizing jet fuel prices. The airlines have no pricing power. The
U.S. economy for airlines and every other industry is not going to turn around, until the
uncertainty of the Iraq situation is completely resolved.

38

SARS
In addition of all the existing problems at hand airlines are cutting back on
additional flights after the outbreak of SARS, the severe acute respiratory syndrome,
which has claimed more than 75 lives.
Factors that Create and Influence Demand
Economic Conditions
In 1999, business travel generated 36.3% of domestic airline revenues. The
weakness in business travel that started in the second half of 2000 continued in 2001 and
into 2002. It has reflected the difficult economy that spurred business travelers to reduce
corporate travel, fly in discounted coach, and/or to use no- frills airlines. Even before the
September 11 attacks, the industry expected to post a huge loss in 2001 due to reduced
business travel and lower airline yields resulting from a higher mix of leisure passengers.
As the economy improves, people will need to fly more frequently. However, any
increase here could be partly offset by business travelers whose is no longer indifferent
toward ticket price.
Before September 11, 2001, average domestic airfares were already down sharply
in response to the weakening economy, reduced business travel, and rising percentage of
low- margin leisure travelers. The effects of September 11 led to continued downward
pressure on domestic airfares.
By June 30, 2002, the average one-way domestic fare for a thousand- mile trip had
declined to $118.50, down 10% from $131.31 a year earlier, and down 19% from
$146.52 in January 2001, as tracked by the Air Transport Association. Since September
11, business travel has not recovered, and airlines have continued efforts to stimulate

39

passenger volumes with deep fare discounts and fare sales. Discounting and increased
security measures have largely succeeded in improving passenger levels since last
September 2001. In September 2001, domestic revenue passenger enplanements (a
measure of total domestic passengers flying) dropped 35% on a year-over- year basis, to
27.1 million. By July 2002, enplanements had recovered to 44.6 million, up 65% from
September 2001, but still down about 11% from the previous July. Although fare sales
helped increase enplanements, they also contributed to a sharp decline in yields,
exacerbating industry losses ("Industry Still," 2002).
Role of Technology
Technology has been able to help with some of the recent problems such as the
long lines to check in and obtain boarding passes and delayed or canceled flights. These
conditions are likely to worsen, given new security measures in place after September 11.
For example, Alaska Airlines passengers can skip the boarding pass counter by
printing their own document through their personal computers. (This service was
temporarily suspended after the September 11 attacks. As of today, the service is again
operating). In addition, Alaska and a growing number of other airlines have installed
hundreds of self- service kiosks that allow passengers to check in luggage, obtain
boarding passes, and check the status of their frequent- flyer credits. Such kiosks have
been around in one form or another since 1995. At Northwest Airlines, when ticket lines
get too long, agents are sent into the crowd with hand-held computers to remotely print
boarding passes. In January 2000, United Airlines introduced paging services, where
customers can be notified through pager, cell phone, or e- mail if their flight has been
canceled or delayed.

40

Factors that Create and Influences Cost Structures
Economic Conditions
Labor is the airline industry's largest single expense. Labor accounted for over
40% of total costs in 2001. Employment is divided into several broad craft positions:
flight crews (pilots and engineers), flight attendants, ground service (including baggage
handlers, ramp workers, and reservationists), dispatchers, maintenance, and customer
service (bookings and boardings).
Most airline workers belong to one of a dozen major unions. The larger unions
include the Association of Flight Attendants, the Airline Pilots Association, and the
International Association of Machinists and Aerospace Workers. Union contract talks
tend to be protracted, often lasting two years or more before settlement, largely because
the industry follows procedures laid out by the Railway Labor Act of 1926 (RLA).
Strikes occur infrequently because under the RLA, airline contracts don't expire but are
amended.
Airline equipment costs, excluding fuel and maintenance, are equal to about 10%
of total expenses. Aircraft may be obtained new or used, or they may be leased. For
carriers whose balance sheets are stretched, leasing is the most affordable method of
obtaining equipment. Many major airlines lease the bulk of their aircraft (about 55% of
their fleets) from intermediary companies known as lessors. Lessors can finance the
purchase of new aircraft more cheaply than airlines can because of their superior credit
ratings, and they pass on some of the savings to the airlines, which reduces carriers'
equipment costs while earning a profit for themselves. For financially strong carriers,
however, it is cheaper to buy aircraft outright than to lease them.

41

Carriers also have the costs of maintaining their fleets, whether leased or owned.
Most carriers perform routine maintenance, but many outsource heavier repairs to
companies that specialize in such work.
Airlines are energy- intensive operations; fuel accounted for about 15.4% of total
expenses in 2000 and 14.9% in 2001. The amount a carrier spends on fuel depends on
the age of its aircraft and its average flight length. The fuel efficiency of different aircraft
varies widely, with the number of engines being a major factor. Takeoffs and landings,
which are more frequent for short-haul carriers, consume a lot of fuel. Some carriers try
to hedge their fuel costs by striking deals with suppliers or by buying and selling futures
on the commodities market. Since the jet fuel futures market is thin, however, carriers
sometimes hedge with crude oil or heating oil, neither of which moves in perfect
harmony with jet fuel ("Industry Still," 2002).
Weather is the second- largest cause of airline accidents behind pilot error. It is
another unpredictable variable that can have a profound short-term effect on airline costs
and operations. Wind speeds and air temperatures influence how much fuel an aircraft
will require to reach its destination. Floods, fog, snow, and ice can shut airports and
force the cancellation of flights.
Technology and Economies of Scale
The air travel industry is labor, capital, and technology intensive. Airlines are
subject to vigorous competition, which often leads to declining yields and very thin profit
margins. Airlines must quickly try any new process or procedure that can reduce costs to
succeed.

42

The process of booking and ticketing passengers for airline travel is changing
along with computer, imaging and communications technology. New procedures are
altering airlines' relationships with travel agents and operators of computer reservation
systems, and may also change the way carriers set prices. Technology is being employed
to significantly improve service. This is particularly true in the boarding/check- in
process.
The Internet has huge potential to cut distribution costs by eliminating paper
shuffling and bypassing agents and airline staff. Carriers have had home pages on the
World Wide Web since 1995. Initially, these sites displayed schedule and fleet
information and promotional material. Today travelers can also use the sites to check the
status of their frequent- flyer accounts, and to book flights and select seats. Despite the
Internet's commercial potential, accurate measurements of the amount of air travel being
booked online are not readily available. Jupiter Research, a New York-based research
firm covering the consumer online industry, estimates that the percentage of airline
tickets sold online will reach 11% by 2003, from an estimated 7% in 2001. Forrester
Research, a technology research firm headquarters in Cambridge, Massachusetts,
estimates that total online travel bookings (which includes cruises, hotels, and car rentals
as well as air travel) will reach $29 billion by 2003, up from $14.2 billion in 2001
("Industry Still," 2002).
Alaska Airlines and new up-start JetBlue have been two of the industry's pioneers
in the application of computer technology. JetBlue is the only airline in the world to offer
passengers live satellite television with up to 24 channels of DIRECTV

programming
free of charge at every seat. In 1995, the Alaska Airlines was the first airline to allow

43

tickets to be booked on the Internet. Currently Alaska books about 19% of its tickets in
this way. Southwest Airlines introduced Internet bookings in 1996 and now leads the
industry in this area, obtaining 40% of its revenues from Internet sales. America West
does about 12% of its business online, while Continental Airlines and United are the
industry laggards at only 3% and 4%, respectively ("Industry Still," 2002).
The Internet's is a great tool for airlines. A commercial Web site can be kept
open for business 24 hours, seven days a week and allows an airline to reduce the number
of customer service agents, since fewer such employees are needed to field flight
information questions. Southwest Airlines reported in 2002 that its Internet bookings
cost it about one dollar to make. Its cost to book with a travel agent is between $6 and
$8. Tickets booked through Southwest's own agents cost several dollars.
The elimination of travel agent commissions is a big incentive for airlines to
distribute tickets on the Internet. In 2001, these commissions cost the leading airlines
$3.0 billion and accounted for about 3.9% of their expenses, though this was down from
$5.2 billion (6.2%) in 1999. Arecent cut in commission rates and increased Internet
sales are the major reasons behind the trend toward lower commissions ("Industry Still,"
2002).
On the other hand, the Internet may hurt airlines by making travelers too price-
sensitive. Airlines must respond quickly to match rivals' fare cuts with airfares changing
at lightning speed and the Internet keeping customers apprised of them. Hence, the range
of fares that competing airlines can charge on a point-to-point route will tend to be
extremely compressed.

44

In late 1999, four airlines including Continental, Northwest Airlines Corp., Delta
and United decided to invest $100 million to create a travel Web site named Orbitz.
American joined the group in May 2000. Orbitz was launched in 2001 and significantly
increased the level of competition in the online travel industry. Orbitz was ranked third,
as of November 2001, in online travel bookings, behind Travelocity and Expedia. Not all
airlines participate in all computer reservation systems (CRSs), and not all online travel
agents subscribe to all CRSs. Orbitz currently has about 45 airlines signed up for its
service, which includes most of the industry, with the exception of Southwest Airlines.
Southwest sell through Expedia or Travelocity either.
Airlines have moved toward ticketless travel, which is the practice of issuing
electronic tickets, or e-tickets to customers. E-tickets are booked in the conventional
manner, through a travel agent or directly through the airline, though no paper ticket is
issued. Instead, passengers obtain boarding passes at the airport check-in counter or from
an automated dispensing machine, which is activated with a credit card or frequent-flyer
card. Much of the savings come from not having to mail actual tickets. Travelers can get
a receipt and itinerary via fax or e-mail or at the airport. In mid-2002, most major
airlines announced fees of up to $25 for each paper ticket issued. This means that in the
future, nearly all tickets will be issued electronically.






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Opportunities and Threats
Opportunities
An opportunity is a major favorable situation in a firm's environment. Southwest
has done very well in rapidly responding to potential threats as well as opportunities.
Across the boarder short-haul flights: Southwest serves a large percentage of
the major cities in the continental U.S., but there are still a few that can be
targeted for service in the future. Eventually, though, the domestic market for
Southwest will be saturated and the company may need to seek opportunities
for short-haul flights to Canada, Mexico and the Virgin Islands where they
can leverage their market focused strengths in the future on other than
domestic only flights.
Technology advances: Technology advances in everything we do these days
creates opportunities never thought of just a few years ago. Southwest must
take full advantage of technology advances associated with the airline industry
and communication systems. The air travel industry is capital, labor and
technology intensive. The airlines are subject to tough competition, which
often leads to declining yields and razor-thin margins. Airlines must quickly
employ any new process or procedure that can reduce costs. New procedures
are altering airlines' relationships with travel agents and operators of computer
reservation systems, and may also change the way carriers set prices.
Technology is being employed to significantly improve services, particularly
in the boarding/ check-in process.

46

Technology has been able to help with problems such as long lines to
check in and obtaining boarding passes and delayed or canceled flights.
Southwest Airlines passengers can skip the additional security documentation
requirements by printing out a ticketing security document from Southwest' s
website.
New jet bridge technology: The new jet bridge technology being developed
for Southwest will save precious boarding and de-boarding time on flights.
Improved communications systems: Improved communications systems will
enhance airline traffic/ air traffic control and also help reduce communication
barriers associated with the constantly changing and expanding company.
Threats
A threat is a major unfavorable situation in a firm's environment. The following
are seen as threats to Southwest Airlines.
High fuel prices: A dominating threat in all airlines is the threat of high fuel
prices. High fuel costs can bring an airline and many other transportation
industries to their knees, as could be the case again the next few months. 20
percent of Southwest's cost structure is in fuel and Southwest pilots are keenly
aware of this. They have been nicknamed "requesters" by air traffic
controllers because of their diligence in always requesting the most direct and
economical flight routes, never taking for granted that the route given by the
air traffic controller is the best route (Freiberg, Jackie and Kevin, 1996).
Overcrowded airports: With airline traffic increasing the threat of
overcrowded airports could be substantial for Southwest. Overcrowded

47

airports that Southwest services have a huge potential of increasing the
turnaround time for planes at the airport and is one of Southwest's greatest
nightmares because there in lies the basis for one of Southwest's core
competitive advantages.
Start-up airlines: Small independent start- up airlines that compete with
Southwest's low cost approach to transportation are perceived as a potential
threat. WestJet Airlines, a Canadian airline that copies Southwest's
philosophy of having flights less than 400 miles, one class of seats, landing in
smaller airports and flying only Boeing 737's, recently announced they were
expanding in Canada again and ordering 20 new Boeing 737's (Baglole, J.,
2000).
Transportation technology advances: Technology advances associated with
potential cost reductions in other means of transportation may create more
competition from traditional rail and car short-haul transportation means
especially when coupled with the dramatic increase in airline traffic the past
few years. It may be more time efficient and less costly to drive to/ from
locations such as Houston, Dallas and San Antonio rather than fly due to
congested air as well as city traffic.
Internet: The Internet has the potential to hurt airlines in general by making
travelers too price-sensitive. With airfares changing so fast and the Internet
keeping customers apprised of them, airlines must respond quickly to match
rivals' fare cuts. Consequently, the range of fares that competing airlines can
charge on a point-to-point route will tend to be extremely compressed.

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Internal Analysis
Organizational Description
Corporate Mission/Vision
Southwest Airlines' mission statement reads: "The mission of Southwest Airlines
is dedicated to the highest quality of Customer Service delivered with a sense of warmth,
friendliness, individual pride, and Company Spirit." All these traits are what have made
Southwest # 1 in fewest customer complaints for several years running. Southwest
continues to thrive on its reputation from this # 1 ranking as well as reap monetary
rewards that come with this distinction. Southwests commitment to their employees
reads: We are committed to provide our Employees a stable work environment with
equal opportunity for learning and personal growth. Creativity and innovation are
encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees
will be provided the same concern, respect, and caring attitude within the organization
that they are expected to share externally with every Southwest Customer (Southwest
Airlines Home, 2003).
Southwest Airlines regularly faced competition from major and regional airlines,
with some like United and Continental eschewing their tradition approach and attempting
to compete by using their own version of the Southwest approach-same planes, routes,
gate procedures, number of attendants, and so on. Southwest is using one of the isolating
mechanisms, causal ambiguity, to deal with competitors. The situations where it is
difficult for competitors to understand exactly how a firm has created the advantage it
enjoys. The most difficult thing to replicate is Southwests personality, or culture of

49

fun, family, and frugal yet focused services and attitude. Just how that works is hard for
United and Continental to figure out.
Services
Southwest Airlines Co. is a major domestic airline that provides primarily
shorthaul, high- frequency, point-to-point, low-fare service operating over 355 Boeing
737 aircraft in 58 U.S. cities. Southwest Airlines is classified as a major airline due to its
revenues being greater than $1 billion. Southwest is unique to the airline industry due to
it being a major airline with short- haul focus.
Organizational Structure
Southwest operates over 355 Boeing 737 aircraft. Southwest Airlines has become
the fourth largest major airline in America. They fly more than 64 million passengers a
year to 58 U.S. cities (59 airports) all over the Southwest and beyond. These are done
more than 2,800 times a day. Southwest has more than 35,000 total employees
throughout the Southwest system. The airline is approximately 81% unionized.
Southwest Airlines operates nine reservations centers located in Dallas, San Antonio,
Houston, Phoenix, Albuquerque, Chicago, Salt Lake City, Little Rock, and Oklahoma
City. The shortest daily Southwest flight is between Austin (AUS) and Houston (HOU)
(152 miles). The longest daily Southwest flight is between Baltimore/Washington (BWI)
and San Jose (SJC) (2,438 miles). Southwest's average one-way airfare is $84.15, and
the average passenger trip length is 720 miles ("Southwest Airlines Company," 2003).
See the appendix for Southwest's management team, which constitutes the
majority of Southwest's organizational infrastructure.


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Strategy
Southwest Airlines, the most successful airlines in the U.S. uses state of the art
management techniques. By concentrating on short routes with low prices, their
customers will fly rather than drive. They are mostly on business trips, so they dont
check baggage, dont transfer to other airlines, dont get assigned seats, dont use tickets
or travel agents. This leads to minimal support requirements, which allows 15- minute
turnaround at the gate. That allows fewer planes to provide more frequent service,
generating a better asset utilization and return. By using only 737 aircraft, maintenance is
standardized and spare parts minimized.
Southwest has synergy that is gained through a consistent strategy. Limited
passenger service allows for frequent and reliable service. Lean support crews are
efficient and keep aircraft utilization high. Short hauls to secondary airports in medium
sized cities minimize congestion and delays. Low costs allow low-ticket prices, which
keeps planes full. Limited passenger service cuts out the cost of baggage handling and
related losses, as well as meals, which cost money and require more turnaround time. By
compensating employees well, turnover is low and commitment to efficiency is high.
Southwest Airlines shows that if you align yourself properly, enormous potential exists in
markets that others reject (Bachmann, 2002).
As Southwest Airlines began to grow quickly, it might have been tempted to
mimic its rivals' ultimately unsuccessful strategies if it hadn't had its own strategic
principle to follow: "Meet customers' short- haul travel needs at fares competitive with the
cost of automobile travel (Gadiesh, 2001)."


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Communication
To understand Southwest Airlines you must first understand Herb Kelleher. Herb
Kelleher has built a business patterned after his unique philosophies of life itself.
Southwest's corporate persona is said to have a maverick personality that has
determination, a flair for being positively outrageous, the courage to be different, the
vulnerability to love, the creativity to be resourceful, and an "esprit de corps" that bonds
people.
Communication is defined as the process of sending and receiving symbols with
meaning attached. Effective communication is when the intended meaning of the source
and the perceived meaning of the receiver are identical. Efficient communication occurs
at minimum cost in terms of resources expended (Schermerhorn, J. R., 1999).
Southwest Airlines' communication process is the backbone of their social
structure. Southwest have become masters at effective and efficient communication.
Their message is related through channels provided by a deep seated culture. Both
internal and external communication is channeled to the targeted audience with a
minimum amount of noise. By developing several channels of communication, Southwest
employees and customers are provided the necessary and critical information needed.
Southwest Airlines is a people company that cherishes open communication for
all employees. Herb Kelleher believes access to information is very important. One of
the reasons, it is believed, Southwest has been so successful in getting people to accept
and embrace the company's beliefs is its commitment to communication. Southwest
makes sure its employees have access to the information they need. Their monthly
magazine, LUV, has a section called "Industry News" which keeps its employees abreast

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of what other carriers are doing. Southwest Airlines prides itself on keeping its
employees informed. All major events are shared with employees before it is released to
the public. Southwest not only informs its employees of all major events, it also keeps
them informed on all aspects of the company, such as financial position, performance as
it relates to on-time arrivals, baggage handling, and customer complaints. Southwest
believes that if the employees have immediate access to critical information they can
make the needed adjustments quickly. Because Southwest Airlines' employees are so
informed and up to date concerning the daily business of the airline, they are able to
epitomize the company's "message." They, in fact, become the message. Southwest has
become so efficient at communicating with their employees "They now have twenty- five
thousand employees spreading the word as missionaries who aren't afraid to be a little
offbeat, work hard, and have a lot of fun" (Freiberg, Jackie and Kevin, 1996).
Developing communication channels in this manner has allowed the employees
themselves to become Southwest Airlines' best advertisement.
Herb Kelleher believes in an open door policy when it comes to communication.
This belief is felt throughout the company. Gary Barron, executive vice president and
chief operations officer, tells of a time he was in the middle of a contract negotiation. As
he left the meeting he received a call from a ground equipment mechanic in Houston. He
had never met the mechanic before. The mechanic just picked up the phone and called
him because he wanted to know how the negotiations were going. Mr. Barron explained
to the mechanic as much as he could about what was happening. This is an example of
the feelings towards communication and the access to information Southwest has created
for its employees (Freiberg, Jackie and Kevin, 1996).

53

An open door policy, in regards to communication, also speeds the decision
making process. When people have access to key people and critical information it gives
them the confidence to make decisions quickly.
Southwest Airlines' Employee Communications Department uses several methods
to communicate information to its employees. Other than the direct one-on-one
conversations Southwest uses in- house newsletters, pamphlets, videos, annual reports,
monthly news letters (LUV Lines), and a quarterly news video called As The Plane Turns.
This video is sent to all sections of the company to share special events or messages with
the growing Southwest family.
"Southwest is known for saturating people with information that will help them
better understand the company and its mission, customers, and competition" (Freiberg,
Jackie and Kevin, 1996). Information about all aspects of the company gives the
employee the knowledge to deal with the customers in an honest and straightforward
manner.
Valuing culture and diversity have a significant impact on communication
(Schermerhorn, J. R., 1999). Southwest realizes the importance of culture and diversity.
In 1990 Southwest created the Culture Committee. The sole purpose of this committee
was to keep Southwest's spirit alive through storytelling. This committee has members
from all levels of the company. The members of the Culture Committee can be described
as a group of shamans, spiritual teachers, and organizational storytellers who work
behind the scenes to foster Southwest's commitment to values such as profitability, low
cost, family, love, and fun (Freiberg, Jackie and Kevin, 1996).


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Organizational Culture and Values
Within any company there are core values that determine the make- up and beliefs
that drive a company's philosophy. These core values contribute to Southwest's
superstructure. Core corporate values are deep-seated beliefs that determine how a
company interacts with their customers and how the public views the company.
Southwest Airlines has never formally documented their principal values, but
Kevin and Jackie Freiberg identified at least thirteen: profitability, low cost, family, fun,
love, hard work, individuality, ownership, legendary service, egalitarianism, common
sense/good judgment, simplicity and altruism. These are identified as values that drive
the company and contribute to Southwest's corporate character (Freiberg, Jackie and
Kevin, 1996).
Southwest's core values are very apparent when one looks at their company
philosophy. The company philosophy includes eleven primary attitudes:
Employees are number-one. The way you treat your employees is the way they will
treat your customer.
Think small to grow big.
Manage in the good times for the bad times.
Irreverence is okay.
It's okay to be yourself.
Have fun at work.
Take the competition seriously, but not yourself.
It's difficult to change someone's attitude, so hire for attitude and train for skill.

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Think of the company as a service organization that happens to be in the airline
business.
Do whatever it takes.
Always practice the Golden Rule, internally and externally.
As humans we have certain basic needs. These basic needs include the need to be
safe and secure, emotionally and physically, the need to be feeling accepted, and the
feeling of importance (Freiberg, Jackie and Kevin, 1996).
Value Chain Analysis
As described by Pearce and Robinson, value chain analysis attempts to understand
how a business creates customer value by examining the contributions of different
activities within the business to that value. It is how insightful managers look at their
business as a chain of activities that add value creating the products or services they sell.
For Southwest Airlines there are no products. Southwest is a service organization and the
service is air transportation.
Primary Activities
The primary activities of the value chain include items such as inbound logistics,
operations, outbound logistics, marketing and sales, and service. Since Southwest
Airlines is a service company we will focus on all of the primary activities listed above,
but outbound logistics. In our discussion we have combined operations and service
activities. Southwest's inbound logistics activities include items such as the supply of
fuel, food, drinks, passenger boarding and unloading, luggage loading and unloading,
inspection and maintenance of the airplanes. These activities must be very closely
coordinated at Southwest's airline gates to assure the planes maintain their best in

56

industry gate turnaround. Fuel trucks, food and beverage trucks and handlers must be on
the ball and efficient at all times to provide the jet with the needed supplies in a most
expeditious and safe manner.
It may be difficult to think of passengers as being a part of inbound logistics, but
as the passengers have to be loaded and unloaded on the planes as well they can be
considered as inbound logistics. The passengers must be ticketed, have their baggage
checked and be security screened prior to boarding. This all takes time and time is
money especially when a jet is not in the air. Southwest Airlines has a very unique
approach to boarding passengers as compared to other airlines. Southwest does not have
reserved seating because all seats are the same. There are no economy, business or first
class sections on the planes. With this passengers receive a boarding pass that is a first
come first served basis for seating assignment. This approach cut down on the passenger
boarding time because passengers are not spending time hunting for their seat, they
simply choose any vacant seat when they see it.
Southwest Airlines does not offer meals on flights as do most other airlines. This
actually helps with the competitive advantage of minimal turnaround at the gate because
without meals there is no need for the planes to wait the extra time at the gate for meals
to be loaded.
The inbound logistics associated with screening, unloading and loading luggage is
a tremendous effort for airlines. Southwest's use of bar-coding technology for luggage
has been a huge benefit in tracking luggage status through the complicated handling
systems at airports. It has also led to improved customer satisfaction with fewer luggage

57

items being lost or missing flights. Bar-coding technology also reduces Southwest's labor
costs by reducing baggage handlers.
The core operational/ service activity for Southwest is considered to be the airline
flight. All of the inbound activities lead up to this event. Southwest's goal is to keep the
planes in the air the maximum amount of time. To do this turnaround time at the gates is
very important as well Southwest having positioned itself to fly to less crowded airports
where it takes less time to get to and from the runway to the passenger gates. This is a
distinct advantage Southwest has over their competitors. Pilots help save Southwest fuel
costs during flight by constantly working with air traffic controllers requesting the most
direct and economical routes, never taking for granted the route given by the air traffic
controller is the best route.
The market focus for Southwest is the time-sensitive business traveler and the
cost-sensitive leisure traveler. Southwest has been able to keep this focus and not
succumb to pressures of trying to gain a better market share in portions of the industry
that do not match their strategic plans and strengths. Southwest's marketing and sales
activities are enhanced by their extensive use of the Internet for marketing and passenger
ticketing. As previously stated Southwest Airlines reported in 2002 that its Internet
bookings cost it about one dollar to make, while their cost to book with a travel agent is
between $6 and $8. Tickets booked through Southwest's own agents cost several dollars.
Secondary Activities
Secondary activities include items such as general administration, human resource
management, research, technology, and systems development and procurement. For
Southwest Airlines we will focus on all of these. Southwest capitalizes on the latest

58

technology to reduce administrative overhead costs. As discussed before their use of the
Internet for ticket sales and the constant upgrading of their equipment have reduced costs.
Human resource management is one of Southwest's strongest suits. Southwest
Airlines' strong base of motivated and dedicated employees has placed the company
ahead of the competition on numerous occasions. As previously stated, the most difficult
thing to replicate is Southwests personality, or culture of fun, family, and frugal yet
focused services and attitude. Just how that works is hard for United and Continental to
figure out.
Another strength mentioned earlier associated with Southwest is the strong
relations developed over the years with the pilot's union, having signed an unprecedented
ten-year agreement with them. This again exemplifies the trust management developed
with the union with its fair practices and open communications policies.
In regards to research, technology, and systems development activities,
Southwest's philosophy of utilizing only one type of airplane, the Boeing 737, simplifies
training requirements, reduces parts inventory, simplifies its record keeping and helps the
company negotiate better deals when acquiring new planes. The use of the Internet and
bar-coding technology as mentioned before has also contributed to Southwest's overhead
cost savings.
Employee Relations
Job Satisfaction
Southwest has used their core values to build a corporate culture that allows
employees to satisfy their emotional and physical needs. Through the created atmosphere
of Southwest Airlines, employees are given the opportunity to work in a very emotionally

59

safe environment. The openness and free flow of information facilitate this environment.
Employees know what is happening. Employees are happy with their jobs and feel
secure in their positions. Employees are also given the opportunity to help others through
many different company encouraged or sponsored clubs and organizations.
Motivation Techniques
Southwest Airlines appears to have incorporated the manor in which the company
motivates its employees into the hiring process. Southwest is very religious in the way
the company reviews a perspective employee. The perspective employee is reviewed for
a certain flare or zaniness to see if he or she will fit the corporate culture. We look for
attitudes; people who dont take themselves too seriously" (Freiberg, Jackie and Kevin,
1996). It is by hiring these types of go-getters that the company insures that its
employees are those that tend to be more self- motivated.
The most obvious motivation technique used by Southwest is its profit sharing
program. It is through monitory incentives like these that Southwest is able to keep its
workforce motivated.
The process Southwest uses to keep its employees motivated is not only one of
monetary incentives, but it is also an inherent process used in the hiring process in which
the perspective employee is carefully picked to fit the company's corporate culture.
Southwest picks future employees that: can think outside the box; not be too uptight; and
tend to favor the more people orientated persona ultimately leading to a more self-
initiated/motivated employee.



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Future Motivation Issues
As Southwest continues to expand at an unprecedented level, it is crucial for
management to stay focused on their highly efficient and motivated employees. This
highly dedicated and motivated work force is a critical key to the past and future success
of Southwest Airlines. The family atmosphere that Southwest has provided its employees
to work in will be more and more difficult to maintain the larger the company grows.
With a much larger Southwest organization communication in general will be more
complicated with additional layers of management and the geographical distances
involved. A bureaucratic, mechanistic type management organization is often times
associated with large companies in which open communication and closeness between
management and employees is very difficult to maintain. Southwest will have to
leverage all possible technological advances to maintain honest and open communication
channels between management and employees. The use of recent technology advances
such as email, video conferencing, NetMeeting among others are valuable tools
Southwest can use to close the potential ever-expanding communication gap of a growing
company.
Southwest employees will continue to have the desire to have ownership in
decisions that are made for the company and management will have to nourish this
entrepreneurship to maintain the motivated employees they now have. As the company
grows it will be more difficult for employees to make the rallies held at the Dallas
headquarters due to the geographical distances between other Southwest locations. There
will have to be more motivational workshops for employees to assure morale within the
company is maintained and the entrepreneurial spirit of the employees is carried forward.

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Southwest's current profit sharing program, or a similar version, in which all
employees share in the company's success will be an important piece of the management
philosophy that must be carried forward in the future to maintain employee morale. A
bonus of 14% of employees annual base salary as will be given this year is not only great
for the individual employees that receive the bonus, but also acts as a good public
relations tool and that attracts future employees for the company.
It is imperative that when co- founder, President, CEO, Chairman of the Board,
Herb Kelleher, leaves Southwest, as he will eventually in the next few years due to his
age and health issues, that his replacement brings the same type of flamboyant,
entrepreneurial, family atmosphere to inspire and motivate employees. Kelleher is
known for being a man of his word. Kelleher thinks and talks straight, so people respect
and trust him. The next Southwest company leader will need some of these same
characteristics.
Strategies and Performance
A little than two years ago, Southwest Airlines was having trouble with its cargo
operations. Even though the average plane was using only 7% of its cargo space, at some
airports there wasn't enough capacity to accommodate scheduled loads of freight, leading
to bottlenecks throughout Southwest's cargo routing and handling system. At the time,
employees were trying to load freight onto the first plane going in the right direction,
which was a seemingly reasonable strategy. But because of it, workers were spending an
unnecessary amount of time moving cargo around and sometimes filling aircraft
needlessly.

62

To solve its problem, Southwest turned to an unlikely source: ants. Specifically,
researchers looked at the way ants forage, using simple rules, always finding efficient
routes to food sources. When they applied this research to Southwest's problem, they
discovered something surprising: it can be better to leave cargo on a plane headed
initially in the wrong direction. If, for example, they wanted to send a package from
Chicago to Boston, it might actually be more efficient to leave it on a plane heading for
Atlanta and then Boston than to take it off and put it on the next flight to Boston.
Applying this insight has slashed freight transfer rates by as much as 80% at the
busiest cargo stations, decreased the workload for the people who move cargo by as
much as 20%, and dramatically reduced the number of overnight transfers. That's
allowed Southwest to cut back on its cargo storage facilities and minimize wage costs. In
addition, fewer planes are now flying full, which opens up significant opportunities for
the company to generate new business. Thanks to the improvements, Southwest
estimates an annual gain of more than $10 million (Bonabeau, 2001).
Strategic Goals
Southwest's strategic goals include:
Provide domestic short-haul airline transportation primarily to the business
traveler.
Provide the low-cost fares at prices comparable to automobile travel.
Be the #1 airline in least number of customer complaints.
Keep airport gate turnaround time as low as possible.
Provide Southwest employees a stable work environment with equal
opportunity for learning and personal growth.

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Be good corporate citizens.
Have fun!
Definition of Business Strategy
Southwest's core business strategy evolves around the operational strategy of
being the lowest cost provider. They strive to do everything at the lowest cost and to still
provide ultimate customer satisfaction. Southwest Airlines shows that if you align
yourself properly, enormous potential exists in markets that others reject. They have held
the line with a consistent strategy of providing low- fare short haul transportation and
have avoided being sucked into larger airline markets that are against Southwest's
strategy and are potentially negative to their core competencies. Sout hwest steers away
from crowded airports that would tend to keep its fleet of jets on the ground longer due to
congestion at the airports, which would substantially eat into Southwest's profits.
Southwest's fleet of 737 jets is a core element to their bus iness strategy. With the
philosophy of having only one type of jet comes substantial cost savings, which is very
key in the airline industry today. With one type of jet being purchased or leased
(Southwest rents approximately 25% of their aircraft), Southwest is able to obtain better
purchase and lease price deals. Employee training and maintenance costs are also
substantially reduced in having only one type of aircraft to use and maintain.
As previously stated, Southwest Airlines has a unique approach to boarding
passengers as compared to other airlines. Southwest does not have reserved seating
because all seats are the same. There are no economy, business or first class sections on
the planes.

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Southwest has consistently shown that by compensating employees well, turnover
is low and commitment to efficiency is high.
Internal Capabilities and Skills
As previously discussed, Southwest has a very motivated and talented workforce
that feeds on each other in everything they do every day. The "fun" work environment
that Southwest deploys is passed on to customers to promote a relaxed atmosphere, which
is especially important in recent years with the September 11, 2001 tragedy and the war
in Afghanistan and most recently in Iraq. People today are more afraid to fly than ever
and a more relaxed atmosphere tends to calm some of those fears. The company culture
of exploiting a family atmosphere for all employees provides the avenue for open
communication between management and employees. This open communication fosters
the teamwork and unprecedented productivity necessary to maintain the competitive edge
in the airline industry. This workforce is considered to be a core competency that is
unmatched by Southwest's competition.
Southwest management's skills in negotiating with the unions have brought about
direct and indirect cost savings. Investing in relationships, not only with its frontline
employees but also with its unions and supervisors, may be more important to
Southwest's success than the operational focus for which it is so well known.
Due to competition and the changing times, organizations must have multiple
competencies to survive and must constantly challenge these against what the
competition has or is doing. Companies must develop forward- looking competencies that
anticipate attack. Companies must create differentiation through multiple core
competencies, which may be very difficult to sustain.

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Evaluation of Financial Performance (2001, 2000, 1999)
Southwest Airlines Compared to the U.S. Airline Industry
Since its beginnings as a scheduled airline in 1971, Southwest Airlines has
distinguished itself within the U.S. airline industry as a unique player. Its commitment to
offering a low fare structure to both business and leisure travelers has made air travel
more affordable to many consumers and has caused a consistent increase in demand for
expansion into new markets, as well as increasing price competition within the cities it
serves. Since the airline deregulation in 1978, Southwest has dramatically increased the
number of markets it serves and its market share. It has also been the model for a number
of less successful low cost start-up airlines, such as ValuJet and Peoples Express.
Southwest Airlines has implemented several cost-effective strategies, which allow
the savings to be passed along to the consumer. First Southwest does not offer full cabin
service and provides only coach class service to its passengers. Meal service is not
offered only peanuts, snacks and beverages. Second, Southwest only operates one type
of aircraft and one type of engine, the Boeing 737 series and GE engines, which greatly
reduces maintenance costs, allows for lower spare parts inventory and cuts on training
costs for crews. Third, Southwest uses ticketless and paperless travel reservations
systems. Passengers are not assigned seating when making reservations. Instead, they
are given alphabetized boarding passes for boarding on a first come, first served basis.
Fourth, Southwest Airlines offers point-to-point transportation, and does not operate
within a hub system like the other major US airlines. It also is a stand-alone carrier with
no alliance or partnerships agreements with other domestic or international airlines. And
last, Southwest Airlines uses a direct method of distribution, selling tickets directly to the

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traveler, bypassing travel agents and reducing the costs associated with commission
incentives.
Profitability Ratios
The objective of the profitability ratios is to determine the profitability of
Southwest Airlines using various financial ratios.
Financial Ratio Southwest 1999 2000 2001

Net Income 474.4 m. 625.2 m. 511.1 m.
Return on Sales 10% 11.1% 9.2%
Return on Stockholders Equity 18.1% 19.9% 13.7%
Return on Operating Assets 9.2% 10.1% 6.5%
Price-Earning Ratio 49.77 17.6 27.18
Earning Per Share $0.63 $0.83 $0.67

The net income has remained steady in the periods since 1999. Southwest
Airlines has a relatively high net income, primarily because of low operating costs. Low
operating costs is one of Southwest Airlines claims to fame. By keeping costs low, we
keep our fares low. This, in turn, gives customers the freedom to fly.
Return on sales discloses the profits earned and measures the efficiency of the
company. The return on sales is above the industry average of 2.9%. Such a favorable
comparison has proven to be the trend for Southwest Airlines.
Return on stockholders equity assesses the effective use of resources provided by
stockholders. This measure of performance is one of the key profitability ratios. What
the investors really want to know is not how pennies of profit are earned on a dollar of
sales or what the current ratio is, but how much profit they earn for each dollar they
invest. It is the overall measure of the performance of the company. The return on
equity has been below the industry median. Southwest Airlines has had a significant
decrease in 2001 as a result of the terrorist attacks and economic downturns.

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Return on Assets is the number of pennies of net income generated by each dollar
of assets. The return on assets is impacted by both the profitability of each dollar of sales
and the efficiency of using assets to generate sales. The industry can be characterized as
low margin but high turnover. The best performance is in year 2000.
Price to Earnings Ratio is the relationship between the market value of a company
and that companys current earnings. High P/E ratios are associated with firms for which
strong growth is predicted in the future.
The most popular profitability ratio is Earning Per Share (EPS). This is one of the
easier ratios to use when comparing companies because many firms include this ratio on
their Income Statement. Earning per share gives a picture of the current net income in a
particular period to the number of outstanding shares of stock. Southwests earnings per
share have steadily increased over the past three years. Southwests earnings per share
appear to be around the industry median ($0.70).
Airlines that were weak before September 11, 2001 have weakened further. The
strongest have taken the opportunity to gain at the expense of their competitors. Of the
nine major airlines, only Southwest posted a profit in 2001. Southwest earned $511
million for the year, down 19% from a $627 million profit in 2000. It was the only
carrier that kept its capacity and employee count intact after September 11, thanks to the
airline's high efficiency levels, low-cost operating structure, and profitable route
schedule. Southwest should remain profitable in 2002/2003, its growth rate to outpace
the airline industry.



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Debt Ratios
The objective of the debt ratios is to apply ration analysis to assess the debt levels
of Southwest Airlines.
Financial Ratio Southwest 1999 2000 2001
Debt-to-Total Capital

19.8% 15% 20.7%
Debt-to-Total Asset (Debt Ratio) 50% 48% 55%
Debt-to-Equity 99.31% 93.24% 124.14%


Financial Ratio Industry 1999 2000 2001
Debt-to-Total Capital

42.30% 47.97% N/A
Debt-to-Total Asset (Debt Ratio) 18.31% 21.83% N/A
Debt-to-Equity 75.76% 94.92% N/A

As evident from the above table there is a decreasing trend in all of the above
ratios from 1999 to 2000, increasing trend from 2000 to 2001. This shows the increasing
stability of Southwest Airlines and the improving ability of the entity to meet its long-
term obligations successfully without being in danger of encountering net losses or
insolvency from 1999 to 2000. From 2000 to 2001, there is an increasing trend in the
ratios. During 2001, the capital expenditures related to the purchase of 11 new 737-700
scheduled aircraft acquisitions.
The Debt Ratio measures the amount of assets supplied by creditors. In
Southwest Airlines' case, about 50%, 48%, and 55% of the assets are provided by
creditors and 50%, 52%, and 45% by stockholders in 1999, 2000 and 2001 respectively.
Compared with the industry average, Southwests assets supplied by creditors are more
than its counterparts.

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The Debt-to-Equity ratio measures the balance of funds being provided by
creditors and stockholders. The higher the debt-to-equity ratio, the more debt the
company has and hence the riskier it is. The 2001 debt-to-equity ratio of 124.14% means
its debt is about 24% higher than its equity. The Southwest Airlines debt-to-equity
ratios are higher than its counterparts.
Liquidity Ratios
The objective of the liquidity ratios is to measure the solvency, or the ability, of
Southwest Airlines to meet its short-term financial obligations and to assess the liquidity,
or the ability, of Southwest Airlines to convert current assets to cash to reduce current
liabilities.
Financial Ratio Southwest 1999 2000 2001
Current Ratio 0.7 0.6 1.1

Financial Ratio Industry 1999 2000 2001
Current Ratio 0.53 0.58 0.5

An important concern about any company is its liquidity, or ability to pay its
debts in the short run. If a firm cant meet its obligations in the short run, it may not live
to enjoy the long run. The most commonly used measure of liquidity is the Current
Ratio, which is a comparison of current assets (cash, receivables, and inventory) with
current liabilities.
Southwest Airlines short-term liquidity has varied over the past three years and
has consistently remained below a 2:1 ratio (rule of thumb: should be 2:1), which could
be perceived as less than optimal. However, relative to the US airline industry,
Southwest Airlines has maintained a higher than average current ratio and has remained
greater than its competitors for three years. These trends indicate Southwest Airlines Co.

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have been in a better position than its competition to meet its short-term financial
obligations.
The airline industry is a debt intensive industry due to the significant amounts of
debt incurred in the financing of aircraft necessary for operations. The current ratios can
be dramatically affected as the number of aircraft leases or debt obligations move into the
current liability section of the balance sheet. Additionally, as an airline expands
operations and service to new cities, it incurs additional liabilities in the form of gate and
ticket counter leases at the new airport destinations.
Strengths and Weaknesses
Strengths
A strength is a resource advantage relative to competitors and the needs of the
market a firm serves or expects to serve. The following represent Southwest Airline's
strengths.
High efficiency levels: Southwest's use of bar-coding technology for luggage
has been a huge benefit in tracking luggage status through the complicated
handling systems at airports. It has also led to improved customer satisfaction
with fewer luggage items being lost or missing flights. Southwest Airlines
has a very unique approach to boarding passengers as compared to other
airlines. Southwest does not have reserved seating because all seats are the
same. There are no economy, business or first class sections on the planes.
With this passengers receive a boarding pass that is a first come first served
basis for seating assignment. This approach cut down on the passenger

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boarding time because passengers are not spending time hunting for their seat,
they simply choose any vacant seat when they see it.
Limited passenger service allows for frequent and reliable service. Lean
support crews are efficient and keep aircraft utilization high.
Low-cost operating structure: Labor is the number 1 target for airline costs
savings as it represents 40% of the airline's cost. Southwest's pilots fly an
average of 62 hours a month compared to an airline such as United's 44 hours
per week. This brings a distinct advantage for Southwest in that Southwest on
average requires fewer pilots per flight hours, which is a significant cost
savings as 40% of airline companies' costs are labor (Zellner & Arndt, 2003).
Motivated and dedicated employees: Southwest Airlines' strong base of
motivated and dedicated employees has placed the company ahead of the
competition on numerous occasions.
Company culture: The company culture of exploiting a family atmosphere for
all employees provides the avenue for open communication between
management and employees. This open communication fosters the teamwork
and unprecedented productivity necessary to maintain the competitive edge in
the airline industry. A strong entrepreneurial co- founder, President, CEO, and
Chairman of the Board, Herb Kelleher, has brought the company where it is
today as number one in the industry the last eleven years in fewest customer
complaints and the fourth largest domestic carrier. Kelleher thinks that a
sense of humor in the work place is another key to promoting open
communication and the family atmosphere enjoyed by Southwest employees.

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Kelleher's legal strengths have also shined in Southwest's numerous litigation
issues brought about by competitors. Southwest's "personality" can be
described as causal ambiguity because it is difficult for competitors to
understand exactly how Southwest has created the advantage it enjoys.
Relationship with union: Another strength mentioned earlier associated with
Southwest is the strong relations developed over the years with the pilot's
union, having signed an unprecedented ten-year agreement with them. This
again exemplifies the trust management developed with the union with its fair
practices and open communications policies.
Major airlines are trying to re- negotiate contracts with their unions to try
and save costs during this time of crisis. Again Southwest's strong
relationship with the union allows the pilots to fly more during the month on
average than their competition.
Investing in relationships not only with its frontline employees but also
with its unions and supervisors may be more important to Southwest's
success than the operational focus for which it is so well known (Gittel &
Hoffer, 2001).
One type of airplane: Southwest's philosophy of utilizing only one type of
airplane, the Boeing 737, simplifies training requirements, reduces parts
inventory, simplifies its record keeping and helps the company negotiate
better deals when acquiring new planes. The average age of the aircraft fleet
is only 8.75 years, which is well below the industry average of 11 years.

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Use of the Internet: The Internet has tremendous potential to cut distribution
costs by eliminating paper shuffling and bypassing agents and airline staff. It
has only begun to change the way airlines price and distribute their product.
Travelers can use airline company websites to check the status of their
frequent- flyer accounts and more importantly book flights and select seats.
The Travel Industry Association estimates that 65 million people used the
Internet to get travel information in 2001. Approximately half of those have
purchased travel over the Internet. Southwest airlines introduced Internet
bookings in 1996 and now leads the industry in this area. Southwest was the
first airline to establish a home page on the Internet. Southwest reported that
over 49% (or over $2.1 billion) of its revenues in 2002 were generated by
online bookings.
Southwest Airlines reported in 2002 that its Internet bookings cost it
about one dollar to make, while their cost to book with a travel agent is
between $6 and $8. Tickets booked through Southwest's own agents cost
several dollars.
Market focus: The market focus for Southwest is the time-sensitive business
traveler and the cost-sensitive leisure traveler. Southwest has been able to
keep this focus and not succumb to pressures of trying to gain a better market
share in portions of the industry that do not match their strategic plans and
strengths.
Gate locations: Assuring that Southwest gate locations are at airports close to
downtown areas assures that the business traveler has easy access to

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Southwest flights. Providing low fare tickets allows more leisure travelers to
use the airline for transportation in lieu of other means than ever before.
Weaknesses
A weakness is a limitation or deficiency in one or more resources or competencies
relative to competitors that impedes a firm's effective performance. Although the authors
of this paper perceive Southwest to be a very strong and competitive company for years
to come, there are a few weaknesses that are worth pointing out.
One type of airplane: Southwest has leveraged its one aircraft type, the
Boeing 737, and short-haul flights to the maximum benefit. This philosophy
of staying with one aircraft type limits flight distances and the customer base,
which when looked upon in those terms would be a weakness for the
company.
Restricted market focus: The rather restricted market focus towards the
domestic, leisure low-cost traveler limits some of the company's potential
growth opportunities.
Retirement of Herb Kelleher: Herb Kelleher will eventually retire within the
next few years, which has some analysts concerned about the future of a
company that will be having its leader and co-founder absent in the not so
distant future. To dampen this perceived weakness and fear, Southwest must
start nurturing a successor soon to assure a smooth transition into the future.
Extreme company growth: The extreme growth afforded the company the
past few years creates problems within itself associated with difficulties in
communications, as mentioned earlier, and the required additional layers of

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management for operational functionality. There is an inherent weakness in
the fact that the family atmosphere within the organization may be eventually
lost in this growth. Growth is definitely good for the company as long as it is
a planned and controlled growth.
"On time" pressure: "On time" pressure for pilots and ground crews can be
perceived as a weakness when associated with safety issues around being in a
hurry to make up lost time or beat airport gate turnaround target times. This
mindset may in fact have contributed to the accident in which a Southwest
flight skid off a runway at the Burbank, CA airport on March 5, 2000
("Statement By," 2003).
Limited financial capacity: Limited financial capacity was a weakness
recognized by Southwest, which charted a selective route expansion strategy
to build the best profit record in a deregulated airline industry.
Strategic Fit Analysis
While operational effectiveness is about achieving excellence in individual
activities, or functions, "strategy fit" is about combining activities. Southwest has built a
system in which activities reinforce one another. Positioning choices determine activities
a company will perform and how it will configure individual activities, and how these
activities relate to one another.
Southwest has developed a strategic fit relationships that has lead to an attractive
competitive advantage. Its rapid gate turnaround, which allows frequent departures and
greater use of aircraft, is essential to its high-convenience, low-cost positioning.
Southwest Airlines achieved it by the companys well-paid gate and ground crews, whose

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productivity in turn-around is enhanced by flexible union rules. Southwest performs
other activities with no meals, no seat assignment, and no interline baggage transfers;
Southwest avoids having to perform activities that slow down other airlines. It selects
airports and routes to avoid congestion that introduce delays. Southwests strict limits on
the type and length of routes make standardized aircraft possible: every aircraft
Southwest turns is a Boeing 737.
What is Southwests core competence? What are its key success factors? The
correct answer is that everything matters. Southwests strategy involves a whole system
of activities, not a collection of parts. Its competitive advantage comes from the way its
activities fit and reinforce one another.
Southwest has identified important interrelations between its present activities and
created a differentiation enhancement. Fit Strategy, locks out imitators by creating a
chain that is as strong as its strongest link. As in most companies with good strategies,
Southwests activities complement one another in ways that create real economic value.
One activitys cost, for example, is lowered because of the way other activities are
performed. Similarly, one activitys value to customers can be enhanced by a companys
other activities. That is the way Southwest Airlines strategic fit creates competitive
advantage and superior profitability.
Southwest translates its strategic fit into competitive advantage by not only
creating a meaningful strategic fit opportunit ies that enhance the company value, but also
by providing inspirational leadership that motivate all employees to perform over their
heads. The translation meshes well with Southwests long-term strategic direction, and
enhances Southwests overall worth (Porter, 1996).

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Recommendations
It is recommended that Southwest maintain their operational strategy focus in the
future as this strategy has proven to be a huge success for them. This strategy is
especially important for Southwest during this time of airline crisis we are in today due to
the September 11, 2001 incident and the current war in Iraq. The strategy employed by
Southwest actually provides more leverage for Southwest in the airline industry today.
Southwest has had such a cost focus that they are now able to survive in the current crisis
where all of the other major carriers are in the hole, with many of them being driven into
bankruptcy.
Even though it is important for Southwest to maintain its current operational
strategy focus, especially near term, there are certain driving forces that need to be
addressed and worked into the corporate strategy in order for Southwest to maintain its
competitive edge in the airline industry. These recommendations needed to be planned
for now and implemented after the airline industry has weathered through the current
crisis. We have explored several recommendations for Southwest's long term strategy
including:
Expanding to international cities
Expanding to long- haul domestic routes
Expanding services to Alaska and Hawaii
Providing Internet access to passengers
Providing secure "smart" cards to passengers
Merging with another comparable domestic airline
Forming an alliance/ code sharing with another airline

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Expanding to international markets is not in the game plan for Southwest, at least
in the next five years. Southwest does not have the infrastructure, namely large enough,
long- haul planes, to accommodate international flights. It would be a major undertaking
and a major change in the business model for Southwest to pursue international travel.
Therefore, we ruled this option out of the possible strategies to pursue.
Among the alternatives investigated, the most logical grand strategies for
Southwest to pursue include market development and joint venture for implementation
over the next five years. Near term strategies to implement in the next one to three years
include upgrades in technology.
Market development is chosen as a strategy due to several reasons. Market
development is the second to concentration strategy as the least costly and is the least
risky of the typical 15 grand strategies. Saving cost and avoiding risk during the next few
months and years for airlines is going to be a keen focus for survival in this declining
industry. We propose that Southwest continue to expand its air travel options to more
U.S. domestic cities by adding Anchorage, Alaska and Honolulu, Hawaii to its list of
cities served.
Alliance
We also chose an alliance with another airline to be viable strategy for Southwest
to pursue because of Southwest's strong competitive position in a slow growth market. In
the past, internal growth and/or mergers were the primary means through which airlines
sought to take advantage of scale economies and we believe that with the crisis the
airlines are now government concerns about industry consolidation and further mergers
are less of an issue. The government is looking for an out in keeping the airline industry

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going. Southwest will pursue an alliance with another domestic airline that has similar
operating equipment, namely 737 jets or some other similar sized equipment. JetBlue
Airways Corp. is one such company. The newly formed JetBlue took to the air in
February 2000 and has contracts for a fleet totaling 132 new A320 aircraft, with 123
ordered with Airbus. All JetBlue aircraft are configured for 162 passengers and outfitted
with leather seats with free satellite television at every seat. JetBlue is the only airline in
the world to offer passengers live satellite television with up to 24 channels of
DIRECTV

programming free of charge at every seat. Every JetBlue aircraft is outfitted

with a DIRECTV

system which features individual seatback monitors, armrest remotes

with channel and volume controls. JetBlue was the first U.S. airline to introduce
"paperless cockpit" flight technology and the only U.S. airline to be 100% e-ticket.
JetBlue was also the first U.S. airline to install bullet-proof cockpit doors across its fleet
and the first and only airline to install security cameras in the passenger cabin for
customer and crew safety. The airline now serves 20 cities around the country.
JetBlue's success can be attributed to the following business model:
1. Start with a lot of money. JetBlue is the best-capitalized airline start-up in
history. This means they are able to invest in the best product available.
2. Fly new planes. The JetBlue fleet of new Airbus A320s comes with
numerous advantages. New aircraft are more reliable, so they spend less
time on the ground where they don't make money. They're more efficient,
so JetBlue spends less on fuel than other carriers. The youngest fleet in
the sky belongs to JetBlue ("JetBlue Home," 2003).

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3. Hire the best people. JetBlue screens employees rigorously, trains them
well and gives them the best tools. This means JetBlue employees are
motivated and service-oriented.
4. Focus on Service. By offering JetBlue customers the best experience they
can deliver, JetBlue finds most of them come back regularly and tell their
friends and family about the excellent service. It's not rocket science...
JetBlue's customers have given them incredible word-of- mouth
recommendations.
The reasons JetBlue is the airline of choice for Southwest to form a relationship
with include the following:
Leverage of Technology: JetBlue's new jets are the best equipped in the
industry now with the latest technology. Southwest will leverage JetBlue's
knowledge and resources to equip their existing fleet of 737s with these
advances.
Additional Flight Routes and Cities: JetBlue serves mainly the U.S. Eastern
seaboard out of New York City, which will complement Southwest's service
areas.
Similar Cultural Values: JetBlue's business model as briefly described above
is a good fit for Southwest's cultural values and cost leadership focus.
What does this alliance mean? This alliance means that Southwest will be able to
use the JetBlues Network and JetBlue will be able to use the Southwests network. This
will bring a joined competitive advantage to the airline industry and to both the alliances.
By using this alliance or code sharing, Southwest will beef up their revenue and their

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presence will be known in other parts of the United States where they dont have any
current segments. This alliance is one of the most important steps for Southwest in the
current situation as there are other airlines ready to fold in the very near future. This
alliance can bring a huge market share in the years to come.
How will it be implemented? As with every alliance, code sharing or merger, the
first step would be a mutual agreement of both the management team. This will give a
clear signal of the managements willingness to capture the available opportunity and
protect both the airlines against current economic downturn. After this step, the
functional team has to come up with a best possible schedule that will ensure that neither
of the airlines is at any disadvantage due to this alliance / code sharing. This scheduling
should ultimately reduce some expenses and bring in more revenue on a continuous basis.
Both the airlines will have to upgrade their individual systems to accommodate the other
airlines passenger details, ticketing capabilities and several other features. This alliance
will be extremely transparent to the customer or the passenger. Passengers should not be
able to tell the difference in service and carrier switch. In addition to the regular
marketing campaign, both airlines will have to make the customer aware of this alliance
so that the customer can also take advantage of this alliance. Ultimately, the customer
will bring in revenue for both the airlines. Both the airlines can run some promotions like
giving away additional 1000 miles or free lounge coupon etc. to attract the initial
business. This recommendation is based on the fact that there is not much of capital
investment required and it can be implemented fairly quickly.
When to implement the alliance / code sharing? Our estimates are based on the
preliminary information available. We recommend that this alliance plan be worked

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between May 1, 2003 and July 4, 2003. After July 5, 2003 it can be implemented. For
quick reference, details of the work plan and implementation schedule is attached in the
Appendix H.
Technology Upgrades
We have carefully examined the Airline Industry keeping in mind the current
business situation and global economy. We have the following recommendations for
Southwest Airlines to be a capable organization in the current situation for the near term
(the next 1-3 years):
Capture market for business travelers by introducing In-Flight Internet Service
Advancement in Technology.
Capture market for leisure travelers by eliminating the fear of air-travel
Introducing a SWA Smart Card
In-Flight Internet Service
This service would allow passengers to check their e- mail, surf the Web and
possibly even do videoconferencing while in the air--a capability that is likely to
particularly appeal to business travelers. The airborne broadband connection would be
provided by a geostationary satellite. This gives a 20mbps downlink from the Internet to
the plane, and a 1mbps uplink. Within the plane, the bandwidth is distributed either
wirelessly, or via a wired LAN.
This asymmetric pipe reflects the fact that people usually consume more
bandwidth when downloading information, such as Web pages, than when sending data.
In case of videoconferencing a minimum bandwidth is required. In- flight Internet service
could lead to millions of dollars in additional annual revenue for Southwest Airlines. The

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existing fleet can be retrofitted with servers, access points and antennas for in- flight
Internet access. In the future, Southwest Airlines planes can emerge from the factory
with the necessary Internet-access equipment installed.
Southwest Airlines can also have a competitive advantage by building Wi-Fi
Connection in the Southwest terminals, lounges, waiting areas in airport. Wi-Fi, also
known as 802.11b, is a technology that allows the creation of wireless networks with a
radius of around 300 feet.
Early marketing tests show that roughly 20 percent of passengers on large planes,
or 60 to 80 people, will sign up for the service, which will cost $25 to $35 per
transcontinental flight. Multiplying these numbers, prospective revenue will come to $5
billion to $8 billion annually (For the entire Airline Industry), depending on the variables
plugged into the equation.

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Making a Connection: Service is established through a combination of wired,
wireless and satellite technologies. Depending on the plane, passengers can plug into a
standard phone jack or connect via 802.11b. Either way, the connections feed directly to
an in-plane bank of servers, which authenticate users and ensure payment has been made.
Many planes also will come with electrical plugs so laptops won't have to run on
batteries. For now, connecting through a jack likely will be more common. National air
traffic authorities have to approve specific Wi-Fi products for in- flight use. The in- flight
servers then connect to satellites orbiting the equator. Boeings subsidiary has specially
designed the antenna the airplanes use to connect. The system is robust enough to not
require in- flight information technology managers.
With the current situation and market at hand, there will be few business travelers
willing to pay the cost of the business class traveling. At the same time, business traveler
would like to get a lot of tasks accomplished while on the plane. Since Southwest
doesnt have any business class cabins, it will attract more of business travelers who are
in need of traveling. Southwest will be able to offer the business traveler a better price
compared to any other airline.
How will Southwest implement this technology? First of all, Southwest will
select the youngest fleet of aircraft. None of the 737-700 aircraft are retiring in next five
years so that will be the best fit for this upgrade. Secondly, Southwest will start with
those aircraft, which are already in the hangers for any kind of maintenance or overhaul.
This will ensure that there is a minimum impact on the schedules etc. While the aircraft
are in the hanger, necessary hardware and software can be installed on the plane. The
functionality can be checked when the plane is being tested for other maintenance work.

85

In the test phase, a series of stress tests can be performed to ensure the load balancing and
response time etc. Southwest can carry out a series of promotional activities to get
customer attention on this new built facility in the plane. Southwest can take some
school kids or under-privileged kids on the test ride to introduce the In- flight Internet
service. This will get a lot of media attention and create a positive public relation
strategy. This project will require capital investment of approximately $78 million
dollars. The detailed cost/ expense recovery schedule is enclosed in Appendix I.
When will it be implemented? This project will require a lot of careful planning
to avoid any kind of revenue loss due to schedule conflict of the planes etc. With the
information available, we estimated that this project (if fully funded) can be kicked-off in
the first week of May 2003 and can be ready for implementation by the last week of July
2003. For quick reference, details of the work plan and implementation schedule is
attached in the Appendix J.
SWA- Smart Card
Safety and Security: The force is the increase in demand for safety and security
measures. As air travel becomes a more prevalent form of transport, safety and security
becomes an increasingly important issue within and outside the industry. The issue of
safety and security in aviation is very important; horrific air crashes, air terrorism,
aviation sabotage by way of a bomb are examples of high profile accidents that have
shown aviations vulnerability.
The perpetrators of air criminal acts are more often than not terrorists who are
motivated by political and social causes or act in the name of religion. Other perpetrators
include organized crime, narcotic gangs and individuals acting on personal agendas. The

86

convergence of political, economic and technological factors is driving the air-transport
industry to make safety and security an issue requiring the highest levels of attention.
This issue is further analyzed from the perspectives of regulator, customer, competitor
and supplier.
From our point of view, smart card, with its multi- functional role can hold your
passport, your credit cards, your tickets for traveling by air, sea or rail, your seat and
accommodation reservation, boarding cards, and customer loyalty point as well as an
electronic purse. One example within the airline industry is the frequent flyer card, a
secure means of access to ticket less travel and the above advantages of loyalty
point/miles. In short, it is a computer in your wallet, with its own processor and memory,
built for your convenience. On the other hand, with emerging information and
communication technologies, and to satisfy tomorrows customer needs, Southwest will
issue a uniform smart card standard for the airline industry.
We recommend that Southwest should introduce a SWA Smart Card that uses
personal characteristics to identify users. No other airline has made any progress to enter
this technology sector, Southwest can have major competitive advantage over its
competitors and can establish a role of a leader in the Smart Card Technology. The
smart card will save the Southwest in ticket distribution costs, provide better security
against fraud, allow more of their passengers to use self-service facilities, and provide a
better means of identification of their frequent travelers. For Southwest, smart cards will
provide easy accountability of credit and debit cards with the liquidity of cash. In
addition, other airlines will be attracted to smart cards as a way to gather information
about their passengers. Smart cards make transactions quicker and cheaper for them and

87

make it easy to gather information on customers for use in marketing and promotional
programs.
Every individual has a distinguishing physical feature whether it is the fingerprint
or the iris (part of the eye). This technology works by measuring different parameters:
the weight and length of the bones in your hand, the blood vessel patterns in your eyes,
the fingerprints, or maybe even the contours of your face. You have a database that holds
all this information and it is mapped accordingly. When a user scans a hand or the retina,
the new mapping or `minutiae' as it is called, is compared with the stored data. Access is
either granted or denied based on matching patterns unique to each individual. It's that
ability to identify someone based on unique physical traits that is driving Smart card into
the corporate world.
These are just a few reasons why Smart Card is emerging as a high- tech solution
to the question of positive individual identification and verification. Coming soon are
amazing features such as thermal emission and body odor sensing, and perhaps even
brain-wave reading.
Over a period of time, it is expected that most airline smart cards will be "co-
branded" cards, which means they will be issued by banks or credit card companies, and
will also contain the airline industry applications. The Airline Industry Smart Card
Standard allows for up to ten airlines to have their applications on the card. The Standard
can also be devised so that it is also compatible with the Europay / Master Card / VISA.
Why will people want to use smart cards? Advantages pitched for using the smart
card include: increased sales, faster transactions, improved cashier productivity, reduced
cash- handing costs, improved customer service and greater security. Smart card

88

technology benefits the network operator, Internet service provider and customer in more
ways than one:
Security: Smart cards offer the optimum security for commercial transactions because
the information they contain can be protected by a series of keys depending on the
cardholder's identity, degree of confidentiality required and other special needs.
Individually: Electronic commerce can address the needs of every family member
with cards that are progressively personalized according to the cardholder's profile.
Portability: The smart card can be carried anywhere and used on any PC or interactive
display.
Loyalty: A smart card is the ideal way for distributors or service providers to establish
and manage loyalty programs-especially when bonus points for long distance
purchases need to be downloaded into the card.
Smart Card recognition can be classified into physiological (physical
characteristics such as finger printing, retina patterns, face structure) and behavioral
identifiers (voice and signature styles).
A quick peek into the dynamics of each authenticating mechanism via SWA Smart
Card:
Fingerprint mechanism: Probably the oldest authenticating system in use, this is
definitely the easiest way to identify an individual.
Face recognition: This can allow you to collate a traveler's passport and a digital
image of the facial features. An image archive of terrorists or criminals can be
compared with that of the traveler. It will be easy for authorities to detect any

89

unwanted elements. Since this system looks for the basic bone structure, disguises
won't help.
Eye patterns: The blood vessels in the retina and the structure of the iris are unique to
every individual. A match in the pattern shall allow access and a mismatch raise an
alarm!
Signature verification: This shall include a `smart' pen with encoded information of
the user. This can check parameters such as pressure on the writing surface and
direction of writing. An effective application is where frequent flyers can use such a
system to check in and out faster.
Hand geometry: This system scans the user's hand and measures the mass and
identifies the bone structure for authentication.
We realize that there will be a huge investment in the initial period on part of
Southwest Airlines, but as per our calculations and projections, Southwest will be in a
driving seat for years to come as other airlines will depend on the Southwest's network
and will have to pay substantial cost for using the SWA Smart Card network and
information base. In todays economy, no other airlines have enough capital to invest in
this kind of project, as other airlines struggle to keep their head out of the water.
Southwest Airlines can gain a major competitive advantage and be a industry leader by
adopting Smart Card technology. This will be a leap forward for Southwest.
How will it be implemented? Initially the corporate communications department
will create forms to obtain necessary information from the RAPID REWARD members.
While the forms are sent out and Southwest is waiting for responses, necessary hardware
and software can be procured and installed to avoid delays. At the same time, the human

90

resources department can either hire new data entry operators or logistics department can
look for a contractor who will carry out all the data entry work for Southwest for this
project. Once the forms are received back at the Southwest office then they can be keyed
in to the newly installed platform. After validating the data and confirming the standards,
SWA Smart card will be generated and issued to all the RAPRID REWARD members.
This project will require capital investment of approximately $207.5 million dollars. The
detailed cost/ expense recovery schedule is enclosed in Appendix K.
When will it be implemented? This project will require a lot of careful
planning to avoid any kind of fraud and duplicate information in the database. This
project is also very much security driven, so there will be a lot of features for checks and
balances. With the information available, we estimated that this project (if fully funded)
can be kicked-off in the first week of May 2003 and can be ready for implementation by
the second week of November 2003. For quick reference, details of the work plan and
implementation schedule is attached in the Appendix L.










91

References

Bachmann, J. W. (2002). Competitive strategy: it's O.K. to be different. Academy
of Management Executive, 16, 61-66.
Baglole J. (2000, April 24). Canada's Westjet battles giant. The Wall Street
Journal. (pg. A26).
Bonabeau, E. (2001). Swarm intelligence. Harvard Business Review, 79, 106-
115.
Freiberg, Jackie and Kevin (1996). Nuts!: Southwest Airlines' Crazy Recipe for
Business and Personal Success. Austin, TX: Bard Books.
Gadiesh, O. (2001). Transforming corner-office strategy into frontline action.
Harvard Business Review, 79, 72-80.
Gittell and Hoffer J. (2001). Investing in relationships. Harvard Business Review,
79, 28-29.
Industry still recovering from september 11 (2002, September 26). Airlines
Industry Survey, pp. 1-31.
JetBlue home page. Retrieved on April 4, 2003. Available:
http://www.jetblue.com/learnmore/factsheet.html
Love is in the air at southwest airlines. Retrieved on February 3, 1999.
Available: www.southwest.com.
McCartney, S. (2000, March 8). Southwest takes back door to beat deplaning
record. The Wall Street Journal. (pg. T2).
Mergent industry review (2002).
Moody's industry review (2002).
Pearce and Robinson (2003). Strategic Management: Formulation,
Implementation, and Control, 8
th
ed. New York, NY: McGraw-Hill Higher Education.
Porter, M. E. (1996). What is strategy? Harvard Business Review, November-
December, 61-78.
Schermerhorn, J. R. (1999). Management, 6th ed. New York, NY: John Wiley &
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92

Southwest airlines company profile. Retrieved on February 15, 2003. Available:
http://www.southwest.com/investor_relations/company_information.html
Southwest Airlines 2001, 2000 and 1999 Annual Reports. Retrieved on February
15, 2003. Available:
http://www.southwestairlines.com/investor_relations/annual_reports.html
Standard and poor's industry review (2002).
Statement by chairman Jim Hall on the NTSB investigation of the runway overrun
accident involving southwest airlines flight 1455. Retrieved on February 15, 2003.
Available: http://www.sout hwest.com.
Zellner, W. and Arndt, M. (2003, April 7). Can anything fix the airlines? BusinessWeek,
52-54.


















93

Appendix A

U.S. Airline Overview










































94

Appendix B


Domestic Airline Yields




















95

Appendix C
Concentration Among Carriers















96

Appendix D

Five Forces Model

Generic Five Forces Driving Industry Competition Model

Entry barriers Rivalry
Determinants

















Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Expected retaliation

Industry
Competitors



Intensity of Rivalry
New
Entrance
Suppliers Buyers
Substitutes
Differentiation of inputs
Switching costs of suppliers & firms
In the industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost of differentiation
Threat of forward integration relative to threat
of backward integration b firms in the industry
Relative price
Performance of substitutes
Switching costs
Buyer propensity to substitute
Industry growth
Fixed costs/value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Bargaining Leverage

Buyer concentration versus
firm concentration
Buyer volume
Buyer switching costs
relative to firm switching
costs
Buyer information
Ability to backward integrate
Substitute products
Pull-through

Price Sensitivity
Price/total purchases
Product differences
Impact on
quality/performance
Buyer profits
Decision makers incentives


Determinants of
Substitution Threat
Determinant of Buyer Power
Determinants of Supplier

97

Appendix E
(Southwest Airlines' Directors and Officers)

Directors

COLLEEN C. BARRETT
President and Chief Operating Officer
Southwest Airlines Co.,
Dallas, Texas
HERBERT D. KELLEHER
Chairman of the Board, Southwest Airlines
Co.,
Dallas, Texas;
Executive Committee
C. WEBB CROCKETT
Shareholder and Director, Fennemore Craig,
Attorneys at Law, Phoenix, Arizona;
Audit, Compensation, and Nominating
Committees
ROLLIN W. KING
Retired, Dallas, Texas;
Audit, Executive, and Nominating Committees
WILLIAM H. CUNNINGHAM, PhD
James L. Bayless Professor of Marketing
University of Texas School of Business
Former Chancellor of The University of Texas
System,
Austin, Texas;
Audit (Chairman) and Nominating Committees
JOHN T. MONTFORD
Senior Vice President, External Affairs
SBC Incorporated
San Antonio, Texas;
Audit and Nominating Committees
WILLIAM P. HOBBY
Chairman of the Board,
Hobby Communications, L.L.C.;
Former Lieutenant Governor of Texas;
Houston, Texas;
Audit, Compensation (Chairman), and
Nominating Committees
JUNE M. MORRIS
Founder and former Chief Executive Officer
of Morris Air Corporation,
Salt Lake City, Utah;
Audit, Compensation, and Nominating
Committees
TRAVIS C. JOHNSON
Attorney at Law, El Paso, Texas;
Audit, Executive, and Nominating Committees
JAMES F. PARKER
Vice Chairman and Chief Executive Officer
of Southwest Airlines Co.,
Dallas, Texas

Officers

JAMES F. PARKER*
Vice Chairman and Chief Executive Officer
BOB MONTGOMERY
Vice President - Properties and Facilities
COLLEEN C. BARRETT*
President and Chief Operating Officer
Corporate Secretary
ROB MYRBEN
Vice President - Fuel
DONNA D. CONOVER*
Executive Vice President - Customer Service
RON RICKS*
Vice President - Governmental Affairs
GARY C. KELLY*
Executive Vice President and Chief Financial
DAVE RIDLEY*
Vice President - Ground Operations

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Executive Vice President and Chief Financial
Officer
Vice President - Ground Operations
JAMES C. WIMBERLY*
Executive Vice President and Chief of
Operations
JAMES A. RUPPEL
Vice President - Customer Relations and Rapid
Rewards
JOYCE C. ROGGE*
Senior Vice President - Marketing
RAY SEARS
Vice President - Purchasing
DEBORAH ACKERMAN
Vice President - General Counsel
JIM SOKOL
Vice President - Maintenance & Engineering
BEVERLY CARMICHAEL
Vice President - People Department
KEITH L. TAYLOR
Vice President - Revenue Management
GREGORY N. CRUM
Vice President - Flight Operations
ELLEN TORBERT
Vice President - Reservations
GINGER C. HARDAGE
Vice President - Corporate Communications
MICHAEL G. VAN DE VEN
Vice President - Financial Planning and
Analysis
ROBERT E. JORDAN
Vice President - Systems
TAMMYE WALKER-JONES
Vice President - Inflight
CAMILLE T. KEITH
Vice President - Special Marketing
GREG WELLS
Vice President - Safety, Security, and Flight
Dispatch
DARYL KRAUSE
Vice President - Provisioning
STEVEN P. WHALEY
Controller
KEVIN M. KRONE
Vice President - Interactive Marketing
LAURA H. WRIGHT
Vice President - Finance and Treasurer
PETE MCGLADE
Vice President - Schedule Planning

("Southwest airlines company," 2003)













99

Appendix F

Southwest Airlines' Cities



















100

Appendix G

JetBlue's Cities Map


















101

Appendix H


Alliance Implementation Schedule






















102

Appendix I

In-Flight Internet Cost/ Expense Schedule






Cost / Expense Schedule for In-Flight Internet

Description
Type of Aircraft 737-700
Number of Aircrafts 129.00
Time required to Install, test new technology 30 days
Number of Seats 137.00

Expenses per Aircraft 600,000.00
Total Expenses for Southwest Airlines = Number of Aircrafts * Expense Per
Aircraft
77,400,000.00


Expenses Recovery Schedule:
Minimum Number of Business Travelers Using the In-Flight Interent Service 8.00
Revenue Per Flight Per Passenger 35.00
Total Revenue Per Flight = Min. # of Business Travelers using the In-flight
Internet Service * Revenue per flight per day
280.00
Minimum Aircraft Trips Per day 6.00
Minimum Revenue Per Aircraft Per day = Total Revenue Per flight * Minimum
Aircraft trips per day
1,680.00
Minimum Revenue For all the Aircrafts per day = Minimum Revenue Per
Aircraft Per day * Number of Aircrafts
216,720.00
Minimum Revenue For all the aircrafts per month = Minimum Revenue For all
the aircrafts per day * 30
6,501,600.00
Minimu Revenue For all the aircrafts per Year = Minimum Revenue For all the
aircrafts per month * 12 month in a year
78,019,200.00






103

Appendix J


In-Flight Internet Implementation Schedule



















104

Appendix K

Smart Card Cost/ Expense Schedule





Cost / Expense Schedule for SWA - Smart Card

Maximum # of RAPID REWARD Members 63,000,000
Cost of Generating Form= Maximum # of RAPID REWARD
MEMBERS * 0.003
189,000.00
Maximum Cost Mailing Forms= Maximum # of RAPID REWARD
MEMBERS * 010
6,300,000.00
Necessary Hardware 50,000,000.00
Necessary Software 150,000,000.00
Data Entry Operators Cost 1,000,000.00


Total Cost 207,489,000.00


Short Term Debt will be issued to raise the initial cost of the project
Maximum 9 other airline will be able to use the database
Royalty expenses charged per customer per airline 0.50
Total Customers With Southwest Airlines 63,000,000
Total Revenue Generated from other airlines over a period of one
year=Maximum number of RAPID REWARD Members in the
database * 5 other airlines using this services *0.50 cents royalty to use
the database
157,500,000.00
Revenues recovered at the end of the first year 157,500,000.00

Remaining debt at the end of the first year = Initial Cost - Revenues
generated at the end of the first year
49,989,000.00






105


Appendix L


Smart Card Implementation Schedule