Southwest Airlines Case - 1

(Prepared by Professor Barry Macy

Texas Tech University)

• Background :

- Founded in 1967 - Love Field in Dallas, TX

- 35,000 Employees (strated Flying in 1972)
- Nation’s 4th largest airline (59+ cities and 65M
Customers)
- Only two fares: regular coach and off-peak

• Results and Outcomes:

- Excellent customer service (rated the best for on-time

performance, fewest lost bags; fewest customer
complaints – 13 years in a row)
- Safest airline in the world (never had a fatal accident)
- Profitable every year (33 years in a row); only airline
in the world Spring 2006—Southwest Airlines Case Presentation
 Southwest Airlines and Some Other Airlines: - 4
4th Quarter, 2001 Profit/Loss

Southwest Airlines $63.5M

$32.4M*
Why?
American Airlines $(748M)

U.S. Air $(1.0 B)

Delta $(1 B)

* Without Federal Aid

Spring 2006—Southwest Airlines Case Presentation
Source: B.A. Macy, Successful Strategic Chance, San Francisco, CA: Berrett-Koehler Publishers (forthcoming).
 Southwest Airlines Case - 2
• Results and Outcomes: (continued)
- Highest stock return of any U.S. Publicly traded stock
(compounded rate of return of over 21,000%)
- $4.5 B in revenue (continuous uninterrupted growth)
- Continues to increase market share (not at expense
of profitability)
•Returned $214M (profit-sharing) to employees (2001-2002)

• 14% of stock held by SWA employees

• Largest Market cap of any U.S. airlines (higher Market cap

than all of U.S. Airlines combined)

• Success Factors (per the Company’s behavior):

-Employees come 1st
-Customers – 2nd
-Shareholders – 3rd Spring 2006—Southwest Airlines Case Presentation
 Results (Con’t)

• After 9/11 SWA had no Layoffs and ALL

employees took a pay cut!!!

Spring 2006—Southwest Airlines Case Presentation

 Southwest Airlines Case - 3
• One of “Best 100 Companies” and in the “top 10 – Most
Admired” companies to work for:
- Unique, off-beat strong/adaptive (HPO) culture!
- FUN emphasized!
- Family emphasized!
- Caring for employees emphasized!
- Customers emphasized!
- Identify with fellow employees (as internal customers!)
- Ten-year Labor agreement! (81% unionized)
- Aggressive under-dog spirit!

•Employees “Love” to work there!!

Spring 2006—Southwest Airlines Case Presentation

 Southwest Airlines - 4
•Competitors have:
- Same Equipment
- Same Locations
- Same Route Planning
- Same Technologies
- Have tried same no-frills, lowest cost model (all have
failed - Why???)

(40 % of competitors went bankrupt or

ceased operations)

Spring 2006—Southwest Airlines Case Presentation

 Southwest’s Values, Philosophy, and Spirit

These are three basic values (“the culture”) or philosophical

pillars at Southwest Airlines:

Value 1: Work should be fun ...it can be play . . . Enjoy it.

Value 2: Work is important ...don’t spoil with seriousness.

Value 3: People are important...each one makes a different.

Beliefs:
•Organizations are transparent
• Family and “Hugs”

Spring 2006—Southwest Airlines Case Presentation

 People at Southwest:
- Hard-working (94 employees per plane vs.. Americans
160 and United 160 - Industry average of 130; serves
2,500 passengers per employee Vs. United and American
average less than 1,000)

- Motivated

- Have FUN - fun place to work

- Treat employees as internal customers

- Employees are comfortable

- Fundamental business philosophy is that employees

come first!

- Not a lot of employees!

Spring 2006—Southwest Airlines Case Presentation

Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low Cost Differentiation
Use a single aircraft model
Focus on customer
(Boeing 737)
satisfaction
Use secondary airports
High level of employee
Fly short routes dedication
No meals
New flight services for
15 minute turnaround time
business travelers
No reserved seats (phones and faxes)
No travel agent reservations S.W.A.’s Culture, Values,
Philosophies &Airlines
Spring 2006—Southwest Principles
Case Presentation
 The “Right” People or the “Right” Organization?
A Values-Based Organization View of Strategy

Fundamental Values or Beliefs • What are our basic Principles, Philosophies

and Core Values?
• What do we believe in?

Design Management Practices • What policies and practices are consistent

That Reflect and Embody with these Values and Philosophies?
These Values

Use These to Build Core •What can we do for the customer better
Capabilities than our competitors?

Invent a Strategy That is Consistent
with the Values and Uses the
Talents & Capabilities of People/
Organization to Compete in
New and Unusual Ways
Senior Management’s Role
• Given our capabilities, how can we deliver
value (EVA) to customers in a way our
competitors cannot easily imitate?
• Senior management “manages” the values
and culture of the firm.
Spring 2006—Southwest Airlines Case Presentation
 Summary of Southwest Airlines Case - 6

1. Alignment between strategies, goals, culture, core

values, structures, systems, processes, and people.

2. Consistency of management and senior

management responsible for maintaining the
Culture and the Core Values

3. Assets are managed and low variable costs

4. Focus on Human Capital - - unleash their innovation

and increase their capabilities

Spring 2006—Southwest Airlines Case Presentation

 Southwest Airlines Results - 5
KPI INDICATOR S.W.A. INDUSTRY EXEMPLAR
ORGANIZATIONS
II. Business/
Financial:
1. Continuous Yes – 10+% No 10+% Per Year
Uninterrupted per Year
Growth

2. Continuous
Uninterrupted Yes No Yes
Market Share
Growth

3. Continuous Mainly
Uninterrupted Yes – 29 yrs. No Yes
Profitability in a row

4. Rate of Return 21,000% Not even close - Close to

(7th Highest – public) below average Top 10

5. Average Hours 11 hrs. 8 hrs. NA

in Air per day Spring 2006—Southwest Airlines Case Presentation
 Southwest Airlines Results - 6
KPI INDICATOR S.W.A. INDUSTRY EXEMPLAR
ORGANIZATIONS
II. Business/
Financial:
6. Flights per 10.5 4.5 NA
Gate

7. Ground Time 15 min. 47 min. NA

(70%) (70%)

8. Employees
Per Plane 94 130 (some 160) NA

9. Employee Service 2,500 1,000 NA

per Passenger

10. Typical
Financial Best Average to Best to
Measures Below Average Excellent
11. Cost Per
Mile 5.86 – 1984 15-40% Higher Average of 5%
7.3 – 1998 Reduction/Yr.
Spring 2006—Southwest Airlines Case Presentation
 Southwest Airlines Results - 7
KPI INDICATOR S.W.A. INDUSTRY EXEMPLAR
ORGANIZATIONS

I. Employees:

They Come 1st Yes No Balanced

Scoreboard

Motivation Very High Average High to Very High

Job Satisfaction Very High (85%) Below Average to High (65-70%)

Average (50%)

Employment Never had a Very Frequent Rare

Security Lay-off Lay-offs

Labor 10 years (No 1-3 years None to 5 years

Agreement Work Rules)

Internal Yes No Yes

Customer Spring 2006—Southwest Airlines Case Presentation
 Southwest Airlines Results - 8
KPI INDICATOR S.W.A. INDUSTRY EXEMPLAR
ORGANIZATIONS

. Employees:

Families Caring Questionable Caring

Trust and
Confidence Yes No Yes

Work Fun Not Challenging/ Fun/

Boring Challenging

0. Catastrophe Yes No ?
FUND

1. Jobs Multi-skill Narrow Multi-skill

2. Number of
Employees Few Lots Few to Average
Spring 2006—Southwest Airlines Case Presentation
 2005 Southwest Airlines Case - 12

• Competitors have:

- Same Equipment
- Same Locations (40 % of competitors went bankrupt or
ceased operations)
- Same Route Planning
- Same Technologies
- Have tried same no-frills, lowest cost model (all have
failed - Why???)

Spring 2006—Southwest Airlines Case Presentation

 2005 Southwest Airlines Case - 14

• Strategies and Goals: Fly to airports that are

under-utilized and close to metropolitan areas

- One type of aircraft (367+ 737’s)

- 80% of customers fly non-stop (no hub necessary -

avoids delays and shorter turnaround times; 70%
of planes have 15 minute ground times)

- Planes average 11 hours in air (Industry average = 8.0)

- Planes average 10.5 flights per gate (Industry

average = 4.5)

Spring 2006—Southwest Airlines Case Presentation

 2005 Southwest Airlines Case - 15
• Strategies and Goals: (continued)

• Simplify the operations (no meals, no seat assignments;

frequent flyer awards are simple - no mileage)

• Low cost structure - - a competitive advantage

- Turnaround time

- Pilot spend more time in air than other airlines

($100,000 wage vs.. Delta’s $200,000)

- Flight attendants and pilots help clean planes, check

passengers in at the gate and load bags if needed
(people pull together to accomplish the mission
and goal)
Spring 2006—Southwest Airlines Case Presentation
 2005 Southwest Airlines Case - 16
• People at Southwest:
- Hard-working (94 employees per plane vs.. Americans
160 and United 160 - Industry average of 130; serves
2,500 passengers per employee Vs. United and American
average less than 1,000)

- Motivated

- Have FUN - fun place to work

- Treat employees as internal customers

- Employees are comfortable

- Fundamental business philosophy is that employees

come first!

- Not a lot of employees! (per customer – Best in the Industry)

Spring 2006—Southwest Airlines Case Presentation
2005 Southwest’s Values, Philosophy, and Spirit - 17

These are three basic values (“the culture”) or philosophical

pillars at Southwest Airlines:

Value 1: Work should be fun ...it can be play . . . Enjoy it.

Value 2: Work is important ...don’t spoil with seriousness.

Value 3: People are important...each one makes a different.

Beliefs:
•Organizations are transparent
• Family and “Hugs”

Spring 2006—Southwest Airlines Case Presentation

 2005 Southwest Airlines Case - 18
• Organization:
• Stable working environment (never had a layoff)
• People orientated culture (informal egalitarianism)
• Equal Opportunity for learning and personal growth
• Creativity and innovation encouraged and rewarded
• Same caring, concern, respect within the organization
as outside (with customers)
• Catastrophe fund for employees
• Targeted selection utilized
• Celebrations (for achievements)
• Contests
• “Walk a Mile in My Shoes”
• Lots of companies say “employees are important” - -
however, their behaviors speak louder than words!!
• Flat/Lean organization structure (only 4 total levels)
Spring 2006—Southwest Airlines Case Presentation
Typical Ten Step Targeted Recruitment and Selection Process - 20

1 Job Fair

Orientation/Application/Testing
2
Screening Interviews
3
4 Assessment Center (COBRA & Team Decision Exercise)

5
Final Interviews

6 Background/Reference Check

7 Pre-Employment Orientation

Job Preview/Offer
8
Med/Drug/Prework
9
Confirm Job
10
Offer

Spring 2006—Southwest Airlines Case Presentation

 2005 Southwest Airlines Case - 21
• Organization: (continued)
• Trust and confidence in employees (No H.R. Dept. -
a “People Department”)
• Over 200,000 job applications in 1998 (35,000 interviewed
and 4,000 hired)
• Recruited primary for attitudes and behaviors
• 29,000 people are trained each year
• Get people excited and enthused - avoid complacency
• Key senior leaders are the “trainers”
• No tuition reimbursement (no to little outside
sponsorship of training)
• Two-way communication and feedback
• Mutuality in Labor Relations (no work rules in contract)
• Everyone receives a “raise” on his/her birthday
• Employee Attitude Surveys
Spring 2006—Southwest Airlines Case Presentation
 2005 Southwest Airlines Case - 22
• Organization: (continued)

• Pay Practices: Collective Vs. Individual

- Profit sharing (all employees over 1 year with company)
- Stock ownership
- Relatively low Executive pay (little to no pay for
performance)
- Consistent treatment (raises or freezes)
- Low pay at the start and high pay with experience
(below market wage for managerial, professional and
wage at start)
- Pilots and flight attendants paid by the “trip”
- Average wage (1992) was $44,305 compared to
American’s $45,801 and United’s $54,380
• Employees treated like “owners” - share all information
(good and bad) Spring 2006—Southwest Airlines Case Presentation
 2005 Southwest Airlines Case - 23
• Organization: (continued)

• Employees encouraged to take responsibility and make

decisions

• Management seeks out employee opinions and listens

carefully to employees; acts accordingly!

• Monthly meetings for sharing of confidential data

• Competitor information shared

• High level of employee trust

• Effectiveness NOT efficiency

• Effective Senior Leadership

• Effective and Strong Senior Management Team

Spring 2006—Southwest Airlines Case Presentation
 Summary of Southwest Airlines Case - 24

• Sees it’s mission as creating the maximum amount

of wealth possible out of the imagination and skills
of it’s employees (rather than maintaining
leadership in a particular market with one
business model.)

• Assumptions: Good business models are not

immortal (only in a slow-spinning world). Business
models can be “rendered absolutely useless in a
blink of an eye” - every organization must now be
“built to change/be redesigned”!

Spring 2006—Southwest Airlines Case Presentation

 Summary Southwest Airlines Case - 25
•Don’t commit to one single business model - - commit
instead to providing “brood after brood of new business
models”!

• Their Characteristics:
- Democratic
- Open
- Experimental (risk taking)
- Highly networked
- Non-hierarchical
- Structures, systems and processes are malleable / adaptive to the
business environment
- Some use of teams
- Speed
- Ideas/Imagination
- Pattern of rule - busting strategies
- Master of innovation platforms/pathways
Spring 2006—Southwest Airlines Case Presentation
 Summary of Southwest Airlines Case - 26

• Other Characteristics
- Scale
- Effectiveness Vs. Efficiency
- Replication
- Discipline
- Culture
- Core Values

• 73% of it’s Revenue from E-Commerce

• Importance of Internet
• Synthesis of “old” and “new” organization (uses their
scale; size; infra-structures, systems, and processes;
and operational excellence to crush competitors!)

Spring 2006—Southwest Airlines Case Presentation

 Summary of Southwest Airlines Case - 27
• Clear, well-defined (NOT blue-sky), and articulated set of
Core Values (Widely shared; acts as a foundation for
managerial behaviors and practices.)

• Alignment and consistency in the organization’s structures,

systems and processes that stem from the Core Values.

• Visionary leaders and senior management

responsibilities for maintaining the organization’s culture
and Core Values (maintained and made real to employees
in terms of managerial behaviors - NOT just “words”)

• Strong and Adaptive Culture

• Hiring (Targeted Selection) for Behavioral “Fit”

Spring 2006—Southwest Airlines Case Presentation
 Summary of Southwest Airlines Case - 28

• Investment in Human Capital (Employees) - - improving their

capabilities

• Widespread information (confidential) sharing (vertically

and horizontally)

• Some (NOT a lot) of “work teams” - accountabilities and

responsibilities of the teams clearly defined

• Rewards and Recognition

• Consistency in Top Management

Spring 2006—Southwest Airlines Case Presentation

Summary of Southwest Airlines Case - 29

1. Alignment between strategies, goals, culture, core

values, structures, systems, processes, and people.

2. Consistency of management and senior

management responsible for maintaining the
Culture and the Core Values

3. Assets are managed and low variable costs

4. Focus on Human Capital - - unleash their innovation

and increase their capabilities

Spring 2006—Southwest Airlines Case Presentation

 Six Attributes of Best Companies:
Employee talent and common sense:
- Hire for attitude – train them for skill (We are in the customer service
business – NOT transportation!)

Financial Soundness:
- Manage in the “good times” to get ready for the “bad times”
- Employees gave back part of their “Sept., 2001” wages
(1to32 hrs. max.) = $1.3M salary giveback
- Top officers: Gave back 100% of their pay in Sept., 2001
- $13.3 Market cap (higher than all U.S. Airlines put together)

Use of Corporate Aircraft and Assets

- Have 367 – Boeing 737’s

Innovativeness: 15-25 Minute turnaround; 30% lower wage rates

Financial Soundness (long term investment)

- $13.3B – Market cap (larger than combination of all US Airlines)

Quality of Management
- Transition Plan to others from Kheller
Spring 2006—Southwest Airlines Case Presentation
 Why is Southwest Successful? (1)
• “NOT” because of:
– Only flies 737’s
– Only Small Airports All Results/
– Low Ticket Prices
– Quick Turnaround Outcomes/
– Low Cost
– Customer Loyalty Effects/
– Efficiency
– Profitable Symptoms
– Rate of Productivity

Spring 2006—Southwest Airlines Case Presentation

 Why is Southwest Successful? (2)

• Because of its Internal Business Environment

and/ or Execution Systems—the Causes:
– Culture, Core Values, Philosophies and
Principles (Vision Direction)
– Effective Management of its Workplace (Level
5 leadership)
– Effective Exemplar Structures, Systems and
Processes (fit between elements of the Execution
System)

Spring 2006—Southwest Airlines Case Presentation

 Why are Firms/Organizations Successful (Using only RBV Theory)?

What are the assumptions the organization makes about people and their
motivations?
What are the manager’s beliefs that underpin how they organize and design
the work environment?
What are the organization’s core values, principles, and philosophies (the
culture)?
What are the organization’s expectations about their employees?
What are the strategies, structures?
How are their people utilized? How are the organization’s capabilities
improved?
Is it their technologies and the physical assets (i.e. equipment, machinery,
etc.)
Why haven’t their competitors been able to imitate them?
Is it their strategies?
. Is it the right people/excellent human resources?
. Or the right organization (strategies, structure, and leadership?)
. Why is the firm/organization so successful/exhibits exemplar performance?

Spring 2006—Southwest Airlines Case Presentation

 Why are Firms/Organizations Successful?

1. What are the assumptions the organization makes about people

and their motivations?
• High Trust and High Motivation/ Committed Employees

2. What are the manager’s beliefs that underpin how they

organize and design the work environment?
• Their Core Values, Philosophies and Principles (Corporate
Culture)

Spring 2006—Southwest Airlines Case Presentation

 Why are Firms/Organizations Successful?

3. What are the organization’s core values, principles, and

philosophies (the culture)?
CORE VALUES:
• Work should be Fun!...It can be play…Enjoy it
• Work is Important …don’t spoil it with seriousness
• Our People (Employees) are is important – They come 1st (above Customers
and Investors)
PRINCIPLES & PHILOSOPHIES:
• No layoffs
• Egualitarism (all equal)
• Equal opportunities for learning and personal growth
• Flat/ lean Org. Structure
• Employees has important input-listen to them
• High participative work environment
• Care, concern, respect within the org. for employees
• Catastrophe fund for Employees + Families
• Hire and we will train/ Develop/ mentor
• Celebrate achievements
• Have Employees Contests (award reception/ financial rewards)
• “Behave / Act” like the words
Spring 2006—Southwest Airlines Case Presentation
 Why are Firms/Organizations Successful?

4. What are the organization’s expectations about their employees?

• Expectation about work performance, communication,
coordination, and integration

5. What are the strategies, structures?

• Employees are always first –ahead of customers and investors;
flat/lean structure (NOW-4 layers: 3 Management and 1 level of Associates

6. How are their people utilized, and organization’s capabilities improved?

PEOPLE UTILIZED:
No specific job/ work description; high expectations; multi-skill
COMPANY IMPROVED CAPABILITIES:
Commercially Astute Employees; Org Capabilities –flexibility and adaptability

7. Is it their technologies and the physical assets (i.e. equipment,

machinery, etc.)
• NO!

Spring 2006—Southwest Airlines Case Presentation

 Why are Firms/Organizations Successful?

8. Why haven’t their competitors been able to imitate them?

• Corporate Culture (Core values, Philosophies & Principles)
• Level 5 leadership (Effective management and Workforce)
9. Is it their strategies?
• Yes—Somewhat (people Strategy)
10. Is it the right people/excellent human resources?
• Yes—Somewhat!
11. Or the right organization (strategies, structure, and leadership?)
• Yes—Somewhat!
12. Why is the firm/organization so successful/exhibits exemplar
performance?
• Corporate Culture!!
• Level 5 Management (effective management of workforce)!!

Spring 2006—Southwest Airlines Case Presentation

 Alignment of Action levers

Southwest J&J SAS Dell GE ABB Cisco Cypress

Action Levers Airlines

• Values, Culture, and

Strategy Alignment 
• Hiring for Fit 
•Work & Jobs 
• Investing in People 

• Widespread 
Information
Sharing

•Shared Leadership & 

Decision making
• Team Based / 0
Systems
• Rewards and 
Recognition
•Lean & Flat Structure 
• Leading / (NOT 
Managing)

•Vision Direction = Excellent
 = Good
• Alignment of   = Fair
Structures, Systems 0 = Missing
& Processes
Spring 2006—Southwest Airlines Case Presentation
 Alignment of Action levers

Southwest J&J SAS Dell GE ABB Cisco Cypress

Action Levers Airlines

• Organizational
Strategies

Enterprise 

GBU& SBU 0

•Business Models


•Core Competencies/
•Operations
•Others 
0

•Capabilities

•Organizational 

0
•Technological
0
•Teams = Excellent
 = Good
  = Fair
•Mutuality  0 = Missing

•Transformation/  Spring 2006—Southwest Airlines Case Presentation
 Future Issues/ Problems for SWA

• Going International
• Merger (Acquisition of another airline)
• Growth:
– Internal?
– External?
– Both?
• Will the Corporate culture change when
Herb leaves?

Spring 2006—Southwest Airlines Case Presentation