126-C98A
COLLEGE
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As the 4:00 p.m. flight to Dallas pulls out of the terminal at Houston, Marilyn the flight attendant breaks into a rap-song, “Federal regulations say you must comply…if you don’t…. you can kiss your seatmate goodbye!….Chhh-ch-ch-
Chhh-ch-ch…”. By the time the applause dies down, Southwest Airlines Flight 40 has been cleared for takeoff.
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As the plane settles into its cruising altitude the pilot jokes with the passengers saying that he will be coming around to collect quarters for feeding the parking meter at the airport gate.
Introduction
You never know what to expect when you are on a Southwest Airlines flight. Flight attendants are known to hide in overhead luggage compartments and surprise unsuspecting passengers when they open the overhead bin. Ground and in-flight crew are known to engage passengers in games and trivia contests and the winners usually get pizza or complimentary drink coupons. However, VP of Customers, Colleen Barrett notes that while fun does have its place,
“Business people just want to read their newspaper first thing in the morning.” 3
With themes like FUN, LUV and NUTS! Southwest has become famous for their Positively Outrageous
Service (POS).
Southwest is the US low fare airline, serving short-haul city pairs, and providing single class air transportation, that targets the business commuter as well as leisure travelers.
Southwest has one of the best overall Customer Service records, one of the lowest operating cost structures and consistently offers the lowest and simplest fares in the domestic airline industry.
Southwest has won the “Triple Crown” five years in a row, 1992 - 1996. The Triple
Crown consists of best baggage handling, fewest customer complaints and best on-time performance among all major airlines, according to the statistics published by the United States
DOT (Dept. of Transportation). In a 1997 ranking of ten major US airlines, Southwest finished first, according to the criteria deemed most important by 1017 respondents to Money magazine’s survey. The criteria included safety, price, baggage handling, timeliness, customer service, comfort, ticketing and others.
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In this poll, safety was the No. 1 concern of passengers, followed by price. Baggage handling and on-time performance finished just behind price. Please see
1 If not referenced, information comes from Southwest’s 1995, 1996 or 1997 annual reports or its official WebPages
2 Slow Climb to New Heights, Success , Oct., 1996
3 How I did it: Pampering Customers on a Budget, Working Woman , April 1993
4 The best Airlines to fly today, Money , Nov. 1997
Professors Jay Rao, James Hunt, Richard Bliss, Michael Fetters, Carol Fiske, and Carl Gwin of Babson College, prepared this case as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
All information has been obtained from publicly available sources. Copyright © Babson College 1998

Exhibit 1 for some numbers related to these criteria. The popular travel magazine Conde Nast
Traveler has recognized Southwest as one of the world’s safest airlines.
Lately, airlines around the globe are trying to benchmark and mimic Southwest’s model.
Belgium’s City Hotels’ City Bird airline 5
, EasyJet
6
of Britain, HIS
7
of Japan and Argentina’s
LAPA 8 are all trying to model themselves after Southwest and replicate its success.
History of LUV
Twenty-six years ago, Rollin King scribbled three lines on a cocktail napkin, leaned across the table, and muttered to his longtime friend, “Herb, let’s start our own airline.” Herbert
Kelleher loosened his tie and knitted his brow before replying, “Rollin, you’re crazy.” Then he paused, grinned, and added, “Let’s do it!”
Based out of Love Field airport in Dallas, America’s most
Luv -ed commercial airline started in 1971 as a little three-jet airline serving the Texas luv -triangle: Dallas, Houston and San
Antonio. This service mainly catered to business travelers who otherwise would have driven between these cities. In the early days, it promoted itself as “Now there’s somebody else up there who luvs you” and its “ luv flights” featured stewardesses in hot pants and go-go boots and served its mainly male clientele luv bites (peanuts) and luv potions (drinks).
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The low fare battles began when Southwest Airlines was less than a year old. Braniff tried to run them out of business by undercutting Southwest’s low fares. (That was not Braniff's only strategy for undermining Southwest as will be discussed further below.) It was an unprecedented attack and Southwest responded with an unprecedented offer. Customers could purchase their ticket at half-price or buy their full-fare ticket and receive a bottle of premium whiskey. The response was historic. The planes were full in a short time and Southwest Airlines was one of the top liquor distributors in the state of Texas. That promotion kept them and low fares alive.
In 1971, they started with nothing: no computers, no ticketing machines, no fancy offices, just three planes and one rotary phone to take reservations. In 1973 they turned a profit and in
1977 they were listed on the NYSE under the LUV sticker. Today they are the innovators of ticket-less travel and pioneers on the World Wide Web. Startup airlines around the world are trying to copy their low fare approach. By the end of 1997, Southwest was the fifth largest domestic airline carrier with 261 planes, and operating out of 52 airports in 27 states. 1997 also marked 25 years of continued profitability and the 6 th
consecutive year of record profits. It was the only major carrier to make a net profit in the years 1990 through 1992, when the airline industry was in a slump. See Airline Industry Note, Appendices A and B for a comparison of the income and balance sheet statements of Southwest and some of its competitors, United Airlines
(UAL), US Air, American West and Air Alaska.
5 The New York Times , Sep. 3, 1997
6 EasyJet uses Southwest as frills-free model, Aviation Week & Space Technology , April 21, 1997
7 New Airline aims to lower shy-high fares, Nikkei Weekly , Oct. 21, 1996
8 Cloning Success, Air Transport World , May 1997
9 Slow Climb to New Heights, Success , Oct., 1996
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How LUV Operates
Southwest has a unique position in the airline industry. It redefined air travel with its short-haul, low-fare, no-frills, point-to-point, high frequency flights. In 1997, the average trip length was 425 miles with an average duration of about 1 hour and 17 minutes. The average one-way airfare was $72. Their “no-frills” service includes a choice of only coach-class, no meals (only peanuts and drinks), no assigned seating and minimal baggage transfers to other airlines. VP-Marketing & Sales, Dave Ridley says that Southwest can get along just fine without travelers who want first-class cabins and assigned seats, because there are a lot more people who pay out of their own pocket and they make up two-thirds of Southwest’s passengers.
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Southwest uses the point-to-point system as opposed to the popular hub and spoke system used by all major airlines. Consequently, nearly 80% of all Southwest customers fly non-stop or one-stop without changing planes (stopover). This reduces the connections, delays and travel time.
Southwest is the industry leader in “turn-time”. On landing, each plane can pull into the gate, unload passengers and baggage, simultaneously get checked by maintenance, refuel, clean the plane, refill drinks and food, reload passengers and baggage, and leave the gate within 20 minutes. These quick turnarounds minimize the ground time for passengers connecting to other flights and also for those on flights with a stopover. Quick turns contribute to improved on-time performance and profitability. The plane can't make money while it is on the ground.
Southwest's turn-time has continued to improve, however. Even though Southwest was fast compared to other airlines (40 minutes on average for Southwest versus a 55 minute industry average) Southwest staff thought they could do better. Instead of benchmarking the refueling process, for instance, against other airlines it looked outside the airline industry for the most efficient re-fuelers in the world – Formula One racing teams. Adopting the turnaround processes used during racing pit stops, Southwest can now refuel an aircraft in 12 minutes.
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Southwest’s staff is trained to pitch in when necessary for greater efficiency and service.
It is common for pilots to help flight attendants clean as people get off the plane or help passengers in wheelchairs down the gate ramp.
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“Walk a mile in someone else’s shoes” is a voluntary program that encourages cross training. It is not unusual for a pilot to work with ramp agents for a full day, a reservations clerk in Southwest’s University for People, or customer service agent with the skycaps. Frequently, CEO Herb Kelleher can be found passing out “luv bites” and “luv potion” on flights (Exhibit 2). He even helps baggage handlers load and unload on holidays.
13 Southwest’s aircraft and airport facilities are used continuously throughout the day, maximizing aircraft utilization and minimizing ground time. In 1997, each Southwest aircraft flew an average of 11 hours and 20 minutes per day.
10 Winning ugly, Air Transport World , Sept. 1997
11 Lateral Benchmarking, Management Today , Nov. 1997
12 Slow Climb to New Heights, Success , Oct., 1996
13 Southwest: back to the FUNdamentals, HR Focus , March 1997
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Poor scheduling, bad weather, air traffic congestion and mechanical problems all can contribute to flight delays. Southwest avoids congested hub airports, where possible. Instead, they operate from more convenient, costly and crowded airports like Dallas Love Field, Houston
Hobby, Chicago Midway, Oakland, Burbank, Ft. Lauderdale, Providence and BWI in Baltimore.
Selection of convenient airports also minimizes customers’ travel time to and from the airport.
They use a sophisticated, state-of-the-art flight dispatch system, which allows to safely minimize weather and operational delays, whenever possible. Having a very young fleet and a highly respected maintenance team and program minimizes their delays and cancellation due to mechanical problems. Southwest leads the industry in mechanical reliability.
Finally, safety remains a singularly important concern at Southwest. All planes undergo weekly, rigorous routine maintenance checks. Maintenance is done in-house and is not outsourced (unlike at ValuJet, for instance). They are the only airline in the U.S. that requires first officers (co-pilot) to be FAA captain-rated for Boeing 737 aircraft. New first officers are required to have 1,000 hours minimum as pilot in command of jet/turbine-powered aircraft.
LUV is Nuts! About Costs
Southwest’s cost cutting measures are legendary and it has the lowest cost per passenger mile in the industry (Exhibit 3). Southwest has one of the youngest fleets in the industry with the average age of the aircraft being only 8.3 years. Its entire fleet consists of only Boeing 737s, in an all-coach configuration. This simplifies its training, scheduling, maintenance, flight operations, record keeping and spare parts inventory. Southwest can substitute aircraft, personnel and mechanics quickly and efficiently. Thorough knowledge of the 737 plays a key factor in fast turn-times as well.
Southwest has the simplest fare structure in the industry. This translates to lower cost of selling tickets. They have simple, quick and efficient ticketing. In 1994, both United and
Continental pushed Southwest out of the computer reservation systems used by travel agents.
Callers to Southwest’s reservation lines had trouble getting through and passengers were lost.
To combat this action, Southwest beefed up its telephone force and in 1995, Southwest was the first major airline to introduce ticket-less travel on all of its scheduled flights. This made it easier for customers to directly make reservations and circumvent agents. Meanwhile,
Southwest developed the SWAT (Southwest Airline Travel) system, allowing high-volume travel agents to directly access reservations. Simultaneously, Southwest introduced overnight ticket delivery to travel agents and reduced to three the number of advanced days reservations required for overnight delivery of tickets to customers (Ticket by Mail). All these measures resulted in annual savings of $25 million
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. Now, over 60% of all Southwest travelers buy on a ticket-less basis and lately, passengers can also book ticket-less travel via their Internet home page ( http://www.iflyswa.com) . Southwest's 1997 initiative to completely go in-house on their reservations system is expected to save them $10 million annually beginning in 1998.
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Walk through any Southwest terminal and you can see dozens and dozens of travelers holding colorful – green, pink, red, blue – boarding cards with a bold block-letter number
14 Southwest Airlines may be heading into calmer skies, Wall Street Journal , 1995
15 Winning ugly, Air Transport World , Sept. 1997
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between 1 and 137 (the capacity of most 737s). The plastic cards are issued in relation to the time of check-in (first come, first served) and are collected back when the passenger boards the plane. The number indicates the order in which the passenger boards the plane. The color indicates the destination. There are no assigned seats.
By avoiding major airports they keep their gate and landing fee costs low. They avoid costly and complicated inter-linking arrangements with other carriers. While this limits the ability of some Southwest Airlines customers to connect with other non-Southwest flights, the
Airline has found that most of its customers would rather have a lower ticket price, than interconnectivity with the rest of the air travel system.
Finally, Southwest's employees play a key role in the efficiency of the operation as well as in the provision of outstanding customer service. As will be discussed further below,
Southwest's employees are encouraged to assume a sense of ownership of the Airline through the values of the Southwest Culture, and an aggressive profit sharing plan. The net result is that each Southwest employee is encouraged to treat cost control as his/her individual responsibility and it is a significant part of his/her training program. Frequent requests for more direct headings and more fuel efficient altitudes, for example, are all a part of the Southwest pilot’s daily quest to maximize speed and minimize the burn rate of fuel. When Desert Storm broke out, jet fuel prices skyrocketed and the pilots came up with creative ways of curtailing the burn rate of fuel and Southwest’s costs went down within one week.
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LUV is not Nuts! About Rapid Growth
Market share has nothing to do with profitability. Market share says we want to be big; that we don’t care if we make money doing it.
-- Herb Kelleher, President, Chairman, CEO
Maximizing profitability is one of Southwest’s main missions, which it accomplishes by keeping costs low and meticulously managing growth. Southwest goes into a new market only after very carefully analyzing the market. If necessary, it will wait (at times for two decades) until it gets the right opportunity.
In 1975, Southwest flew to 8 cities in Texas. The VP of Operations, Lamar Muse, was ready to aggressively expand and to include service out of Midway Airport in Chicago. This would have been a huge gamble requiring a major investment and the board refused. However, when Midway Airlines went out of business in 1992, Kelleher negotiated a lucrative deal to take over its gates at Midway Airport. growth:
VP of Marketing and Sales, Dave Ridley, comments on Herb’s disciplined attitude to
In mid-1995 American closed its Nashville hub and this gave us an opportunity to do one of the things vital in airline expansion – grab ground facilities. We’d been
16 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Suc cess,
New York: Broadway Books
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at Nashville since 1986, just biding our time. One of the things Southwest has always done – I’m amazed by Herb’s discipline and patience – is to wait until circumstances are right.” 17
By the end of 1995, Southwest was the largest Nashville air carrier based on daily flight departures.
It is not just opportunity, Southwest also has a very proven formula for expansion. City pairs are identified that can generate a substantial amount of business and leisure traffic.
Southwest can estimate within five percent exactly how many passengers there are going to be as a consequence of entering into a city-pair. They carefully track air traffic between potential citypairs and its business-leisure composition. They usually expect to see a three-to-fourfold expansion in the market after entering. This is especially true in shorthaul markets where ground transportation like cars, buses and trains are a viable option. In many cases, people weren’t traveling at all. That changes once Southwest enters the market. Based on the traffic and loadfactors, Southwest enters a market and quickly brings the number of departures from that city to at least 10 per day.
A group of employees called the Diamond Team, representing numerous disciplines but primarily led by marketing, go into a new city before operations are established. They analyze factors important to the community including civic events, charitable organizations, and festivals, and then associate Southwest with them. For example, Sea Fair is the biggest celebration in Seattle and Southwest became a principal sponsor of Sea Fair by the time they began flying into Seattle.
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All flights into San Diego are painted like killer whale Shamu and bear the Sea World logo (Exhibit 4).
Southwest then works to familiarize employees with the local culture. The Airline launched an internal trivia contest with questions about Florida politics, history and geography, for instance. Since Florida has a high population of senior citizens, Southwest also gave its employees special training in handling senior citizens. In Ft. Lauderdale it developed “attach teams” to help load and unload wheelchair passengers. In Orlando, home of Disney World, so many families with children want to pre-board that the airline is considering altering its procedures to force pre-boarders to the back of the airplane and reserve the front 12 rows for business fliers.
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LUV is Innovative
Southwest can claim a number of firsts. In 1979, they pioneered the “ luv -machine” (selfticketing vending machines). Southwest was the first airline to introduce senior discount fares.
They were also the first major airline to provide ticket-less travel on all their scheduled routes.
Southwest was the first airline with a frequent flier program to give credit for number of trips taken and not the number of miles flown. Customers earn a trip after flying eight roundtrips
17 Winning ugly, Air Transport World , Sept. 1997
18 Flying like a madman, Sales & Marketing Management , Oct. 1996
19 Southwest Airlines lands plenty of Florida passengers, Wall Street Journal , Nov. 11, 1997
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within any 12-month period. This is significantly below most airlines’ requirements. The free trip is transferable among travelers and expires one year after it has been earned.
Southwest has been successful in encouraging its employees to develop new approaches to old problems. The innovative actions of employees, their sense of responsibility leading to both efficient and excellent customer service represents what many observers feel to be one of the most innovative aspects of Southwest, the special relationship between employees and the
Company. In order to understand that relationship it is necessary to take a closer look at the leadership, culture and history of the Company.
Making it Happen - Working at LUV
In January 1998, Fortune released its annual report on the 100 Best Companies to work for, and Southwest, a long time contender for the honor, topped the list.
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Libby Satain, VP of
People for Southwest Airlines attributes the view that employees hold of the company to the
"niceness" that has been an important part of the culture at Southwest for the past twenty years.
Herb Kelleher personally pushed for such a relationship between the company and its employees because he believed that people are the hardest thing for competitors to copy.
21
A typical employee's comment to the Fortune writers was: "Working here is truly an unbelievable experience. They treat you with respect, pay you well, and empower you. They use your ideas to solve problems. They encourage you to be yourself. I love going to work." 22
Indeed Southwest Airlines is known for being good to employees and expecting them to be good to one another, and to the customers, in return. According to Kelleher, work should be a source of enjoyment in life, not a source of despair. The values that drive the company, include, but are not limited to:

"Family - The Company believes that when you treat employees like family, you foster the kind of intimacy and informality that builds strong relationships and makes work more fun."

"Fun - Employees are encouraged to take their jobs and the competition seriously, but not themselves. The company is serious about creating an environment where play, humor, creativity, and laughter flourish."
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The culture at Southwest is visible in many ways, including the public recognition of employees that exemplify such values. The Southwest Web site in June 1998 describes the "Star of the Month." She is a flight attendant, identified by name and photograph. In her background statement are found the following examples of why she made the grade of "Star of the Month."
"This fun-loving flight attendant has a knack for playing practical jokes. Her favorite prank is pretending to spill a tray full of beverages on a row of unsuspecting Customers. Just as (the award winner) begins to serve her
20 The 100 Best Companies to Work for in America, Fortune , January 12, 1998
21 Southwest VP tells recruiters: Think Nice, HR-News , June 1998.
22 The 100 Best Companies to Work for in America, Fortune , January 12, 1998.
23 Freiberg, K. & Freiberg, J., 1997, Nuts!
, Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books.
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Customers’ drinks, another flight attendant bumps into her, sending cups soaring.
Everyone gasps, but then they laugh. The cups are filled with peanuts and torn napkins." and
"I believe I've been successful because I treat everyone with kindness and respect.
That's the way I like to be treated." (Southwest web site)
The Mission Statement of Southwest, (Exhibit 5) articulates the formal relationship that
Southwest makes between the goal of outstanding customer service and the relationship between employees and the Company. Yet, there is more to the story than being "nice" to one another.
LUV Empowers
An additional aspect of their success as an employer is also reflected in the Fortune quote, above: "They use your ideas to solve problems." The workforce at Southwest is seen as being more capable of addressing many of the problems the airline faces than management can alone. One small example serves to illustrate the Company's willingness to utilize solutions from employees to help them achieve a business goal, in this case, to cut costs:
One of Southwest's flight attendants, Rhonda Holley, wrote to Colleen Barrett in 1994 suggesting that the company remove its logo from the white plastic bags used for collecting trash at the end of the flight. Her argument was that nobody really cares about a logo on a trash bag. After Joanne Lardon, purchasing manager, looked into it, they and
Barrett decided that Holley had a good point. By using trash bags without logos,
Southwest now saves $300,000 a year.
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In Southwest's effort to be 'the' low cost airline, encouraging such behavior among employees is significant. The philosophy of leadership is critical to such an effort. If employees believe that they will be penalized for making controversial and challenging suggestions, they won't do it. Leadership at Southwest seems to savor such controversy. Kelleher has been questioned whether or not the Company is 'out of control.'
"A financial analyst once asked me if I was afraid of losing control of our organization. I told him I've never had control and I never wanted it. If you create an environment where the people truly participate, you don't need control. They know what needs to be done, and they do it. And the more that people will devote themselves to your cause on a voluntary basis, a willing basis, the fewer hierarchies and control mechanisms you need."
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This philosophy has affected the structure of the Company. There are no more than four layers of management between Kelleher and a front-line supervisor. Under these circumstances,
24 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 130.
25 Keller, Herb, Spring 1997. "A Culture of Commitment", Leader to Leader.
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each manager will typically have many direct reports. Management simply has to depend on their employees to get the job done and solve problems independently.
In addition, the values of the leadership and employees encourage initiative in communications as well. The structure and hierarchy of the organization itself doesn't determine what employees are supposed to be paying attention to. If they need to talk with someone in another department, even someone higher up the hierarchical ladder, they are encouraged to do so directly.
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Such an informal style encourages flexibility and action. Employees do not feel that they have to take the time to 'go through channels.' The organizational structure is a simple, functional one. There are few formal teams, except in marketing. If an employee has a good idea, she can get approval from those directly involved in the issue. Internal entrepreneurship is encouraged while bureaucratic slowness is discouraged.
LUV Culture Emerges from a Struggle to Survive
A supportive atmosphere and a reliance on employee initiative, by itself, however, ignores another side to the Southwest culture. Southwest was actually born, as a Company, under attack. After King and Kelleher agreed to start an airline, and received the appropriate certificates of permission from the Texas Aeronautics Board, they were immediately attacked in court. Braniff and Texas Air sued to block Southwest's entrance into the airline business, claiming that another Texas-focused carrier was not needed. Prior to the deregulation of the airlines in 1978, such lawsuits were common.
Kelleher at that time was the Southwest CEO, but was the outside lawyer for the
Company. A trained litigater from New Jersey, he is known for liking a good fight, and for having a strong sense of right and wrong. He felt that the initial attack, and the subsequent attacks that occurred over the next three years, were morally offensive and so took on what appeared to many as an obsession for freeing the Company from its legal constraints. This meant numerous lawsuits, court appearances, and legislative battles.
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Meanwhile, during the period from its founding in 1966 until the early 70's, the airline had minimal resources, and was constantly on the verge of being forced to close by its much larger competitors. The legal roadblocks thrown up by competitors prevented service from beginning until 1971. The early employees of Southwest developed a survival mentality. Their initial sense of purpose was not only to salvage their investment and/or their jobs, but also was to survive in the face of what seemed to be genuinely unfair competition. That survival mentality, what Fortune called a “sense of purpose,” is common among companies on the 100 Best
Employers list.
28
That sense of purpose in the face of competitive threat is still visible today. In 1994
Southwest had very successfully entered the in-state market in California, the most lucrative in
26 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 83.
27 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 14-47.
28 Why Employees Love these Companies, Fortune , January 12, 1998.
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the US. United Airlines counterattacked with a low cost, high service, operation of its own,
United Shuttle. Kelleher wrote to the employees of Southwest, describing his feelings about the competition. The text of his letter is in Exhibit 6.
29 He not so subtly compares United to
Aeroflot, the state-owned airline of the former USSR. He portrays United as the 'bad guys' who make a profit at the expense of their employees (who actually get paid more than the employees of Southwest), and threaten the very way of life of the Southwest 'family'. Far from advocating a
'nice' approach to competition, he views it clearly as a war, and expects his troops to follow his lead into battle. They evidently did so, with great success. Today, Southwest is California's largest intrastate carrier.
30
Is LUV All Herb Kelleher?
Kelleher is known for representing to the world the culture of Southwest Airlines. He is direct, egalitarian, and unorthodox. He is also an approachable CEO who does not put himself above employees or customers. His friendly style, his efforts at fairness (see the discussion on compensation, below) and his evident caring mean that he is extremely well thought of by his employees. The work force at Southwest is overwhelmingly unionized, and yet his relationships with them have been both cordial and collaborative. Regular union employees as well as union leadership see him as having integrity as a bargaining partner. After one thorny negotiating situation, a union leader and Kelleher worked out a compromise solution to the problem at hand, on their own, shaking hands to seal the deal. The union leader was pressed by one of his lieutenants who hadn't had experience with Southwest, to get the agreement in writing. The union leader said to the colleague, "You don't need it in writing. When Herb Kelleher tells you that something is going to be taken care of, it's taken care of."
31
He has readily, and happily, stepped into the role of spokesperson for Southwest, though he is actually not a frequent participant in their ads. His visibility comes more from industry talks, writings and other less subtle efforts. Rather than go to court, Kelleher publicly armwrestled Stevens Aviation President Kurt Herwald, to decide who owned the rights to a particular advertising slogan that both companies had arrived at independently. The CEOs competed for the best two out of three wrestles, the loser of each round paying $5000 to a charity of the winner's choice. Kelleher lost, but didn't complain about the tremendous publicity generated by this novel approach to conflict resolution. In fact, he claimed to a reporter while being carried out on a stretcher (from the arm wrestling contest), that the idea of gaining publicity from the situation had never occurred to him.
32
Kelleher has been CEO at Southwest since 1981, and only then did he give up his law practice.
33
His impact on the company has been enormous, leaving some to speculate as to
29 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 93.
30 Slow Climb to New Heights, Success , October 1996.
31 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 110.
32 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 246.
33 Slow Climb to New Heights, Success , p. 23.
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whether or not the organization can survive after his departure. He is currently 66 years old.
34
From the beginning, however, Southwest has actually been operationally managed by a team of industry experts, which Kelleher is not. This group of leaders came from other airlines, attracted to Southwest by what they were trying to do, their flexibility and relative openness.
The environment within Southwest also encourages the development of new leaders from within. In a recent series of senior management changes, three individuals were promoted, to senior vice-president level positions. All three were in their 40's, but perhaps more importantly, all three had been at Southwest for at least ten years. Never the less, Kelleher is a powerful symbol and guardian of the culture of Southwest, which all there consider to be a core competitive competency. The transition to a new leader will raise important questions for the corporation. At the same time, there are a variety of other forces that serve to support that culture, separate from the impact of a single individual.
Keeping the LUV Culture Alive
Southwest Airlines was one of the first major corporations to pursue a hiring philosophy characterized as 'hire for attitude and train for skill.' While pilots and airline mechanics must have the appropriate technical backgrounds, even highly skilled professionals must have the right
'attitude' in order to work at Southwest. Each year, Southwest receives many thousands of job applications. In 1995, for instance that number was 124,000. Ultimately, only 5,444 individuals were hired.
35 Interestingly, their effort to hiring in a fashion that supports their culture has resulted in an extremely diverse workforce. In 1997, 24% of Southwest employees were from
US minority groups.
36
The selection process is rigorous, but unusual. In the initial screening, potential employees undergo a targeted selection interview process in which they are asked questions such as "tell me how you have used humor to defuse a difficult situation."
37
In teams, applicants are asked to prepare a five-minute presentation about themselves. While each individual is presenting, Southwest staff will also be watching the behavior of those applicants not presenting.
If they continue to work on their own speeches while their colleagues are talking, they may not be seen as having the characteristic selflessness that Southwest strives to maintain as part of its culture.
Even informal behavior is noticed. One highly skilled and sought after pilot was not selected because he had been rude to a receptionist on his way into the building. Another group of pilots showed up in formal business suits. All were offered the opportunity to change into company standard Bermuda shorts. About half the group of applicants accepted the offer.
Ultimately, they were the ones who were offered the jobs.
38
34 SEC form DEF14A, Proxy for 1997
35 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 72.
36 The 100 Best Companies to Work for in America, Fortune , January 12, 1998.
37 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 68.
38 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 68.
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Once hired, Southwest employees are constantly exposed to both a formal and informal educational process that helps employees understand what “positively outrageous service” means. Stories of outstanding customer service are legendary, and the Company goes out of its way to recognize the individuals providing such service and tell other employees exactly what was done.
The structure of rewards at Southwest also serves to support the important value placed on encouraging employees to feel as though they are owners. Southwest has an aggressive profit-sharing plan. In 1997, Southwest contributed $91 million of after tax profits to the plan.
This can amount to as much as 11 percent of an employee's pay. A worker earning $25,000 in
1997 would have received an additional $2,750 from the profit sharing plan.
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Thus, employees have a clear sense of the importance of corporate profitability. In addition, the profit sharing distributions are made through a number of investment options, including an automatic 25% of the profit sharing proceeds toward the purchase of Southwest stock.
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Southwest was the first
US Airline to introduce profit sharing, in 1994. Through their encouragement of Southwest stock ownership, employees by 1993 owned eleven percent of the Company.
On the other hand, salaries at Southwest are not high. In 1992, the average salary for
Southwest employees was $44,305 compared to $54,380 at United. In spite of their relatively lower salaries, however, Southwest continues to have one of the lowest employee turnover rates in the Airline Industry, approximately 4.5% per year.
41
Executive compensation is also not high in comparison with other companies with similar revenue pictures. Kelleher's compensation for
1998 is $395,000 in base salary, $172,000 in bonus assuming performance goals are met, plus various stock options.
42
Stock ownership is encouraged for executives as well as employees.
The emphasis on lower salaries and stock ownership gives employees the sense that compensation is fair. Eighty-seven percent reported that feeling of fairness when they got their share of company profits, in 1997.
43
Southwest also continues to maintain a no layoff policy. Kelleher maintains that "we were looking at our employees' and our company's longer-term interests. Providing a no layoff policy imposes additional discipline, because if your goal is to avoid layoffs, then you hire very sparingly. So our commitment to job security has actually helped us keep our labor force smaller and more productive than our competitors."
44
The results of such attention to people and corporate culture: Southwest employees are the most productive (number of passengers served per employee, please see Exhibit 4) airline workers in the United States. The relatively slow expansion of Southwest over the years can be
39 PointCast Network, February 25, 1998.
40 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 100.
41 Freiberg, K. & Freiberg, J., 1997, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success;
New York: Broadway Books, p. 7.
42 SEC form DEF14A, Proxy for 1997
43 The 100 Best Companies to Work for in America, Fortune , January 12, 1998, p. 86.
44 Keller, Herb, Spring, 1997. "A Culture of Commitment", Leader to Leader .
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explained in part by their desire to hire carefully and avoid layoffs. Each new station requires a careful attention to the hiring process if the culture is to be maintained. However, if the
Company is to grow, it must face up to the challenge of spreading the culture, as well. It can’t all be Herb!
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Exhibit 1 - The Triple Crown
Airline
Southwest 0.14
America West 0.2
United
Alaska Air
US Airways
American
Northwest
Continental
Safety
0.31
0.32
0.36
0.39
0.4
0.41
Price
$116
$161
$258
$279
$214
$214
$203
$199
Baggage
Handling
4.02
4.37
6.13
6.58
4.88
5.24
5.84
4.26
On-Time Arrival
Performance
0.82
0.777
0.762
0.754
0.804
0.793
0.751
0.782
Consumer
Complaints
0.28
1.51
0.95
0.63
0.78
1.06
1.39
0.77
TWA
Delta
Safety:
0.43
0.44
$193
$221
6.14
5.12
0.803
0.741
0.83
0.64
Number of accidents + “incidents” per 10,000 departures, Jan. 1995 –
June 1997. Source: Federal Aviation Administration, National
Transportation Safety Board
Price: Average one-way fare for trips of more than 1500 miles during the year ending March 1997. Source: GKMG Consulting Services
Baggage Handling: Number of mishandled pieces of luggage per 1,000 passengers, Jan.
1995 – June 1997. Source: Bureau of Transportation Statistics
On-Time Arrival: 1997 On-Time Arrival Percentage. Source: Air Travel Consumer
Report, U.S. Department of Transportation, Office of Aviation
Enforcement and Proceedings
Consumer Complaints: 1997 Total Complaints per 100,000 passengers reported to the
Department of Transportation by Consumers. Source: Air Travel
Consumer Report, U.S. Department of Transportation, Office of
Aviation Enforcement and Proceedings
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Exhibit 2 - Herb Kelleher at Work
Exhibit 3 - Operational Measures
ATA Airline Statistics – 1996
Alaska
America West
Number of
Aircraft
74
Number of
Employees
7,440
Passengers
(000)
11,758
Revenue
Passenger
Miles (000)
9,793,978
Passenger
Revenues
($000)
1,105,883
Total Revenues
($000)
Net Profit
($000)
1,306,621 45,609
Cost per
Seat Mile
(¢)
7.8
Number of
Passengers served
Per Employee
1580.4
99 9,357 18,130 15,275,989 1,625,460 1,751,813 8,505 7.3 1937.6
American
Continental
Delta
Northwest
Southwest
TWA
United
US Airways
642
317
544
399
243
192
564
390
82,571
29,199
58,935
45,320
21,863
24,731
79,205
39,417
79,324 104,521,123 13,631,844
35,743 37,344,225 4,885,152
97,201 93,876,999 11,980,514
52,682 68,626,530 8,598,293
55,372 27,085,489
23,281 27,110,708
3,269,240
3,077,905
81,863 116,554,641 14,246,992
56,639 38,942,794 6,799,420
15,136,003
5,487,150
13,317,693
9,751,383
573,819
319,551
249,024
578,817
3,407,361 207,337
3,554,407 -284,816
16,316,749
7,704,057
533,744
183,232
7.2
8.6
8.8
12.8
8.8
8.8
8.6
8.2
960.7
1224.1
1649.3
1162.4
2532.7
941.4
1033.6
1436.9
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Exhibit 4 - A Southwest Air Boeing 737
Exhibit 5 - The Mission of Southwest Airlines
The mission of Southwest Airlines is dedicating to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride and Company spirit.
To Our Employees
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.
January 1988
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Exhibit 6 - Southwest Goes to War
Since the collapse of Russia's Aeroflot, United Airlines has become the largest airline in the world, approximating seven times the size of Southwest, in terms of gross revenues per year.
The world's largest airline has recently announced that it will launch its initial direct assault against Southwest, in the western part of our route system.
This initial attack will utilize roughly 25 of the 125 737's that United can devote to its "United
Shuttle" operation, signifying that an additional 100 airplanes are in reserve to be hurled against us, at a later date.
United has, on hand, over $1,000,000,000 in cash; can cross-subsidize its efforts against
Southwest with revenues derived from its worldwide service; and has substantially reduced its costs by recently obtaining substantial wage and benefit reductions from most of its employees.
In addition to our stock price, our wages, our benefits, our job security, our expansion opportunities, and, foremost, our pride of accomplishment as our nation's best airline are all on the line, as the war begins with United Shuttle on October 1, 1994, when it first takes to the air.
At its beginning, Southwest routed Braniff, Trans Texas and Continental with three airplanes.
And Southwest can thwart United's actions against us with our 200 airplanes. The crucial elements are the martial vigor, the dedication, the energy, the unity, and the devotion to warm, hospitable, caring and loving Customer Service of all of our people.
Southwest's essential difference is not machines and "things." Our essential difference is minds, hearts, spirits and souls. Winston Churchill stated: "Success is never final." Indeed, "success" must be earned over and over again or it disappears. I am betting on your minds, your hearts, your souls, and your spirits to continue our success. Let's win this one and make aviation history
- again!
- From a letter to all employees in 1994, titled "Commencement of Hostilities." as quoted in
Nuts!, pages 92 - 93.
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Discussion Questions:
1.
Why is this company the envy of businesses all over the world?
2.
What are the company’s key operations factors that support the company’s business strategy?
3.
How does a company that seems obsessed with having fun keep earning the industry’s highest awards for customer service and on-time performance? Specifically, how does the company’s operations system support its key competitive factors?
4. What role does the CEO, Herb Kelleher, play in the success of Southwest Airlines?
5. Describe the culture of Southwest Airlines, its values, behaviors and underlying assumptions.
How does the culture of Southwest contribute to its success? How did the culture develop?
6. How can the culture be replicated at new locations? Does the culture require Herb Kelleher's guidance?
7. Appendices A and B of the Note on the U.S. Airline Industry contain historical financial and operating data for Southwest Airlines and several of its competitors. Use this information and the DuPont formula to analyze Southwest's financial performance relative to the other airlines. Discuss any trends or significant changes you observe over the three-year period
1995-97. Compare results for the point-to-point airlines to those using a hub and spoke system. What factors do you think could be responsible for the differences?
8. List the distinguishing operational characteristics responsible for Southwest's success. How would you expect these characteristics to be reflected in Southwest's financial results? Use the financial and operating data in Appendices A and B of the Note on the U.S. Airline in calculations to support your answers.
9. Using your results from Questions 7) and 8), compare Southwest's financial and operating performance to Alaska Air, another point-to-point airline. Discuss possible reasons for any differences between these two.
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