SOUTHWEST AIRLINES

A Corporate Strategy Course Term Paper

Submitted By: Hamza Farooq (BB-4481)

 SOUTHWEST AIRLINE: A Corporate Strategy Term Paper

Preface
This Term Paper has been submitted as a requirement for the fulfillment for the completion of
the course of Corporate Strategy. I would like to take this initiative to thank my Professor who
enabled be to grasp a good understanding of this course and made me able to make this term
report. The core inception of this term report has been to prepare a comprehensive understanding
about the renowned airline, SOUTHWEST AIRLINE and to under their different cultures and
strategies so as to link them to course work that we have studies and been taught. This way we
can link it to the concepts we have learned and see how are they being applied in this
organization.

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Contents

SOUTHWEST AIRLINES: An Introduction..................................................................................3

The Airline Industry........................................................................................................................5
Competitive Environment................................................................................................................7
Southwest Airlines’ Mission and Objectives.................................................................................10
Southwest Airlines’ Strategy.........................................................................................................11
Organization..................................................................................................................................16
Performance...................................................................................................................................25
Situation Analysis..........................................................................................................................28
SWOT Analysis.............................................................................................................................30
The Challenges Ahead...................................................................................................................32
Exhibit 1.........................................................................................................................................37
References......................................................................................................................................38

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SOUTHWEST AIRLINES: An Introduction

Few industries have experienced the turmoil faced by the US
domestic airline business during the past two decades. Once
characterized by high wages, stable prices and choreographed
competition, the industry changed swiftly and dramatically
when deregulation took effect in 1978. Several of the
strongest and greatest airlines (e.g., Pan Am, Eastern)
disappeared through mergers or bankruptcies. Strikes and
disruptions interfered with companies' attempts to reduce
costs. New competitors aggressively swooped into the
marketplace; the majority failed. In fact, in 1992, industry
losses for the year surpassed cumulative profits since the
industry's inception.

The industry is again in a period of high demand and expanding profitability. Despite the
volatile conditions and many organizational failures, one carrier grew and prospered throughout
this entire period -- Southwest Airlines.

Southwest was controversial from its inception. Although the Texas Aeronautics Commission
approved Southwest's petition to fly on February 20, 1968, the nascent airline was locked in legal
battles for three years because competing airlines -- Braniff, TransTexas, and Continental --
fought through political and legal means to keep it out of the market. Through the efforts of
Herb Kelleher, a New York University law school graduate and the airline's current chief
executive officer, Southwest finally secured the support of both the Texas Supreme Court and
the United States Supreme Court.

Southwest emerged from these early legal battles with its now famous underdog fighting spirit.
The company built its initial advertising campaigns around a prominent issue of the time as well
as its airport location. Thus "Make Love, Not War" became the airline's theme, and the company
became the "Love" airline. Fittingly, LUV was chosen as the company's stock ticker symbol.
Southwest went on to see successful growth through three distinct periods. The "Proud Texan"
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period (1971-1978) saw the establishment of a large city-service network within its home state of
Texas. Because it did not engage in interstate commerce, the fledgling carrier was not subject to
many federal regulations, particularly those imposed by the Civil Aeronautics Board (CAB).
The second phase, "Interstate Expansion" (1978-1986), was characterized by the opening of
service to fourteen other states. Interstate expansion was made possible by, and thus coincided
with, the deregulation of the domestic airline industry. The most recent phase, "National
Achievement" (1987-1997), has been a time of considerable growth, distinguished recognition
and success.

Despite its past success, Southwest Airlines now faces new challenges that raise concerns about
its continued ability to grow. Ironically, many of these concerns are a result of changes brought
about by Southwest itself. Some of them are external, such as imitation by competitors who are
becoming more efficient and the limited size of the shorter haul flight markets in which
Southwest developed a core competency. Others are internal, including the emergent problems
of managing a larger, more complex organization, and a culture that may be too dependent on the
charisma of a single individual or that may not play well to the new audiences needed for future
growth. Will Southwest Airlines be able to continue its remarkable success or will emerging
conditions seriously threaten Southwest's future prosperity?

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The Airline Industry

The competitive environment in which Southwest
operates can be subdivided into different value-added
stages, customer and service segments, and
competitor groups.

Airlines engage in several value-adding activities.

These include aircraft procurement, aircraft
maintenance, reservation systems, schedule and route
planning, in-flight services, and after-flight services.
Competitors may differ in their involvement in these activities. For example, Southwest
performs some in-house maintenance but offers no post-flight services. By contrast, American
Airlines owns and markets its own reservation system, and Allegis, as United Airlines was
known briefly in 1987, at one time operated a car rental agency (Hertz) and two hotel chains
(Hilton and Westin).

Airlines compete for three primary types of customers: travel agents, corporate travel managers,
and individual travelers. The two major categories of passengers are leisure travelers, who tend
to be quite price-sensitive, and business travelers, who are more concerned with convenience. To
satisfy the different needs of some or all of these groups, airlines present a wide variety of
services, depending on their strategy.

Passenger service can be categorized along a number of dimensions. For example, airlines differ
by geographical coverage; some specialize in short-haul service while others provide a vast
network of interconnected long-haul and short-haul flights on a global basis through a network of
strategic alliances. They also differ in how their routes are structured within the territories they
serve. The two extremes are point-to-point and hub-and-spoke. The former is characterized by
direct service between two points. The latter is characterized by complex, coordinated routes
and schedule structures that channel passengers from numerous far-flung airports (the spokes)
through a central airport (the hub). The hub itself has many costly infrastructure requirements
(baggage handling systems, large terminals, maintenance facilities and parts inventories). To
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address the pricing complexity created by multiple traffic flows through a hub, hub-spoke
carriers conduct complicated yield and inventory management calculations. The result of this
complexity is that the hub-spoke pricing structure is systematically different from point-to-point
pricing. These added complexities allow a carrier to offer flights between more "city-pairs" than
it could under a point-to-point network. For a company that relies on a network, like an airline or
telephone company, competitive advantage accrues from economies of scope, i.e., the
geographic reach of that network. Economies of scope do not necessarily complement economies
of scale, and in fact are often achieved at the expense of scale economies and vice versa. Thus,
although the hub-and-spoke system is driven by economies of scope, each strategy, hub-and-
spoke or point-to-point, has its own inherent cost and organizational implications.

Passenger service can also be characterized in terms of breadth. An airline may choose to
provide a broad gamut of services including meals, advance seat assignments, and frequent flier
programs (full service), or it can offer only Spartan services (no-frills). A further differentiation
is the number of service classes offered. Most airlines have two classes of service, First and
Coach. Some offer three classes, First, Business and Coach (United and American on select
flights), others offer only Coach (Southwest), and a few offer only First Class (Midwest
Express). In addition to the direct cost of providing differentiated service, amenities such as
First Class seating and in-flight meals indirectly affect the cost structure of an airline by limiting
the number of seats its aircraft can hold. Because Southwest does not currently offer meals or
First Class service, its 737-300 holds 137 seats whereas a United Airlines 737-300 holds only
128 seats.

US airlines can be categorized into three major competitor groups based on geographical
coverage. First are the "major" national airlines. They include: America West Airlines,
American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, United Airlines,
USAir, Southwest Airlines, and TWA. Second are the regionals, which include Reno Air,
Airtran (formerly ValuJet), Frontier Airlines, Alaska Airlines, Horizon Airlines, Western Pacific
Airlines, Inc., Kiwi International, Air South, and many others. Third is the commuter or "feed"
carriers, most of which operate as extensions of the majors. These carriers use mostly turboprop

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or regional jet equipment and fly routes that are generally less than 500 miles. Some of these
carriers include Atlantic Coast Airlines, which operates as United Express, Atlantic Southeast
Airlines, which operates as Delta's Business Express, Comair Holdings, another Delta commuter,
Mesa Air Group, which operates its own flights as well as feeder flights for United, Mesabi
Holdings, Inc., SkyWest, Inc., and numerous others.

Competitive Environment
The Airline Deregulation Act of 1978 redefined
the industry by eliminating the ability of the Civil
Aeronautics Board (CAB) to set fares, allocate
routes, and control entry and exit into markets.
Unfortunately, most airlines were hamstrung by
high cost structures, including exorbitant labor
costs, and highly inefficient planes and
infrastructure facilities. In the aftermath of the
complete removal of entry and price controls by
1980, competition intensified considerably as
new entrants cherry-picked the large carriers'
most profitable routes. This led to an extended
period of severe industry shakeout and
consolidation.

Structural characteristics. The industry's

structural characteristics make it a tough place to
be very profitable. The overall industry is not highly concentrated, although it has become more
concentrated since deregulation. Nevertheless, most discrete markets are served by a limited
number of carriers. In the oligopolistic markets in which most airlines compete, the pricing
actions of one company affect the profits of all competitors. Intense price wars have been a
frequent event in the industry. Because competition varies from route to route, a carrier can

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dominate one market, be dominated in another and face intense rivalry in a third. As a result of
the hub-and-spoke system, airlines face head-to-head competition with more carriers in more
markets.

Suppliers tend to have relatively high bargaining power. Certain unions are in a position to shut
down airlines. Airplane manufacturers (Boeing, Airbus) have considerable power in altering the
terms of purchase for planes. Furthermore, the business is capital intensive and requires very
large expenditures for airplanes and other infrastructure.

Despite difficult economics, the industry is still attractive to new entrants. There are few
substitutes for long-haul air travel. In addition, most of the incumbents have high cost structures
that are exceedingly difficult to improve significantly. Carrier failures and downsizing have also
created a large supply of relatively new "used" aircraft and the cost of acquiring aircraft is
reduced further by the practice of aircraft leasing. Given high debt levels and low profitability in
comparison to other industries, most airlines, including Southwest, have begun to lease their
planes rather than purchase them. In light of high debt and low profits, the depreciation tax
shield is not as valuable to the airlines. By leasing, carriers can "sell" that tax shield to the
leasing company, actually creating value for the carrier. As a result, entry barriers are not as
high as one would expect in other capital-intensive industries.

Furthermore, new entrants generally gain significant cost advantage by securing lower labor
costs because they are not burdened by the unfavorable union contracts that affect many older
airlines. Many of the union contracts agreed to by the major airlines call for higher pay and
contain work rule provisions that reduce labor productivity. In addition, new entrants are
sometimes able to gain favorable terms by purchasing excess capacity of other airlines, such as
training and maintenance.

Profitability. In order to survive and profit in this tough environment, airlines attempt to
manipulate three main variables: cost, calculated as total operating expenses divided by available
seat miles (ASM); yield, calculated as total operating revenues divided by the number of revenue
passenger miles (RPM); and load factor, calculated as the ratio between RPMs and ASMs, which
measures capacity utilization. Thus, profitability, defined as income divided by ASM, is
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computed as:

Profitability = [yield X load factor] - cost

The major airlines have faced intensive competition from low price airlines in the 1990s. While
these low priced airlines expanded the market for air travel they also placed great downward
pressure on the prices of the majors, thereby reducing their yields. To compete, the majors
engaged in great cost cutting efforts. Delta announced the goal of reducing its cost/ASM to 7.5
cents by June 1997. It fell from 9.6 cents in April 1994 to 8.75 cents in March 1997. While this
resulted in significant savings, it did not prevent Delta's stock price from falling after the
company announced earnings well below Wall Street's expectations. Strains arose between
Delta CEO Ronald Allen and the board as a consequence of the damage done to Delta's
reputation for stellar service, due in part to the cost cutting. This apparently contributed to the
board's decision in May 1997 to replace Allen.

Capacity. JP Morgan analysts believe that the most important factor influencing pricing in the
long-term will be the falling industry cost curve. They point out that low-cost airlines have
already lowered and inverted the traditionally downward sloping industry cost curve. "With it
they have pressured fares industry-wide, but particularly in short-haul markets where their
impact on costs have been most dramatic...the airlines that are increasing capacity are those
lowest on the industry's cost curve.1 This shift has occurred because of the growth in low-cost,
short-haul travel.

Outlook. Lehman Brothers analysts concluded in 1996 that the US airline industry was entering
a mature and more stable phase, as the major restructuring it required was largely accomplished.
In their view, this restructuring was driven by two key developments. First was the retrenchment
of the majors into their core hubs. Second was technology diffusion, which occurred when the
weaker airlines upgraded their systems technology regarding pricing and yield management and
eliminated many disparities among major carriers.

Arenas of competition have also shifted. Low-cost carriers, including Southwest Airlines and
Shuttle by United, dominate short-haul capacity in the west. Expansion of the low-cost carriers

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seems to be slowing, and competition appears to be stabilizing. Meanwhile the East Coast is still
dominated by high-cost carriers such as USAir. Consequently, it is not surprising that the low-
cost airlines have targeted the east as a major arena for expansion. Southwest's invasion of
Florida and Providence, RI is a noteworthy example. In the Northeast, capacity reduction by
high-cost competitors such as American, USAir, and Continental has also enhanced the
opportunities for low-cost airlines. As carriers learn to adapt the low-cost formula to the
geographic, climatic, and market intricacies of the Northeast, low-cost operations will likely
continue to expand.

Southwest Airlines’ Mission and Objectives

Southwest Airlines' mission focuses to an
unusually large degree on customer service and
employee commitment. According to its annual
report, the mission of Southwest Airlines is
"dedication to the highest quality of Customer
Service delivered with a sense of warmth,
friendliness, individual pride, and Company
Spirit." Indeed, Southwest proudly proclaims,
"We are a company of People, not planes. That
is what distinguishes us from other airlines and other companies." In many respects, the vision
that separates Southwest from many of its competitors is the degree to which it is defined by a
unique partnership with, and pride in, its employees. As stated in its Annual Report:

At Southwest Airlines, People are our most important asset. Our People know that
because that's the way we treat them. Our People, in turn, provide the best Customer
Service in the airline industry. And that's what we are in business for - to provide
Legendary Customer Service. We start by hiring only the best People, and we know how
to find them. People want to work for a "winner," and because of our success and the
genuine concern and respect we have for each of our Employees, we have earned an

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excellent reputation as a great place to work. As a result, we attract and hire the very
best applicants. Once hired, we train, develop, nurture, and, most important of all,
support our People! In other words, we empower our Employees to effectively make
decisions and to perform their jobs in this very challenging industry.

The airline's goal is to deliver a basic service very efficiently. This translates into a number of
fundamental objectives. A central pillar of its approach is to provide safe, low price
transportation in conjunction with maximum customer convenience. The airline provides a high
frequency of flights with consistent on-time departures and arrivals. Southwest's employees also
aspire to make this commodity service a "fun" experience. Playing games is encouraged, such as
"guess the weight of the gate agent." The fun spirit is tempered so that it is never in poor taste
and does not alienate business travelers.

Long-term financial objectives include a 15% operating margin, 7.5%-8.0% net margin, return
on equity (ROE) of 15%, and a debt/equity ratio below 60%.

Southwest Airlines’ Strategy

Southwest Airlines is categorized as a Low Fare/No Frills airline. However, its size and
importance have led most analysts to consider it to be one of the major airlines despite its fit in
the low fare segment. In a fundamental sense Southwest's business level strategy is to be the
cheapest and most efficient operator in specific domestic regional markets, while continuing to
provide its customers with a high level of convenience and service leveraged off its highly
motivated employees. Essentially, Southwest's advantage is that it is low-cost and has a good
safety reputation.

Cost Leadership. Southwest operates the lowest cost major airline in the industry. The airline
devised a number of clever stratagems to achieve this low-cost structure. For example, by
serving smaller, less congested secondary airports in larger cities, which tend to have lower gate
costs and landing fees, Southwest can maintain schedules cheaply and easily. Southwest's
approach is also facilitated by its focus on the southwest and other locations with generally
excellent weather conditions, which leads to far fewer delays. Moreover, by following a point-
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to-point strategy, Southwest need not coordinate flight schedules into connecting hubs and
spokes, which dramatically reduces scheduling complexity and costs.

Route Structure. Historically, Southwest has specialized in relatively short-haul flights and has
experienced considerable threat from providers of ground transportation (cars, trains and buses)
because the buyers of these short-haul services tend to be quite price sensitive. Southwest has
widened the market for air travel by attracting large numbers of patrons who previously relied on
ground transportation. For example, before it entered the Louisville to Chicago market, weekly
traffic totaled 8,000 passengers. After Southwest entered the market, that number grew to over
26,000. This increase in traffic is now recognized as "The Southwest Effect." Emphasis on
short-haul flights has also allowed them to pare costly services such as food, which passengers
demand on longer flights. Passengers are provided with only an "extended snack" -- cheese,
some crackers and a Nutri-Grain bar.

Turnaround Time. Its route structure has helped Southwest to experience the most rapid
aircraft turnaround time in the industry (15-20 minutes vs. an industry average of 55 minutes).
Interestingly, Southwest's "10 Minute Turnaround" can be traced directly to the carrier's first
days of operation in Texas when financial pressures forced the company to sell one of the four
Boeing 737s it had purchased for its initial service. Having only three planes to fly three routes
necessitated very rapid turnaround.

Rapid turnaround time is essential for short-haul fights because airplanes are airborne for a
smaller percentage of time than on long-haul flights. Faster turnaround also allows Southwest to
fly more daily segments with each plane, which in turn increases its assets turnover.

Fleet Composition. Southwest has the simplest fleet composition among the major airlines.
The company only flies Boeing 737 planes and has committed to fly the 737 exclusively through
2004. Southwest will add a fourth variation when it introduces the 737-700, the newest
generation 737.

In choosing the fuel efficient 737, Southwest developed a close relationship with Boeing that
enabled it to develop comparatively favorable purchase terms. Although Southwest flies a

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number of model variations of the 737, the cockpits of the entire fleet are standardized.
Therefore, any pilot can fly any plane and any plane can be deployed on any route. In addition
to helping capture scale economies at a much smaller size than its larger competitors, the
homogenous fleet composition reduces the complexities of training, maintenance and service. It
is difficult to calculate the large savings associated with this approach but they exist in almost all
operating areas including scheduling, training, aircraft deployment and use, wages and salaries,
maintenance and spare parts inventories.

Travel Agency Exposure. Southwest sells only 60% of its tickets through travel agents
(compared to 80-85% for the majors), thereby saving the 10% commission paid to travel agents.
This also alleviates the need to participate in many of the travel agent reservation systems.

While this reduces the company's breadth of distribution, it helps to reduce commission
payments and Computer Reservation System (CRS) fees, which are approximately $2.50 per
flight segment.

Gates. Access to gates is often a constraining factor in the ability of airlines to expand because
major airports have limited numbers of gates and most are already taken by other airlines.
Access to gates is often a constraining factor in the ability of airlines to expand because major
airports have limited numbers of gates and most are already taken by other airlines. An
emphasis on less crowded secondary airports has alleviated this problem for Southwest.
Southwest purchases or leases gates at airports, as opposed to renting the gates of other airlines,
which enables the airline to use its own ground crews.

Connections. Southwest does not offer connections to other airlines, which simplifies its ground
operations. However, this also limits access for many passengers, particularly from international
flights.

Fare Structure. Southwest also controls costs through its simplified fare structure. While
Southwest's major competitors have complex fare structures and use computers and artificial
intelligence programs to maximize passenger revenues, Southwest offers no special business or

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first-class seating. Rather, they generally offer a regular coach fare and a limited number of
discounted coach fares.

Labor. Labor is the largest cost component of airlines despite the heavy capital investment
demanded in the industry. In 1996, Southwest's labor costs were 30.6% of revenue and 32.7% of
operating expenses. About 85% of Southwest's employees are unionized. Given the ability of
unions to bring carrier operations to a halt, it is not surprising that they wield considerable
power. The International Association of Machinists and Aerospace Workers (IAM) represents
customer service and reservation employees; the Transportation Workers Union of America
(TWU) represents flight attendants; the Southwest Airline Pilots' Association (SWAPA)
represents pilots; and the International Brotherhood of Teamsters (IBT) represents aircraft
cleaners, mechanics, flight training instructors, and others. There are also some other smaller
unions.

What is unique in the industry is Southwest's partnership between its management and its unions.
Southwest's strategy has been a combination of profit sharing and participation. In 1992
employees owned 10% of stock and in 1995 pilots were granted options to purchase 14.5 million
shares of stock (an additional 10.1% of outstanding common stock). Pilots will be eligible for
profit bonuses of up to 3% of compensation in three of the first five years and in two of the
second five years of the recently signed 10-year contract.

In an industry where unions and management have often been at war -- and where unions have
the power to resist essential changes -- the quality of their relationship is a crucial issue. Perhaps
one of the best examples of this is the 1994 agreement between Southwest Airlines and SWAPA.
The pilots agreed to keep pay rates at existing levels for five years, with increases of 3% in three
of the last five years of the 10-year deal (five-year base term, with an additional five years unless
it is terminated by the union.). As mentioned, pilots can earn additional pay based on company
profits. The pilots also obtained options to acquire up to 1.4 million shares of company stock in
each of the ten years, in accord with market prices on the date of the deal. Pilots hired between
1996 and 2003 obtain lesser amounts of options at 5% over the then market value of the stock.

Customer Service.
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Southwest's approach to customer service is one of its core strategies. Its "Positively Outrageous
Service" (POS) is different from the customer service associated with other major airlines.
Service is provided with friendliness, caring, warmth and company spirit --staff go out of their
way to be helpful. This approach to service leverages off Southwest's outstanding relationship
with its employees. However, this stellar customer service does not include costly amenities like
reserved seats or food service, and only offers very limited automatic baggage re-checking. By
emphasizing flight frequency and on-time performance, Southwest has redefined the concept of
quality air service. This unusual approach has allowed Southwest to differentiate its service
while maintaining its cost leadership strategy.

Culture. Perhaps one of the most unique aspects of Southwest's strategy is the degree to which
it has used its unique culture as a major strategic weapon. An atmosphere of cooperation and
team spirit characterizes the culture. Workers believe that Southwest's management cares about
them, and management tries hard to ensure that personnel are treated properly. This culture
provides much of the basis for Southwest's labor relations, customer service and organizational
flexibility.

Marketing. Marketing savvy also plays a key role in Southwest's strategy. Since Southwest's
inception, the major elements of the product offering have been price, convenience and service.
As a Texas native serving mostly Texas markets, it has played the role of the hometown
underdog, fighting against the majors. Now, when Southwest enters a new market, they use a
sophisticated combination of advertising, public relations, and promotions in the belief that once
people fly Southwest they will be hooked.

Growth. Despite its remarkable growth in what had been until recently a relatively moribund
industry, Southwest has not emphasized growth as an objective. In fact, Herb Kelleher expresses
a "go-slow" philosophy. For example, Southwest will not enter markets unless it perceives
favorable conditions, which range from the wishes of the local community to the availability of

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an appropriate labor supply. Given its record of success and its reputation it is not surprising that
there are many communities that want Southwest to serve their markets. After all, good air
service is considered by most communities to be an essential aspect of economic development.
However, Southwest's policy prohibits accepting monetary subsidies or other incentives that
cities and airports offer to gain air service. Southwest has also demonstrated a remarkable ability
to manage its growth, an essential commodity in an industry known for its complexity. The
inability to manage rapid growth has been blamed for the failure of many carriers, including
Braniff, PeopleExpress and ValuJet.

Organization
Structure. Southwest, like most airlines, is a formal and centralized organization.
Organizationally Southwest is structured according to functions, as illustrated in Exhibit1. The
nature of operations in the airline business is quite mechanical. That is, airline operations
naturally aim for efficiency and consistency. They are not spontaneous -- they value clock-like
behavior. Planes must be in certain places at certain times and must be operated safely and
efficiently. Safety itself requires following very rigorous procedures to ensure proper
maintenance and training. The reputation of an airline can be seriously damaged by only one or
two serious accidents. Therefore, the organization of Southwest is characterized by a high
degree of formalization and standardization.

Reporting to Chief Executive Officer (CEO) Herb Kelleher are three Executive Vice Presidents.
Perhaps the most influential is Colleen C. Barrett who is in charge of such key functions as
marketing, sales, advertising, human resources, customer relations and governmental affairs.
John G. Denison is Executive Vice President in charge of Corporate Services, which includes
finance, legal, facilities, reservations, revenue management (pricing) and systems (including
computer services and telecommunications). Gary Barron is Executive Vice President and Chief
Operations Officer. His responsibilities include schedule planning, flight operations, fuel and
administrative purchasing, ground operations, in-flight services, and maintenance and
engineering. There is one other Vice President reporting to Kelleher, Al Davis, who is in charge

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of internal auditing and special projects. For operations controller functions he reports to Gary
Barron.

How has Southwest Airlines maintained high levels of customer and employee satisfaction in the
context of a functional organization? The company uses a number of mechanisms to allow
employee participation. The fundamental concept is the notion of a "loose-tight" design. Within
the context of tight rules and procedures, employees are encouraged to take a wide degree of
leeway. The company maintains rather informal job descriptions and decentralizes decision
making regarding customer service. So while there is very high standardization regarding
operations, it is low with respect to customer service. Employees are empowered to do what is
necessary to satisfy customers. Flight attendants are allowed to improvise cabin instructions and
employees play practical jokes on each other and customers. Positively Outrageous Service in
action! The company management operates with an informal open door policy that allows
employees to circumvent the formal hierarchy. Employees are encouraged to try things,
knowing they will not be punished.

Southwest's organization is considerably simpler than its major competitors. Most of its
competitors must manage the spatial complexity of far flung international operations and contend
with the added intricacies of hub-and-spoke systems. These large international carriers are also
involved in complex alliances with other airlines in foreign markets to augment the scope of their
services. They manage code sharing arrangements with small regional domestic carriers. In
short, the large carriers are complex networks, with more complicated organizational
management issues.

Size. Southwest operates in approximately 51 cities in 25 states and employed 22,944 people.
This consisted of 6,228 flight personnel, 1,049 maintenance workers, 13,148 in ground customer
service, and 2,519 in management, marketing, accounting, and clerical positions. The company
has become such a popular employer that in 1995, 124,000 people applied for 5,500 jobs.
Southwest is still a relatively small company compared to the other major airlines. It ranks 8th in
revenues and 5th in passenger boardings. Southwest's Available Seat Miles (ASMs) total less
than a quarter of American Airlines, and it operates a fleet of only 243 aircraft compared to

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American's 635. Nevertheless, Southwest is the largest carrier in a significant number of the
markets in which it flies and the dominant airline in the short-haul niche of the airline business.

Adaptability. Southwest has been a very nimble organization, quick to take advantage of
market opportunities. For example, when American Airlines and USAir scaled back their
California operations, Southwest quickly took over the abandoned gates, acquired more planes,
and now has 50% of the California market. Another example is Southwest's expansion into the
Chicago Midway market following the collapse of Midway Airlines. Much of this flexibility
stems from the company's remarkable labor relations. In addition, although Southwest is still
purely a domestic carrier, it is developing a strategic alliance with Icelandair, a small North-
European Carrier.

Human Resource Management. At Southwest Airlines the human resource function is called
the People Department. According to the department's mission statement: "recognizing that our
people are the competitive advantage, we deliver the resources and services to prepare our
people to be winners, to support the growth and profitability of the company, while preserving
the values and special culture of Southwest Airlines." The crucial importance of human
resources to the strategy of Southwest has made the People Department more organizationally
central to the company than its counterparts are at its competitors. Given Southwest's reputation
as a great place to work it is no wonder that so many people apply for each job opening. This
allows the company to be extremely selective in its hiring and to look for applicants who are a
good "fit." In fact, the company rejects about 100,000 applicants a year and the turnover rate is
less than half of most other airlines. As Kelleher has said, "We draft great attitudes. If you don't
have a good attitude, we don't want you, no matter how skilled you are. We can change skill
levels through training. We can't change attitude." A new hire's first six months at Southwest
are a period of indoctrination and mentoring. These six months are also used to weed out anyone
who does not mesh with the culture.

In an organization where attitudes, culture and fit are so important it is natural that the company
places such a great emphasis on socialization and training. McDonald's has its Hamburger
University, Southwest has its University for People. Everyone at Southwest has a responsibility

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for self-improvement and training. Once a year, all Southwest employees, including all senior
management, are required to participate in training programs designed to reinforce shared values.
Except for flight training, which is regulated and certified, all training is done on the employee's
own time. Nonetheless, the training department operates at full capacity, seven days a week.
The fun spirit of Southwest emerges in graduates very early. For example, a class of new pilots
stumbled into Kelleher's office wearing dark glasses and holding white canes.

The importance of labor relations cannot be underestimated in a company that is almost 85%
unionized. Here again Kelleher's unusual abilities emerge. Somehow he has been able to
convince union members and officials to identify with the company.

It is also noteworthy that in an era when chief executive pay has escalated to huge amounts,
Kelleher, in 1994, was named one of the lowest-paid chief executive officers in Dallas on a
performance-adjusted basis. Furthermore, company officers do not get the perks often enjoyed
by their counterparts in comparable organizations -- no cars or club memberships -- and they
even stay in the same hotels as flight crews. Southwest has refused to compete for executive
talent based on salary. This is not to suggest that Kelleher is impoverished. Like many
Southwest employees, he has become wealthy from its stock.

Culture and Control. The most distinguishing feature of Southwest Airlines is its culture.
When competitors and outside observers describe Southwest, they tend to focus on its cultural
attributes. Herb Kelleher has made the development and maintenance of culture one of his
primary duties. The culture permeates the entire organization and sends clear signals about the
behavior expected at Southwest. To promote employee awareness of the effects of their efforts
on the company's bottom line, LUV Lines (the company newsletter) reports break-even volumes
per plane. The newsletter informs employees not only of Southwest's issues, but competitor
news as well. The belief is that informed employees are better equipped to make decisions.

One of the shared values is the importance of having fun at work. Humor is a significant aspect
of the work environment. Such attributes are believed by senior management to enhance a sense
of community, trust, and spirit and to counterbalance the stress and pressures of the mechanistic
demands of airline operations.
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Another characteristic is the cooperative relationship among employee groups. This can be an
advantage in functional structures, which are notorious for generating coordination problems. In
other airlines, work procedures clearly demarcate job duties. However, at Southwest everyone
pitches in regardless of the task. Stories abound of pilots helping with baggage and of
employees going out of their way to help customers. In one particularly bizarre story, an agent
baby-sat a passenger's dog for two weeks so that the customer could take a flight on which pets
were not allowed. Employee cooperation impacts the bottom line. When pilots help flight
attendants clean the aircraft and check in passengers at the gate, turnaround time, a cornerstone
of the low-cost structure, is expedited.

Because of its team-oriented culture, Southwest is not stifled by the rigid work rules that
characterize most competitors. As a result, Southwest has tempered the stringent demands of a
functional structure with the liberating force of an egalitarian culture. One excerpt from
Southwest's "The Book on Service: What Positively Outrageous Service Looks Like at
Southwest Airlines" is rather instructive:

"'attitude breeds attitude...' If we want our customers to have fun, we must create a fun-
loving environment. That means we have to be self-confident enough to reach out and
share our sense of humor and fun -- with both our internal and external customers. We
must want to play and be willing to expend the extra energy it takes to create a fun
experience with our customers.

Just as the words 'it's not my job' can take away the source of life for a consumer-
oriented business, the words 'it's just a job' are equally as dangerous. Positively
Outrageous Service cannot be learned from a book or manual; it cannot be artificially
manufactured; and it is not required by law. It is born and bred in each individual
according to his or experiences, attitude, and genuine desire to succeed -- both
personally and professionally. Service does not start at the beginning of each work day,
nor does it end when you go home. It is a very real part of you...it's your company; your
success; your future."

This approach certainly contributes significantly to the lowest employee turnover rate in the
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industry (7%) and the highest level of consumer satisfaction.

Despite all of the freedom that the culture permits, in some areas the company also employs very
stringent controls. Perhaps the best example is that Herb Kelleher himself must approve all
expenditures over $1,000!

Forged over 26 years, Southwest's culture has been a source of sustainable competitive
advantage. A Bankers Trust analyst put it this way:

"Southwest has an indefinably unique corporate culture and very special

management/employee relationship that has taken years to cultivate. Employees have
long had a significant stake in the company; employee ownership and employee
contribution to wealth creation are not ideas that are alien to the workforce of Southwest
Airlines since it is emphatically not 'just a job.' Then, too, the relationship is not merely
spiritual-the employees have come to trust the only company that has a record of 23
consecutive years of earning stability combined with an impressive record of stock
appreciation unmatched by virtually any company...within or beyond the airline industry.
The pilots are well compensated relative to the industry average, and they understand
that. The challenge was to find creative ways to tie together the fortunes of the company
with those responsible for it without risk or destruction of shareholder value...and, unlike
the employee groups at other major airlines, the Southwest pilots understand that."2

Management. There is no doubt as to who is in charge at Southwest. In this respect Southwest

is like most of the other airlines, centralized with a very strong, if not dominating CEO. What
sets Herb Kelleher apart is his charismatic nature. His friendly, participative, deeply involved,
and caring approach is revered throughout the organization. A very large number of employees
know the CEO and he is reputed to know thousands of them by name. Nonetheless, it is also
known that behind the scenes he can be extremely tough, implying that his public and private
personae can be quite different.

Herb Kelleher, age 67, started Southwest with a former client, Rollin King, who is still a member

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of the Board of Directors. King supposedly presented his idea for a low-cost Texas-only airline
based on the success of Pacific Southwest Airlines in California to Kelleher over dinner at the St.
Antony Club in San Antonio. The original "Love Triangle," the foundation of Southwest's
strategy, was drawn on a cocktail napkin.

Kelleher's management style, which has been described as a combination of Sam Walton's
thriftiness and Robin Williams's wackiness,3 seems to have been consistent right from the
beginning. Direct, visible, and, some would say, even bizarre, he has attended company parties
dressed in drag and appeared in a company ad as Elvis. Known for constantly showing the flag
in the field and interacting with large numbers of employees and customers, Kelleher is reputed
to have engaged people in conversations for hours, at all hours, about company and industry
issues, often with a drink in his hand. He almost always seems ready for a party, and this fun-
oriented atmosphere pervades the organization. The company newspaper, LUV Lines, has a
column, "So, What Was Herb Doing All This Time?" recounting the CEO's activities. Kelleher
regularly works 16-hour days and seven-day weeks. Following his example, Southwest
employees are well known for going the extra mile. Among the stories of such behavior is that
of a customer service representative who stayed overnight at a hotel with an elderly woman who
was afraid to stay alone when her flight was grounded due to fog. The agent "knew" that was
what Herb would have done.

Kelleher has replaced formal strategic planning with "future scenario generation," arguing that
"reality is chaotic, and planning is ordered and logical. The meticulous nit-picking that goes on
in most strategic planning processes creates a mental-straight jacket that becomes disabling in an
industry where things change radically from one day to the next."4

One of the most powerful departments is the Customer Department headed by Colleen Barrett,
Executive Vice President, and Kelleher's right-hand. She is the senior female in the airline
industry, and provides the organizational balance for Kelleher. While he is reputed to have a
chaotic style, she is known to be a stickler for details. She plays another unofficial role, acting as
an ombudsman for customers and as an internal management expert.

In the early 1990s Barrett set up a company culture committee, comprised of people from all
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geographic areas and levels of the company. The committee, which meets four times a year, is
charged with preserving and enhancing the company culture. One of the committee's successes
is illustrated by the company organization. It is well known that functional structures such as
Southwest's are designed to promote specialization and scale economies, but often at the expense
of teamwork and coordination. As these organizations grow they become even more difficult to
operate in an integrated manner. The committee developed a number of initiatives to improve
cross-functional cooperation. One example is that all company officers and directors have to
spend one day every quarter in the field -- working a real "line job."

Technology. Like all airlines, Southwest is a very heavy user of computer-related technology.
This technology supports all activities from scheduling to reservations to general operations
support. The network is built on four superservers and a reservations subsystem that connects
more than 5,000 PCs and terminals across the country. Remote locations communicate with the
servers using TCP/IP across Novell LANs.

This network supports a reservation system that has enabled Southwest to be the first carrier to
offer ticketless travel on all of its flights. They now average more than 15,000 ticketless
passengers per day, according to Robert W. Rapp, Vice President of Systems. The ticketless
system offers significantly improved customer service by eliminating lines at ticket counters.
The system also reduces costs; it is estimated that it costs an airline from $15 to $30 to produce
and process a single paper ticket.

Customers using the Southwest ticketless system can purchase a seat on a Southwest flight by
telephone or on the Internet. Customers receive a confirmation code, which is traded for a
boarding pass at the airport. The concept of ticketless travel originated at Morris Air, a Salt Lake
City airline acquired by Southwest in 1993. Although policy and operational differences
prevented Southwest from adopting the Morris system, the company was able to accelerate the
development of its own system with the assistance of Evan Airline Information Services, a
consulting firm that helped to develop Morris Air's system. The first ticketless passenger
boarded a Southwest plane only four months after development began.

All Internet activities are concentrated under Kevin Krone, Manager of Marketing Support.
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Marketing activities explicitly build on the Internet as a primary marketing channel. Krone's
activities are closely coordinated with the requirements and support facilities of Rapp's
department. Southwest was the first carrier to host a web site, WWW.IFLYSWA.COM, which
was deemed "Best Airline Web Site" by Air Transport World. It recently launched a joint
venture with Worldview Systems to enhance its Internet presence.

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Performance
There are many different criteria that can be used to evaluate Southwest's success in achieving its
basic objectives. Certainly Southwest's different
constituencies look at its performance in
different ways. Southwest takes particular pride
in the following accomplishments:

 30 years of safe, reliable operations;

 Five consecutive years of Triple Crown

Customer Service;

 Five consecutive years of record profits

and 24 consecutive years of profitability;

 Recognition as one of the top ten places to work in Robert Levering and Milton
Moscowitz's book, The Best 100 Companies To Work For In America;

 Top ranking in the Airline Quality Survey conducted by The National Institute for
Aviation Research for two of the last three years;

 Launch customer for three different Boeing airplanes, providing thousands of jobs in the
aerospace industry; and

 A route system that has grown to 52 airports in 25 states, carrying more than 50 million
customers on 243 Boeing 737 aircraft.

No issue is more important than safety. One need only to study the checkered history of ValuJet
or Air Florida to see what one catastrophic crash can do to an airline when the airline is
perceived to have been at fault. Meanwhile, Southwest maintains a 26-year safety record and is
generally acknowledged to be one of the world's safest airlines.

Of course, Southwest's customers remain one of the company's main constituencies. Despite its
"no-frills" orientation, Southwest consistently receives the highest rankings for customer
satisfaction. This is achieved through the successful management of customer expectations. By

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emphasizing low price and consistency, Southwest has successfully redefined the concept of
quality airline service. For example, the "Triple Crown Award" goes to the airline, if any, which
has the best on-time record, best baggage handling and fewest customer complaints according to
statistics published in the Department of Transportation (DOT) Air Travel Consumer Reports.
First won by Southwest in 1988, the airline has won the award every year since 1992. No other
airline has ranked on top in all three categories for even a single month.

Given its mission, employee satisfaction is another important indicator of company success.
Personnel are a crucial determinant of organizational performance throughout the industry.
Labor costs are about 40% of operating costs in the industry, while at Southwest they are
considerably lower. As noted, labor relations is an important determinant of company survival.
Southwest has one of the lowest personnel turnover ratios in the industry. It began the first profit
sharing plan in the industry, and employees now own more than 10% of the stock. Fortune has
named Southwest as one of the best companies for attracting, developing and keeping talented
people. In 1997 Fortune ranked Southwest first on its list of the "100 Best Companies to Work
For in America."

Southwest has had generally peaceful and cooperative labor relations throughout most of its
history. One salient result of management-labor harmony is that Southwest employees are the
most productive in the industry. A single agent usually staffs gates, where competitors
commonly use two or three. Ground crews are composed of six or fewer employees, about half
the number used by other carriers. Despite the lean staffing, planes are turned around in half the
time of many rivals. Southwest pays its pilots wages that are comparable to the major carriers,
but pilot productivity (e.g., number of flights per day, number of hours worked) is considerably
higher.

Despite its low-cost structure, Southwest is not able to control all costs. Perhaps the most
important uncontrollable element is fuel, which has varied from 21.8% of operating expenses in
1990 to 14.0% in 1995 (it is estimated at 15.3% in 1996). One advantage that larger, broader
scope carriers have is a more limited exposure to fuel price volatility. Broader scope allows
them to take advantage of geographic differences in fuel prices and deeper pockets allow them to

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hedge against future price increases. However, Southwest does have the advantage of a younger
and more fuel-efficient fleet than its larger competitors.

Southwest has also performed well on many financial criteria. The company's net earnings were
$207.3 million in 1996 compared to $182.6 million in 1995, capping five consecutive years of
record profits and 24 consecutive years of profitability. This record includes 1991 and 1992,
when every other major airline lost money. It has an "A" rating on unsecured debt, and its debt
to equity ratio is one of the best in the industry (.25 versus .6 industry average). Its interest
coverage is one of the best (6.75 versus an industry average of 2).

Market share is another indicator of an organization's performance. By this criterion, Southwest

also ranks at the top of the industry. For example, it consistently ranks first in market share in
80-90 of its top 100 city-pair markets, with a passenger share of 60-70%. Because of the
"Southwest Effect," the carrier gains this share by growing the size of each of its markets -- this
is achieved by a fare structure that is on average $60 lower than the majors.

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Situation Analysis

Industry Analysis

Trends

Southwest Airlines shines above its competitors as the

industry leader in low fare flights. They strive to give
their customers that (positively outrageous service) POS
that they are known so well for. Southwest Airlines
discovered a niche market for air travelers who wanted
an easy and affordable way to travel, Southwest flies
making it easy for customers to travel within the states
conveniently without all the hassles of a major airport or
many transfer flights. Southwest was established in the
time when economy flights were steadily increasing,
more and more families wanted to travel in state but could not afford the high priced seats that
Southwest’s competitors, Continental, Alaska or United offered. This was a great opportunity for
Southwest because they now had a chance to increase their market segmentation and create
loyalty from these customers and new ones from the value they offer. By providing open seating
coupled with a corporate culture of happy employees and spontaneous attitudes Southwest has
truly taken the trend of economy flying to the next level.

Southwest Airlines has come up with a plan to offer its customers no in flight meals, which cuts
costs for everyone, a first come first serve seating, and outstanding customer service to make the
low cost experience feel like your flying first class to your destination. In 2002 Southwest
introduced 250 new ticket dispensing kiosks throughout the airports, the goal with these kiosks
was to reduce the time spent in line and improve airport experience since September 11 2001.

Throughout Southwest’s history the only roadblock that they have encountered was in 1978 with
The Airline Deregulation Act, which redefined the industry by eliminating the ability of the Civil

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Aeronautics Board (CAB) to set fares, allocate routes, and control entry and exit into markets.
Companies had no ability to change fares, even if their costs were increasing. The only attempt
to raise prices was through a petition to the CAB for a fare raise. A request commonly took up to
6 weeks to be processed. This effected Southwest since their business tends to be very cyclical in
nature. In certain months people are likely to pay more than in other months. To fight this new
law Southwest averaged their prices and went for a slow and steady growth business model,
understanding that this will eventually land them in first place among their competitors.

Competitors

Southwest’s competitors include another low cost airline called Jet Blue. This airline is
mimicking what Southwest is trying to do with its no frills flights. They could take customers
from Southwest by creating new ways to innovate this industry. This could be concerning to
Southwest customer base because they must always be aware of what they are doing in order to
hedge against their new offers.

Other Airlines that contribute to taking Southwest’s customer base are Continental, United, and
American airlines. Of course these airlines offer a variation on the services to their customers,
and are targeting different target segments.

Customer Profile

Southwest Airlines have long since prided itself on a no frill low fare flights. This kind of
service, in addition with their outstanding customer service, attracts mainly families and the
traveler looking to save a few dollars. This demographic segmentation allows southwest to offer
their target market the best possible service, and prices, by rewarding being early with a choice
seat, and still offering that POS service. Since young families are their main customers
Southwest offers promotional coupon with their flights in order to attract customers going on
vacations. Such as they created an alliance with a Ski resort based in Utah, Southwest then
offered a weekend of skiing on them, if you chose to fly on their airline. Also southwest targets
travel agents, corporate travel managers along with their individual travelers.

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SWOT Analysis

Strengths

Southwest Airlines is the leader in providing low cost in state flights for its customers. It
consistently offers frequent flights, inviting cabins, reliable service, and amazing customer
service. Since every Southwest airplane is operated by only 71 people, the lowest ever in their
history, labor costs have decreased and those who are left are highly trained and specifically
chosen out of thousands of applicants to reflect Southwest’s customer oriented culture.

Since Southwest airlines has been the leader in low cost flights for the last 36 years, and have
been profitable for 33 years, they use the strategy of purchasing the same airplane for their entire
fleet. The Boeing 737 is their airplane of choice; they have chosen to have a single airplane
because you only need to have your employees trained on one type of airplane and because of
that their efficiency increases. All of these, low cost flights, smaller hubs, excellent customer
service, and cost cutting techniques, have led to Southwest being the leader of its industry.

Weaknesses

Southwest Airlines have managed to be consistently profitable in all of their years in business.
However, there are things that Southwest needs to improve upon in order to continue their plan
of slow yet steady growth over the long term. The first thing they need to improve upon is their

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dependence on passenger revenues. Since about 95% of their revenues come from their
passengers an empty seat on a plane is revenue lost that can never be retrieved.

Another thing that Southwest can improve upon is their load factor. Their load factor is the
amount of people they can get onto their plane to exceed their break even point in revenues.
They have been consistently behind all of their competitors. This of course could be due to the
much higher frequency of flights on each route. Since they need to fill a certain number of seats
to meet their quota, any decrease in their load could negatively affect their bottom line. Along
with this are their limited growth capabilities. Since they only travel within the United States and
not internationally they could potentially be missing out on a whole new market for air travel.

Opportunities

To compliment their new strategy of steady long term growth, Southwest Airlines could consider
expanding into new smaller airports. This would increase the number of flight they could offer
their customers, thus appealing to a broader range of clientele, especially the business minded
people, who could be a potential market they have yet to tap in to. They could offer flight
transfers, which they currently do not, and also offer more frequent flyer rewards to passengers
and businesses who want to save money but still be involved in all aspects of their company state
wide.

In addition to the expansion into new hubs across the nation, Southwest should invest in new
Boeing 737’s to expand their fleet to accommodate the increase in flights. This would positively
impact the company’s bottom line by improving their range and their flight offerings.

Since their business operates on a entirely cyclical system, they could hedge against the
possibility of a decrease in flights by expanding into a air freight business. They could do this by
purchasing cheaper, smaller airplanes that would haul cargo across the states. This would allow
for another stream of revenue year long, and it would also allow them to decrease their complete
dependence on passenger revenues.

Threats

Due to recent political activities the price of oil has increase to almost thirty six dollars a barrel.

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Being involved in the transportation industry during this time is proving to be difficult. Already
the price for aviation turbine fuel has nearly doubled in the last year with no signs of slowing
down. This could have an effect on Southwest’s bottom line.

Another factor that the airline must consider is the past events of September 11 2001. On this day
air travel as we know it changed. This of course decreased revenues and trust in the airlines to
keep their passengers safe. Southwest must now come up with a new and innovative way to
make their customers feel safe and secure, since a lot of their customers are families with
children, in order to continue to see long term growth. Any wrong move could ruin this great
company’s reputation for quality service that still saves you money.

The Challenges Ahead

Southwest Airlines is no Johnny-come-lately. Its basic strategy of consistent low-cost, no-frills,
high frequency, on-time air transportation with friendly service is a recipe that has been refined
throughout the company's 30-year life. It has worked for the company in periods of catastrophic
losses for the industry as well as in times of abundance. Southwest has been able to compete
successfully both with the major airlines and those that have been formed to copy its formula.

Opportunities for Growth. Southwest apparently recognizes the potential saturation of its
historic markets, and the limited number of attractive short-haul markets. Therefore, it has
expanded into some longer-haul markets. Longer-haul not only provides avenues for future
growth, but also provides potentially higher margins. On average, the company's cost per ASM
is just below 7.5 cents. However, on its longer routes costs are as low as 4 cents per ASM.
Furthermore, as mentioned, the 10% ticket tax has been replaced with a combination ticket tax
and takeoff fee. This increases the attractiveness of longer-haul flights.

Analysts see growth directions in the invasion of new markets, such as Florida, as well as in the
addition of new city-pairs to Southwest's point-to-point network. In 1996, Southwest entered
four new markets: Tampa, Ft. Lauderdale, and Orlando, Florida, and Providence, Rhode Island.
At year-end 1996, 22 percent of the carrier's ASMs were deployed on the west coast; 33 percent
in the remainder of the western region (west of Texas); 19 percent in the heartland region (Texas,
Oklahoma, Arkansas, and Louisiana); 16 percent in the Midwest region; and ten percent on the
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east coast (Providence, Baltimore, and Florida). Southwest is adding longer routes, such as the
recently inaugurated Albuquerque to Orlando route, and operations from Nashville all the way to
the west coast. Seven new nonstop flights from Nashville International Airport began in April of
1997 and two additional departures became effective in June. The new nonstop routings are
Nashville to Detroit, Los Angeles, Oakland, and Columbus, and enhanced nonstop service from
Nashville to Las Vegas and Tampa. Southwest began service to Jacksonville, Florida on January
15, 1997. Southwest is now flying into Islip, Long Island in New York.

Limits to Growth. As critics have noted, there are many challenges on the horizon. Southwest
will eventually saturate its historic niche. The company currently flies into more than 52 airports
with an average of 2,600 flights per day. Its old strategy of focusing on good climates and
smaller, less congested airports has contributed to Southwest's low costs. Many believe that poor
weather conditions can affect Southwest's ability to maintain on-time performance and can
significantly impact down-line operations. This is magnified by a schedule based on a rapid
turnaround, which leaves little leeway for flight delays. Southwest entered and then left the
Denver market when bad weather forced an unacceptable number of delays and canceled flights.

This puts a limit on growth because there are only a finite number of markets that can satisfy
these criteria. Thus, Southwest has begun to enter markets in poorer climates and to introduce
longer-haul flights. Providence, RI, one of the newer locations, is not a good weather location.
There are about 56 airports in good weather locations with populations of over 100,000.
Southwest currently serves 36. It is unclear how much demand for point-to-point service exists
in the remaining 20.

If Southwest decides to introduce food services as an amenity for longer haul flights it would
require galleys and onboard services that would significantly boost the cost of operation of those
airplanes. Longer flights also result in fewer flights per day and may serve to drive down yield.
A mixture of galleyed and non-galleyed aircraft will also make fleet scheduling less flexible.
Furthermore, there will be a greater need for functions in the organization responsible for new
elements such as national marketing, the frequent flyer program, interline agreements, new
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geographic operations and possibly food services.

People and culture also are major concerns to further expansion. Southwest is highly selective, it
consequently needs a large pool of applicants in order to find a few people good enough for the
culture. With labor shortages across the country, it may be difficult to attract large pools of
applicants. Without the selectivity, Southwest may not be able to get the human resources it
needs in order to differentiate itself from others. The unique culture of Southwest helps make
the company really fly. As companies expand, particularly in geographic location, the often find
that it becomes increasingly more difficult to maintain the same culture. This is particularly true
if the culture is built around the persona of one major leader such as Herb.

Competition. During the last several years, the gap between Southwest and the rest of the
majors has narrowed as other carriers have attempted to emulate Southwest's formula. Larger
airlines have developed lower cost short-haul divisions. Continental, United and Delta have all
introduced an "airline within an airline" to lower costs for short-haul flights, and American is
likely to follow. These separate divisions may hire their own pilots and ground support at much
lower cost under separate contractual relations with unions. Under these arrangements pilots can
often be employed for less than half the cost of the parent airline. This, not surprisingly, has led
to some bitter disputes between management and unions. For example, at American Airlines the
unions have seen this as a management tactic for shifting their members from high to low paying
jobs with the same duties.

At the same time, Southwest has adopted many of the features that the majors use to support
their large networks. As Southwest has grown in scope, it has introduced national advertising,
including NFL sponsorship; a frequent flyer program, including a branded credit card; and
interline and marketing agreements with international carriers. Southwest's operations at
Nashville are developing into a hub. The carrier's average stage length has also increased over
the last several years. Southwest has now expanded into geographic markets and climates that
are not as compatible with its original fair-weather, low-congestion strategy. Its flights now
compete head to head with some of the major carriers.

Succession. Few CEO's are more closely identified with company success than Herb Kelleher.
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As the company gets larger, and as he gets older -- and by the way, he boasts of his passion for
bourbon (Wild Turkey) and cigarettes (five packs a day) -- will organizational weaknesses begin
to emerge? For example, Southwest's boast about hard working employees provoked 92 percent
of its flight attendants to reject a new contract in June 1997. As Paul Sweetin, the flight
attendants' union chief stated: "After being told for a long time that they were the best employees
in the business, flight attendants are saying 'Well show me I'm the best in terms of
compensation.'"5

Analysts worry about the degree to which Southwest's future is dependent on one person --
although the company claims that this is not the case. In fact, articles in Fortune and The New
York Times Magazine have identified the issue as an obstacle to the company's long-term
success. Although Kelleher says he won't retire until about 2010, Rollin King, a board member
and close friend, predicts he will likely retire at the end of his five-year contract in 2003.6

Board members, concerned about his health, cut back on the number of people reporting to
Kelleher several years ago and have questioned him about succession planning. However, he
still does not have a clear second in command. To some extent, the board also sees his lack of an
apparent successor as a virtue, claiming that it keeps contenders from leaving. As a safeguard,
Southwest has also put in place a Culture Committee of more than 100 corporate missionaries
who have been charged with institutionalizing Kelleher's influence. Still, invoking the case of
Walt Disney, analysts wonder whether Southwest's greatest risk after Kelleher is gone might be
letting that influence grow too strong.7

Whoever will lead Southwest in the coming

years will need to deal with significant
challenges: a set of increasingly able
competitors, potentially weakened labor
relations, and the strain of national growth that
will accompany Southwest's departure from
previously successful strategies. Southwest is
committed to introducing "safe, affordable,

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 SOUTHWEST AIRLINE: A Corporate Strategy Term Paper
Triple Crown service to even more Americans in order to allow them to go, see, and do things
never before dreamed possible." In effect, this means doing for the United States what the high-
speed rail network did for Western Europe. To keep this dream from turning into a nightmare,
the company's management will need to think very carefully about the challenges ahead and the
actions that will be critical for future success.

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 SOUTHWEST AIRLINE: A Corporate Strategy Term Paper

Exhibit 1

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 SOUTHWEST AIRLINE: A Corporate Strategy Term Paper

References

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1
JP Morgan, Short-haul Competitive Update (April 16, 1996) 3; Wendy Zellner, “Southwest’s New
Direction,” Business Week, February 8, 1999.
2
Vivian Lee, "Impacts of Deregulation and Recent Trends on Aviation Industry Management,"
Bankers Trust Research (August 30, 1996): 16.
3
A. R. Myerson, "Air Herb," New York Times Magazine, (November 9, 1997): 36.
4
J. Freiberg and K. Freiberg, NUTS! Southwest Airlines' Crazy Recipe for Business and Personal
Success. (Bard Books, 1996).
5
Allen R. Myerson, "Air Herb," p. 39.
6
Ibid.
7
Ibid. Also see Ken Brooker, “Can Anyone Replace Herb?” Fortune, April 17, 2000.