114 Part One The Management Control Environment

Case 3-1

Southwest Airlines Corpora~ion By January 2005 Southwest Airlines Corporations (Southwest) year-end results marked 32 consecutive years of profitability a record unmatched in the airline industry Southwest which was incorporated in Texas commenced cusshytomer service on June 18 1971 with three Boeing 737 aircraft serving three Texas cities Dallas Houston and San Antonio In 2004 it boasted a fleet of 417 Boeing 737 jets and provided service to 60 airports in 31 states throughout the United States Southwest was well entrenched as the nations low-fare hlgh customer satisfaction airline (Refer to Exhibit 1 for five-year financial highlights)

Southwest had the lowest operating-cost structure in the domestic airline industry and consistently offered the lowest and simplest fares In 2004 the airline had 31000 employees and generated total operating revenues of $65 billion from a passenger load factor of 695 percent Its stock exchange symbol was LUV representing Southwests home at Dallas Love Field as well as the theme of its employee and customer relationships

In 2005 for the ninth year in a row Fortune magazine recognized Southwest Airlines as the most admired airline in the world and among all industries listed Southwest Airlines as number five among Americas Top Ten most admired corporations Since 2002 Business Ethics magazine listed Southwest Airlines in its 100 Best Corporate Citizens a list that ranks public companies based on their corporate service to various stakeholder groups In 2005 The

EXHIBIT 1 Comparative Fin~ncial Data on Selected COmpanies

This case was written by Professor Vijay Govindarajan julie B Lang (T93) and Suraj Prabhu (T06) of the Tuck School of Business at Dartmouth copy Trustees of Dartmouth College

Sources wwwsouthwestcom What Management Is How It Works and Why Its Everyones Business by joan MagrEitta copy 2002 The Free Press NUTS Southwest Airlines Crazy Recipe for Business and Personal Success by Kevin Freiberg and jackie Freiberg copy 1996 Bard Press Inc Southwest Aims East (Condensed) case study written by Steven Sullivan under the supervision of Paul W Harris University of Virginia Darden School Case no UVA-M-0464 The Talent Myth The New Yorker july 22 2002

Chapter 3 Behavior in Organizations 115

American Customer Satisfaction Index (ACSI) recognized Southwest Airlines as leading the industry in customer satisfaction and InsideFlyer magazine awarded Southwest airlines for best Customer Service best bonus promotion and besectt award redemptions in 2004

The Southwest Difference

Southwest did not employ the hub-and-spoke approach used by other major airlines such as United American and Delta Instead its approach was short haul and medium haul and point-to-point (eg Dallas to Houston Los Angeles to Phoenix) As a result about 80 of its passengers flew non-stop and the overall average passenger trip length was 758 miles and an average airfare of $9115 Southwest had no assigned seats paid its crews by trip and used less congested airports (eg Baltimore instead of Washingtons Dulles or Reagan Manchester NH instead ofBoston Mass) About 60 percent of Southwests passenger revenue was generated by online bookings via southwestcom PhoCusWright reported that southwestcom was the number one airline webshysite by revenue and Nielsen Net Rating identified it as the largest airline site in terms of unique visitors In 2005 Southwest eontilUed to push its online presence and launched several automation services including Ding a desktop application that provided exclusive deals

Southwest consistently soughtoutiways to improve its efficiencies and pass on the cost savings to its passengergt In 2004 Southwest had reduced the headcount per aircraft to 74 from 85 in 2003 It hedged about 85 of its fuel and oil needs and as a result saved about $455 million It entered new aiports after a process of diligence and with a sense of commitment to the people it served (In its entire history Southwest has only pulled out of five airports)

Southwest pilots were among the only pilots of major US airlines who did not belong to a national union National union rules limited the number of hours pilots could fly But Southwests pilots were unionized independently allowing them to fly far more hours than pilots at other airlines

Other workers at Southwest were nationally unionized (total workforce unionization was at 81 in 2005) but their contracts were flexible enough to allow them to jump in and help out regardless ofthe task at hand From the time a plane landed until it was ready for takeoff took approximately 20-25 minutes at Southwest and required a ground crew of four plus two people at the gate By comparison turnaround time at United Airlines was closer to 35 minutes and

required a ground crew of 12 plus three gate agents CEO Herb Kelleher who founded Southwest was deeply committed to a phishy

losophy of putting employees first If theyre happy satisfied dedicated and energetic theyll take real good care of the customers When the customers are happy they come back And that makes the shareholders happyl Southwests walls were filled with photographs of its employees More than 1000 married couples (2000 employees) worked for the airline Southwest employees were among the highest paid in the industry and the company enjoyed low employee turnover relative to the airline industry

1Joan Magretta What Management 15 How It Work5 and Why It 5 Everyone5 BU5ine55 (The Free Press 2002) 199

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116 Part One The Management Control Environment

Southwests culture of hard work high-energy fun local autonomy and creshyativity was reinforced through training at its University of People encourageshyment of in-flight contests and recognition of personal initiative

Being in the people business meant a rigorous approach to hiring new emshyployees In 2004 Southwest reviewed 225895 resumes and hired 1706 new employees The companys hiring process was somewhat unique Peers screened candidates and conducted interviews pilots hired pilots and gate agents hired gate agents To better understand what the company sought in candidates Southwest interviewed its top employees in each job function (eg pilots gate agents baggage handlers ground crew) and identified their common strengths then used these profiles to identify top candidates during the interview process Southwest hired for attitude as much as aptitude Noted CEO Kelleher We want people who do things well with laughter and grace2

Southwest initiated the first profit-sharing plan in the US airline industry in 1974 and offered profit sharing to its employees every year since then Through this plan employees owned about 10 percent of the company stock For fiscal 2003 Southwest offered its employees $126Mn in profit sharing

Discussion Questions

1 What is Southwests strategy What is the basis on which Southwest builds its competitive advantage

2 How do Southwests control systems help execute the firms strategy

21evin Freiberg middotand Jackie Freiberg NUTS Southwest Airlines Crazy Recipe for Business and Personal Success (Bard Press Inc 1996) 65