Mini-Case Southwest Airlines

For over 30 years, Southwest Airlines had outperformed all its major competitors in terms of

growth and profitability and, by 2005; it had become the seventh largest airline in the United States. It was the only airline in the US to have consistently posted a profit since it was incorporated in the early seventies, despite the fact it had always priced its services significantly lower than most other airlines and entered new routes with fares at least 60% below competition. While Southwest was growing and thriving, such dominant airlines as PanAm, Eastern or People Express had gone out of business and others like United or Delta had had to seek protection from creditors by filing for chapter 11. In 2005, most significant carriers were losing money, except Southwest.

Southwest operated very unconventionally. Though other airlines primarily made money with

their business class, Southwest had chosen to offer a single-class service. In addition, they did not serve meals (cost $3 average for the industry) on board and did not assign seats prior to boarding. Southwest did all its own ticketing, not making its seats available through computerized systems such as Apollo or Sabre (which charged a $2 fee per transaction). Travel agents received the standard 10% commission, but had to contact the airline directly to book seats. As a result, only 25% of Southwest's seats were booked through a travel agent, in contrast to a 60% average for the industry.

While all other large airlines had switched to the "Hub-and-Spoke" system in the early eighties, Southwest continued operating point to point connections, thus offering most its passengers non-stop service from origin to destination. Most flights were short-haul and lasted 65 minutes on average. Southwest generally flew into uncongested airports of small cities or into secondary less-congested airports of large cities (Love field in Dallas, Midway in Chicago, Detroit City airport…). This made it difficult for passengers to transfer from other airlines to Southwest flights, or vice-versa. As a result, Southwest chose not to offer connections or to transfer baggage directly to other airlines. Operating out of uncongested airports did, however, save an average of 20% on flight time as a result of reduced taxi time and less in-air waiting. In addition, Southwest benefited from lower gate costs and landing fees at these secondary airports: $2.50 on average per passenger, compared to $6 to $8 at major airports.

Southwest operated a homogeneous fleet of 400 Boeing 737 aircraft that flew an average of

4 000 trips per day. These aircraft had an average cost of $45 million and an average life of 20 years. Southwest's fleet was one of the youngest in the industry. Southwest offered frequent service at all the destinations it served, usually 8 or more one-way flights a day between two cities; in order to optimize the utilization of their gates, Southwest only operated out of airports where they could schedule at least 20 departures a day. Despite its name, Southwest flew to destinations all over the US, from New York to California and from Michigan to Arizona.

Southwest was the US airline with the highest level of customer satisfaction. Industry conducted surveys revealed in particular that Southwest had the fewest passenger complaints and an unmatched record for on-time performance. In addition, Southwest was able to turn its aircraft around in an average of 15 minutes, when the industry average for this operation was 55 minutes. Turnaround time referred to the time between arrival at and departure from the airport gate; this period included the time in which passengers got on and off the plane, baggage was loaded on and off, the aircraft was cleaned, tidied up, refueled, provisioned with food and drinks, and inspected.

Southwest has also built a strong organization culture with highly motivated employees and. Concern for people was one of the cornerstones of the Southwest culture. Profit was shared among the employees and a fair appraisal system was followed. Employees were highly satisfied which reflected in the higher per capita productivity and enhanced the quality of service delivery by the employees.

This mini-case was adapted from the case developed by Professors Pierre Dussauge and Bernard Garrette as a basis for class discussion which was not intended to illustrate either effective or ineffective handling of a business situation. It draws on various published sources including the Southwest Airlines case by Roger H. Hallowell and James L. Heskett, a collection of articles compiled by Aneel Karnani and a chapter from “Hidden Value” by C. O’Reilly and J. Pfeffer (HBS Press 2000). I have made the adaptation by adding a paragraph to the original case developed by Prof. Pierre and Prof. Bernard

2 Southwest Airlines

Exhibit: Data on the US airline industry (2004)

Southwest

American

United

Delta

Northwest

US Airways

Continental

Revenue (M$)

5,555 15,639 14,087 13,800 10,302 8,253 8,200

Operating expenses (M$)

4,924 16,197 15,530 15,183 10,697 9,434 8,523

Operating profit (M$)

631 (558) (1,443) (1,383) (395) (1,181) (323)

Operating margin

11.4 % -3.6 % -10.2 % -10.0 % -3.8 % -14.3 % -3.9%

Labor costs (M$)

1,467 5,556 5,280 5,754 3,551 2,991 2,693

as % of expenses

29.8 % 34.3 % 34.0 % 37.9 % 33.2 % 31.7 % 31.6 %

Fuel (M$) 734 2,203 1,895 1,928 1,508 1,283 1,040

as % of expenses

14.9 % 13.6 % 12.2 % 12.7 % 14.1 % 13.6 % 12.2 %

Cost per ASM1

7.54 cents 10.38 cents 12.00 cents 10.14 cents 9.78 cents 12.46 cents 9.58 cents

# of employees

24,200 90,400 83,900 81,600 57,300 46,200 45,300

Fleet size 400 612 494 555 373 322 319

Passengers (million)

70 86 67 83 43 37 38

Load factor (%)

69.8 69.4 70.8 69.1 74.3 68.9 72.8

1 Available Seat Mile