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Southwest Airlines

What are the key pol icies, procedures, operating practices, and core values under-lying Southwests efforts to implement and execute its low-cost /no frills strategy?

Southwests execution of its low-cost/no frills/low fares strategy is underpinned by some criticallyimportant policies, procedures, operating practices, and core values.

The following policies, procedures, operating practices, and core values stand out:

Southwest managements strong conviction and operative principle that employees come first

and customers come second has been a crucial factor in achieving high levels of customersatisfaction and high employee productivity. The importance placed on employees reflectedmanagements belief that delivering superior service required employees who not only werepassionate about their jobs but who also knew the company was genuinely concerned for theirwell-being and committed to providing them with job security. Southwests thesis was simple:

Keep employees happythen they will keep customers happy.

Managements beliefs that employees were the companys most important asset were visiblysymbolized by designating the personnel department as the People Department (and, most recentlythe People and Leadership Department) and titling the head of the department as the vice presidentof people. The message Herb Kelleher penned in 1990 that was prominently displayed in thelobby of Southwests headquarters in Dallas is particularly telling:

The people of Southwest Airlines are the creators of what we have becomeand ofwhat we will be.

Our people transformed an idea into a legend. That legend will continue to grow onlyso long as it is nourishedby our peoples indomitable spirit, boundless energy,

immense goodwill, and burning desire to excel.

Our thanksand our loveto the people of Southwest Airlines for creating amarvelous family and a wondrous airline.

The strength and depth of managements commitment to deliver high quality customer serviceas stated in the companys mission statement in case Exhibit 4 (which company managementgives every appearance of having lived up to and tried to achieve):

The mission of Southwest Airlines is dedication to the highest quality of CustomerService delivered with a sense of warmth, friendliness, individual pride, andCompany Spirit.

CEO Gary Kelly was continuing to stress the importance of top-rate customer service, as

evidenced by the four factors he saw as being keys to Southwests recipe for success:

Hire great people, treat em like family.

Care for our Customers warmly and personally, like theyre guests in our home.

Keep fares and operating costs lower than anybody else by being safe, efficient, andoperationally excellent.

Stay prepared for bad times with a strong balance sheet, lots of cash, and a stout fuel hedge.

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Southwest managements zealous pursuit of low operating costs, which had led to a number of

practices to achieve lower costs than rival airlines like American, Delta, Continental, Northwest,United and US Airways:

The company operated only one type of aircraftBoeing 737sto minimize the size of spare

parts inventories, simplify the training of maintenance and repair personnel, improve theproficiency and speed with which maintenance routines could be done, and simplify the taskof scheduling planes for particular flights. Significantly, AirTran also flies mostly Boeing737s, along with 86 Boeing 717s. So this cost-saving element will remain largely intactfollowing the AirTran acquisition.

Southwest was the first major airline to introduce ticketless travel (eliminating the need toprint and process paper tickets) and also the first to allow customers to make reservations andpurchase tickets at the companys website (thus bypassing the need to pay commissions totravel agents for handling the ticketing process and reducing staffing requirements atSouthwests reservation centers). Selling a ticket on its Web site cost Southwest roughly $1,versus $3-4 for a ticket booked through its own internal reservation system and as much as$15 for tickets for business travelers purchased through travel agents and professionalbusiness travel partners. Ticketless travel accounted for more than 95 percent of all sales in

2007 and nearly 74 percent of Southwests revenues were generated through sales at itswebsite.

Southwests point-to-point scheduling of flights was more cost-efficient than the hub-and-spoke systems used by rival airlines.

To economize on the amount of time it took terminal personnel to check passengers in and tosimplify the whole task of making reservations, Southwest had never adopted the practice ofassigning each passenger a reserved seat. All passengers could check in online up to 24 hoursbefore departure time and print out a boarding pass, thus bypassing counter check-in (unlessthey wished to check baggage).

Southwest flight attendants were responsible for cleaning up trash left by deplaningpassengers and otherwise getting the plane presentable for passengers to board for the next

flight (until recently, other carriers had cleaning crews come on board to perform thisfunction; however, recurring losses at many airlines in 2001-2005 forced stringent cost-cutting measures, prompting most all airlines to cut out the use of cleaning crews and copySouthwests practice).

Southwest did not have a first-class section in any of its planes and had no fancy clubs for itsfrequent flyers to relax in at terminals.

Southwest offered passengers no baggage transfer services to other carrierspassengers withchecked baggage who were connecting to other carriers to reach their destination wereresponsible for picking up their luggage at Southwests baggage claim and then getting it tothe check-in facilities of the connecting carrier.

Southwest regularly upgraded and enhanced its management information systems to speed data

flows, improve operating efficiency, lower costs, and upgrade its customer service capabilities.

Starting in 2001, Southwest began converting from cloth to leather seats; the team ofSouthwest employees that investigated the economics of the conversion concluded that an all-leather interior would be more durable and easier to maintain, more than justifying the higherinitial costs.

Southwest was a first-mover among major U.S. airlines in employing fuel hedging andderivative contracts to counteract rising prices for crude oil and jet fuel. From 1998 through2008, the companys fuel hedging activities produced fuel savings of about $4 billion overwhat it would have spent had it paid the industrys average price for jet fuel. But unexpectedly

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large declines in jet fuel prices in late 2008 and 2009 resulted in reported losses of $408million on the fuel hedging contracts that the company had in place during 2009.

The addition of vertical winglets on the wing tips of the existing aircraft fleet and orderingnew planes equipped with winglets. These winglets reduced lift drag, allowed aircraft to climbmore steeply and reach higher flight levels quicker, improved cruising performance, helpedextend engine life and reduce maintenance costs, and reduced fuel burn. In 2007,

Southwest managements conviction that delivering superior service required employees who notonly were passionate about their jobs but who also knew the company was genuinely concernedfor their well-being and committed to providing them with job security. Managements thesis wassimple: Keep employees happythen they will keep customers happy. The excerpt from thecompanys 2000 annual report that is reproduced in the case lays out the benefit of Southwestsemployees fiirst, customers second policy: pursuing such a provides further evidence:

The careful attention paid to recruiting, screening, and hiring new employees. Southwest hiredemployees for attitude and trained for skills. Southwest received 90,043 rsums and hired 831new employees in 2009. In 2007, prior to the onset of the recession, Southwest received 329,200rsums and hired 4,200 new employees.

Managements success in involving and engaging employees in seeking out and implementing

ways to save on costs. Southwests pilots had been instrumental in developing new protocols fortakeoffs and landings that conserved fuel. Another frontline employee had suggested not puttingthe company logos on trash bags, saving an estimated $250,000 annually. Rather than buy 800computers for a new reservations center in Albuquerque, company employees determined thatthey could buy the parts and assemble the PCs themselves for half the price of a new PC, savingthe company $1 million. It was Southwest clerks who came up with the idea of doing away withpaper tickets and shifting to e-tickets.

The companys no layoff policyimportant because employees did not have to fear for their jobsin pursuing cost-saving initiatives. Southwest Airlines had never laid off or furloughed any of itsemployees since the company began operations in 1971. Southwest had built up considerablegoodwill with its unions over the years by avoiding layoffs.

Southwests compensation policies and practices. Southwests pay scales tended to be above the

industry averagesometimes even at or near the top of the industry (see case Exhibit 12), and itsbenefit packages compared favorably with those at other airlines. Southwest also had an attractiveprofit-sharing plan.

Southwests employees enjoyed substantial authority and decision-making power. The company

relies heavily upon empowerment of employees and decentralized decision-making. According toKelleher:

Southwests supervisory positions were filled internally, reflecting managements belief thatpeople who had been there and done that would be more likely to appreciate and understand thedemands that people under them were experiencing and, also, more likely to enjoy the respect oftheir peers and higher-level managers.

Managements strong commitment to and skills in building a strong strategy-supportive culture,accompanied by efforts to ingrain core values that were equally strategy supportive. Southwestmanagement has done a very, very commendable job over the years in creating and nurturing corevalues and a culture that has promoted good strategy execution and operating excellence.

Southwest managers were expected to spend at least one-third of their time out of the office,

walking around the facilities under their supervision, observing firsthand what was going on,

listening to employees and being responsive to their concerns . This helped keep managers well-informed about employee concerns and promoted effective employee-management relationships.

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Management encouraged union members and negotiators to research their pressing issues and to

conduct employee surveys before each contract negotiation. Southwests contracts with the unionsrepresenting its employees were relativelyfree of restrictive work rules and narrow jobclassifications that might impede worker productivity. All of the contracts allowed any qualifiedemployee to perform any functionthus pilots, ticket agents, and gate personnel could help loadand unload baggage when needed and flight attendants could pick up trash and make flight cabinsmore presentable for passengers boarding the next flight.