Southwest Airlines began operations in 1971, with the company’s initial service taking place between Dallas, Texas, Houston, Texas, and San Antonio, Texas (Southwest Airlines, 2006). Rollin King and Herb Kelleher started the company with a simple mission focused on being different than other airlines; their chief focus was to provide on-time flights at a low cost, along with a bit of fun (Southwest Airlines).
As Welch (2005) argued, Southwest Airlines was the world’s richest and most profitable airline, illustrating the success the company enjoyed as a result of a simple, yet practical strategy. Hill & Jones (2004) explained that an emergent strategy is a result of acting on an intended strategy (p. 20). Kelleher and King set their strategy for Southwest Airlines based on low cost, no-frills flying from the company’s initial launch in 1971.
Southwest Airlines explained that 1973 was its first profitable year of operations, a monumental achievement being that it had only been operating for two years (Southwest Airlines) As Southwest Airlines explained, the company experienced fast growth, flying its one-millionth passenger a mere three years after launching! By 1977, the company was listed on the New York Stock Exchange, with a ticker that signified the company’s commitment to its customers, LUV (Southwest Airlines).
With a clearly defined mission-oriented towards pleasing customers through low prices and a fun environment while flying, Southwest set the stage for its next level of success. Southwest Airlines earned a number of distinctions soon after its launch, establishing itself as a major player in the airline industry. By 1981, Southwest Airlines was ranked number one in customer satisfaction and in 1987 was recognized for its sixth consecutive year of high consumer satisfaction (Southwest Airlines, 2006).
Southwest Airlines was the first airline to win the Triple Crown for a month in 1988, which recognized the airline for having the best on-time record, best baggage handling, and fewest customer complaints (Southwest Airlines). Southwest Airlines appears to have been dominating the airline industry at this point in time, which is evidenced by a large number of awards and recognition it received in a variety of categories.
Southwest Airlines argued that the company is still dedicated to meeting customer needs at a low cost, which is demonstrated by its winning of the Triple Crown thirty times since 1988. As Hill & Jones (2004) discussed, successful organizations demonstrate vision, eloquence, and consistency (p. 25-6). Southwest Airline’s ability to earn recognition rewards for excellent service and on-time operations is a testament to the company’s consistent pursuit of its vision. Southwest Airlines has run a highly successful operation in the past and contributed to the overall advancement of the airline industry.
As Southwest Airlines (2006) reported the company took a different approach to its frequent flyer program by offering customers credit based on the number of trips with the airline instead of the number of miles flown. Additionally, Southwest Airlines was the first ever to offer senior discounts, same-day air-freight delivery service, and ticketless travel options. As Answers Corporation (2007) explained, Southwest Airlines significantly cut its operational costs with ticketless travel and saved additional money by running its own proprietary reservation system.
Hill & Jones (2004) argued that an organization’s competitive advantage leads it to superior profitability (p. 79). One factor impacting competitive advantage is the value customers place on a given service and Southwest Airlines use of ticketless travel made it easier for customers to get from the check-in counter onto the airplane, illustrating the utility ticketless travel provided customers of Southwest Airlines (Hill & Jones, p. 79).
Competitive Advantage at Southwest Airlines
As Ewing Marion Kauffman Foundation (2006) explained, Southwest Airlines created a competitive advantage based on organizational efficiency that focused on excellent service, low fare prices, and quick turnaround times. As Hill & Jones (2004) explained, one major component contributing to an organization’s competitive advantage is the maximization of employee productivity (p. 87). Southwest Airlines has taken a number of steps to ensure it places the right employees within the company and creates a culture that breeds success. As Trustees of Dartmouth College (2002) argued, Southwest Airlines stock symbol LUV has set the tone for how employees treat one another and customers. Trustees of Dartmouth College explained that Southwest Airlines CEO Herb Kelleher’s explanation of the company’s approach to employee relations was, “If they’re happy, satisfied, dedicated, and energetic, they’ll take real good care of the customers. When customers are happy, they come back. And that makes the shareholders happy” (p. 2). Herb Kelleher has translated Southwest Airlines’ organizational strategy based on LUV into a simple accolade that easily resonates with customers and employees alike.
Southwest Airlines (2007) received 284,827 resumes in 2006 and hired 3,363 of those that applied, demonstrating the company’s careful approach towards employee selection. The Trustees of Dartmouth College (2002) described Southwest Airlines’ hiring process as being highly unique, with peers screening candidates and handling interviews; pilots would hire pilots. Southwest had interviews with its top employees throughout each job function and used the information from these interviews to determine common strengths important to the company’s success (Trustees of Dartmouth College).
As a result of this process, Southwest had an amicable system in place to select the best candidates to hire; however, the company placed as much weight on one’s attitude as they did aptitude when making hiring decisions (Trustees of Dartmouth College). As a result of Southwest’s unique and carefully planned hiring approach, it has been able to create a working culture that is well established and ensures the company will have happy employees for years to come, which in turn generates happy customers. Southwest Airlines’ competitive advantage is also based on its ability to focus on delivering a quality experience for its customers.
As Answers Corporation (2007) argued that Southwest’s focus on offering low prices in lieu of in-flight meals and baggage transfers redefined customer’s perceptions of airline travel, placing it on par with the cost of driving a similar trip distance. The Ewing Marion Kauffman Foundation (2006) suggested that Southwest started a trend among other airlines based on cost-conscious, low-frills air transportation. As a result of Southwest’s approach, it has redefined how many consumers perceive air travel. Binggeli & Pompeo (2002) discussed how Southwest Airlines low cost approach has spurred a number of low-cost airline startups in Europe.
Short’s Travel Management (2006) reported that the average price for a domestic airline ticket in the third quarter of 2006 was $416. Southwest Airlines (2007) explained that Southwest’s average passenger fare was a scant $104. 40 in 2006, which represents a significant difference in price from the average charged by other major airlines. As Welch (2005) argued, “Air travelers will flock to the lowest prices, period” (p. 1). Southwest Airlines low cost approach has provided it with a competitive advantage that works wonders; its prices cause customers to flock to the airline.
Schachter (2003) argued that although Southwest Airlines has created a competitive advantage as a result of its low cost approach to doing business, the company’s true strength is due to its exceptional employee management skills. Jody Gittell conducted an extensive study of Southwest and other airlines, ultimately finding that Southwest Airlines “success stems from the ability to build and sustain strong relationships among everyone involved in the airline, notably employees and managers, but also unions and suppliers” (Schachter, p.). As Schachter exemplified, Southwest pilots don’t simply fly their airplanes; they act as team members and complete activities like fluffing pillows and picking up trash to ensure the flight turns around as quickly as possible. The company has provided employees with several compensation options to ensure they generate the greatest value for the company. As Hill & Jones (2004) explained, Southwest provides all employees with a profit-sharing plan with a portion invested in Southwest Airlines stock (p. 89).
The company’s formula is simple: “The harder employees work, the more profitable Southwest becomes, and the richer employees get” (p. 89). Once again, Southwest Airlines has proven that doing it differently by acting as a true team, yields the synergy necessary to make Southwest Airlines employee relations strategy stand apart from the competition. Southwest Airlines has taken a no frills approach to its daily operations as well. The company is considered a low cost carrier (LCC) and by the late 1990s, Southwest Airlines low cost approach was hurting the profitability of larger airlines such as Delta (Bowen & Rodrigue, 2007).
Southwest Airlines utilized economies of scale by flying the Boeing 737 and no other aircraft; this keeps Southwest’s maintenance costs low and allows it to reap the cost benefits of bulk purchasing (Hill & Jones, 2004, p. 112; Welch, 2005). Furthermore, since Southwest flies from point to point, it can fly its airplanes more often per day than hub and spoke airlines that must return to their home base several times each day. (Welch). Bowen & Rodrigue elaborated on Southwest’s success, explaining that it has traditionally focused on secondary airports, which typically carry lower landing and parking fees.
Southwest’s no-frills approach allows it to turn flights around in a mere fifteen minutes, which is one-third of the industry average (Answers Corporation, 2007). As it has been explained above, Southwest Airlines has a number of core practices that lend strength to its competitive advantage from a cost-standpoint, and the company has successfully synergized these practices together to gain maximum value and savings. Southwest Airlines’ employee perspective Southwest Airlines has taken a unique approach to manage its employees.
Essentially, it doesn’t manage them in conventional terms but instead provides them with the freedom to go above and beyond their job responsibilities to deliver superior customer service (Hill & Jones, 2004, p. 408). As a result of Southwest’s flat organizational hierarchy, employees are able to act more autonomously in their jobs and provide better service at the same time. Southwest opts for cooperation among managers and employees at all levels of the organization, instead of pursuing a dictatorship-style management approach (Schachter, 2003).
Hill & Jones reported that Southwest encourages its employees to find better techniques for getting work done without managerial input. Southwest’s decentralized management approach not only allows customers to receive great service on the spot but it also allows Southwest to save substantial capital because it needs fewer managers to oversee employees that are already autonomous (Hill & Jones, p. 409). Schachter (2003) explained that Southwest Airlines has increased the number of frontline supervisors while other airlines scale them back.
Schachter argued that the addition of front line supervisors allows for greater contact with employees and increased coaching opportunities. Southwest appears to understand the value of teamwork and collaboration based on its unique concept of how to utilize frontline supervisors in the business. Supervisors don’t focus solely on disciplining employees or measuring performance but instead, work to create a team environment and lead by example by covering breaks for employees and filling in when departments are understaffed (Schachter).
As Ellis Communications Inc (2006) explained, Southwest Airlines knows that its success starts with the people it employs. Southwest Airlines has taken its mission a step above many other companies touting similar claims and pursued its dedication to employees with vigor, ensuring they are always first because company executives know that satisfied employees will naturally satisfy customers and attract them for the long term.
Current Threats & Challenges
Serwer (2004) reported that Southwest Airlines is currently facing a threat of low cost imitators entering the market and taking away some of its share, primarily from JetBlue and United’s low cost spinoff, Ted. However, Southwest still adheres to its original business strategy, which is focused on entering markets served by traditional airlines and offering much lower fare prices than they charge. Warren (2005) explained that many hubs and spoke airlines have transitioned from ceding the battle with Southwest when it expands to new territory to fighting it out aggressively.
Southwest’s three primary competitors include American Airlines, Continental Airlines, and Jet Blue, as of 2007 (Hoover’s Inc., 2007). Imitation airlines such as JetBlue have seen an increase in market share, which increased from 7% in 2000 to 15% in 2005. Schneiderman (2006) explained that Southwest Airlines’ low price model is threatened because of market saturation, as many other airlines are reacting to market pressures and lowering their ticket prices. Southwest may still have the upper hand, as JetBlue is focusing on taking away market share from major airlines instead of Southwest, whereas Southwest is focusing primarily on budget-minded travelers (Schneiderman). As a result of low-cost imitation airlines such as JetBlue, Southwest now faces a major challenge of differentiating itself in other ways that will cause consumers to perceive greater value in Southwest than their competitors. Maynard (2005) explained that rising fuel costs may make it difficult for Southwest Airlines to continue the level of growth and profitability experienced in years past.
However, Maynard argued that Southwest still carries the lowest overall cost and highest market capitalization of any carrier in the airline market, which is a promising observation that could help Southwest to remain profitable. Warren (2005) explained that Southwest isolated itself from fuel price spikes a few years ago by purchasing fuel at fixed prices, known as hedging, while other airlines failed to do so and saw their expenses increase exponentially as fuel prices rose dramatically. Some of Southwest’s fuel hedging benefits are expiring, which incidentally increases costs for the airline (Maynard).
Answers Corporation (2007) explained that Southwest has hedges of varying prices and quantities currently in place through 2009. Increasing fuel prices are certainly one variable that could have a severe impact on Southwest’s future ability to maintain profitability into the future, especially if it is unable to hedge fuel at acceptable prices in the future. Labor costs are another factor that has plagued Southwest Airlines recently. Many of the major airline employees negotiated concessions with their companies and as a result, employees at Southwest demanded similar benefits (Answers Corporation, 2007).
Bailey (2007) explained that Southwest Airlines pilots are currently in negotiations with the airline and want extra pay. If the airline and pilots agree to a higher pay rate, this will further impact the airline’s profitability and growth potential. Schnurman (2006) argued that Southwest has been extremely generous with its employees in the past; awarding even those that cleaned its airplanes twenty times more stock options than competitor American Airlines gave its flight attendants.
Nonetheless, Southwest Airlines will have to closely monitor its labor costs in the future, especially if other major airlines make concessions to the demands of their employees. Recommended Solutions The threat of imitators is perhaps the most important area Southwest Airlines should focus on. Southwest is already a market leader and as a result has earned higher than average profits ever since 1973, never missing a year since then (Hill & Jones, 2004, p. 97; Southwest Airlines, 2007). Other airlines will naturally seek to learn how Southwest operates in order to erode Southwest’s advantage and profits (Hill & Jones, p. 7). Warren (2005) reported in an interview with Gary Kelly, Southwest’s CEO that the company realized it couldn’t maintain an advantage solely based on price. Southwest has professed many times that its true sustainable advantage rests in having the best people in the airline industry, which no airline has yet been able to match (Warren). Southwest would be wise to continue developing its people and ensuring it recruits only the best employees in the industry in order to maintain a competitive advantage over other airlines, even if they do match its ticket prices.
Furthermore, the company must manage labor relations with its union in order to ensure labor costs don’t erode the company’s profit opportunities. As Hill & Jones (2004) alluded, intangible resources such as employee knowledge and the capabilities of a company are the most difficult to imitate by competitors (p. 98). Marta (2007) explained that Southwest has recently aired television commercials that make fun of its competitors, showing customers that have to pay to open overhead bins and go to the bathroom.
Based on this observation, Southwest should ensure it continually recruits the best employees and ensures they demonstrate a passion for their jobs towards customers, creating a fun and fulfilling flying experience for everyone aboard Southwest aircraft. Southwest Airlines has battled perceptions among customers that it is a second class airline in the past; however, the airline is trying to shed the image and educate customers that the extra amenities other airlines provide actually cost them more (Marta, 2007).
Therefore, Southwest must work to enhance its customers’ perceptions of its service as being first-class, even though it may charge a second class rate (Hill & Jones, 2004,p. 88). Marta argued that some airline industry experts feel that Southwest will eventually have to change its service offerings in order to compete with other low-cost carriers (Marta). One hotly contested feature that Southwest should consider is adding seat assignments for passengers. Southwest tried various seating and boarding options in the past; however, the airline has vehemently defended its unassigned seat policy.
Southwest must gather information to help substantiate its decision for change by conducting surveys related to customer demand for amenities such as assigned seating and in-flight entertainment. The Associated Press (2006) reported that Southwest Airlines has experienced profitability as a result of its fuel hedging strategy, whereas other airlines lost money because they failed to hedge fuel as far into the future as Southwest. Hedging fuel does carry its risks, including the increased expense in recent years as a result of sharp price increases in jet fuel (Associated Press).
Southwest’s savings from fuel hedging could decline in the future, especially since it only has 12% of its projected fuel consumption hedged through 2010. Southwest Airlines is advised to avoid the Icarus Paradox downfall, which could occur if Southwest becomes overly focused on its profit advantage as a result of fuel hedging even though it no longer offers competitive advantage (Hill & Jones, 2004, p. 102). Instead, Southwest should focus on its true differentiator that has surfaced throughout this analysis numerous times; its ability to motivate employees to do everything with passion (Serwer, 2004).
Although Southwest Airlines faces challenges related to increasing labor costs, fuel costs, and intense competition from emerging copycat low cost airline carriers, it still has a number of advantages over the competition. Birger & Stires (2007) predicted that Southwest will continue to be highly successful in the future. Even though Southwest is experiencing greater price competition from other airlines, their competitors will be unable to grow as quickly as Southwest unless they can do so at a cost equal to or less than Southwest’s, which is highly unlikely (Birger & Stires).
Furthermore, Southwest Airlines (2007) reported that in August 2006, Southwest Airlines carried more passengers than any other U. S. airline for the first time. This suggests a possible correlation between Southwest’s ability to operate more efficiently than competitors and expand its operations simultaneously. Furthermore, Southwest has displayed a history of financial strength, declaring a profit every year from 1973 through 2006, despite many other airlines seeing financial losses and bankruptcies (Southwest Airlines).
Southwest will certainly face more intense competition in the future; however, it can remain successful if it stays true to its mission that puts its employees and customers first. Southwest has remained a highly successful company and can continue to do so as long as it fine-tunes its strategy as necessary.
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