Southwest Airlines Strategy

Background

Southwest Airlines is the largest air hose measured by figure of riders carried each twelvemonth within the United States. It is besides known as a ‘discount air hose ‘ compared with its big challengers in the industry. Rollin King and Herb Kelleher founded Southwest Airlines on June 18, 1971. Its first flights were from Love Field in Dallas to Houston and San Antonio, short hops with no-frills service and a simple menu construction. The air hose began with one simple scheme: “If you get your riders to their finishs when they want to acquire at that place, on clip, at the lowest possible menus, and do darn sure they have a good clip making it, people will wing your airline.” This attack has been the key to Southwest ‘s success. Presently, Southwest serves about 60 metropoliss ( in 31 provinces ) with 71 million entire riders carried ( in 2004 ) and with a entire operating gross of $ 6.5 billion. Southwest is traded publically under the symbol “LUV” on NYSE.

Facts

• The first major air hose to wing a individual type of aircraft ( Boeing 737s )
• The first major air hose to offer ticketless travel system broad including a frequent flyer plan based on figure of trips and non figure of stat mis flown.
• The first air hose to offer a profit-sharing plan to its Employees ( instituted in 1973 ) .
• The first major air hose to develop a Web site and offer on-line engagement. In 2001, approximately 40 per centum ( $ 2.1 billion ) of its rider gross was generated through on-line engagements at www.southwest.com. Southwest ‘s cost per booking via the Internet is about $ 1, compared to a cost per booking through travel agents of $ 6 to $ 8.

Key competitory advantages

• Low Operational costs / High Operational Efficiency
• Award winning client service
• Human Resource patterns / Work civilization

Operationss Analysis – Competitive Dimensions

Southwest clearly has a distinguishable advantage compared to other air hoses in the industry by put to deathing an effectual and efficient operations scheme that forms an of import pillar of its overall corporate scheme. Given below are some competitory dimensions that will be studied in this paper.

1. Operational Costss and Efficiency
2. Customer Service
3. Employee/Labor Relationss
4. Technology

Operational Costs and Efficiency

After all, the air hose industry overall is in shambles. But, how does Southwest Airlines stay profitable? Southwest Airlines has the lowest costs and strongest balance sheet in its industry, harmonizing to its president Kelleher. The two biggest operating costs for any air hose are – labour costs ( approx 40 % ) followed by fuel costs ( approx 18 % ) . Some other ways that Southwest is able to maintain their operational costs low is – winging point-to-point paths, taking secondary ( smaller ) airdromes, transporting consistent aircrafts, keeping high aircraft use, promoting e-ticketing etc.

Labor Costs

The labour costs for Southwest typically accounts for approximately 37 % of its operating costs. Possibly the most critical component of the successful low-fare air hose concern theoretical account is accomplishing significantly higher labour productiveness. Harmonizing to a recent HBS Case Study, sou’-west air hoses is the “most to a great extent unionized” US air hose ( about 81 % of its employees belong to an brotherhood ) and its salary rates are considered to be at or above norm compared to the US air hose industry. The low-fare bearer labour advantage is in much more flexible work regulations that allow cross-utilization of virtually all employees ( except where disallowed by licensing and safety criterions ) . Such cross-utilization and a long-standing civilization of cooperation among labour groups translate into lower unit labour costs. At Southwest in 4th one-fourth 2000, entire labour disbursal per available place stat mi ( ASM ) was more than 25 % below that of United and American, and 58 % less than US Airways.

Carriers like Southwest have a enormous cost advantage over web air hoses merely because their work force generates more end product per employee. In a survey in 2001, the productiveness of Southwest employees was over 45 % higher than at American and United, despite the well longer flight lengths and larger norm aircraft size of these web bearers. Therefore by its relentless chase for lowest labour costs, Southwest is able to positively impact its underside line grosss.

Fuel Costs

Fuel costs is the second-largest disbursal for air hoses after labour and histories for about 18 per centum of the bearer ‘s operating costs. Airlines that want to forestall immense swings in operating disbursals and bottom line profitableness choose to fudge fuel monetary values. If air hoses can command the cost of fuel, they can more accurately estimate budgets and forecast net incomes. With turning competition and air travel going a trade good concern, being competitory on monetary value was cardinal to any air hose ‘s endurance and success. It became difficult to go through higher fuel costs on to riders by raising ticket monetary values due to the extremely competitory nature of the industry.

Southwest has been able to successfully implement its fuel hedge scheme to salvage on fuel disbursals in a large manner and has the largest hedging place among other bearers. In the 2nd one-fourth of 2005, Southwest ‘s unit costs fell by 3.5 % despite a 25 % addition in jet fuel costs. During Fiscal twelvemonth 2003, Southwest had much lower fuel disbursal ( 0.012 per ASM ) compared to the other air hoses with the exclusion of JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent of the air hose ‘s fuel needs has been hedged at $ 26 per barrel. World oil monetary values in August 2005 reached $ 68 per barrel. In the 2nd one-fourth of 2005 entirely, Southwest achieved fuel nest eggs of $ 196 million. The province of the industry besides suggests that air hoses that are hedged have a competitory advantage over the non-hedging air hoses. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to its current and future fleet of Boeing 737-700 ‘s. The visually typical Winglets will better public presentation by widening the aeroplane ‘s scope, salvaging fuel, take downing engine care costs, and cut downing takeoff noise.

Point-to-Point Service

Southwest operates its flight point-to-point service to maximise its operational efficiency and remain cost-efficient. Most of its flights are short draw averaging about 590 stat mis. It uses the scheme to maintain its flights in the air more frequently and hence achieve better capacity use.

Secondary Airports

Southwest flies to secondary/smaller airdromes in an attempt to cut down travel holds and hence provide first-class service to its clients. It has led the industry in on-time public presentation. Southwest has besides been able to pare down its airdrome operations costs comparatively better than its rival air hoses.

Consistent aircrafts

At the bosom of Southwest ‘s success is its individual aircraft scheme: Its fleet consists entirely of Boeing 737 jets. Having common fleet significantly simplifies programming, operations and flight care. The preparation costs for pilots, land crew and mechanics are lower, because there ‘s merely a individual aircraft to larn. Purchasing, provisioning, and other operations are besides immensely simplified, thereby take downing costs. Consistent aircrafts besides enables Southwest to use its pilot crew more expeditiously.

E-Ticketing

The thought of ticketless travel was a major advantage to Southwest because it could take down its distribution costs. Southwest became electronic or ticketless back in the mid-1990s, and today they are about 90-95 % ticketless. Customers who use recognition cards are eligible for on-line minutess, and today Southwest.com bookings history for approximately 65 % of entire gross. The CEO Gary Kelly thinks that this thought would turn further and that he would n’t be surprised if e-ticketing accounted for 75 % of Southwest ‘s grosss by terminal of 2005. In the yesteryear, when there was a 10 % travel bureau committee paid, it used to be about $ 8 a engagement. But presently, Southwest is paying between 50 cents and $ 1 per booking for electronic minutess that translate to immense cost nest eggs.

Employee and Labor Relations

Southwest has been extremely regarded for its advanced direction manner. It maintains a grim focal point on high-performance relationships and its people-management patterns have been the key to its alone success in the air hose industry.

Mission Statement

To Our Employees

“We are committed to supply our Employees a stable work environment with equal chance for acquisition and personal growing. Creativity and invention are encouraged for bettering the effectivity of Southwest Airlines. Above all, Employees will be provided the same concern, regard, and caring attitude within the organisation that they are expected to portion externally with every Southwest Customer.”

The Southwest mission statement shows that the company has a strong committedness to its employees. The company affords the same regard to its employees that is provided to its clients. The Southwest mission statement is alone in that it recognizes the importance of its employees within the broader concern scheme, which emphasizes superb client service and operational efficiency. The employees reciprocate the regard, trueness and trust that Southwest demonstrates. Southwest employees are known for their trueness, dedication, attitude and invention. The employees are the separating factor between Southwest and the remainder of the air hose industry.

Hiring

Southwest hiring policy is alone non merely within the air hose industry, but besides more loosely, and revolves around happening people with the right attitude that will boom in the Southwest civilization. Extensive processs are employed to engage for positive attitude and dedication. Those who do non posses those qualities are weeded out. Colleen Barrett, a non-operational officer at Southwest, states that

“Hiring is critical, because you can non commit behaviour. Alternatively, you must place those people who already pattern the behaviours you are looking for. Then you can let Employees to be themselves and do determinations about Customer service based on common sense and their natural inclinations.” 1

Enrolling and questioning at Southwest is a two-step procedure. The first measure is a group interview, conducted by employees, where communicating accomplishments of possible campaigners are evaluated. The following stairss in this procedure are one on one interview, where the campaigners ‘ attitudes and orientation toward functioning others are evaluated. These engaging standards use to all occupation maps since all Employees at Southwest drama a client service function. A critical portion of Southwest operational scheme is that every occupation at Southwest is a client service place, whether it straight applies to the client or whether it is internal.

The tabular array below shows that even though Southwest is the most to a great extent nonionized air hose, at about 80 % , that contract dialogues between the brotherhoods and Southwest are much shorter in continuance than of the other major bearers. This shows the quality of relationship that Southwest has with its employees and with the brotherhoods that represent them.

Culture

Southwest was created as a different sort of company and from its beginnings a alone civilization was nurtured. In 1990 Colleen Barrett formed the Southwest Culture Committee. This is alone within the industry and among all big companies. The commission besides has a mission statement:

“This group ‘s end is to assist make the Southwest spirit and civilization where needed ; to enrich it and do it better where it already exists ; and to invigorate it up in topographic points where it might be “ staggering ” . In short, this group ‘s end is to make “ whatever it takes ” to make, heighten, and enrich the particular Southwest spirit and civilization that has made this such a fantastic Company/Family.”

It is this alone attack to company values that has created a civilization that differentiates itself from others. Southwest ‘s civilization is the ground why it is successful.

Customer Service

The Mission of Southwest Airlines

The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of heat, friendliness, single pride, and Company Spirit.

Approach

Herb Kelleher, laminitis of Southwest, has been quoted as stating that “ We ‘re in the Customer service concern ; we merely go on to supply air hose transit ” .2 Award winning client service is a separating feature of Southwest and it is referred to internally as “Positively Hideous Service” . It means that from the top to bottom everyone does whatever he or she can to fulfill the client. This includes Herb Kelleher, who has been known for assisting out luggage animal trainers on Thanksgiving. It is through stressing the client and employee that Southwest is able to distinguish itself from others in the air hose industry. On a more proficient degree, each employee or group within Southwest has his or her ain client. This means that every employee ‘serves ‘ in one manner or another despite non being straight involved with the rider. The machinist ‘s client is the pilot and the caterer ‘s is the flight attender.

Consequences

It can be said that the “ Positively Hideous Service ” that is alone to Southwest “is non the consequence of a section, or a plan, or a authorization from direction. It is non secondary to the merchandise ; it is the product.” This attack creates the conditions where Employees are more likely to handle clients in ways that distinguish the company from others. There are legion histories of riders who have received exceeding intervention from Southwest employees.

The inquiry that needs to be answered is how Southwest ‘s client service is different and why? Is it common for clients of other air hoses to rave about their particular service? The reply is that it is non. While Southwest does non hold a monopoly on people who are sort and who are willing to travel above and beyond to fulfill a client, such behaviour is nurtured at Southwest to a much greater extent.

It can so be concluded that the client service that is built-in to Southwest is a portion of its civilization. This civilization is supported through employee encouragement to make the supernumerary to fulfill the client. This attack inspires people who would normally merely on juncture go out of their manner to assist person, to go consistent performing artists that offer exceeding service all the clip. Southwest employees are what distinguish its client service from the other air hoses.

Technology

Southwest utilizes engineering in many ways to carry through its concern aims and keep its efficient operations. Harmonizing to its CEO, engineering peers productiveness. Launched in 1996, ticketless travel was foremost introduced by Southwest. On May 1st 2000, Southwest Airlines introduces “ SWABIZ, ” a portal that assists company travel directors in engagement and tracking trips made through its web site www.southwest.com. There are many new engineering enterprises being undertaken presently and some are in the grapevine.

Bar codifications in Boarding Base on ballss

Southwest Airlines has invested $ 12 million during the past three old ages to standardise corporate and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude notebook computing machines harmonizing to its company executives. Southwest wanted to replace its well known, brilliantly colored plastic embarkation base on ballss with an electronic system with bar-code paper embarkation base on ballss. So it installed approximately 350 touch screen ticket readers powered by Dell OptiPlex desktops. The saloon codification gives Southwest more information to automatically accommodate the figure of get oning base on ballss with the figure of riders that really board the plane.

Although the engineering will assist Southwest Airlines remain efficient by consolidating rider information for the company ‘s 3,000 day-to-day flights, there were concerns it could lengthen the clip to acquire travellers on board. However it was found that scanning each saloon codification on the embarkation base on ballss did n’t increase or shorten boarding agendas, but it did take proceedingss from administrative procedures, such as looking up client records. The new paper saloon codification system is giving Southwest ticket agents the ability to fit a client record within holding to scroll through and log into multiple package screens. The procedure is much more machine-controlled. Once the saloon codification on the embarkation base on balls is scanned at the terminal gate it checks off the individual from the rider list in existent clip.

The old procedure was manual that involved happening the information, scrolling through several package screens from reserves to check-in to embarkation. The saloon codification hardware to scan the embarkation passes has been deployed. The company is in the procedure of replacing client service back-office equipment at airdromes including at its central offices in Dallas.

Software Upgrades

Software applications, such as those used by clerks to look into in riders, are being replaced. Southwest Airlines ‘ internally written “ Airport Application Suite ” is expected to rollout following twelvemonth as the company passages from green screens to Window-based user interface. Similar to Wal-Mart Stores Inc. , Southwest Airlines believes in developing in-house the package that runs its operations. The company uses really small off-the-rack package. There are between 75 and 100 undertakings in the plants each twelvemonth supported by about 900 IT employees.

RFID

Radio frequence designation engineering, a favourable alternate to bar-coding for baggage designation, is besides on Southwest ‘s radio detection and ranging. It plans to prove RFID engineering sometime in 2006. Even though, Southwest is playing a small catch-up with other air hoses such as Air Tran, Alaska and Champion Airlines, in many instances they are able leapfrog to more sophisticated applications easy holding waited longer.

Challenges:

Southwest has emerged really successful, despite the most troubled times in the air hose market. However, it faces new challenges in the face of increasing competition from other low menu air hoses such as JetBlue, ATA air hoses, America West.

Reserved Seating

Due to increasing security guidelines since September 2001, Southwest would necessitate to fix for assigned ( reserved ) siting to track its in-flight riders. This alteration will affect big engineering investings and may impact its gate operations negatively since the current manner of unassigned seating has helped in speedy gate turnarounds.

Passenger Demand

The keep-it-simple doctrine has served Southwest good. But as its ain concern grows and grows more complex, with programs to buy tonss of new aircraft and an expected rush in rider traffic to about 80 million embarkation ‘s a twelvemonth, the simpleness scheme that has been reflected in the air hose ‘s IT doctrine is germinating. The CIO Tom Nealon says that “ It ‘s clip to accommodate our concern processes for efficiency. As our air hose graduated tables for us to supply the same sort of high-touch client service, we have to automatize a batch of things we ‘ve been able to make without engineering antecedently. The challenge is making that without professing the client touch. ” Southwest is besides sharply prosecuting client relationship direction ( CRM ) techniques and has applications to acquire insight into client ‘s wants and disfavors. Harmonizing to an interview with its CEO Gary Keller, Southwest has its focal point on bettering in two countries – client ‘s airdrome experience and in-flight experience.

In-Flight Entertainment

In an overall attempt to better client ‘s in-flight experience, in-flight amusement is something that Southwest is presently measuring and which JetBlue has been really successful at already because of its debut in its long-haul flights. In comparing, Southwest has 415 aeroplanes to see and that represents an investing determination at a whole new dimension. Additionally, Southwest has to see how things may suit into their environment. At this point, 60 % of its service is still really short draw. Southwest needs to be aware of the fact that a certain attack that has been successful for its rival may non be needfully work to its advantage.

Summary

Southwest has long been regarded as a benchmark in its industry for operational excellence. Southwest Airlines is a all right illustration of a company that is committed to its nucleus competences – efficient operations to drive its low cost construction, outstanding bringing of client service and advanced HR direction patterns. We hope this paper provided a good penetration into Southwest operations, as portion of its overall scheme, to accomplish success and derive competitory advantage.

Mentions

1.  www.southwest.com ( Southwest airlines official web site )
2.  “Southwest keeps it simple” – Air Transport World, April 2005, Pg 36
3.  “Around the World on $ 48 ( or So ) : How High Can Discount Airlines Fly? “ Strategy Management – Knowledge @ Wharton Newsletter Oct 5, 2005
4.  TechWeb – hypertext transfer protocol: //www.techweb.com/wire/ebiz/173601227
5.  “Southwest ‘s Strategy for Success: Consolidate! ” – Oracle Magazine ( Sept/Oct 2004 edition ) hypertext transfer protocol: //www.oracle.com/technology/oramag/oracle/04-sep/o54swest.html
6.  “Southwest Airlines: High Tech, Low Costs” – Eweek.com, April 2005
7.  “Jet Fuel Hedging Schemes: Options Available for Airlines and a Survey of Industry Practices” – Kellogg School of Management Research Paper, Spring 2004
8. Wining Behavior: What the Smartest, Most Successful Companies Do Differently, Terry R. Bacon and David G. Pugh, 2003
9.  Time Magazine, Oct 28th 2002 issue, Vol. 160 Issue 18, p. 45
10.  “Wings Of Change” , Information Week, March 28, 2005,
11. Labor Contract Negotiations in the Airline Industry, Monthly Labor Review, July 2003, page 24 ( Table A.A The south west clip chart 1971-2005, source-http: //www.southwest.com/about_swa/airborne.html )