Was the advantage really sustainable?

1991-1993• Southwest’s share in the market had increased from 26% to 45%• United’s share fell from 38% to 30%• Continental’s share also fell• Southwest’s success spawned a number of imitators like Kiwi,

Reno, United and Continental.

Major concern • Was southwest getting the most in competitive advantage from its

own people?• Could the competitors imitate Southwest’s successful HR Practices?

Background• Started flying on June18, 1971 with three Boeing 737 aircrafts

serving Dallas, Houston and San Antonio

• Headquartered at Love Field in Dallas

COMP

ETITORS

Texas International

Brainiff

Continental

• Used political and regulatory means to keep Southwest off the ground

• Waged a four year long legal battle leaving Southwest bankrupt at the time of its first flight

• Outcome: The Wright Amendment• It prohibited any air carrier from

offering direct service into Love Field • Neither airlines nor travel agents were

permitted to advertise connections through love field

• Basically aimed at stopping southwest

STRATEGY• Put flight attendants in hot pants• Encouraged its employees to o Identify with others, deliver great customer service and have fun• Used its location ‘Love Field’ to launch an advertising campaign -

Make love, not war

• Southwest’s stock ticker symbol

• All Southwest’s aircrafts have a small heart emblazoned on their sides

• Hearts used prominently on corporate communications and advertising

• Pursued a low fare strategy

American withdrew from some cities and USAir made a number of marketing and service mistakes.

Southwest seized the opportunity to expand in California and in 1989, from a zero market share, it became the leading airline in passenger boardings in 1993.In 1995, it served 10 cities, with more than 70 percent average market share

Result

Pricing Strategy

Only two fares – A regular coach fare and an off-peak fare

Never sold interline connections to another carrier

Has its own frequent flyer club – based on the number of trips flown, not mileage, one free ride for accumulating 16 segments

Never offers meal on the flights, instead serves beverages and peanuts

Prices same within a state

Awards took less mileage to obtain and were more widely available

PROFIT

Competitive Advantage Cost

Structure• Kelleher recognized that the lowest cost provider could leverage that cost advantage most where costs are highest• Over a decade (1984 – 1994) , Southwest’s cost only increased by 20

percent (From 5.86 cents in 1984 to 7.1 cents per mile 1994)• Saved on maintenance and training costs by using only one type of

aircraft.

Human Resource

•Southwest pilots – flies an average of 70 hours a month while other pilots average 50 hours a month

•Volunteer to help customers in need

Customer Satisfaction

•Customer always capitalised in corporate communications.

•Employees treated as internal customers

Employee productivity

•Only 81 employees per aircraft (others had 157 and 152)

•Served an average of 2,443 customers per employee(others only 795 and 840)

•Use of less congested airports

Sources of Competitive Advantage

• Profitable in everyone of the last 21 years, a record achieved by no other major US airline, profitable even in the 1991-92 period when major players were facing bankruptcy

• Earned the highest returns of any publicly traded U.S. stock

• Won the Monthly “Triple Crown’’ 24 times

• Won the Annual “Triple Crown’’ thrice

SUCCESS STORY

1993 1994Southwest 7.13 7.03

Continental 7.64 7.56

USAir 10.94 10.74

Airline costs per available seat mile

Leadership

Herb Kelleher

• Kelleher credited with being the principal driving force behind most of the changes occuring in the airline market

• Herb was able to get out effort from the people who work for him

• Brilliant, tough and charming • From the beginning, he had adopted a slightly

over the top style- always ready to promote a party and have fun

• Constantly interacted with customers and employees at Southwest

Work is important – don’t spoil it with seriousness

Leadership

• Reflects relaxed management style• Officially responsible for communication, marketing,

public relation and people• Unofficially described as combination of den mother,

management guru, and customer ombudsman• She is the backbone of the airline

Colleen Barrett

Leadership

• Human resource function renamed as “ the people department”

• Ann takes the charge seriously and believes in the two C’s – compassion and common sense

• Believes that it is imperative to get the right people into HR

• Her department is also continuously feeding back information to employees such as on time performance and turn around timesAnn Rhoades

R RECRUITMENT - Policy

• Extraordinarily selective(1993- interviewed only 16000 applicants out of 98000 and selected only 2700

• Looks for creative spirit• Emphasis on peer recruiting• Sometimes customers involved in hiring new flight attendants• Process focuses on teamwork and positive attitude• Even the advertisements emphasize the southwest spirit• Identifies the key components that comprise effective performance and

behavior by analyzing the common characteristics(like teamwork) of the top employees.

• Attitude – most important , skills can be developed• Rejected applicants are potential customers, therefore are not made to

feel inferior• Prefer people without extensive industry experience• Does not have a nepotism policy

Advertisement Campaigns

Creative

Southwest spirit

TRAINING

New Hire Celebration• Designed to get new employees

enthused and excited• Training oriented towards customer

service • All new hires exposed to the history,

principles, values, mission and culture of the company

• Emphasis on team work and team building

The Climb• Two and a half day ropes and

outward bound course• Attended by intact work teams• Entire team lives together cut-off

from phones, cars and contact with other outside issues.

• Each team develops and action plan to insure that their new behaviors are transferred to the work setting

TRAININGManager Training

• Three and a half day course on leadership, revenue management and on how the business works

• 100 percent internal• A member of the senior team

always talks openly with the participants

Other Trainings

• Two day training for front line leaders• 80 hours of training per year for

supervisors• Courses include usual offering of

communication, time management and career planning

• Customer service and interpersonal relationships also focused upon.

• 12-15 individuals with ten to fifteen years of work experience are brought together to discuss how the company is doing and how it has changed.

• Explore questions like ‘Have we delivered?

The Front-Line Forum

WORKFORCE• Low pay in the beginning, high pay when you get seniority• Employees can bid for shifts and work hours• Pilots and Flight Attendants are paid by the trip• Average wage rate at Southwest ($44,305) lower than that of

American($45,801) and United(54,380)• Southwest employees have the flexibility to work more and earn more• Executive compensation – modest• No executive stock option plan until a few years ago• No country club memberships and no company cars• Profit sharing covers all employees who have been with the firm for

over a year• Temporary workers paid salary on a pro-rata basis• Company encourages ‘days on the field’ so that employees can try front

line jobs

Salaries

WORKFORCE

• Average age of the workforce is 34 years• 23 percent of the employees are minorities (10-12 percent at the

managerial level)• Women widely represented at the highest levels of the company• Low turnover • Never had a layoff or furlough• Proof of ex-employees who can be called in case of emergencies• 89 percent unionized with 9 separate unions• The last walkout – a decade ago

Composition and Union

THE SOUTHWEST SPIRIT

Hard Work Trust and Respect

Dedication

Family and Fun

Cost Consciousness

Equality

Customer Satisfaction

Kindness

Competitive Threat• Industry characterized by poor labor relations and

authoritarian management

Continental AirlinesFrank Lorenzo led it to bankruptcy

Trans AirlineCarl Icahn faced numerous strikes

Eastern AirlinesUltimately failed because of the

conflict

American AirlinesFlight attendants

struck in an attempt to roll out

wages

Continental, USAirEmployee oriented

Management

Continental Lite• Emerged from its second bankruptcy in 1993 under the leadership of CEO

Bob Fergusan• Company was split into two operations

• Fergusan believed that by imitating Southwest’s practices, he could take advantage of greater density, shorter flights and avoid competing directly with Southwest, at least in the short term

• By summer it had expanded to 28 percent of Continental’s capacity, with plans to grow upto 40 percent

• Fares were cut dramaticallyEarlier results were mixed –• customer reaction wasn’t always positive, flyers were miffed because of no

priority boarding or meal service

First class service at business class prices

CA Lite – low fare flights for short haul

• Increased workloads for flight attendants• Lack of breaks between flights• Pilots were not provided meals in busy days• March, 1994 – Continental had worst marks of any domestic airline in terms

of customer complaints, on-time performance and mishandled baggage.Financial Results• Lost $38.5 million on revenues• Expected to break even in mid of 1994• ‘Only 20percent of CAlite’s routes were losing money’ – CFO Daniel Garton

• Fergussan denied that he had communicaation problems, saw these just as initial problems.

United’s Shuttle• Oct1, 1994 – begins its own airline-within-an-airline on the West Coast.• Operation named – ‘The Shuttle’• The goal was to cut costs on these routes by 30 percent• Service would include advance seat assignments, a first class cabin and

United’s frequent flyer mileage program

• ‘Declaration of war’• On July12, United had completed negotiations for an employee buyout• The former CFO replaced by a Chrysler Executive, Gerald Greenwald who

had no previous airline industry experience• Not everyone was sure of the success of the shuttle

Conclusion• SW airlines has gradually grown from a small airline

with 3 aircrafts to a major airline service• Since it is the only airline profitable after the Sep’11

incident we recommend a few points:- Expand their services - Low pricing strategies- Upgradation of hardware and software- Lower operational costs by using cost saving technology