In 1992 Southwest Airlines was the only major airline in the US to post a profit. In 1993 the same airline outperformed its competitors. The CEO, Herb Kelleher stated the primary and most challenging SWA goal is to offer great service at low cost. SWA was able to meet and exceed this goal by competing using a new-game strategy. They sought to restructure the airline’s business to match company strengths. Instead of adapting to the way that other airlines operated, they created their own set of rules.
They took their competitors by surprise by breaking away from the conventional wisdom of the marketplace. SWA differentiated itself by focusing on the SWA model which addressed this goal by; creating a matchless perspective on cost control, combining unique operations, championing a successful marketing campaigns, offering great service , retaining affable people and encouraging a culture focused on community and fun. An analysis of these elements and how they are interrelated allows evaluation of SWA’s ability to outperform other airlines in 1993.
First and foremost, SWA performed so well compared to other airlines due to their matchless perspective on cost control. SWA managers emphasized that “Airlines don’t have revenue problems, they have cost problems. ” SWA watched its costs so carefully that their CEO approved any expense over $1000. This encouraged employees to be cost conscious because they knew expenses were being monitored. SWA strategy deemed their costs must be lower than their competitors, and they were. SWA cost per airplane seat mile was 7. 3 cents in 1993 in comparison to an industry average of 9. 35. (See exhibit 8). SWA kept costs low compared to their competitors in all departments, particularly with their short haul, high frequency, low cost (LUV) strategy. The average flight was 65 minutes in 1993. They saw their competition as the car, and targeted customers who would normally drive those shorter distances. They cut costs in the way that they ran their operations and the people who worked for SWA were a part of this cost cutting strategy.
SWA’s unique operations differed from that of their competitors. Specific operations that set them apart included: SWA did all of its own ticketing, it did not operate a hub and spoke system, they only utilized uncongested airports, they considered both ground and air travel as direct competition, SWA did not transfer baggage directly to other airlines, they had quicker turn times in comparison to competitors, limited beverages and snacks served on the airline, and addressed other operational issues in a manner that allowed them to cut costs.
For example, because SWA did all of their own ticketing, they paid less in commissions to travel agents, who captured a 10% commission on average. SWA booked only 55% of their seats via travel agents versus the industry average of 90%. After deregulation in 1978, when industry experts claimed that specific operations such as meals, pre-assigned seats, membership in an airline reservation system and hub to spoke routes systems were vital to compete, SWA did not capitulate and add these. By declining to operate hub to spoke routes and add meals, SWA continued to save and cut costs at the same time.
Finally, SWA was able to cut costs by minimizing the time required to “turn,” or the time differential between the plane arriving and departing from the gate. SWA was able to turn two of three planes in 15 minutes or less compared to the industry average of 55 minutes. The remaining one-third had 20-minute turns scheduled. Therefore, SWA could save anywhere between 35-40 minutes per turn. Considering that SWA aimed to schedule at least 20 departures a day, multiplying this time savings per number of departures saves SWA on average 12. hours per day per location. This time savings accounted for significant cost savings. Clearly SWA’s operational strategy allowed them to cut costs without affecting great service. In fact, cost cutting initiatives such as decreasing turn time increases customer satisfaction. SWA’s Marketing strategy was simple; to advertise price, convenience and service. In addition to marketing their strengths as a company via advertising, the also painted their planes to promote their relationships with business customers.
Finally, employees observed that many SWA ambassadors were customers and that “once customers fly on us three times, they’re hooked. ” In addition to an excellent approach to cost cutting and a having a well-executed operations team, SWA stood apart from the competition by creating a corporate wide culture of community among its employees, and establishing an attitude of customer service, which in turn bred a high level of loyalty and satisfaction among both its customers and employees. Exceptional service at a low cost, provided by authentic people was the backbone of the SWA culture.
In order to hire the right people, SWA established peer hiring and invited customers to sit on employee selection panels and provide feedback for decision making process. This is one example of how SWA employed a bottom up, rather than top down, managerial style, involving their employees in decision making as much as possible. During the Persian Gulf crisis the CEO also reached out to SWA employees to survey their ideas about conserving costs, and he sent a letter to every pilot asking for their ideas on how to conserve fuel for cost savings.
The pilots responded and initiated a new procedure for departures and landings that produced significant savings. SWA also involved employees by creating a “culture committee” of 60 people across the organization at all levels to focus on the culture at SWA and work to build relationships between departments and teams. This inclusive management approach enabled employees to participate in decisions that strengthened the culture and relationships at SWA. In 1992 the company was listed as one of the top 10 employers to work for in the United States.
Another way that SWA engaged employees and strengthened company loyalty was via creating specific employee training that focused on team building. SWA valued community and believed that without the success of the community, SWA employees could not achieve personal success. Teamwork was key at SWA, whether it was engaging a team to turn a plane or working together to attain the “triple crown status” which consisted of “the fewest complaints, fewest delays, and fewest mishandles bags (per 1,000 customers) over the period of one month, based on the data the US Department of Transportation began collecting in September 1987. SWA even went as far to encourage nepotism as they must have thought that this would also strengthen loyalty internally. In 1992 there were 400 married couples out of 13,400 employees. Finally, the company has a policy of promoting from within, which saves on hiring costs and allows opportunities to employees that they may not otherwise have. All of these factors contributed to a high employee retention rate. They had a low turnover of 4. 5% in 1993 and reported a 7% companywide average for the last 4 years.
Many of the same factors encouraged a loyal workforce, which attributes to why SWA was able to keep compensation levels lower than at other major airlines. SWA adhered to the model to make educated decisions regarding where and how to enter prospective markets while simultaneously assessing market areas for potential growth. In 1993 Southwest had two uncommitted planes to utilize. There were three possible flight options; add a route between Detroit and Phoenix, or enter the Dayton or Baltimore markets.
An analysis of these three scheduling options determines that Baltimore will lead to the most favorable return on investment. Baltimore –high growth and fits SW model for short haul flights (described above). Consider competition to be cars and train traffic on East Coast. Include West Coast comparison. Based on analysis has positive profits. Right fees, rights airport. Right demand, large population. Is the weather an issue –Similar to Chicago. Employees and issue? No. Dayton has good economics. Low growth. Doesn’t follow the same model. Phonix Detroit option, economics are bad. Inefficent use of capital.