Strategic Business Management Case Analysis.

736 Crafting & Executing Strategy

Arthur A. Thompson The University of Alabama

n 2010, Southwest Airlines was the market share leader in domestic air travel in the United States; it transported more passengers from

US. airports to U.S. destinations than any other airline, and it offered more regularly scheduled domestic flights than any other airline. Southwest also had the enviable distinction of being the only major U.S. air carrier that was consistently prof- itable. The U.S. airline industry had lost money in 15 of the 30 years from 1980 through 2009, with combined annual losses exceeding combined annual profits by $43.2 billion. Yet Southwest had reported a profit every year since 1973, chiefly because of its zealous pursuit of low operating costs, low fares, and customer-pleasing service.

From humble beginnings as a quirky but scrappy underdog that flew mainly to second- ary airports (rather than high-traffic airports like Chicago O'Hare, Dallas-Fort Worth, Atlanta Hartsfield, and New York's LaGuardia and Kennedy airports), Southwest had climbed up through the industry ranks to become a major competitive force in the domestic segment of the U.S. airline industry. It had weathered industry downturns, dramatic increases in the prices of jet fuel, cataclysmic falloffs in airline traffic due to terrorist attacks and economy-wide recessions, and fare wars and other attempts by rivals to undercut its business, all the while adding more and more flights to more and more airports. Since 2000, the number of passengers flying Southwest had increased by more than 28 million annually, whereas passenger traffic on domestic routes had declined at such carriers as Ameri- can Airlines, Delta, Continental, United, and US Airways-see Exhibit 1.

John E. Gamble The University of South Ahbama

CO~APANY

Bi\CKGROUND In late 1966, Rollin King, a San Antonio entre- preneur who owned a small commuter air service, marched into Herb Kelleher's law office with a plan to start a low-cost/low-fare airline that would shuttle passenfers between San Antonio, Dallas, and Houston. Over the years, King had heard many Texas businesspeople complain about the length of time that it took to drive between the three cities and the expense of flying the airlines CUlTently serving these cities. His business con- cept for the airline was simple: attract passengers by flying convenient schedules, get passengers to their destination on time, make sure they have a good experience, and charge fares competitive with travel by automobile. Kelleher, skeptical that King's business idea was viable, dug into the pos- sibilities during the next few weeks and concluded that a new airline was feasible; he agreed to han- dle the necessary legal work and also to invest $10,000 of his own funds in the venture.

In 1967, Kelleher filed papers to incorporate the new airline and submitted an application to the Texas Aeronautics Commission for the new company to begin serving Dallas, Houston, and San Antonio.2 But rival airlines in Texas pulled every string they could to block the new airline from commencing operations, precipitating a contentious four-year parade of legal and regu- latory proceedings. Herb Kelleher led the fight on the company's behalf, eventually prevailing in

Copyright© 2010 by Arthur A. Thompson and John E. Gamble. All rights reserved.

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Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-277

Total Number o-f Domestic and International Passenget·s Traveiing on Selected Ah'lines, 2000-2009 (in thousands)

American Airlines

Domestic 68,319 77,489 72,648 76,813 76,581 71,539 66,142

International 17,951 16,580 18,858 21,313 21,562 21,233 19,578

Total 86,270 94,069 91,506 98,126 98,143 92,772 85,720

Continental Air Lines 1

Domestic 36,591 31,653 31,529 35,795 37,117 34,501 31,915 International 8,747 8,247 9,146 10,994 11,859 12,418 12,031 Total 45,338 39,900 40,675 46,789 48,976 46,919 43,946

Delta Air Lines2

Domestic 97,965 83,747 79,374 63,496 61,599 59,276 55,627 International 7,596 7,036 7,416 10,020 11,435 12,339 12,118

Total 105,561 90,783 86,790 73,516 73,034 71,615 67,745

JetBiue Airways

Domestic 1,128 5,672 11,616 18,098 20,528 20,479 20,008 International 116 408 777 1,345 2,370 Total 1,128 5,672 11,732 18,506 21,305 21,824 22,378

Northwest Airlines2

Domestic 48,462 43,314 45,959 45,141 43,812 38,449 32,542 International 8,228 7,454 7,576 7,831 8,042 10,323 8,323 Total 56,690 50,768 53,535 52,972 51,854 48,772 40,865

Southwest Airlines 72,568 72,459 81,121 96,330 101,948 101,921 101,338 (Domestic only, has no International flights)

United Air Lines 1

Domestic 72,450 57,830 60,081 57,229 56,402 51,661 45,571 International 10,625 9,532 9,490 10,770 11,011 11,409 10,454 Total 83,075 67,362 69,571 67,999 67,413 63,071 56,025

USAirways3

Domestic 56,667 43,480 37,810 31,886 51,895 48,504 44,515 International 3,105 3,679 4,598 4,609 4,978 6,272 6,460 Total 59,772 47,159 42,408 36,495 56,873 54,776 50,975

1Continental and United agreed to merge in May 2010; the deal became effective on October 1, 2010. 2Delta Air Lines and Northwest Airlines announced their intent to merge in October 2008; however, the merger did not clear all regulatory hurdles unti12010 and combined reporting did not begin until2010. 3US Airways and America West merged in September 2005; beginning in 2007, traffic data for US Airways includes the results of the merger.

Source: U.S. Department of Transportation, Bureau of Transportation Statistics, Air Carrier Statistics, Form T-100.

June 1971 after winning two appeals to the Texas constant proceedings had gradually come to Supreme Court and a favorable ruling from the enrage me. There was no merit to our competi- U.S. Supreme CourL Kelleher recalled, "The tors' legal assertions. They were simply trying to

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use their superior economic power to squeeze us dry so we would collapse before we ever got into business. I was bound and determined to show that Southwest Airlines was going to survive and was going into operation.d

In January 1971, Lamar Muse was brought in as Southwest's CEO to get operations under way. Muse was an aggressive, self-confident airline vet- eran who knew the business well and who had the entrepreneurial skills to tackle the challenges of building the airline from scratch and then com- peting head-on with the major carriers. Through private investors and an initial public offering of stock in June 1971, Muse raised $7 million in new capital to purchase planes and equipment and provide cash for start-up. Boeing agreed to supply three new 737s from its inventory, discounting its price from $5 million to $4 million and financing 90 percent of the $12 million deal. Muse was able to recruit a talented senior staff that included a number of veteran executives from other carriers. He particularly sought out people who were inno- vative, wouldn't shirk from doing things differ- ently or unconventionally, and were motivated by the challenge of building an airline from scratch. Muse wanted his executive team to be willing to think like mavericks and not be lulled into insti- tuting practices at Southwest that imitated what was done at other airlines.

In June 1971, Southwest initiated its first flights with a schedule that soon included 6 round-trips between Dallas and San Antonio and 12 round-trips between Houston and Dal- las. But the introductory $20 one-way fares to fly the Golden Tliangle, well below the $27 and $28 fares charged by rivals, attracted dis- appointingly small numbers of passengers. Southwest's financial resources were stretched so thin that the company bought fuel for several months on Lamar Muse's personal credit card. Money for parts and tools was so tight that, on occasion, company personnel got on the phone with acquaintances at rival airlines operating at the terminal and arranged to borrow what was needed. Nonetheless morale and enthusiasm remained high; com~ pany personnel displayed can-do attitudes and

adeptness at getting by on whatever resources were available.

To try to gain market visibility and drum up more passengers, Southwest decided it had to do more than run ads in the media publicizing its low fares:

• Southwest decided to have its flight hostesses dress in colorful hot pants and white knee- high boots with high heels. Recruiting ads for Southwest's first group of hostesses were headlined "Attention, Raquel Welch: You can have a job if you measure up." Two thousand applicants responded, and those selected for interviews were asked to come dressed in hot pants to show off their legs-the com- pany wanted to hire long-legged beauties with sparkling personalities. More than 30 of Southwest's first graduating class of 40 flight attendants consisted of young women who were cheerleaders and majorettes in high school and thus had experience performing in front of people while skimpily dressed.

• A second attention-getting action was to give passengers free alcoholic beverages during daytime flights. Most passengers on these flights were business travelers. Management's thinking was that many passengers did not drink duling the daytime and that with most flights being less than an hour's duration it would be cheaper to simply give the drinks away rather than collect the money.

• Taking a cue from being based at Dallas Love Field, Southwest began using the tag line "Now There's Somebody Else Up There Who Loves You." The routes between Houston, Dallas, and San Antonio became known as the Love Tliangle. Southwest's planes were referred to as Love Birds, drinks became Love Potions, peanuts were called Love Bites, drink coupons were Love Stamps, and tickets were printed on Love Machines. The "Love" cam- paign set the tone for Southwest's approach to its customers and company efforts to make flying Southwest an enjoyable, fun, and differentiating experience. (Later, when the company went public, it chose LUV as its stock-trading symbol.)

" In order to add more flights without buying more planes, the head of Southwest's ground operations came up with a plan for ground

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Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-279

crews to off-load passengers and baggage, refuel the plane, clean the cabin and restock the galley, on-load passengers and bag- gage, do the necessary preflight checks and paperwork, and push away from the gate in 10 minutes. The 10-minute tum became one of Southwest's signatures dming the 1970s and 1980s. (In later years, as passenger vol- ume grew and many flights were filled to capacity, the turnaround time gradually expanded to 25 minutes-because it took more time to unload and load a plane with 125 passengers, as compared with a half-full plane with just 60-65 passengers. Even so, the 25-minute average turnaround time at South- west during the 2000-2009 period was shorter than the 30- to 50-minute turnaround times typical at other major airlines.)

• In late November 1971, Lamar Muse came up with the idea of offering a $10 fare to pas- sengers on the Friday-night Houston-Dallas flight. With no advettising, the 112-seat flight sold out. This led Muse to realize that South- west was serving two quite distinct types of travelers in the Golden Triangle market: ( 1) business travelers who were more time- sensitive than price-sensitive and wanted weekday flights at times suitable for conduct- ing business and (2) price-sensitive leisure trav- elers who wanted lower fares and had more flexibility about when to fly. 4 He came up with a two-tier on-peak/off-peak pricing structure in which all seats on weekday flights depmting before 7:00P.M. were priced at $26 and all seats on other flights were priced at $13. Passenger traffic increased significantly-and system- wide on-peak/off-peak pricing soon became standard across the whole airline industry.

• In 1972, the company decided to move its flights in Houston from the newly opened Houston Intercontinental Airport (where it was losing money and where it took 45 min- utes to get to downtown) to the abandoned Houston Hobby Airport located much closer to downtown Houston. Despite being the only carrier to fly into Houston Hobby, the results were spectacular-business travelers who flew to Houston frequently from Dallas and San Antonio found the Houston Hobby location far more convenient, and passenger traffic doubled almost immediately.

• In early 1973, in an attempt to fill empty seats on its San Antonio-Dallas flights, Southwest cut its regular $26 fare to $13 for all seats, all days, and all times. When Braniff Interna- tional, at that time one of Southwest's major rivals, announced $13 fares of its own, South- west retaliated with a two-page ad, run in the Dallas newspapers, headlined "Nobody is going to shoot Southwest Airlines out of the sky for a lousy $13" and containing copy saying Braniff was trying to run Southwest out of business. The ad announced that Southwest would not only match Braniff's $13 fare but that it would also give passen- gers the choice of buying a regular-priced ticket for $26 and receiving a complimentary fifth of Chivas Regal scotch, Crown Royal Canadian whiskey, or Smimoff vodka (or, for nondrinkers, a leather ice bucket). More than 75 percent of Southwest's Dallas-Houston passengers opted for the $26 fare, although the percentage dropped as the two-month promotion wore on and corporate control- lers began insisting that company employees use the $13 fare. The local and national media picked up the story of Southwest's offet~ pro- claiming the battle as a David-versus-Goliath struggle in which the upstart Southwest did not stand much of a chance against the much larger and well-established Braniff; grassroots sentiment in Texas swung to Southwest's side.

All these moves paid of£ The resulting gains in passenger traffic enabled allowed Southwest to report its first-ever annual profit in 1973.

During the rest of the 1970s, Southwest found itself embroiled in another round of legal and regulatory battles. One involved Southwest's refusal to move its flights from Dallas Love Field, located 10 minutes from downtown, to the newly opened Dallas-Fort Worth (DFW) Regional Airport, which was 30 minutes from downtown Dallas. Local officials were furious because they were counting on fees from Southwest's flights in and out of DFW to help service the debt on the bonds issued to finance the construction of DFW Southwest's position was that it was not

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required to move because it had not agreed to do so or been ordered to do so by the Texas Aero- nautics Commission-moreover, the company's headquarters were located at Love Field. The courts eventually ruled that Southwest's opera- tions could remain at Love Field.

A second battle ensued when rival airlines protested Southwest's application to begin serv- ing several smaller cities in Texas; their pro- test was based on arguments that these markets were already well served and that Southwest's entry would result in costly overcapacity. South- west countered that its low fares would allow more people to fly and grow the market. Again, Southwest prevailed and its views about low fares expanding the market proved accurate. In the year before Southwest initiated service, 123,000 passengers flew from Harlingen Airport in the Rio Grande Valley to Houston, Dallas, or San Antonio; in the 11 months following Southwest's initial flights, 325,000 passengers flew to the same three cities.

Believing that Braniff and Texas Interna- tional were deliberately engaging in tactics to harass Southwest's operations, Southwest con- vinced the U.S. government to investigate what it considered predatory tactics by its chief rivals. In February 1975, Braniff and Texas International were indicted by a federal grand jury for conspir- ing to put Southwest out of business--a violation of the Sherman Antitrust Act. The two airlines pleaded ''no contest" to the charges, signed cease- and-desist agreements, and were fined a modest $100,000 each.

When Congress passed the Airline Deregu- lation Act in 1978, Southwest applied to the Civil Aeronautics Board (now the Federal Avia- tion Agency) to fly between Houston and New Orleans. The application was vehemently opposed by local government officials and airlines oper- ating out of DFW because of the potential for passenger traffic to be siphoned away from DFW. The opponents solicited the aid of Fort Worth congressman Jim Wright, then the major- ity leader of the U.S. House of Representatives, who took the matter to the floor of the House of Representatives; a rash bf lobbying and maneu- vering ensued. What emerged came to be known as the Wright Amendment of 1979: no airline may provide nonstop or through-plane service from Dallas Love Field to any city in any state

except for locations in Texas, Louisiana, Arkan- sas, Oklahoma, and New Mexico. Southwest was prohibited from advertising, publishing schedules or fares, or checking baggage for travel from Dal- las Love Field to any city it served outside the five-state "Wright Zone." The Wright Amend- ment continued in effect until 1997, when Ala- bama, Mississippi, and Kansas were added to the Wright Zone; in 2005, Missouri was added to the Wright Zone. In 2006, after a heated battle in Congress, legislation was passed and signed into law that repealed the Wright Amendment begin- ning in2014.

The legal, regulatory, and competitive battles that Southwest fought in its early years produced a strong esprit de corps among Southwest person- nel and a drive to survive and prosper despite the odds. With newspaper and TV stolies report- ing Smithwest's difficulties regularly, employees were fully aware that the airline's existence was constantly on the line. Had the company been forced to move from Love Field, it would most likely have gone under, an outcome that employ- ees, Southwest's rivals, and local government offi- cials understood well. According to Southwest's former president Colleen Barrett, the obstacles thrown in Southwest's path by competitors and local officials were instrumental in building Herb Kelleher's passion for Southwest Airlines and ingraining a combative, can-do spirit into the cor- porate culture:

They would put twelve to fifteen lawyers on a case and on our side there was Herb. They almost wore him to the ground. But the more arrogant they were, the more determined Herb got that this airline was going to go into the air-and stay there.

The warrior mentality, the very fight to sur- vive, is truly what created our culture. 5

When Lamar Muse resigned in 1978, South- west's board wanted Herb Kelleher to take over as chairman and CEO. But Kelleher enjoyed practicing law and, while he agreed to become chairman of the board, he insisted that someone else be CEO. Southwest's board appointed How- ard Putnam, a group vice president of marketing

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Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-281

services at United Airlines, as Southwest's president and CEO in July 1978. Putnam asked Kelleher to become more involved in South- west's day-to-day operations, and over the next three years, Kelleher got to know many of the company's personnel and observe them in action. Putnam announced his resignation in the fall of 1981 to become president and chief operating officer at Braniff International. This time, Southwest's board succeeded in persuading Kelleher to take on the additional duties of CEO and president.

Sustained Growth and the Emer- gence of a New Industry Leader, 1981-2009 When Herb Kelleher took over in 1981, Southwest was flying 27 planes to 14 destination cities and had $270 million in revenues and 2, 100 employees. Over the next 20 years, Southwest Airlines prospered under Kelleher's leadership. When Kelleher stepped

down as CEO in mid-2001, the company had 350 planes flying to 58 U.S. airports, annual revenues of $5.6 billion, more than 30,000 employees, and 64 million fare-paying passengers annually. Under the two CEOs who succeeded Kelleher, South- west continued its march to becoming the market share leader in domestic air travel; by 2009, it was eaming annual revenues of $10.4 billion, employ- ing 34,874 people, flying 537 planes to 69 airports in 36 states, and transporting some 86 million fare-paying passengers and some 100 million pas- sengers (including those traveling on frequent flyer awards) annually. In the process, the com- pany won more industry Triple Crown Awards for best on-time record, best baggage handling, and fewest customer complaints than any other U.S. airline.

Exhibit 2 provides a five-year summary of Southwest's financial and operating perfor- mance. Exhibit 3 provides selected financial and operating data for major U.S. air carriers during 1995-2009.

:. Summary of Southwest Airlines' financial and Operating Pedonnance, 2005-2009

Financial Data ($ millions, except per share data) Operating revenues $10,350 $11,023 $ 9,861 $ 9,086 $ 7,584

Operating expenses 10,088 10,574 9,070 8,152 6,859 ---

Operating income 262 449 791 934 725

Other expenses (income) net 98 171 (267) 144 (54)

Income before taxes 164 278 1,058 790 779

Provision for income taxes 65 100 413 291 295 --- Net Income $ 99 $ 178 $ 645 $ 499 $ 484 --- --- --- --- --- Net income per share, basic $0.13 $0.24 $0.85 $0.63 $0.61

Net income per share, .13 .24 .84 .61 .60 diluted

Cash dividends per common $0.018 $0.018 $0.018 $0.018 $0.018 share

Total assets at period-end $14,269 $14,068 $16,772 $13,460 $14,003

Long-term obligations at $ 3,325 $ 3,498 $ 2,050 $ 1,567 $ 1,394 period-end

Stockholders' equity at $ 5,466 $ 4,953 $ 6,941 $ 6,449 $ 6,675 period-end

(Continued)

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(Concluded)

Operating Data Revenue passengers carried 86,310,229 88,529,234 88,713,472 83,814,823 77,693,875 Enplaned passengers 1 101,338,228 101,920,598 101 ,910,809 96,276,907 88,379,900 Revenue passenger miles 74,456,710 73,491,687 72,318,812 67,691,289 60,223,100

(RPMs) (OOOs) Available seat miles (ASMs) 98,001,550 103,271,343 99,635,967 92,663,023 85,172,795

(OOOs) Load facto~ 76.0% 71.2% 72.6% 73.1% 70.7% Average length of passenger 863 830 815 808 775

haul (miles) Average aircraft stage length 639 636 629 622 607

(miles) Trips flown 1, 125,111 1,191,151 1,160,699 1,092,331 1,028,639 Average passenger fare $114.61 Passenger revenue yield per 13.29¢

RPM Operating revenue yield per 10.56¢

ASM Operating expenses per 10.29¢

ASM Fuel costs per gallon $2.12

(average) Fuel consumed, in gallons 1,428

(millions) Full-time equivalent 34,726

employees at year-end Size of fleet at year-end3 537

11ncludes passengers traveling on free travel award tickets. 2Revenue passenger miles divided by available seat miles. 3includes leased aircraft. Source: Southwest Airlines, 2009 10-K report, p. 23.

ELLEHE ESTlS

E EO Herb Kelleher majored in philosophy at Wes- leyan University in Middletown, Connecticut, graduating with honors. He eamed his law degree at New York University, again graduat- ing with honors and also serving as a member of the law review. After graduation, he clerked for a New Jersey Supreme Court justice for two years and then joined a law firm in Newark. Upon

$119.16 $106.60 $104.40 $93.68 14.35¢ 13.08¢ 12.93¢ 12.09¢

10.67¢ 9.90¢ 9.81¢ 8.90¢

10.24¢ 9.10¢ 8.80¢ 8.05¢

$2.44 $1.80 $1.64 $1.13

1,511 1,489 1,389 1,287

35,499 34,378 32,664 31,729

537 520 481 445

marrying a woman from Texas and becoming enamored with Texas, he moved to San Anto- nio, where he became a successful lawyer and came to represent Rollin King's small aviation company.

When Herb Kelleher took on the role of Southwest's CEO in 1981, he made a point of visiting with maintenance personnel to check on how well the planes were running and of talking with the flight attendants. Kelleher did not do much managing from his office, preferring instead to be out among the troops as much as he could. His style was to listen and observe and to offer

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Case 20 Southwest Airlines in 2010: Culture, Values, ancl Operating Practices C-283

Selected Operating and Financial Data Major U.S. Aidine Caniers, years)

Passengers (in millions) 559.0 666.2 738.3 769.6 743.3 703.9 Flights (in thousands) 8,062 9,035 11,564 11,399 10,841 10,373 Revenue passenger miles (in billions) 603.4 692.8 778.6 829.4 812.4 769.5 Available seat miles (in billions) 807.1 987.9 1,002.7 1,037.7 1,021.3 957.2 Load factor 67.0 72.4 77.7 79.9 79.5 80.4 Passenger revenues (in millions) $69,470 $93,622 $93,500 $107,678 $111,542 $91,331 Operating profit (loss) (in millions) $5,852 $6,999 $427 $9,344 ($3,348) $2,409 Net profit (loss) excluding one-time $2,283 $2,486 ($5,782) $4,998 ($9,464) ($2,799)

charges and gains (in millions) Total employees 546,987 679,967 562,467 560,997 556,920 536,200

Sources: Air Transport Association, 2010 Economic Report, pp. 8, 19, 23, and 30; 2009 Economic Report, p. 19; Air Transport Association, 2008 Economic Report, p. 19; and Air Transport Association, 2005 Economic Report, p. 7.

encouragement. Kelleher attended most gradu- ation ceremonies of flight attendant classes, and he often appeared to help load bags on "Black Wednesday," the busy travel day before Thanks- giving. He was held in the highest regard by South- west employees and knew thousands of their names. When he attended a Southwest employee function, he was swarmed like a celebrity.

Kelleher had an affinity for bold-print Hawai- ian shirts, owned a tricked-out motorcycle, and made no secret of his passion for cigarettes and Wild Turkey whiskey. He loved to make jokes and engage in pranks and corporate antics, prompting some people to refer to him as the "clown prince'' of the airline industry. He once appeared at a company gathering dressed in an Elvis costume and had arm-wrestled a South Carolina company executive at a public event in Dallas for rights to use "Just Plane Smart" as an advertising slogan. 6

Kelleher was well known inside and outside the company for his combativeness, particularly when it came to beating back competitors. On one occa- sion, he reportedly told a group of veteran employ- ees, "If someone says they're going to smack us in the face-knock them out, stomp them out, boot them in the ditch, cover them over, and move on to the next thing. That's the Southwest spirit at work." 7 On another occasion, he said, "I love bat- tles. I think it's part of the lrish in me. It's like what Patton said, 'War is hell and I love it so.' That's how I feel. I've never gotten tired of fighting." 8

While Southwest was deliberately combative and flamboyant in some aspects of its opera- tions, when it came to the financial side of the business Kelleher insisted on fiscal conservatism, a strong balance sheet, comparatively low levels of debt, and zealous attention to bottom-line profitability. While believing strongly in being prepared for adversity, Kelleher had an aversion to Southwest personnel spending time drawing up all kinds of formal strategic plans, saying, "Reality is chaotic; planning is ordered and logi- caL The meticulous nit-picking that goes on in most strategic planning processes creates a men- tal straightjacket that becomes disabling in an industry where things change radically from one day to the next." Kelleher wanted South- west managers to think ahead, have contingency plans, and be ready to act when it appeared that the future held significant risks or when new conditions suddenly appeared and demanded prompt responses.

Kelleher was a strong believer in the principle that employees--not customers--came first:

You have to treat your employees like your cus- tomers. When you treat them right, then they will treat your outside customers right. That has been a very powerful competitive weapon for us. You've got to take the time to listen to people's ideas. lf you just tell somebody no, that's an act of power and, in my opinion, an abuse of power. You don't want to constrain people in their thinking. 9

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Another indication of the importance that Kelleher placed on employees was the message he had penned in 1990 that was prominently dis- played in the lobby of Southwest's headqua1ters in Dallas:

The people of Southwest Airlines are "the creators" of what we have become-and of what we will be.

Our people transformed an idea into a legend. That legend will continue to grow only so long as it is nourished-by our people's indomitable spirit, boundless energy, immense goodwill, and burning desire to excel.

Our thanks-and our love-to the people of Southwest Airlines for creating a marvelous fam-

. ily and a wondrous airline.

In June 2001, Herb Kelleher stepped down as CEO but continued on in his role as chairman of Southwest's board of directors and the head of the board's executive committee; as chairman, he played a lead role in Southwest's strategy, expan- sion to new cities and aircraft scheduling, and governmental and industry affairs. In May 2008, after more than 40 years of leadership at South- west, Kelleher retired as chairman; he was, how- ever, scheduled to remain a full-time Southwest employee until July 2013.

E S IP

2001-2010 In June 2001, responding to anxious investor con- cerns about the company's leadership succession plans, Southwest Airlines began an orderly trans- fer of power and responsibilities from Herb Kelle- her, age 70, to two of his most trusted proteges: James F. Parke1; 54, Southwest's general coun- sel, succeeded Kelleher as Southwest's CEO, and Colleen Barrett, 56, Southwest's executive vice president-customers and self-described keeper of Southwest's pep-rally corporate culture, became president and chief operating officer.

James Parker's association with Herb Kelleher went back 23 years, to the time when they were colleagues at Kelleher's old law firm. Parker

moved over to Southwest from the law firm in February 1986. Parker's profile inside the com- pany as Southwest's vice president and gen- eral counsel had been relatively low, but he was Southwest's chief labor negotiator, and much of the credit for Southwest's good relations with employee unions belonged to him. Prior to his appointment as CEO, Parker had been a mem- ber of the company's executive planning com- mittee; his experiences ranged from properties and facilities to technical services team to the company's alliances with vendors and partners. Parker and Kelleher were said to think much alike, and Parker was regarded as having a good sense of humor, although he did not have as col- orful and flamboyant a personality as Kelleher. Parker was seen as an honest, straight-arrow kind of person who had a strong grasp of Southwest's culture and market niche and who could be nice or tough, depending on the situation. When his appointment was announced, Parker said:

There is going to be no change of course insofar as Southwest is concerned. We have a very experi- enced leadership team. We've all worked together for a long time. There will be evolutionary changes in Southwest, just as there have always been in our history. We're going to stay true to our business model of being a low-cost, low-fare airline. 10

Parker retired unexpectedly, for personal rea- sons, in July 2004, stepping down as CEO and vice chairman of the board and also resigning from the company's board of directors. He was succeeded by Gary C. Kelly.

Colleen Barrett began working with Kelle- her as his legal secretary in 1967 and had been with Southwest since 1978. As executive vice president-customers, Barrett had a high profile among Southwest employees and spent most of her time on culture building, morale building, and customer service; her goal was to ensure that employees felt good about what they were doing and felt empowered to serve the cause of South- west Airlines. 11 She and Kelleher were regarded as Southwest's guiding lights, and some analysts said she was essentially functioning as the com- pany's chief operating officer (COO) prior to her

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Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-285

formal appointment as president. Much of the credit for the company's strong record of cus- tomer service and its strong-culture work climate belonged to Barrett.

Barrett had been the driving force behind lin- ing the hallways at Southwest's headquarters with photos of company events and trying to create a family atmosphere at the company. Believing it was important to make employees feel cared about and important, Barrett had put together a network of contacts across the company to help her stay in touch with what was happening with employees and their families. When network members learned about events that were worthy of acknowledgment, the word quickly got to Barrett--the information went into a database, and an appropriate greeting card or gift was sent. Barrett had a remarkable ability to give gifts that were individualized and that connected her to the recipient. 12

Barrett was the first woman appointed as president and COO of a major US. airline. In October 2001, Fortune ranked Colleen Barrett 20th on its list of the 50 most powerful women in American business. Barrett retired as president in July 2008, but was scheduled to remain as a full- time Southwest employee until2013.

Gary Kelly was appointed vice chairman of the board of directors and CEO of Southwest effective July 15, 2004. Prior to that time, Kelly was executive vice president and chief finan- cial officer (CFO) from 2001 to 2004, and vice president-finance and CFO from 1989 to 2001. He joined Southwest in 1986 as its controller. In 2008, effective with the retirement of Kelleher and Barrett, Kelly assumed the titles of chairman of the board, CEO, and president.

When Kelly was named CEO in 2004, Herb Kelleher said:

Gary Kelly is one of our brightest stars, well respected throughout the industry and well known, over more than a decade, to the media, analyst, and investor communities for his excellence. As part of our Board's succession planning, we had already focused on Gary as Jim Parker's succes- sor, and that process has simply been accelerated by .Jim's personal decision to retire. Under Gary's

leadership, Southwest has achieved the strongest balance sheet in the American airline industry; the best fuel hedging position in our industry; and tre- mendous progress in technology. 13

During his tenure as CEO, Kelly and other top-level Southwest executives had sharpened and fine-tuned Southwest's strategy in a number of areas, continued to expand operations (add- ing both more flights and initiating service to new airports), and worked to maintain the company's low-cost advantage over its domestic rivals.

Kelly saw four factors as keys to Southwest's recipe for success: 14

• Hire great people, treat 'em like family. • Care for our Customers warmly and person-

ally, like they're guests in our home. • Keep fares and operating costs lower than

anybody else by being safe, efficient, and operationally excellent.

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

To help Southwest be a standout performer on these four key success factors, Kelly had estab- lished five strategic objectives for Southwest: 15

• Be the best place to work. • Be the safest, most efficient, and most reliable

airline in the world. • Offer customers a convenient flight schedule

with lots of flights to lots of places they want to go.

• Offer customers the best overall travel experience.

• Do all of these things in a way that maintains a low cost structure and the ability to offer low fares.

During 2008-2009, Kelly initiated a slight revision of Southwest's mission statement and also spearheaded a vision statement that called for a steadfast focus on a triple bottom line of Performance, People, and Planet-see Exhibit 4.

AIRLI ES'

From day one, Southwest had pursued a low- cost/low-price/no-frills strategy. Its signature low

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.s. Southwest Airline's Mission, Vision, and Triple Bottom line Commitment to Performance, People, and Planet

THE MISSION OF SOUTHWEST AIRLINES The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

TO OUR EMPLOYEES

We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.

TO OUR COMMUNITIES

Our goal is to be the hometown airline of every community we serve, and because those communities sustain and nurture us with their support and loyalty, it is vital that we, as individuals and in groups, embrace each community with the SOUTHWEST SPIRIT of involvement, service, and caring to make those communities better places to live and work.

TO OUR PLANET

We strive to be a good environmental steward across our system in all of our hometowns, and one component of our stewardship is efficiency, which by its very nature, translates to eliminating waste and conserving resources. Using cost-effective and environmentally beneficial operating procedures (including facilities and equipment), allows us to reduce the amount of materials we use and, when combined with our ability to reuse and recycle material, preserves these environmental resources.

TO OUR STAKEHOLDERS

Southwest's vision for a sustainable future is one where there will be a balance in our business model between Employees and Community, the Environment, and our Financial Viability. In order to protect our world for future generations, while meeting our commitments to our Employees, Customers, and Stakeholders, we will strive to lead our industry in innovative efficiency that conserves natural resources, maintains a creative and innovative workforce, and gives back to the Communities in which we live and work.

Source: Southwest Airlines, "One Report, 2009;' ' ·· . ·

fares made air travel affordable to a wide seg- ment of the U.S. population-giving substance to its tag line "The Freedom to Fly." It employed a relatively simple fare structure, with all of the fare options plainly displayed at the company's website. The lowest fares were usually nonre- fundable but could be applied to future travel on Southwest Airlines without incurring a change fee (rival airlines charged a change fee of $100 to $175), and the company's advance purchase requirements on tickets were more lenient than those of its rivals. Many Southwest flights had some seats available at deeply discounted fares, provided they were purchased online at the com- pany's website.

In November 2007, Southwest introduced a new Business Select fare to attract economy- minded business travel~rs; Business Select cus- tomers had early boarding privileges, received extra Rapid Rewards (frequent flyer credits), and a free cocktail. In 2008, rival airlines instituted a

, accessed August 20, 2010.

series of add-on fees-including a fuel surcharge for each flight, fees for checking bags, fees for processing frequent flyer travel awards, fees for buying a ticket in person at the airport or calling a toll-free number to speak with a ticket agent to make a reservation, fees for changing a previously purchased ticket to a different flight, and fees for in-flight snacks and beverages-to help defray skyrocketing costs for jet fuel (which had climbed from about 15 percent of operating expenses in 2000 to 40 percent of operating expenses in mid- 2008). Southwest, however, choose to forgo a !a carte pricing and stuck with an all-inclusive fare price. During 2009, Southwest ran an ad campaign called "Bags Fly Free" to publicize the cost savings of flying Southwest rather than pay- ing the $20 to $50 fees that rival airlines charged for a first or second checked bag.

When advance reservations were weak for particular weeks or times of the day or on cer- tain routes, Southwest made a regular practice

Southwest Airlines in 2010: Culture, Values, and Operating Practices 747

Case 20 Southwest Airli.nes in 2010: Culture, Values, and Operating Practices C-287

of initiating special fare promotions to stimulate ticket sales on flights that otherwise would have had numerous empty seats. For instance, the com- pany had used fare sales to combat slack air travel during much of the recession of 2008-2009.

The combined effect of Southwest's "Bags Fly Free" ads and periodic fare sales resulted in company-record load factors for every month from July through December 2009. (A load fac- tor was the percentage of all available seats on all flights that were occupied by fare-paying passen- gers.) Southwest continued to run the "Bags Fly Free" ads during the first half of 2010. In June 2010, to celebrate its 39 years of flying, South- west instituted a two-day special promotion of $39 one-way fares for travel up to 450 miles, $79 one-way fares for travel between 451 and 1,000 miles, and $119 one-way fares for travel between 1,001 and 1,500 miles; the fares were good for travel from September 8, 20 l 0, through November 17, 2010 to select destinations.

Southwest was a shrewd practitioner of the concept of price elasticity, proving in one mar- ket after another that the revenue gains from increased ticket sales and the volume of passen- ger traffic would more than compensate for the revenue erosion associated with low fares. When Southwest entered the Florida market with an introductory $17 fare from Tampa to Fort Lau- derdale, the number of annual passengers fly- ing that route jumped 50 percent, to more than 330,000. In Manchester, New Hampshire, passen- ger counts went from 1.1 million in 1997, the year prior to Southwest's entry, to 3. 5 million in 2000, and average one-way fares dropped from just over $300 to $129. Southwest's success in stimulating higher passenger traffic at airports across the United States via low fares and frequent flights had been coined the "Southwest etTect" by per- sonnel at the US. Department of Transportation. Exhibit 5 shows the cities and airports Southwest served in May 2010. Southwest began service to Boston, New York (LaGuardia), Minneapolis- St. Paul, and Milwaukee in 2009. Management had announced plans for Southwest to begin service to Newark, New Jersey and two South Carolina airports-Charleston and Greenville- Spartanburg-in 2011.

Unlike the hub-and-spoke route systems of rival airlines (where operations were concen- trated at a limited number of hub cities and most

destinations were served via connections through the hub), Southwest's route system had been care- fully designed to concentrate on flights between pairs of cities 150 to 700 miles apart that handled enough passenger traffic to allow Southwest to offer a sizable number of daily flights. As a gen- eral rule, Southwest did not initiate service to an airp01i unless it envisioned the potential for origi- nating at least 8 flights a day there and saw oppor- tunities to add more flights over time-in Denver, for example, Southwest had boosted the number of daily departures from 13 in January 2006 (the month in which service to and from Denver was initiated) to 79 daily departures in May 2008 and to 129 departures in May 2010. Southwest's point-to-point route system minimized connec- tions, delays, and total trip time-its emphasis on nonstop flights between pairs of cities allowed about 75 percent of Southwest's passengers to fly nonstop to their destination. While a majority of Southwest's flights involved actual in-air flight times of less than 90 minutes, in recent years the company had added a significant number of non- stop flights to more distant airports where its low fares could generate profitable amounts of pas- senger traffic.

Southwest's frequent flyer program, Rapid Rewards, was based on trips flown rather than mileage. Rapid Rewards customers received one credit for each one-way trip or two credits for each round-trip flown and could also earn credits by using the services of Southwest's car rental, hotel, and credit card partners. There were two principal types of travel awards:

• Standard Award~-these were for Rapid Rewards members who accumulated one free round-trip after the accumulation of 16 cred- its within 24 consecutive months. Standard Awards were valid for one free round-trip to any destination available on Southwest Air- lines, had to be used within 12 months, and were subject to seat restrictions and blackout dates around certain major holidays.

• Companion Passes-these were for Rapid Rewards members who accumulated 100 credits within a 12-month period; these passes provided unlimited free round-trip travel to any destination available on Southwest for a designated companion of a qualifying Rapid Rewards Member who purchased a ticket or

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Airports and Cities Served by Southwest Airlines, May 2010

Chicago Midway 224 29 51 Las Vegas 223 19 57 Baltimore/Washington 181 20 44 Phoenix 177 24 44 Houston (Hobby) 135 17 30 Dallas (Love Field) 131 15 15 Denver 129 14 42 Los Angeles (LAX) 116 11 20 Oakland 114 13 20 Orlando 104 12 33

Albany Fort Myers/Naples Minneapolis/St. Paul Renoffahoe Albuquerque Harlingen/South Padre Nashville Sacramento Amarillo Island New Orleans St. Louis Austin Hartford/Springfield New York (LaGuardia) Salt Lake City Birmingham Indianapolis Norfolk San Antonio Boise Long Island (MacArthur) Oklahoma City San Francisco Boston Logan Jackson, MS Omaha San Jose Buffalo Jacksonville Ontario, CA Seattleffacoma Burbank, CA Kansas City Orange County, CA Spokane Cleveland Little Rock Panama City, FL Tampa Columbus, OH Louisville Philadelphia Tucson Corpus Christi, TX Lubbock Pittsburgh Tulsa Detroit Metro Manchester, NH Portland, OR Washington, DC (Dulles) EIPaso Midland/Odessa, TX Providence West Palm Beach Fort Lauderdale Milwaukee Raleigh-Durham

Source: Southwest Airlines, · , accessed August 5, 2010.

used a free travel award ticket. The Rapid Rewards member and designated compan- ion had to travel together on the same flight. Companion Passes were valid for 12 months after issuance and were not subject to seat restrictions or blackout dates.

In addition, Rapid Rewards members who flew 32 qualifying flights within a 12-month period received priority boarding privileges for a year. Southwest customers redeemed 2.4 million free ticket awards during 2009 and 2.8 million free ticket awards in both 2007 and 2008. Free travel award usage accounted for about 8 percent of

Southwest's total revenue passenger miles flown during 2007-2009. Since the inception of Rapid Rewards in 1987, approximately 16 percent of all fully earned awards had expired without being used.

Southwest's approach to delivering good cus- tomer service and creating customer satisfac- tion was predicated on presenting a happy face to passengers, displaying a fun-loving attitude,

Southwest Airlines in 2010: Culture, Values, and Operating Practices 749

Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-289

and doing things in a manner calculated to make sure passengers had a positive flying experience. The company made a speciai effort to employ gate personnel who enjoyed interacting with cus- tomers, had good interpersonal skills, and dis- played cheery, outgoing personalities. A number of Southwest's gate personnel let their wit and sense of humor show by sometimes entertain- ing those in the gate area with trivia questions or contests such as "Who has the biggest hole in their sock?" Apart from greeting passengers coming onto planes and assisting them in finding open seats and stowing baggage, flight attendants were encouraged to be engaging, converse and joke with passengers, and go about their tasks in ways that made passengers smile. On some flights, attendants sang announcements to passengers on takeoff and landing. On one flight while pas- sengers were boarding, an attendant with bunny ears popped out of an overhead bin exclaiming "Surprise!" The repertoires to amuse passengers varied from flight crew to flight crew.

During their tenure, both Herb Kelleher and Colleen Barrett had made a point of send- ing congratulatory notes to employees when the company received letters from customers compli- menting particular Southwest employees; com- plaint letters were seen as leaming opportunities for employees and reasons to consider making adjustments. Employees were provided the fol- lowing policy guidance regarding how far to go in trying to please customers:

No Employee will ever be punished for using good judgment and good old common sense when try- ing to accommodate a Customer-no matter what our rules are. 16

When you empower People to make a posi- tive difference every day, you allow them to decide. Most guidelines are written to be broken as long as the Employee is leaning toward the Customer. We follow the Golden Rule and try to do the right thing and think about our Customer. 17

Southwest executives believed that conveying a friendly, fun-loving spirit to customers was the key to competitive advantage. As one Southwest manager put it, "Our fares can be matched; our airplanes and routes can be copied. But we pride ourselves on our customer service." 18

In 2007, Southwest did an "extreme gate makeover'' to improve the airport experience of customers. The makeover included adding (l) a

business-focused area with padded seats, tables with power outlets, power stations with stools, and a Hat-screen TV with news programming, and (2) a family-focused area. with smaller tables and chairs, power stations for charging electrical devices, and kid-friendly program- ming on a flat-screen TV.

Southwest was continually on the lookout for novel ways to tell its story, make its distinctive persona come alive, and strike a chord in the minds of air travelers. Many of its print ads and billboards were deliberately unconventional and attention~getting so as to create and reinforce the company's maverick, fun-loving, and combative image. Some previous campaigns had used the slo- gans "The Low-Fare Airline" and "The All-Time On-Time Airline"; others had touted the compa- ny's T1iple Crown Awards. One of the company's billboard campaigns highlighted the frequency of the company's flights with such headlines as "Austin Auften," "Phoenix Phrequently,'' and "L.A. A.S.A.P." Each holiday season since 1985, Southwest had run a "Christmas Card" ad on TV featuring children and their families from the Ronald McDonald Houses and Southwest employees. Fresh advertising cam- paigns were launched periodically-Exhibit 6 shows four representative ads.

In 2002, Southwest began changing the look of its planes, updating its somewhat drab gold-orange-red scheme to a much fresher and brighter canyon blue/red/gold/orange scheme-see Exhibit 7.

Southwest tended to advertise far more heav- ily than any other U.S. earlier. According to The Nielsen Company, during the first six months of 2009, Southwest boosted its ad spending by 20 percent, to $112.6 million, to hammer home its "Bags Fly Free" message. Passenger traffic at Southwest subsequently rose, while passenger volumes went in the opposite direction at South- west's five largest competitors-Delta, Ameri- can, United, Continental, and US Airways, all of which had recently introduced or increased fees for checked baggage. Passenger travel on South- west's domestic flights rose by more than 28 mil- lion passengers annually from 2000 through 2009, whereas passenger volnme on domestic flights

750 Crafting & Executing Strategy

C-290 Part 2 Cases in Crafting and Executing Strategy

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Southwest Airlines in 2010: Culture. Values, and Operating Practices 751

Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-291

Old Color Scheme (Plane without winglets)

was down by 88 million passengers annually at Delta, American, United, Continental, and US Airways during this same period.

Southwest's strategy included several other elements:

• Gradual expansion into new geographic mar- kets. Southwest generally added one or two new cities to its route schedule annually, pre- ferring to saturate the market for daily flights to the cities/airports it currently served before entering new markets. In selecting new cities, Southwest looked for city pairs that could generate substantial amounts of both busi- ness and leisure traffic. Management believed that having numerous flights flying the same routes appealed to business travelers looking for convenient night times and the ability to catch a later flight if they unexpectedly ran late.

~ Adding.flights in areas where rivals were cutting back service. When rivals cut back flights to cities that Southwest served, Southwest often moved in with more flights of its own, believ- ing its lower fares would attract more passen- gers. When Midway Airlines ceased operations in November 1990, Southwest moved in over- night and quickly instituted flights to Chi- cago's Midway Airport. Southwest was a first-mover in adding flights on routes where rivals had cut their offerings following the ter- rolist attacks of September 11, 2001 (9/ll).

Equipped with Winglets

New Color Scheme (plane with wing lets)

When American Airlines closed its hubs in Nashville and San Jose, Southwest immedi- ately increased the number of its flights into and out of both locations. When US Airways trimmed its flight schedule for Philadelphia and Pittsburgh, Southwest promptly boosted its flights into and out of those airports. Southwest initiated service to Denver when United, beset with financial difficulties, cut back operations at its big Denver hub.

• Curtailing flights on marginally profit- able routes where numerous seats often went unfilled and shffting planes to routes with good growth opportunities. Management was attracted to this strategy element because it enabled Southwest to grow revenues and profits without having to add so many new planes to its fleet. This strategy was aggres- sively pursued in 2008-2009 as a means of coping with industry-wide declines in pas- senger air travel during the recession. Man- agement canceled the planned additions to the size of its aircraft fleet in 2009, cut the number of flights in markets where ticket bookings were weak, and redeployed the capacity to support entry into four new markets with promising long-term growth potential: New York's LaGuardia Airport, Minneapolis-St. Paul International Airport, Boston's Logan International Airport, and Milwaukee's General Mitchell International Airport.

• Putting strong emphasis on safety, high-quality maintenance, and reliable operations.

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Southwest management believed the com- pany's low-fare strategy, coupled with frequent flights and friendly service, delivered "more value for less money" to customers rather than "less value for less money." Kelleher said, "Everybody values a very good service provided at a very rea- sonable price." 19

Southwest management fully understood that low fares necessitated zealous pursuit of low oper- ating costs and had, over the years, instituted a number of practices to keep its costs below those of rival carriers:

• The company operated only one type of aircraft-Boeing 737s-to minimize the size of spare parts inventories, simplify the training of maintenance and repair person- nel, improve the proficiency and speed with which maintenance routines could be done, and simplify the task of scheduling planes for particular flights. Furthermore, as the launch

customer for Boeing's 737-300, 737-500, and 737-700 models, Southwest acquired its new aircraft at favorable prices. See Exhibit 8 for statistics on Southwest's aircraft fleet.

• Southwest was the first major airline to intro- duce ticketless travel (eliminating the need to print and process paper tickets) and also the first to allow customers to make reservations and purchase tickets at the company's website (thus bypassing the need to pay commissions to travel agents for handling the ticketing process and reducing staffing requirements at Southwest's reservation centers). Selling a ticket on its website cost Southwest roughly $1, versus $3 to $4 for a ticket booked through its own intemal reservation system and as much as $15 for tickets for business travelers purchased through travel agents and professional business travel partners. Ticket- less travel accounted for more than 95 percent of all sales in 2007, and nearly 74 percent of Southwest's revenues were generated through sales at its website.

• The company stressed flights into and out of airports in medium-sized cities and less con- gested airports in major metropolitan areas (Chicago Midway, Detroit Metro, Houston

'3 Southwest's Aircraft fleet as of March 31, 2010

Boeing 737-300 173 137

Boeing 737-500 25 122

Boeing 737-700 343 137

541

Average age of aircraft fleet-10.5 years

Average aircraft trip length-633 miles, with an average duration of 1 hour and 54 minutes

Average aircraft utilization-6.5 flights per day and 12 hours and 15 minutes of flight time

Fleet size-1990: 106 1995: 224 2000:344 2009:537

Firm orders for new aircraft-2010: 10 2011: 10 2012: 13 2013-2016: 58

Source: Southwest Airlines, , accessed August 5, 2010, and 2009 10-K report, p.18.

Southwest was Boeing's launch customer for this model.

Southwest was Boeing's launch customer for this model.

Southwest was Boeing's launch customer for this model.

Southwest Airlines in 2010: Culture, Values, and Operating Practices 753

Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-293

Hobby, and Dallas Love Field). This strategy helped produce better-than-average on-time performance and reduce the fuel costs asso- ciated with planes sitting in line on crowded taxiways or circling airports waiting for clear- ance to land. It further allowed the company to avoid paying the higher landing fees and terminal gate costs at such high-traffic air- ports as Atlanta's Hartsfield International, Chicago's O'Hare, and Dallas-Fort Worth (DFW) where landing slots were controlled and rationed to those airlines willing to pay the high fees. Southwest's strategy of serving less congested airports also helped minimize total travel time for passengers-driving to the airport, parking, ticketing, boarding, and flight time. However, in recent years, to help sustain growth in passenger traffic and revenues, Southwest had initiated service to airports in several large metropolitan cities where air traffic congestion was a frequent problem-such as Los Angeles (LAX), Bos- ton (Logan International, beginning in 2009), New York (LaGuardia), Denver, San Fran- cisco, and Philadelphia.

• Southwest's point-to-point scheduling of flights was more cost-efficient than the hub- and-spoke systems used by rival airlines. Hub-and-spoke systems involved passengers on many different flights coming in from spoke locations (or perhaps another hub) to a central airport or hub within a short span of time and then connecting to an outgoing flight to their destination-a spoke loca- tion or another hub). Most flights arrived at and departed from a hub across a two-hour window, creating big peak-valley swings in airport personnel workloads and gate utilization-airport personnel and gate areas were very busy when hub opera- tions were in full swing and then were underutilized in the interval awaiting the next round of inbound/outbound flights. In contrast, Southwest's point-to-point routes permitted scheduling aircraft so as to minimize the time aircraft were at the gate, currently approximately 25 minutes, thereby reducing the number of aircraft and gate facilities that would otherwise be required. Furthermore, with a relatively even flow of incoming/outgoing flights and gate

traffic, Southwest could staff its terminal operations to handle a fairly steady work- load across a day, whereas hub-and-spoke operators had to staff their operations to serve three to four daily peak periods.

• To economize on the amount of time it took terminal personnel to check passengers in and to simplify the whole task of making res- ervations, Southwest dispensed with the prac- tice of assigning each passenger a reserved seat Instead, for many years, passengers were given color-coded plastic cards with the let- ters A, B, or C when they checked in at the boarding gate. Passengers then boarded in groups, according to the color/letter on their card, sitting in whatever seat was open when they got on the plane-a procedure described by some as a "cattle calL" Passengers who were particular about where they sat had to arrive at the gate early to get boarding cards and then had to position themselves near the front when it was their group's turn to board. In 2002, Southwest abandoned the use of plastic cards and began printing a big, bold A, B, or C on the boarding pass when the pas- senger checked in at the ticket counter; pas- sengers then boarded in groups according to their assigned letter. In 2007-2008, in order to significantly reduce the time that passengers spent standing in line waiting for their group to board, Southwest introduced an enhanced boarding method that automatically assigned each passenger a specific number within the passenger's boarding group at the time of check-in; passengers then boarded the air- craft in that numerical order. All passengers could check in online up to 24 hours before departure time and print out a boarding pass, thus bypassing counter check-in (unless they wished to check baggage).

• Southwest flight attendants were respon- sible for cleaning up trash left by deplaning passengers and otherwise getting the plane presentable for passengers to board for the next flight. Rival carriers had cleaning crews come on board to perform this function until they incurred heavy losses in 2001-2005 and were forced to institute stringent cost-cutting measures that included abandoning use of cleaning crews and copying Southwest's practice.

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• Southwest did not have a first-class section on any of its planes and had no fancy fre- quent flyer clubs at terminals.

• Southwest offered passengers no baggage transfer services to other carriers-passengers with checked baggage who were connecting to other carriers to reach their destination were responsible for picking up their luggage at Southwest's baggage claim and then getting it to the check-in facilities of the connect- ing carrier. (Southwest only booked tickets involving its own flights; customers connect- ing to flights on other carriers had to book such tickets either through travel agents or the connecting airline.)

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

• Southwest was a first-mover among major U.S. airlines in employing fuel hedging and derivative contracts to counteract rising prices for crude oil and jet fuel. From 1998 through 2008, the company's fuel hedging activities produced fuel savings of about $4 billion over what it would have spent had it paid the industry's average price for jet fuel. But unexpectedly large declines in jet fuel prices in late 2008 and 2009 resulted in reported losses of $408 million on the fuel hedging contracts that the company had in place during 2009. Southwest's fuel hedging strategy involved modifying the amount of its future fuel requirements that were hedged based on management's judgments about the forward market prices of crude oil and jet fuel.

• To enhance the performance and efficiency of its aircraft fleet, Southwest had recently added vertical winglets on the wing tips of most all its planes and begun ordering new planes equipped with winglets (see Exhibit 7). These winglets reduced lift drag, allowed aircraft to climb more steeply and reach higher flight levels quicker, improved cmis- ing performance, helped extend engine life and reduce maintenance costs, and reduced

fuel burn. In 2007, Southwest entered into an agreement with Naverus, the worldwide leader in performance~based navigation sys- tems, to develop and implement new flight procedures for Southwest planes that would result in lower fuel consumption and green- house gas emissions, better on-time reliabil- ity, and increased safety in bad weather and at airports situated in mountainous terrain.

• Southwest regularly upgraded and enhanced its management information sys- tems to speed data flows, improve operating efficiency, lower costs, and upgrade its cus- tomer service capabilities. In 2001, South- west implemented use of new software that significantly decreased the time required to generate optimal crew schedules and help improve on-time performance. In 2007- 2008, Southwest invested in next-generation technology and software to improve its ticketless system and its back~office accounting, payroll, and human resource information systems. During 2009, the company replaced or enhanced its point of sale, electronic ticketing and boarding, and revenue accounting systems. During 2010, it completed an initiative to convert to a new SAP enterprise resource planning application that would replace its general ledger, accounts payable, accounts receiv- able, payroll, benefits, cash management, and fixed asset systems; the conversion was designed to increase data accuracy and consistency, and. to lower administrative support costs.

For many decades, Southwest's operating costs had been lower than those of American, Continental, Delta, Northwest, United, US Airways, and other major U.S. airline carriers. Recently, JetBlue, an airline that began operations in 2000 and had grown rapidly with a low-cost, low-fare strategy that was similar to Southwest's strategy, had been able to achieve operating costs that were below those of Southwest-see Exhibit 9 for cost comparisons among the major U.S. airlines during the 1995-2010 period. Exhibit 10 shows a detailed breakdown of Southwest's oper- ating costs based on the number of available seats rather than the number of passenger-occupied seats.

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American Airlines "' ~< () 1995 0.94¢ 5.59rt 1.53rt 1.34¢ 0.59¢ 0.22¢ 0.19¢ 1.14¢ 3.85¢ 14.25¢ ~

> 2000 1.16 5.77 2.04 1.90 0.48 0.23 0.18 0.58 3.30 14.48 :::L 2005 0.90 4.65 3.67 1.42 0.41 0.32 0.10 0.95 3.66 15.18

s· c;;

"' 2008 0.87 4.81 6.19 1.72 0.37 0.31 0.12 i .91 4.12 19.54 ::l 2009 0.91 5.30 4:10 1.88 0.42 0.35 013 1.56 3.47 17.20 ~

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Q1 2010 0.98 5.63 4.64 2.16 0.46 0.38 0.14 1.50 3.85 18.76 9 ,... ::;

~..J ::: Continental Air lines It> s ~

1995 0.95¢ 3.69¢ 1.67¢ 1.50¢ 1.25¢ 0.27¢ 0.25¢ 0.56¢ 3.68 12.870 2 §: ..., 2000 1.25 4.43 2.18 1.42 1.17 0.24 0.09 0.59 3.57 13.70

SD s· _.< I'D 60' "' 2005 0.79 3.85 3.42 1.18 0.91 0.34 0.13 0.82 5.74 16.38 2' :;·

0.81 19.14 (!) "-' 2008 0.77 3.63 5.90 1.26 0.33 0.11 1.06 6.04 ~ 0

2009 0.82 3.89 3.43 1.37 0.79 0.33 0.13 0.98 5.25 16.16 p 9 ::l ;:l.. n

012010 0.90 4.21 3.75 1.40 0.83 0.35 0.14 1.03 5.80 17.49 0 c ;:;-

"d c Delta Air Lines (merged with Northwest Airlines in 2009 and began combined reporting in January 2010}

(') lti ...., p <

1995 1.27¢ 4.97¢ 1.70¢ 1.16¢ 0.71¢ 0.30¢ 0.18¢ 0.43t.t 4.07¢ 13.53¢ g· "" c 2000 1.27 5.08 1.73 1.41 0.54 0.22 0.12 0.74 3.03 12.85

::0 I'D >-C) !:"

0.93 4.31 3.68 1.10 0.38 0.22 0.16 0.84 6.01 16.68 ....,

"" 2005 p :J n 0. 2008 0.76 3.55 5.99 1.08 0.20 0.21 0.10 0.82 7.85 19.79

c. 0 n

(') "0

2009 0.86 4.04 4.72 1.28 0.19 0.25 0.14 1.10 6.78 18.52 Ul ~

"' 012010 1.02 4.46 4.60 1.48 0.13 0.31 0.09 0.52 6.96 18.54 ,... :;· <0

JetBiue Airways "'0 Ol " 2005 0.51¢ 2.31¢ 2.42¢ 0.68¢ 0.38¢ 0.25¢ 0.16¢ 0.51¢ 1.44¢ 8.13¢ ,.., ?\'

2008 0.74 2.86 5.35 0.86 0.49 0.33 0.18 0.53 2.06 12.67 [Ji

2009 0.86 3.20 3.64 0.98 0.48 0.40 0.19 0.62 2.13 11.64

Q1 2010 0.97 3.62 3.93 1.04 0.48 0.40 0.14 0.88 2.30 12.80

~ ..... (Continued) \A

U1

(Concluded)

Northwest Airlines (merged with Delta and began combined reporting in January 2010)

1995 1.21¢ 4.84¢ 1.73¢ 1.39¢ 0.58¢ 0.37¢ 0.20¢ 0.52¢ 3.14¢ 12.77¢ 2000 1.01 4.76 2.35 1.55 0.53 0.31 0.17 0.55 2.77 12.99 2005 0.94 5.07 4.01 1.54 0.57 0.38 0.12 0.58 5.13 17.40 2008 0.73 3.77 7.33 1.30 0.26 0.34 0.08 0.86 6.49 20.43 2009 0.98 4.34 3.79 1.18 0.18 0.32 0.06 1.41 5.22 16.49

Southwest Airlines

1995 0.92¢ 3.94¢ 1.56¢ 1.21¢ 0.79¢ 0.35¢ 0.41¢ 1.09¢ 1.56¢ 10.91¢ 2000 0.86 4.22 1.95 1.22 0.48 0.31 0.35 1.42 0.96 10.91 2005 1.18 4.70 2.44 1.17 0.31 0.34 0.29 0.73 1.23 11.21 2008 1.31 4.81 5.04 1.45 0.26 0.39 0.27 0.84 1.30 14.36 2009 1.33 4.88 4.08 1.43 0.30 0.41 0.27 0.84 1.30 13.53

012010 1.46 5.27 4.78 1.45 0.34 0.48 0.26 0.95 1.47 14.98

United Air Lines

1995 0.86¢ 4.73¢ 1.51¢ 1.51¢ 0.90¢ 0.29¢ 0.17¢ 0.53¢ 2.92¢ 12.58¢ 2000 1.15 5.75 1.98 1.84 0.73 0.28 0.21 0.76 3.09 14.65 2005 0.62 3.72 3.53 1.60 0.35 0.30 0.16 0.60 5.09 15.35 2008 0.69 4.18 7.02 1.88 0.37 0.31 0.06 1.16 5.00 19.97 2009 0.70 4.06 3.39 1.87 0.35 0.37 0.04 0.90 5.06 16.03

012010 0.73 4.59 4.15 1.92 0.35 0.41 0.05 0.97 5.52 17.95

US Airways (merged with America West in September 2005 and began combined reporting in 2007)

1995 1.55¢ 7.53¢ 1.59¢ 2.09¢ 1.05¢ 0.29¢ 0.13¢ 0.73¢ 4.32¢ 17.73¢ 2000 1.36 7.59 2.44 2.30 0.97 0.28 0.19 1.10 4.81 19.68 2005 0.78 3.74 3.89 1.50 1.06 0.31 0.06 0.66 7.27 18.49 2008 0.80 3.92 5.94 1.94 1.22 0.24 0.02 2.63 7.59 23.50 2009 0.78 3.97 3.20 1.90 1.23 0.27 0.03 1.06 6.77 18.42

Q1 2010 0.84 4.49 4.07 1.99 1.35 0.28 0.03 1.26 7.48 20.94

*Costs per passenger revenue mile represent the costs per ticketed passenger per mile flown; the figures are derived by dividing the company's total expenses in each of the cost categories by the total number of miles flown by all ticketed passengers-thus, if there are 100 ticketed passengers on a flight that travels 500 miles, the number of passenger revenue miles for that flight is 100 x 500, or 50,000).

Source: U.S. Department of Transportation, Bureau of Transportation Statistics, Air Carrier Statistics Form 298C Summary Data and Form 41, Schedules P-6, P-12, P-51, and P-52.

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Southwest Airlines in 2010: Culture, Values, and Operating Practices 757

Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-297

Expenses per Available Seat Mile,

Salaries, wages, 3.54¢ 3.23¢ 3.22¢ 3.29¢ 3.27¢ 3.18 2.89¢ 2.81¢ 2.40¢ bonuses, and benefits

Fuel and oil 3.11 3.60 2.70 2.31 1.58 1.30 1.11 1.34 1.01

Maintenance materials 0.73 0.70 0.62 0.51 0.52 0.60 0.57 0.63 0.60 and repairs

Aircraft rentals 0.19 0.15 0.16 0.17 0.19 0.23 0.27 0.33 0.47

Landing fees and 0.73 0.64 0.56 0.53 0.53 0.53 0.50 0.44 0.44 other rentals

Depreciation 0.63 0.58 0.56 0.56 0.55 0.56 0.52 0.47 0.43

Other expenses 1.36 1.34 1.28 1.43 1.41 1.37 1.55 1.71 1.72

Total 10.29¢ 10.24¢ 9.10¢ 8.80¢ 8.05¢ 7.70¢ 7.41¢ 7.73¢ 7.07¢

Note: Figures in this exhibit differ from those for Southwest in Exhibit 9 because the cost figures in Exhibit 9 are based on cost per pas- senger revenue mile, whereas the cost figures in this exhibit are based on costs per available seat mile. Costs per revenue passenger mile represent the costs per ticketed passenger per mile flown, whereas costs per available seat mile are the costs per seat per mile flown (irrespective of whether the seat was occupied or not).

Source: Southwest Airlines, 10-K reports and annual reports, various years.

E

Whereas the litany at many companies was that customers come first, at Southwest the operative principle was that ''employees come first and cus- tomers come second.'' The high strategic prior- ity placed on employees reflected management's belief that delivering superior service required employees who not only were passionate about their jobs but also knew that the company was genuinely concerned for their well-being and committed to providing them with job security. Southwest's thesis was simple: Keep employees happy-then they will keep customers happy.

In Southwest's 2000 annual report, senior management explained why employees were the company's greatest asset:

Our people are warm, caring and compassionate and willing to do whatever it takes to bring the Freedom to Fly to their fellow Americans. They

take pride in doing well for themselves by doing good for others. They have built a unique and powerful culture that demonstrates that the only way to accomplish our mission to make air travel affordable for others, while ensuring ample profit- ability, job security, and plentiful Profitsharing for ourselves, is to keep our costs low and Customer Service quality high.

At Southwest, our People are our greatest assets, which is why we devote so much time and energy to hiring great People with winning atti- tudes. Because we are well known as an excellent place to work with great career opportunities and a secure future, lots of People want to work for Southwest. ... Once hired, we provide a nurtur- ing and supportive work environment that gives our Employees the freedom to be creative, have fun, and make a positive difference. Although we offer competitive compensation packages, it's our Employees' sense of ownership, pride in team accomplishments, and enhanced job satisfaction that keep our Culture and Southwest Spirit alive and why we continue to produce winning seasons.

Gary Kelly, the company's current CEO, echoed the views of his predecessors: "Our Peo- ple are our single greatest strength and our most enduring long term competitive advantage."20

758 Crafting & Executing Strategy

C-298 Part 2 Cases in Crafting and Executing Strategy

The company changed the Personnel Depart- ment's name to the People Department in 1989. Late1~ it was renamed the People and Leadership Development Department.

Southwest hired employees for attitude and trained for skills. Herb Kelleher explained:

We can train people to do things where skills are concerned. But there is one capability we do not have and that is to change a person's attitude. So we prefer an unskilled person with a good atti- tude ... [to] a highly skilled person with a bad attitude. 21

Southwest recruited employees by means of newspaper ads, career fairs, and Internet job listings; a number of candidates applied because of Southwest's reputation as one of the best companies to work for in America and because they were impressed by their experiences as a customer on Southwest flights. Recruitment ads were designed to capture the attention of peo- ple thought to possess Southwest's "personality profile." For instance, one ad showed Herb Kelle- her impersonating Elvis Presley and had the fol- lowing copy:

Work In A Place Where Elvis Has Been Spotted. The qualifications? It helps to be outgoing. Maybe even a bit off center. And be prepared to stay for a while. After all, we have the lowest employee turn- over rate in the industry. If this sounds good to

you, just phone our jobline or send your resume. Attention Elvis.22

Colleen Barrett elaborated on what the com- pany looked for in screening candidates for job openings:

We hire People to Jive the Southwest Way. They must possess a Warrior Spirit, lead with a Ser- vant's Heart, and have a Fun-LUVing attitude. We hire People who fight to win, work bard, are dedicated, and have a passion for Customer Ser- vice. We won't hire People if something about their behavior won't be a Cultural fit. We hire the best. When our new hires walk through the door, our message to them is you are starting the flight of your life. 23

All job applications were processed through the People and Leadership Development Depart- ment. Exhibit 11 details what the company called the "Southwest Way."

In hiring for jobs that involved personal contact with passengers, the company looked for people-oriented applicants who were extro- verted and had a good sense of humor. It tried to identify candidates with a knack for reading peoples' emotions and responding in a genu- inely caring, empathetic manner. Southwest wanted employees to deliver the kind of service that showed they truly enjoyed meeting people, being around passengers, and doing their job, as opposed to delivering the kind of service that came across as being forced or taught. Kelleher elaborated: "We are interested in people who externalize, who focus on other people, who are

Personal Traits, Attitudes, and Behaviors That Southwest Wanted Employees to Possess and Display

• Work hard • Follow the Golden Rule • Have FUN • Desire to be the best • Adhere to the Basic Principles • Don't take yourself too seriously • Be courageous • Treat others with respect • Maintain perspective (balance) • Display a sense of urgency • Put others first • Celebrate successes • Persevere • Be egalitarian • Enjoy your work • Innovate • Demonstrate proactive Customer Service • Be a passionate team player

• Embrace the SWA Family

Source: Southwest Airlines, :·,· ,' · · , '• accessed August 18, 2010.

Southwest Airlines in 2010: Culture, Values, and Operating Practices 759

Case 20 Southwest Airlines in 2010: Culture, Values, and Operatin~1 Practices C-299

motivated to help other people. We are not inter- ested in navel gazers." 24 In addition to a "whistle while you work" attitude, Southwest was drawn to candidates who it thought would be likely to exercise initiative, work harmoniously with fel- low employees, and be community-spirited.

Southwest did not use personality tests to screen job applicants., nor did it ask them what they would or should do in certain hypothetical situations. Rather, the hiring staff at Southwest analyzed each job category to determine the spe- cific behaviors, knowledge, and motivations that job holders needed and then tried to find can- didates with the desired traits-a process called targeted selection. A trait common to all job categ01ies was teamwork; a trait deemed critical for pilots and flight attendants was judgment. In exploling an applicant's aptitude for teamwork, interviewers often asked applicants to tell them about a time in a prior job when they went out of their way to help a coworker or to explain how they had handled conflict with a coworker. Another frequent question was "What was your most embarrassing moment?" The thesis here was that having applicants talk about their past behaviors provided good clues about their future behaviors.

To test for unselfishness, Southwest inter- viewing teams typically gave a group of poten- tial employees ample time to prepare five-minute presentations about themselves; during the pre- sentations in an informal conversational setting, interviewers watched the audience to see who was absorbed in polishing their presentations and who was listening attentively, enjoying the stories being told, and applauding the efforts of the pre- senters. Those who were emotionally engaged in hearing the presenters and giving encouragement were deemed more apt to be team players than those who were focused on looking good them- selves. AU applicants for flight attendant positions were put through such a presentation exercise before an interview panel consisting of custom- ers, experienced flight attendants, and members of the People and Leadership Department. Flight attendant candidates that got through the group presentation interviews then had to complete a three-on~one interview conducted by a recruiter, a supervisor from the hiring section of the People and Leadership Department, and a Southwest flight attendant; following this interview, the

three-person panel tried to reach a consensus on whether to recommend or drop the candidate.

Southwest received 90,043 resumes and hired 831 new employees in 2009. In 2007, prior to the onset of the recession, Southwest received 329,200 resumes and hired 4,200 new employees.

Apart from the FAA-mandated training for cer- tain employees, training activities at Southwest were designed and conducted by Southwest's University for People. The curriculum included courses for new recruits, employees, and manag- ers. Learning was viewed as a never-ending pro- cess for all company personnel; the expectation was that each employee should be an "intentional learner," looking to grow and develop not just from occasional classes taken at Southwest's fes- tive University for People learning center but also from their everyday on-the-job experiences.

Southwest's University for People conducted a variety of courses offered to maintenance per- sonnel and other employees to meet the training and safety requirements of the Federal Aviation Administration, the U.S. Department of Trans- portation, the Occupational Safety and Health Administration, and other government agencies. And there were courses on written communica- tions, public speaking, stress management, career development, performance appraisal, decision making, leadership, customer service, corporate culture, and employee relations to help employees advance their careers.

Employees wanting to explore whether a man- agement career was for them could take Leadership 10 l and 20 l. One of the keystone course offerings for new frontline managers was a four-session ''Leadership Southwest Style" course, which made extensive use of the Myers-Briggs personality assessment to help managers understand the "why" behind coworkers' behaviors and to learn how to build trust, empathize, resolve conflicts, and do a better job of communicating. There was a special "manager-in-training" course for high-potential employees wanting to pursue a long-term career at Southwest. Leadership courses for people already in supervisory or managerial positions emphasized a management style based on coaching, empower- ing, and encouraging, rather than supervising or enforcing rules and regulations. From time to time,

760 Crafting & Executing Strategy

C-300 Part 2 Cases in Crafting and Executing Strategy

supervisors and executives attended courses on corporate culture, intended to help instill, ingrain, and nurture such cultural themes as teamwork, trust, harmony, and diversity.

All employees who came into contact with customers, including pilots, received customer care training. Southwest's latest customer-related tra_ining initiative involved a course called "Every Customer Matters"; by the end of 2009, 14,225 employees had completed the course. Altogether, Southwest employees spent more than 720,000 hours in train- ing sessions of one kind or another in 2009:25

Maintenance and support personnel

Customer support and services personnel

Flight attendants Pilots Ground operations personnel

S1 ,633 hours

106,480 hours

109,450 hours 199,500 hours 224,799 hours

The OnBoarding Program for Newly Hired Employees Southwest had a pro- gram called OnBoarding "to welcome New Hires into the Southwest Family" and provide informa- tion and assistance from the time they were selected until the end of their first year. Orientation for new employees included a one-day orientation session, videos on Southwest's history, an over- view of the airline industry and the competitive challenges that Southwest faced, and an intro- duction to Southwest's culture and management practices. The culture introduction included a video called the Southwest Shuffle, which fea- tured hundreds of Southwest employees rap- ping about the fun they had on their jobs (at many Southwest gatherings, it was common for a group of employees to do the Southwest Shuf- fle, with the remaining attendees cheering and clapping). There were also exercises that demon- strated the role of creativity and teamwork and a scavenger hunt in which new hires were given a timeline with specific dates in Southwest's his- tory and were asked to fill in the missing details by viewing the memorabilia decorating the cor- ridors of the Dallas headquarters and getting information from people working in various offices. During their first 30 days at Southwest,

new employees could access an interactive online tool-OnBoarding Online Orientation-to learn about the company.

An additional element of the Onboarding Program involved assigning each new employee to an existing Southwest employee who had vol- unteered to sponsor a new hire and be of assis- tance in acclimating the new employee to his or her job and the Southwest Way; each volun- teer sponsor received training from Southwest's Onboarding Team in what was expected of a sponsor. Much of the indoctrination of new employees into the company's culture was done by the volunteer sponsor, coworkers, and the new employee's supervisor. Southwest made active use of a one-year probationary employment period to help ensure that new employees fit in with the company's culture and adequately embraced its cultural values.

Approximately 80 to 90 percent of Southwest's supervisory positions were filled internally, reflect- ing management's belief that people who had "been there and done that" would be more likely to appreciate and understand the demands that peo- ple under them were experiencing and, also, more likely to enjoy the respect of their peers and higher- level managers. Employees could either apply for supervisory positions or be recommended by their present supervisor. New appointees for supervisor, team leader, and manager attended a three-day class called Leading with Integrity and aimed at developing leadership and communication skills. Employees being considered for managerial posi- tions of large operations (Up and Coming Lead- ers) received training in every department of the company over a six-month period in which they continued to perform their current job. At the end of the six-month period, candidates were pro- vided with 360-degree feedback from department heads, peers, and subordinates; representatives of the People and Leadership Department analyzed the feedback in deciding on the specific assign- ment of each candidate. 26

Southwest's pay scales compared quite favorably with other major U.S. airlines (see Exhibit 12).

Southwest Airlines in 2010: Culture, Values, and Operating Practices 761

Case 20 Southwest Airlines in 2010: Cullure, Values, and Operating Practices C-301

Benefits at Selected U.S,

Average Pilot Wage/Salary 2008 $172,800 $138,800 $125,600 $136,300 $112,000 $119,500 $113,900

2009 176,200 137,500 137,900 150,200 124,700 125,500 111,300

Average Flight Attendant Wage/Salary

2008 $ 53,000 $ 49,800 $ 37,000 $ 49,100 $ 33,000 $ 40,100 $ 39,700 2009 46,800 50,900 39,200 51,200 33,800 40,600 40,600

All-Employee Average Wage/Salary

2008 $ 72,100 $ 60,900 $ 56,100 $ 54,400 $ 54,400 $ 58,100 $ 53,800 2009 75,600 63,000 59,600 56,800 58,600 58,200 55,500

Average Benefits per Employee

2008 $ 24,200 $ 24,300 $ 45,100 $ 15,800 $ 13,800 $ 25,600 $ 14,500 2009 23,800 30,500 30,100 19,900 14,800 22,700 13,500

Note: The compensation and benefits numbers are estimated from compensation cost and workforce size data reported by the airlines to the Bureau of Transportation Statistics The number of employees at year-end were used to calculate the averages, which may cause distortions in the event of significant changes in a company's workforce size during the year. In addition, several companies were engaged in mergers and/or major cos! restructuring initiatives during 2008-2009, which in some instances (notably Delta) resulted in significant within-company changes from 2008 to 2009.

Source: Derived from data in various airline ;ndustry reports published by tl"ie Bureau of Transportation Statistics and from information posted at

Southwest's average pay for pilots and its all- employee average compensation were the highest of all the major U.S. airlines-sometimes even at or near the top of the industry---and its benefit packages were quite competitive.

Southwest introduced a profit-sharing plan for senior employees in 1973, the first such plan in the airline industry. By the mid-l990s, the plan had been extended to cover most South- west employees. As of 2010, Southwest had stock option programs for various employee groups (including those covered by collective bargaining agreements), a 40l(k) employee savings pians that included company-matching contributions.. an employee stock purchase plan. and a profit-sharing plan covering virtually all employees that con- sisted of a money purchase defined-contribution plan to which Southwest contributed J 5 percent of eligible pretax profits. Company contributions to employee 410(k) and profit-sharing plans totaled

$1.3 billion during 2005-2009; in recent years, the annual contribution had represented 6 to 12 per- cent of base pay, Employees participating in stock purchases via payroll deduction bought 1 3 million shares in 2007, L3 million shares in 2008, and 2.2 million shares in 2009 at prices equal to 90 percent of the market value at the end of each monthly purchase period. Southwest employees owned about l 0 percent of Southwest's outstanding shares and, as of December 31, 2009, held options to buy some 78.2 million additional shares.

About 82 percent of Southwest's 34,700 employ- ees belonged to a union, making Southwest one of the most highly unionized U.S. airlines. An in-house union-the Southwest Airline Pilots Association-represented the company's pilots. The Teamsters Union represented Southwest's

762 Crafting & Executing Strategy

C-302 Part 2 Cases in Crafting and Executing Strategy

stock clerks and flight simulator technicians; a local of the Transportation Workers of America represented flight attendants; another local of the Transportation Workers of America represented baggage handlers, ground crews, and provision- ing employees; the International Association of Machinists and Aerospace Workers represented customer service and reservation employees; and the Aircraft Mechanics Fraternal Association represented the company's mechanics.

Management encouraged union members and negotiators to research their pressing issues and to conduct employee surveys before each contract negotiation. Southwest's contracts with the unions representing its employees were rela- tively free of restrictive work rules and narrow job classifications that might impede worker produc- tivity. AU of the contracts allowed any qualified employee to perform any function-thus pilots, ticket agents, and gate personnel could help load and unload baggage when needed and flight attendants could pick up trash arid make flight cabins more presentable for passengers boarding the next flight.

Except for one brief strike by machinists in the early 1980s and some unusually difficult nego- tiations in 2000-2001, Southwest's relationships with the unions representing its employee groups were harmonious and nonadversarial for the most part-even though there were sometimes spirited disagreements over particular issues.

In 2000-2001, the company had contentious negotiations with Local 555 of the Transporta- tion Workers of America (TWU) over a new wage and benefits package for Southwest's ramp, baggage operations, provisioning, and freight personnel; the previous contract had become open for renegotiation in December 1999, and a tentative agreement reached at the end of 2000 was rejected by 64 percent of the union members who voted. A memo from Kelleher to TWU representatives said, "The cost and struc- ture of the TWU 555 negotiating committee's proposal would seriously undermine the com- petitive strength of Southwest Airlines; endan- ger our ability to grow; threaten the value of our employees' profit-sharing; require us to contract out work in order to remain competitive; and threaten our 29-year history of job security for our employees." In a union newsletter in early 2001, the president of the TWU local said, "We asked for a decent living wage and benefits to

support our families, and were told of how unworthy and how greedy we were." The ongo- ing dispute resulted in informational picket lines in March 2001 at several Southwest locations, the first picketing since 1980. Later in 2001, with the help of the National Mediation Board, Southwest and the TWU reached an agreement covering Southwest's ramp, operations, and provisioning employees.

Prior to 9/11, Southwest's pilots were some- what restive about their base pay relative to pilots at other U.S. airlines. The maximum pay for Southwest's 3,700+ pilots (before profit-sharing bonuses) was $148,000, versus maximums of $290,000 for United's pilots, $262,000 for Del- ta's pilots, $206,000 for American's pilots, and $199,000 for Continental's pilots. 27 Moreover, some veteran Southwest employees were grum- bling about staff shortages in certain locations (to hold down labor costs) and cracks in the company's close-knit family culture due to the influx of so many new employees over the past several years. A number of employees who had accepted lower pay because of Southwest's under- dog status were said to feel entitled to "big air- line" pay now that Southwest had emerged as a major U.S. carrier. 28 However, when airline traf- fic dropped precipitously following 9/11, South- west's major airline rivals won big wage and salary concessions from unions representing pilots and other airline workers; moreover, about 1 in 5 airline jobs-some 120,000 in all-were eliminated. In 2006, a senior Boeing 737 pilot at Delta Air Lines working a normal 65-hour month made $116,200 annually, down 26 percent from pre-9/11 wages. A comparable pilot at United Airlines earned $102,200, down 34 per- cent from before 9/11, and at American Airlines such a pilot made $122,500, 18 percent less than in the days before 9111.

In 2004, 2007, and 2009, in an attempt to contain rising labor costs and better match workforce size to its operating requirements, Southwest offered voluntary buyout or early retirement packages to selected groups of employees. The 2004 buyout package was offered to approximately 8, 700 flight attendants, ramp workers, customer service employees, and those in reservations, operations, and freight who had reached a specific pay scale; the buy- out consisted of a $25,000 payment and medical and dental benefits for a specified period. About

Southwest Airlines in 2010: Culture, Values, and Operating Practices 763

Case 20 Southwest Airlines in 2010: Culture, Values, and Operating Practices C-303

1,000 employees accepted the 2004 buyout offer, In 2009, Southwest announced Freedom '09, a one-time voluntary early retirement program offered to older employees, in which the com- pany offered cash bonuses, medical/dental cov- erage for a specified period of time, and travel privileges based on work group and years of service; some 1,400 employees elected to partici- pate in Freedom '09, resulting in payouts of $66 million.

Southwest Airlines had never laid ofT or fur- loughed any of its employees since the com- pany began operations in 1971. The company's no-layoff policy was seen as integral to how the company treated its employees and management efforts to sustain and nurture the culture. Accord- ing to Kelleher:

Nothing kills your company's culture like lay- offs. Nobody has ever been furloughed here, and that is unprecedented in the airline industry. It's been a huge strength of ours. It's certainly helped negotiate our union contracts .... We could have furloughed at various times and been more profit- able, but I always thought that was shortsighted. You want to show your people you value them and you're not going to hurt them just to get a iittle more money in the short term. Not furloughing people breeds loyalty. It breeds a sense of security. It breeds a sense of trust. 29

Southwest had built up considerable goodwill with its employees and unions over the years by avoiding layoffs. Both senior management and Southwest employees regarded the three recent buyout offers as a better approach to workforce reduction than involuntary layoffs.

ln 2007, Southwest management launched an internal initiative called Operation Kick TaiL a multiyear call to action for employees to focus even more attention on providing high-quality customer service, maintaining low costs, and nurturing the Southwest culture. One compo- nent of Operation Kick Tail involved singling out employees for special recognition when they did something to make a positive difference in a customer's travel experience or in the life of a coworker.

Gary Kelly saw this aspect of Operation Kick Tail as a way to foster the employee attitudes and commitment needed to provide "Positively Out- rageous Customer Service." He explained:

One of Southwest's rituals is finding and develop- ing People who are "built to serve." That allows us to provide a personal, warm level of service that is unmatched in the airline industry.

Southwest management viewed Operation Kick Tail as a means to better engage and incen- tivize employees to strengthen their display of the traits included in the Southwest Way and achieve a competitive edge keyed to superior customer serv1ce.

At Southwest, management strove to do things in a manner that would make Southwest employ- ees proud of the company they worked for and its workforce practices. Managers were expected to spend at least one-thlrd of their time walk- ing around the facilities under their supervision, observing firsthand what was going on, listening to employees, and being responsive to their con- cerns. A former director of people development at Southwest told of a conversation he had with one of Southwest's terminal managers:

While I was out in the field visiting one of our sta- tions, one of our managers mentioned to me that he wanted to put up a suggestion box. J responded by saying, "Sure--why don't you put up a sugges- tion box right here on this wall and then admit you are a failme as a manager?" Our theory is, if you have to put up a box so people can write down their ideas and toss them in, it means you are not doing what you are supposed to be doing. You are supposed to be setting your people up to be winners. To do that, you should be there listen- ing to them and available to them in person, not via a suggestion box. For the most part, I think we have a very good sense of this at Southwest. l think that most people employed here know that they can call any one of our vice presidents on the telephone and get heard, almost immediately.

The suggestion box gives managers an out; it relinquishes their responsibility to be accessible to their people, and that's when we have gotten in trouble at Southwest-when we can no lon- ger be responsive to our flight attendants or cus- tomer service agents, when they can't gain access to somebody who can give them resources and answers. 30

764 Crafting & Executing Strategy

C-304 Part 2 Cases in Crafting and Executing Strategy

Company executives were very approach- able, insisting on being called by their first names. At new employee orientations, people were told, "We do not call the company chairman and CEO Mr. Kelly, we call him Gary." Managers and exec- utives had an open-door policy, actively listening to employee concerns, opinions, and suggestions for reducing costs and improving efficiency.

Employee-led initiatives were common. South- west's pilots had been instrumental in developing new protocols for takeoffs and landings that con- served fuel. Another frontline employee had sug- gested not putting the company logos on trash bags, saving an estimated ~250,000 annually. Rather than buy 800 computers for a new reservations center in Albuquerque, company employees deter- mined that they could buy the parts and assemble the PCs themselves for half the price of a new PC, saving the company $1 million. It was Southwest clerks who came up with the idea of doing away with paper tickets and shifting toe-tickets.

There were only four layers of manage- ment between a frontline supervisor and the CEO. Southwest's employees enjoyed substantial authority and decision-making power. According to Kelleher:

We've tried to create an environment where people are able to, in effect, bypass even the fairly lean structures that we have so that they don't have to convene a meeting of the sages in order to get something done. In many cases, they can just go ahead and do it on their own. They can take indi- vidual responsibility for it and know they will not be crucified if it doesn't work out. Our leanness requires people to be comfortable in making their own decisions and undertaking their own efforts. 31

From time to time, there were candid meet- ings of frontline employees and managers where operating problems and issues between/among workers and departments were acknowledged, openly discussed, and resolved. 32 Informal prob- lem avoidance and rapid problem resolution were seen as managerial virtues.

Two core values-LUV and fun-permeated the work environment at Southwest. LUV was much more than the company's ticker symbol and a recurring theme in Southwest's advertising

campaigns. Over the years, LUV grew into South- west's code word for treating individuals-fellow employees and customers-with dignity and respect and demonstrating a caring, loving atti~ tude. The code word LUV and red hearts com- monly appeared on banners and posters at company facilities, as reminders of the compas- sion that was expected toward customers and other employees. Practicing the Golden Rule, internally and extemally, was expected of all employees. Employees who struggled to live up to these expectations were subjected to consider- able peer pressure and usually were asked to seek employment elsewhere if they did not soon leave on their own volition.

Fun at Southwest was exactly what the word implies-and it occurred throughout the com- pany in the form of the generally entertaining behavior of employees in performing their jobs, the ongoing pranks and jokes, and frequent company~sponsored parties and celebrations (which typically included the Southwest Shuffle). On holidays, employees were encouraged to dress in costumes. There were charity benefit games, chili cook-offs, Halloween parties, new Ronald McDonald House dedications, and other special events of one kind or another at one location or another almost every week. According to one manager, "We're kind of a big family here, and family members have fun together."

Southwest executives believed that the company's growth was primarily a function of the rate at which it could hire and train people to fit into its culture and consistently display the desired traits and behaviors. CEO Gary Kelly said, ''Some things at Southwest won't change. We will continue to expect our people to live what we describe as the 'Southwest Way,' which is to have a Warrior Spirit, Servant's Heart, and Fun-Loving Attitude. Those three things have defined our culture for 36 years."33

The Corporate Culture Committee Southwest formed its Corporate Culture Commit- tee in 1990 to promote "Positively Outrageous Ser- vice" and devise tributes, contests, and celebrations intended to nurture and perpetuate the Southwest Spirit and Living the Southwest Way. The com- mittee, chaired by Colleen Barrett until mid-2008 and then by Ginger Hardage (who was given lead

Southwest Airlines in 2010: Culture, Values, and Operating Practices 765

Case 211 Southwest Airlines in 2010: Culture, Values, ancl Operating Practices C-305

executive responsibility for cultural aspects at Southwest when Barrett retired), was composed of 100 employees who had demonstrated their commitment to Southwest's mission and values and zeal in exhibiting the Southwest Spirit and Living the Southwest Way. Members came from a cross-section of departments and locations and functioned as cultural ambassadors, missionaries, and storytellers during their two-year term.

The Corporate Culture Committee had four ail-day meetings annually; ad hoc subconm1ittees formed throughout the year met more frequently. Over the years, the committee had sponsored and supported hundreds of ways to promote and ingrain the traits and behaviors embedded in Living the Southwest Way-examples included promot- ing the use of red hearts and LUV to embody the spirit of Southwest employees caring about each other and Southwest's customers, showing up at a facility to serve pizza or ice cream to employees or to remodel and decorate an employee break room. Kelleher indicated, "We're not big on Committees at Southwest, but of the committees we do have, the Culture Committee is the most important." 34

Efforts to Nurture and Sustain the Southwest Culture Apart from the efforts of the Corporate Culture Committee, Southwest management had sought to reinforce the company's core values and culture via its annual Heros of the Heart Award, its CoHearts mentming program, its Day in the Field program in which employees spent time working in another area of the company's operations, its Helping Hands program in which volunteers from around the system traveled to work two weekend shifts at other Southwest facilities that were tempo- rarily shorthanded or experiencing heavy work-

Southwest Airlines 2,475

American Airlines 1,289 Continental 1,177 Delta 1,430 JetBiue 2,121 United 1,204 US Airways 1,628

Source: Calculated from data in Southwest Airlines' 10-K reports.

loads, and periodic Culture Exchange meetings to celebrate the Southwest Spirit and company milestones. Almost every event at Southwest was videotaped, which provided footage for creating multipurpose videos, such as Keepin' the Spirit A live. that could be shown at company events all over the system and used in training courses. The concepts of LUV and fun were spotlighted in all of the company's training manuals and videos.

Southwest's monthly employee newsletter often spotlighted the experiences and deeds of particular employees, reprinted letters of praise from customers, and reported company celebra- tions of milestones. A quarterly news video, As the Plane Turns, was sent to all facilities to keep employees up to date on company happenings, provide clips of special events, and share mes- sages from customers, employees, and executives. The company had published a book for employ- ees describing "outrageous" acts of service.

Management was convinced the company's strategy, culture, esprit de corps, and people management practices fostered high labor pro- ductivity and contributed to Southwest's having low labor costs in comparison to the labor costs at its principal domestic rivals. When a Southwest flight pulled up to the gate, ground crews, gate personnel, and flight attendants hustled to per- form all the tasks requisite to turn the plane quickly--employees took pride in doing their part to achieve good on-time performance. Southwest's turnaround times were in the range of 25 to 30 minutes, versus an industry average of around 45 minutes. In 2009, Southwest's labor productivity compared quite favorably with its chief domestic competitors (as shown below):

65 109 115 103 70

129 90

766 Crafting & Executing Strategy

C-306 Part 2 Cases in Crafting and Executing Strategy

Under Herb Kelleher, instituting practices, pro- cedures, and support systems that promoted operating excellence had become a tradition and a source of company pride. Much time and effort over the years had gone into finding the most effective ways to do aircraft maintenance, to operate safely, to make baggage handling more efficient and baggage transfers more accu- rate, and to improve the percentage of on-time arrivals and departures. Believing that air travel- ers were more likely to fly Southwest if its flights were reliable and on time, Southwest's manag- ers constantly monitored on-time arrivals and departures, making inquiries when many flights ran behind and searching for ways to improve on-time performance. One initiative to help mini- mize weather and operational delays involved the development of a state-of-the-art flight dispatch system.

Southwest's current CEO, Gary Kelly, had followed Kelleher's lead in pushing for operating excellence. One of Kelly's strategic objectives for Southwest was "to be the safest, most efficient, and most reliable airline in the world." South- west managers and employees in all positions and ranks were proactive in offering suggestions for improving Southwest's practices and procedures; those with merit were quickly implemented. Southwest was considered to have one of the most competent and thorough aircraft maintenance programs in the commercial airline industry and, going into 2008, was widely regarded as the best operator among U.S. airlines. Its recent record vis-a-vis rival airlines on four important measures of operating perfonnance was commendable-see Exhibit 13.

The First Significant Blemish on Southwest's Safety Record While no Southwest plane had ever crashed and there had never been a passenger fatality, there was an inci- dent in 2005 in which a Southwest plane landing in a snow storm with a strong tailwind at Chi- cago's Midway airport was unable to stop before overrunning a shorter-than-usual runway, rolling onto a highway, crashing into a car, killing one of the occupants, and injuring 22 of the passengers on the plane. A National Traffic Safety Board investigation concluded that "the pilot's failure to

use available reverse thrust in a timely manner to safely slow or stop the airplane after landing" was the probable cause.

Belated Aircraft Inspections Fur- therTarnish Southwest's Reputation In early 2008, various media reported that South- west Airlines over a period of several months in 2006 and 2007 had knowingly failed to con- duct required inspections for early detection of fuselage fatigue cracking on 46 of its older Boe- ing 737-300 jets. The company had voluntarily notified the Federal Aviation Administration about the lapse in checks for fuselage cracks but continued to fly the planes until the work was done-about eight days. The belated inspections revealed tiny cracks in the bodies of six planes, with the largest measuring four inches; none of the cracks impaired flight safety. According to CEO Gary Kelly, "Southwest Airlines discov- ered the missed inspection area, disclosed it to the FAA, and promptly re-inspected all poten- tially affected aircraft in March 2007. The FAA approved our actions and considered the mat- ter closed as of April 2007." Nonetheless, on March 12, 2008, shortly after the reports in the media surfaced about Southwest's failure to meet inspection deadlines, Southwest canceled 4 percent of its flights and grounded 44 of its Boeing 737-300s until it verified that the aircraft had undergone required inspections. Gary Kelly then initiated an internal review of the com- pany's maintenance practices; the investigation raised "concerns" about the company's aircraft maintenance procedures, prompting Southwest to put three employees on leave. The FAA sub- sequently fined Southwest $1 0.2 million for its transgressions. In an effort to help restore cus- tomer confidence, Kelly publicly apologized for the company's wrongdoing, promised that such a lapse would not occur again, and reasserted the company's commitment to safety. He said:

From our inception, Southwest Airlines has main- tained a rigorous Culture of Safety-and has maintained that same dedication for more than 37 years. It is and always has been our number one priority to ensure safety.

We've got a 37-year history of very safe oper- ations, one of the safest operations in the world, and we're safer today than we've ever been.

Southwest Airiines in 2010: Culture, Values, and Operating Practices 76 7

Case 20 Sot.itl'":\\·est l\irHnes ln 2010: Culture,. Values, and ()perating Pre.ctices C-307

American Airlines 75.8% 78.0% 75.6% 72.4% 66.9% 75.2% 77.5% Continental Air Lines 76.7 78.7 74.8 73.5 74.1 75.6 80.4 Delta Air Lines 78.3 76.4 76.2 76.6 75.7 76.3 79.3 JetBlue Airways n.a. 76.3 73.1 69.4 73.3 74.0 77.3 Northwest Airlines* 80.7 79.3 75.1 71.4 71.1 80.5 Southwest Airlines 78.7 79.9 80.3 80.7 78.5 83.3 81.5 United Air Lines 71.6 79.8 75.7 73.0 69.1 76.2 82.5 US Airways 72.7 76.0 78.9 69.7 75.5 79.9 81.9

American Airlines 5.44 4.58 4.91 6.40 5.82 4.32 3.87 Continental Air Lines 4.11 3.30 3.85 5.02 3.78 2.32 2.27 Delta Air Lines 3.64 6.21 4.75 5.26 3.81 4.33 3.50 JetBiue Airways n.a. 3.16 2.88 4.38 3.23 2.26 2.15 Northwest Airlines* 4.98 3.58 3.11 3.80 2.97 2.11 Southwest Airlines 4.14 3.46 3.66 5.54 4.41 3.30 3.09 United Air Lines 6.71 4.00 3.89 4.83 4.76 3.67 3.05 US Airways 4.57 9.73 5.69 7.17 3.86 2.91 2.27

American Airlines 0.59 0.72 1.16 1.06 0.98 0.43 1.28 Continental Air Lines 0.50 3.01 2.60 1.93 1.57 1.42 2.73 Delta Air Lines 0.44 1.06 2.68 3.47 1.80 1.64 0.63 JetBlue Airways n.a. 0.00 0.01 0.04 0.02 0.00 0.01 Northwest Airlines • 0.12 1.70 1.00 1.25 1.15 0.68 Southwest Airlines 1.70 0.74 1.81 1.25 1.68 1.42 2.59 United Air Lines i .61 0.42 0.88 0.4 0.89 1.30 1.92 US Airways 0.80 1.01 1.07 1.68 2.01 1.50 2.96

American Airlines 2.77 1.01 1.22 1.44 1.30 1.18 1.61 Continental Air Lines 2.25 0.89 0.85 0.75 1.03 1.03 1.36 Delta Air Lines 1.60 0.91 0.93 1.50 2.10 1.85 1.57 JetBiue Air.vays n.a. 0.00 0.22 0.40 0.56 0.93 1.72 l'·lorthwest Airlines* 2.17 0.83 0.69 1.13 0.94 0.88 Southwest Airlines 0.41 0.17 0.18 0.19 0.32 0.13 0.26 United Air lines 5.07 0.87 1.19 2.00 1.61 1.16 1.67 US Airways 1.63 0.99 1.22 2.65 1.94 1.34 1.19

'"Effective January 2010, data of the merged operations of Delta Air Lines and Northwest Airlines were combined and reported as Delta for Qi 2010.

Source: Office of Aviation Enforcement and Proceedings, Air Travel Consumer Report, various years.

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C-308 Part 2 Cases in Crafting and Executing Strategy

In the days following the public revelation of Southwest's maintenance lapse and the tarnishing of its reputation, an industry-wide audit by the FAA revealed similar failures to conduct timely inspections for early signs of fuselage fatigue at five other airlines--American, Continental, Delta, United, and Northwest An air travel snafu ensued, with more than a thousand flights sub- sequently being canceled due to FAA-mandated grounding of the affected aircraft while the over- due safety inspections were performed. Further public scrutiny, including a congressional inves- tigation, turned up documents indicating that, in some cases, planes flew for 30 months after the inspection deadlines had passed. Moreover, high-level FAA officials were apparently aware of the failure of Southwest and other airlines to perform the inspections for fuselage cracks at the scheduled times and chose not to strictly enforce the inspection deadlines-according to some commentators, because of allegedly cozy relationships with personnel at Southwest and the other affected airlines. Disgruntled FAA safety supervisors in charge of monitoring the inspec- tions conducted by airline carriers testified before Congress that senior FAA officials frequently ignored their reports that certain routine safety inspections were not being conducted in accor- dance with prescribed FAA procedures. Shortly thereafter, the FAA issued more stringent pro- cedures to ensure that aircraft safety inspections were properly conducted.

E S

In September 2010, Southwest announced that it had entered into a definitive agreement to acquire all of the outstanding common stock of AirTran

5 1bid., pp. 26-27. B Ibid., pp. 246-47.

Holdings, Inc. (NYSE: AAI), the parent com- pany of AirTran Airways (AirTran), for a combi- nation of cash and Southwest Airlines' common stock. The transaction was valued at about $1.4 billion; Southwest planned to fund approxi- mately $670 million of the acquisition cost out of cash on hand.35 For the twelve months ending June 30, 2010, AirTran had revenues of $2.5 billion and operating income (excluding special items) of $128 million. Like Southwest, AirTran was also a low-fare, low-cost airline. AirTran served 70 airports in the United States, Mexico, and the Caribbean; nineteen of these coincided with air- ports already served by Southwest. AirTran's hub was Atlanta's Hartsfield-Jackson International Airport, the busiest airport in the United States and the largest domestic airport not served by Southwest; AirTran had 202 daily departures out of Atlanta. 36 Some analysts believed that South- west's entry into the Atlanta market alone could translate into 2 million additional passengers for Southwest annually. AirTran had 8,033 employ- ees, 138 aircraft, and 177 nonstop routes; in 2009 AirTran transported 24.0 million passengers, the seventh largest number of all U.S. airlines. Based on current operations, the combined organization would have nearly 43,000 employees and serve more than 100 million passengers annually. In addition, the combined carriers' all-Boeing fleet consisting of 685 active aircraft would include 401 Boeing 737-700s, 173 Boeing 737-300s, 25 Boeing 737-SOOs, and 86 Boeing 717s, with an average age of approximately 10 years, one of the youngest fleets in the industry. The companies hoped to close the merger deal in early 2011 and then begin integration of AirTran into the South- west Airlines brand-a process which Southwest management said might take as long as two years in order to maintain Southwest's standards for customer service.

10 Quoted in Seattle Times, March 20, 2001, p.C3.

1 Kevin Freiberg and Jackie Freiberg, NUTS! Southwest Airlines' Crazy Recipe for Business and Personal Success (New York: Broadway Books, 1998), p.15.

7 Quoted in the Dallas Morning News, March 20,2001.

11 Speech at Texas Christian University, September 13, 2007; accessed at

2 ibid., pp. 16-18. 3Katrina Brooker, "The Chairman of the Board Looks Back;' Fortune, May 28, 2001 ,.p. 66. 4 Freiberg and Freiberg, NU1S, p. 31.

8 Quoted in Brooker, "The Chairman of the Board Looks Back;' p. 64. 9 1bid., p. 72.

on September 8, 2008. 12 Freiberg and Freiberg, NUTS/, p. 163. 13 Company press release, July 15, 2004.