GITAM INSTITUTE of INTERNATIONAL

BUSINESS
GITAM Campus, Visakhapatnam
(2009-11)

ASSIGNMENT
ON
Operational Excellence Of
Southwest Airlines

Submitted to: Submitted By:

Prof. V. G. Patnaik Vinay

Bhandari

Section A

Roll No. 157

1
Background:

Southwest Airlines was incorporated in Texas and commenced Customer

Service on June 18, 1971, with three Boeing 737 aircraft serving three Texas
cities - Houston, Dallas, and San Antonio. Today, Southwest operates more than
500 Boeing 737 aircraft between 67 cities. Southwest topped the monthly
domestic originating passenger rankings for the first time in May 2003. Yearend
results for 2008 marked Southwest’s 36th consecutive year of profitability.
Southwest Airlines is the largest airline measured by number of passengers
carried each year within the United States. It is also known as a ‘discount
airline’ compared with its large rivals in the industry. Rollin King and Herb
Kelleher founded Southwest Airlines on June 18, 1971. Its first flights were
from Love Field in Dallas to Houston and San Antonio, short hops with no-frills
service and a simple fare structure. The airline began with one simple strategy:
“If you get your passengers to their destinations when they want to get there, on
time, at the lowest possible fares, and make darn sure they have a good time
doing it, people will fly your airline.” This approach has been the key to
Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states)
with 71 million total passengers carried (in 2004) and with a total operating
revenue of $6.5 billion. Southwest operates more than 3,300 flights a day coast-
to-coast, making it the largest U.S. carrier based on domestic departures as of
September 30, 2008 Southwest is traded publicly under the symbol “LUV” on
NYSE.

2
Facts:

• The first major airline to fly a single type of aircraft (Boeing 737s)
• The first major airline to offer ticketless travel system wide including a
frequent flier program based on number of trips and not number of miles
flown.
• The first airline to offer a profit-sharing program to its Employees
(instituted in 1973).
• The first major airline to develop a Web site and offer online booking. In
2001, about 40 percent ($2.1 billion) of its passenger revenue was
generated through online bookings at http://www.southwest.com.
Southwest's cost per booking via the Internet is about $1, compared to a
cost per booking through travel agents of $6 to $8.

Key competitive advantages:

• Low Operational costs / High Operational Efficiency

• Award winning customer service
• Human Resource practices / Work culture

3
 Cities served by Southwest

Albany El Paso Manchester

Albuquerque Ft.Lauderdale/Ho Midland/Odessa

llywo
Amarillo Minneapolis/St.
Ft. Myers/Naples Paul
Austin
Harlingen/South Nashville
Baltimore/Washi
Padre Island
ngton New Orleans

Birmingham Hartford/Springfi NewYork

eld (LaGuardia)
Boise
Houston (Hobby) Norfolk
Boston Logan
Indianapolis Oakland
Buffalo
Long Island Oklahoma City
Burbank (MacArthur)
Chicago Omaha
Jackson
(Midway) Ontario
Jacksonville
Cleveland Orange
Kansas City
Columbus County
Las Vegas
Corpus Christi Orlando
Little Rock
Dallas (Love Philadelphia
Field) Los Angeles
Phoenix
(LAX)
Denver Pittsburgh
Louisville
Detroit (Metro) Portland
Lubbock
4
 Providence

Raleigh-
Durham

Reno

Sacramento

St. Louis

Salt Lake City

San Antonio

San Diego

San Francisco

San Jose

Seattle/Tacom
a

Spokane

Tampa

Tucson

Tulsa

Washington,
DC (Dulles)

West Palm
Beach

5
Fleet:

• Southwest currently operates 544 Boeing 737 jets (as of July 16, 2009).
• Company’s fleet has an average age of approximately 10 years.

• The average aircraft trip length is 635 miles with an average duration of
one hour and 55 minutes.

• Southwest aircraft fly an average of 6.2 flights per day, or almost 12 hours
and 9 minutes per day.

• Southwest was the launch customer for the Boeing 737-700 in 1997.
Southwest was also a launch customer for the Boeing 737-500 and -300
series aircraft.

• Southwest has almost completed updating its traditional gold, red and
orange paint scheme by adding Canyon Blue. All new aircraft will have
the updated colors and interior. Existing aircraft are being retrofitted.

• Performance-enhancing Blended Winglets have been added to our fleet of

737-700s, and all new 737-700 aircraft arrive from Boeing with Blended
Winglets installed. Additionally, Southwest began installation of Blended
Winglets on some of our 737-300 aircraft in early 2007. Approximately 90
-300 aircraft are expected to retrofitted with Blended Winglets, and as of
the first quarter of 2009, over 70 of those retrofits have been completed.
The remainder are expected to be completed by the end of 2009

Operations Analysis – Competitive Dimensions:

Southwest clearly has a distinct advantage compared to other airlines in the
industry by executing an effective and efficient operations strategy that forms an
important pillar of its overall corporate strategy. Given below are some
competitive dimensions that will be studied in this paper.

1. Operational Costs and Efficiency

2. Customer Service

3. Employee/Labour Relations

4. Technology

1. Operational Costs and Efficiency

After all, the airline industry overall is in shambles. But, how does Southwest
Airlines stay profitable? Southwest Airlines has the lowest costs and strongest
balance sheet in its industry, according to its chairman Kelleher. The two biggest
operating costs for any airline are – labour costs (approx 40%) followed by fuel
costs (approx 18%). Some other ways that Southwest is able to keep their
operational costs low is - flying point-to-point routes, choosing secondary
(smaller) airports, carrying consistent aircrafts, maintaining high aircraft
utilization, encouraging e-ticketing etc.

 Labour Costs

The labour costs for Southwest typically accounts for about 37% of its operating
costs. Perhaps the most critical element of the successful low-fare airline
business model is achieving significantly higher labour productivity. According
to a recent HBS Case Study, southwest airlines is the “most heavily unionized”
US airline (about 81% of its employees belong to a union) and its salary rates are
considered to be at or above average compared to the US airline industry.

The low-fare carrier labour advantage is in much more flexible work rules that
allow cross-utilization of virtually all employees (except where disallowed by
licensing and safety standards). Such cross-utilization and a long-standing
culture of cooperation among labor groups translate into lower unit labor costs.
At Southwest in 4th quarter 2000, total labor expense per available seat mile
(ASM) was more than 25% below that of United and American, and 58% less
than US Airways.

Carriers like Southwest have a tremendous cost advantage over network airlines
simply because their workforce generates more output per employee. In a study
in 2001, the productivity of Southwest employees was over 45% higher than at
American and United, despite the substantially longer flight lengths and larger
average aircraft size of these network carriers. Therefore by its relentless pursuit
for lowest labor costs, Southwest is able to positively impact its bottom line
revenues.

 Fuel Costs

Fuel costs is the second-largest expense for airlines after labor and accounts for
about 18 percent of the carrier's operating costs. Airlines that want to prevent
huge swings in operating expenses and bottom line profitability choose to hedge
fuel prices. If airlines can control the cost of fuel, they can more accurately
estimate budgets and forecast earnings. With growing competition and air travel
becoming a commodity business, being competitive on price was key to any
airline’s survival and success. It became hard to pass higher fuel costs on to
passengers by raising ticket prices due to the highly competitive nature of the
industry.

Southwest has been able to successfully implement its fuel hedging strategy to
save on fuel expenses in a big way and has the largest hedging position among
other carriers. In the second quarter of 2005, Southwest’s unit costs fell by 3.5%
despite a 25% increase in jet fuel costs. During Fiscal year 2003, Southwest had
much lower fuel expense (0.012 per ASM) compared to the other airlines with
the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent of
the airline’s fuel needs has been hedged at $26 per barrel. World oil prices in
August 2005 reached $68 per barrel. In the second quarter of 2005 alone,
Southwest achieved fuel savings of $196 million. The state of the industry also

suggests that airlines that are hedged have a competitive advantage over the non-
hedging airlines. Southwest announced in 2003 that it would add performance-
enhancing Blended Winglets to its current and future fleet of Boeing 737-700’s.
The visually distinctive Winglets will improve performance by extending the
airplane’s range, saving fuel, lowering engine maintenance costs, and reducing
takeoff noise.

 Point-to-Point Service

Southwest operates its flight point-to-point service to maximize its operational

efficiency and stay cost-effective. Most of its flights are short hauls averaging
about 590 miles. It uses the strategy to keep its flights in the air more often and
therefore achieve better capacity utilization.

 Secondary Airports

Southwest flies to secondary/smaller airports in an effort to reduce travel delays

and therefore provide excellent service to its customers. It has led the industry in
on-time performance. Southwest has also been able to trim down its airport
operations costs relatively better than its rival airlines.

 Consistent aircrafts

At the heart of Southwest's success is its single aircraft strategy: Its fleet consists
exclusively of Boeing 737 jets. Having common fleet significantly simplifies
scheduling, operations and flight maintenance. The training costs for pilots,
ground crew and mechanics are lower, because there's only a single aircraft to
learn. Purchasing, provisioning, and other operations are also vastly simplified,
thereby lowering costs. Consistent aircrafts also enables Southwest to utilize its
pilot crew more efficiently.

 E-Ticketing

The idea of ticketless travel was a major advantage to Southwest because it

could lower its distribution costs. Southwest became electronic or ticketless back
in the mid-1990s, and today they are about 90-95% ticketless. Customers who
use credit cards are eligible for online transactions, and today Southwest.com
bookings account for about 65% of total revenue. The CEO Gary Kelly thinks
that this idea would grow further and that he wouldn't be surprised if e-ticketing
accounted for 75% of Southwest’s revenues by end of 2005. In the past, when
there was a 10% travel agency commission paid, it used to cost about $8 a
booking. But currently, Southwest is paying between 50 cents and $1 per
booking for electronic transactions that translate to huge cost savings.

2. Employee and Labour Relations

Southwest has been highly regarded for its innovative management style. It
maintains a relentless focus on high-performance relationships and its people-
management practices have been the key to its unparalleled success in the airline
industry.

 Mission Statement

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.”

The Southwest mission statement shows that the company has a strong
commitment to its employees. The company affords the same respect to its
employees that is provided to its customers. The Southwest mission statement is
unique in that it recognizes the importance of its employees within the broader
business strategy, which emphasizes superb customer service and operational
efficiency. The employees reciprocate the respect, loyalty and trust that
Southwest demonstrates. Southwest employees are known for their loyalty,
dedication, attitude and innovation. The employees are the distinguishing factor
between Southwest and the rest of the airline industry.
  Hiring

Southwest hiring policy is unique not only within the airline industry, but also
more broadly, and revolves around finding people with the right attitude that will
thrive in the Southwest culture. Extensive procedures are employed to hire for
positive attitude and dedication. Those who do not posses those qualities are
weeded out. Colleen Barrett, a non-operational officer at Southwest, states that

“Hiring is critical, because you cannot institutionalize behavior. Instead, you

must identify those people who already practice the behaviors you are looking
for. Then you can allow Employees to be themselves and make decisions about
Customer service based on common sense and their natural inclinations.” 1

Recruiting and interviewing at Southwest is a two-step process. The first step is

a group interview, conducted by employees, where communication skills of
potential candidates are evaluated. The next steps in this process are one on one
interview, where the candidates' attitudes and orientation toward serving others
are evaluated. These hiring criteria apply to all job functions since all Employees
at Southwest play a customer service role. A critical part of Southwest
operational strategy is that every job at Southwest is a customer service position,
whether it directly applies to the customer or whether it is internal.

The table below shows that even though Southwest is the most heavily unionized
airline, at approximately 80%, that contract negotiations between the unions and
Southwest are much shorter in duration than of the other major carriers. This
shows the quality of relationship that Southwest has with its employees and with
the unions that represent them.

 Culture

Southwest was created as a different kind of company and from its beginnings a
unique culture was nurtured. In 1990 Colleen Barrett formed the Southwest
Culture Committee. This is unique within the industry and among all large
companies. The committee also has a mission statement:
“This group's goal is to help create the Southwest spirit and culture where
needed; to enrich it and make it better where it already exists; and to liven it up
in places where it might be "floundering". In short, this group's goal is to do
"whatever it takes" to create, enhance, and enrich the special Southwest spirit
and culture that has made this such a wonderful Company/Family.”

It is this unique approach to company values that has created a culture that
differentiates itself from others. Southwest’s culture is the reason why it is
successful.

3. Customer Service

The Mission of Southwest Airlines

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

 Approach

Herb Kelleher, founder of Southwest, has been quoted as saying that "We're in
the Customer service business; we just happen to provide airline
transportation".2 Award winning customer service is a distinguishing
characteristic of Southwest and it is referred to internally as “Positively
Outrageous Service”. It means that from the top to bottom everyone does
whatever he or she can to satisfy the customer. This includes Herb Kelleher, who
has been known for helping out baggage handlers on Thanksgiving. It is through
emphasizing the customer and employee that Southwest is able to

differentiate itself from others in the airline industry. On a more technical level,
each employee or group within Southwest has his or her own customer. This
means that every employee ‘serves’ in one way or another despite not being
directly involved with the passenger. The mechanic’s customer is the pilot and
the caterer’s is the flight attendant.
  Results

It can be said that the "Positively Outrageous Service" that is unique to

Southwest “is not the result of a department, or a program, or a mandate from
management. It is not secondary to the product; it is the product.” This approach
creates the conditions where Employees are more likely to treat customers in
ways that distinguish the company from others. There are numerous accounts of
passengers who have received exceptional treatment from Southwest employees.

The question that needs to be answered is how Southwest’s customer service is

different and why? Is it common for customers of other airlines to rave about
their special service? The answer is that it is not. While Southwest does not have
a monopoly on people who are kind and who are willing to go above and beyond
to satisfy a customer, such behavior is nurtured at Southwest to a much greater
extent.

It can then be concluded that the customer service that is inherent to Southwest
is a part of its culture. This culture is supported through employee
encouragement to do the extra to satisfy the customer. This approach inspires
people who would ordinarily only on occasion go out of their way to help
someone, to become consistent performers that offer exceptional service all the
time. Southwest employees are what differentiate its customer service from the
other airlines.

4. Technology

Southwest utilizes technology in many ways to fulfill its business objectives and
maintain its efficient operations. According to its CEO, technology equals
productivity. Launched in 1996, ticketless travel was first introduced by
Southwest. On May 1st 2000, Southwest Airlines introduces "SWABIZ," a
portal that assists company travel managers in booking and tracking trips made
through its web site http://www.southwest.com. There are many new technology
initiatives being undertaken currently and some are in the pipeline.
  Bar codes in Boarding Passes

Southwest Airlines has invested $12 million during the past three years to
standardize corporate and terminal operations on about 10,000 Dell OptiPlex
desktop and Latitude notebook computers according to its company executives.
Southwest wanted to replace its well known, brightly colored plastic boarding
passes with an electronic system with bar-code paper boarding passes. So it
installed about 350 touch screen ticket readers powered by Dell OptiPlex
desktops. The bar code gives Southwest more information to automatically
reconcile the number of boarding passes with the number of passengers that
actually board the plane.

Although the technology will help Southwest Airlines remain efficient by

consolidating passenger information for the company's 3,000 daily flights, there
were concerns it could lengthen the time to get travelers on board. However it
was found that scanning each bar code on the boarding passes didn't increase or
shorten boarding schedules, but it did take minutes from administrative
processes, such as looking up customer records. The new paper bar code system
is giving Southwest ticket agents the ability to match a customer record within
having to scroll through and log into multiple software screens. The process is
much more automated. Once the bar code on the boarding pass is scanned at the
terminal gate it checks off the person from the passenger list in real time.

The old process was manual that involved finding the information, scrolling
through several software screens from reservations to check-in to boarding. The
bar code hardware to scan the boarding passes has been deployed. The company
is in the process of replacing customer service back-office equipment at airports
including at its headquarters in Dallas.

 Software Upgrades
Software applications, such as those used by clerks to check in passengers, are
being replaced. Southwest Airlines' internally written "Airport Application
Suite" is expected to rollout next year as the company transitions from green
screens to Window-based user interface. Similar to Wal-Mart Stores Inc.,
Southwest Airlines believes in developing in-house the software that runs its
operations. The company uses very little off-the-shelf software. There are
between 75 and 100 projects in the works each year supported by approximately
900 IT employees.

 RFID

Radio frequency identification technology, a favorable alternative to bar-coding

for luggage identification, is also on Southwest's radar. It plans to test RFID
technology sometime in 2006. Even though, Southwest is playing a little catch-
up with other airlines such as Air Tran, Alaska and Champion Airlines, in many
cases they are able leapfrog to more sophisticated applications easily having
waited longer.

 Challenges:

Southwest has emerged very successful, despite the most troubled times in the
airline market. However, it faces new challenges in the face of increasing
competition from other low fare airlines such as JetBlue, ATA airlines, America
West.

 Reserved Seating

Due to increasing security guidelines since September 2001, Southwest would

need to prepare for assigned (reserved) seating to track its in-flight passengers.
This change will involve large technology investments and may impact its gate
operations negatively since the current way of unassigned seating has helped in
quick gate turnarounds.

 Passenger Demand
The keep-it-simple philosophy has served Southwest well. But as its own
business grows and grows more complex, with plans to purchase dozens of new

aircraft and an expected upsurge in passenger traffic to about 80 million

boarding’s a year, the simplicity strategy that has been reflected in the airline's
IT philosophy is evolving. The CIO Tom Nealon says that "It's time to adapt our
business processes for efficiency. As our airline scales for us to provide the same
kind of high-touch customer service, we have to automate a lot of things we've
been able to do without technology previously. The challenge is doing that
without conceding the customer touch." Southwest is also aggressively pursuing
customer relationship management (CRM) techniques and has applications to get
insight into customer’s wants and dislikes. According to an interview with its
CEO Gary Keller, Southwest has its focus on improving in two areas -
customer’s airport experience and in-flight experience.

 In-Flight Entertainment

In an overall effort to improve customer’s in-flight experience, in-flight

entertainment is something that Southwest is currently evaluating and which
JetBlue has been very successful at already because of its introduction in its
long-haul flights. In comparison, Southwest has 415 airplanes to consider and
that represents an investment decision at a whole new dimension. Additionally,
Southwest has to consider how things may fit into their environment. At this
point, 60% of its service is still very short haul. Southwest needs to be mindful
of the fact that a certain approach that has been successful for its competitor may
not be necessarily work to its advantage.

Summary:

Southwest has long been regarded as a benchmark in its industry for operational
excellence. Southwest Airlines is a fine example of a company that is committed
to its core competencies - efficient operations to drive its low cost structure,
outstanding delivery of customer service and innovative HR management
practices. We hope this paper provided a good insight into Southwest operations,
as part of its overall strategy, to achieve success and gain competitive advantage.