Southwest Airlines Operations – A Strategic Perspective

Background:

Southwest Airlines is the biggest airline measured by a variety of passengers carried every year inside the United States. It is also referred to as a ‘low-cost airline’ in contrast with its giant rivals within the business. Rollin King and Herb Kelleher based Southwest Airlines on June 18, 1971. Its first flights had been from Love Field in Dallas to Houston and San Antonio, quick hops with no-frills service and an easy fare construction. The airline started with one easy technique: “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 strategy has been an important thing to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million complete passengers carried (in 2004) and with a complete working income of $6.5 billion. Southwest is traded publicly below the image “LUV” on NYSE.

Facts:

* The first main airline to fly a single sort of plane (Boeing 737s)

* The first main airline to supply ticketless journey system huge together with a frequent flier program based mostly on a variety of journeys and never a variety of miles flown.

* The first airline to supply a revenue-sharing program to its Employees (instituted in 1973).

* The first main airline to develop a Web web site and supply on-line reserving. In 2001, about 40 p.c ($2.1 billion) of its passenger income was generated by way of on-line bookings at [http://www.southwest.com]. Southwest’s price per reserving through the Internet is about $1, in contrast to a price per reserving by way of journey brokers of $6 to $8.

Key aggressive benefits:

* Low Operational prices / High Operational Efficiency

* Award-profitable customer support

* Human Resource practices / Work tradition

Operations Analysis – Competitive Dimensions:

Southwest clearly has a definite benefit in comparison with different airways within the business by executing an efficient and environment-friendly operations technique that varieties a vital pillar of its general company technique. Given beneath are some aggressive dimensions that will likely be studied in this paper.

1. Operational Costs and Efficiency

2. Customer Service

3. Employee/Labor Relations

4. Technology

1. Operational Costs and Efficiency

After all, the airline business general is in shambles. But, how does Southwest Airlines keep worthwhile? Southwest Airlines has the bottom prices and strongest steadiness sheet in its business, in line with its chairman Kelleher. The two largest working prices for any airline are – labor prices (approx 40%) adopted by gasoline prices (approx 18%). Some different ways in which Southwest is ready to maintain its operational prices low is – flying level-to-level routes, selecting secondary (smaller) airports, carrying constant planes, sustaining excessive plane utilization, encouraging e-ticketing and so on.

Labor Costs

The labor prices for Southwest sometimes account for about 37% of its working prices. Perhaps essentially the most essential factor of the profitable low-fare airline enterprise mannequin is attaining considerably larger labor productiveness. According to the latest HBS Case Study, southwest airways is the “most heavily unionized” US airline (about 81% of its workers belong to a union) and its wage charges are thought of to be at or above common in comparison with the US airline business. The low-fare service labor benefit is in rather more versatile work guidelines that enable cross-utilization of just about all workers (besides the place disallowed by licensing and security requirements). Such cross-utilization and a protracted-standing tradition of cooperation amongst labor teams translate into decrease unit labor prices. At Southwest in 4th quarter 2000, complete labor expense per out there seat mile (ASM) was greater than 25% beneath that of United and American, and 58% lower than US Airways.

Carriers like Southwest have an amazing price benefit over community airways just because their workforce generates extra output per worker. In an examination in 2001, the productiveness of Southwest workers was over 45% larger than at American and United, regardless of the considerably longer flight lengths and bigger common plane measurement of those community carriers. Therefore by its relentless pursuit for lowest labor prices, Southwest is ready to positively impression its backside line revenues.

Fuel Costs

Fuel prices are the second-largest expense for airways after labor and account for about 18 p.c of the service’s working prices. Airlines that need to forestall big swings in working bills and backside line profitability select to hedge gasoline costs. If airways can management the price of gasoline, they will extra precisely estimate budgets and forecast earnings. With rising competitors and air journey changing into a commodity enterprise, being aggressive on worth was key to any airline’s survival and success. It grew to become onerous to move larger gasoline prices on to passengers by elevating ticket costs as a result of the extremely aggressive nature of the business.

Southwest has been in a position to efficiently implement its gasoline hedging technique to avoid wasting on gasoline bills in an enormous approach and has the biggest hedging place amongst different carriers. In the second quarter of 2005, Southwest’s unit prices fell by 3.5% regardless of a 25% improvement in jet gasoline prices. During Fiscal yr 2003, Southwest had a lot decrease gasoline expense (0.012 per ASM) in comparison with the opposite airways except JetBlue as illustrated in exhibit 1 beneath. In 2005, 85 percent of the airline’s gasoline wants has been hedged at $26 per barrel. World oil costs in August 2005 reached $68 per barrel. In the second quarter of 2005 alone, Southwest achieved gasoline financial savings of $196 million. The state of the business additionally means that airways that are hedged have an aggressive benefit over the non-hedging airways. Southwest introduced in 2003 that it could add efficiency-enhancing Blended Winglets to its present and future fleet of Boeing 737-700’s. The visually distinctive Winglets will enhance efficiency by extending the airplane’s vary, saving gasoline, reducing engine upkeep prices, and lowering takeoff noise.

Point-to-Point Service

Southwest operates its flight level-to-level service to maximize its operational effectiveness and keep price-efficient. Most of its flights are quick hauls averaging about 590 miles. It makes use of the technique to maintain its flights within the air extra usually and due to this fact obtain higher capacity utilization.

Secondary Airports

Southwest flies to secondary/smaller airports in an effort to scale back journey delays and due to this fact present glorious service to its prospects. It has led the business in on-time efficiency. Southwest has additionally been in a position to trim down its airport operations prices comparatively higher than its rival airways.

Consistent plane

At the guts of Southwest’s success is its single plane technique: Its fleet consists completely of Boeing 737 jets. Having frequent fleet considerably simplifies scheduling, operations, and flight upkeep. The coaching prices for pilots, floor crew and mechanics are decreases, as a result of there’s solely a single plane to study. Purchasing, provisioning, and different operations are additionally vastly simplified, thereby reducing prices. A consistent plane additionally permits Southwest to make the most of its pilot crew extra effectively.

E-Ticketing

The thought of the ticketless journey was a serious benefit to Southwest as a result of it might decrease its distribution prices. Southwest grew to become digital or ticketless again within the mid-1990s, and immediately they’re about 90-95% ticketless. Customers who use bank cards are eligible for online transactions, and immediately Southwest.com bookings account for about 65% of complete income. CEO Gary Kelly thinks that this concept would develop additional and that he would not be stunned if e-ticketing accounted for 75% of Southwest’s revenues by the finish of 2005. In the previous, when there was a 10% journey company fee paid, it used to price about $Eight a reserving. But at the moment, Southwest is paying between 50 cents and $1 per reserving for digital transactions that translate to large price financial savings.

2. Employee and Labor Relations

Southwest has been extremely regarded for its progressive administration model. It maintains a relentless deal with excessive-efficiency relationships and its folks-administration practices have been the important thing to its unparalleled success within the airline business.

Mission Statement

To Our Employees

“We are committed to providing 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 assertion reveals that the corporate has a powerful dedication to its workers. The firm affords the identical respect to its workers that are offered to its prospects. The Southwest mission assertion is exclusive in that it acknowledges the significance of its workers inside the broader enterprise technique, which emphasizes very good customer support and operational effectiveness. The workers reciprocate the respect, loyalty, and belief that Southwest demonstrates. Southwest workers are identified for his or her loyalty, dedication, angle and innovation. The workers are the distinguishing issue between Southwest and the remainder of the airline business.

Hiring

Southwest hiring coverage is exclusive not solely inside the airline business, but additionally extra broadly, and revolves around discovering folks with the precise angle that can thrive within the Southwest tradition. Extensive procedures are employed to rent for constructive angle and dedication. Those who don’t possess these 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 course of. The first step is a bunch of interviews, performed by workers, the place communication abilities of potential candidates are evaluated. The subsequent steps on this course of are one on one interview, the place the candidates’ attitudes and orientation towards serving others are evaluated. These hiring standards apply to all job features since all Employees at Southwest play a customer support function. An essential part of the Southwest operational technique is that each job at Southwest is a customer support place, whether or not it straight applies to the shopper or whether or not it’s inner.

The desk beneath reveals that although Southwest is essentially the most closely unionized airline, at roughly 80%, that contract negotiations between the unions and Southwest are a lot shorter in period than of the opposite main carriers. This reveals the standard of relationship that Southwest has with its workers and with the unions that signify them.

Culture

Southwest was created as a special type of firm and from its beginnings, a singular tradition was nurtured. In 1990 Colleen Barrett shaped the Southwest Culture Committee. This is exclusive inside the business and amongst all giant firms. The committee additionally has a mission assertion:

“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 that this distinctive strategy to firm values that have created a tradition that differentiates itself from others. Southwest’s tradition is the rationale of why it’s profitable.

3. Customer Service

The Mission of Southwest Airlines

The mission of Southwest Airlines is a dedication to the very best high quality of Customer Service delivered with a way of heat, friendliness, particular person delight, and Company Spirit.

Approach

Herb Kelleher, founding father of Southwest, has been quoted as saying that “We’re in the Customer service business; we just happen to provide airline transportation”.2 Award-profitable customer support is a distinguishing attribute of Southwest and it’s referred to internally as “Positively Outrageous Service”. It implies that from the highest to backside everybody does no matter what she or he can to fulfill the shopper. This contains Herb Kelleher, who has been identified for serving to out baggage handlers on Thanksgiving. It is through emphasizing the shopper and worker that Southwest is ready to differentiate itself from others within the airline business. On an extra technical stage, every worker or group inside Southwest has his or her, personal buyer. This implies that each worker ‘serves’ in a method or one other regardless of not being straight concerned with the passenger. The mechanic’s buyer is the pilot and the caterers are the flight attendant.

Results

It will be stated that the “Positively Outrageous Service” that’s distinctive 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 strategy creates the situations the place Employees usually tend to deal with prospects in ways in which distinguish the corporate from others. There are quite a few accounts of passengers who’ve obtained distinctive remedy from Southwest workers.

The query that must be answered is how Southwest’s customer support is completely different and why? Is it frequent for patrons of different airways to rave about their particular service? The reply is that it’s not. While Southwest doesn’t have a monopoly on people who find themselves variety and who’re prepared to go above and past to fulfill a buyer, such conduct is nurtured at Southwest to a lot higher extent.

It can then be concluded that the customer support that’s inherent to Southwest is part of its tradition. This tradition is supported by way of worker encouragement to do the additional to fulfill the shopper. This strategy conjures up individuals who would ordinarily solely every so often exit of their approach to assisting somebody, to turn out to be constant performers that supply distinctive service on a regular basis. Southwest workers are what differentiate their customer support from the opposite airways.

4. Technology

Southwest makes use of know-how in some ways to satisfy its enterprise aims and preserve its environment-friendly operations. According to its CEO, know-how equals productiveness. Launched in 1996, the ticketless journey was first launched by Southwest. On May 1st, 2000, Southwest Airlines introduces “SWABIZ,” a portal that assists firm journey managers in reserving and monitoring journeys made by way of its website [http://www.southwest.com]. There are many new know-how initiatives being undertaken at the moment and a few are within the pipeline.

Bar codes in Boarding Passes

Southwest Airlines has invested $12 million throughout the previous three years to standardize company and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude pocket book computer systems in line with its firm executives. Southwest wished to switch its well-known, brightly colored plastic boarding passes with a digital system with bar-code paper boarding passes. So it put in about 350 contact display screen ticket readers powered by Dell OptiPlex desktops. The bar code offers Southwest extra data to robotically reconcile the variety of boarding passes with the variety of passengers that truly board the aircraft.

Although the know-how will assist Southwest Airlines stay environment friendly by consolidating passenger data for the corporate’s 3,000 everyday flights, there have been considerations it might lengthen the time to get vacationers on board. However it was discovered that scanning every bar code on the boarding passes did not improve or shorten boarding schedules, nevertheless, it did take minutes from administrative processes, corresponding to wanting up buyer information. The new paper bar code system is giving Southwest ticket brokers the flexibility to match a buyer file inside having to scroll by way of and log into a number of software program screens. The course of is rather more automated. Once the bar code on the boarding move is scanned on the terminal gate it checks off the individual from the passenger checklist in actual time.

The outdated course of guided that concerned discovering the data, scrolling by way of a number of software program screens from reservations to test-in to boarding. The bar code {hardware} to scan the boarding passes has been deployed. The firm is within the strategy of changing customer support again-workplace tools at airports together with at its headquarters in Dallas.

Software Upgrades

Software purposes, corresponding to these utilized by clerks to test in passengers, are being changed. Southwest Airlines’ internally written “Airport Application Suite” is anticipated to roll out subsequent yr as the corporate transitions from inexperienced screens to Window-based consumer interface. Similar to Wal-Mart Stores Inc., Southwest Airlines believes in growing in-home the software program that runs its operations. The firm makes use of little or no off-the-shelf software program. There are between 75 and 100 tasks within the works every year supported by roughly 900 IT workers.

RFID

Radiofrequency identification know-how, a good different to bar-coding for baggage identification, can be on Southwest’s radar. It plans to check RFID know-how someday in 2006. Even although, Southwest is taking part in somewhat catch-up with different airways corresponding to Air Tran, Alaska and Champion Airlines, in lots of instances they’re ready leapfrog to extra refined purposes simply having waited longer.

Challenges:

Southwest has emerged very profitably, regardless of essentially the most troubling occasions within the airline market. However, it faces new challenges within the face of accelerating competitors from different low fare airways corresponding to JetBlue, ATA airways, America West.

Reserved Seating

Due to rising safety pointers since September 2001, Southwest would want to organize for assigned (reserved) seating to track its in-flight passengers. This change will contain giant know-how investments and should impression its gate operations negatively because the present approach of unassigned seating has helped in fast gate turnarounds.

Passenger Demand

The maintain-it-easy philosophy has served Southwest properly. But as its personal enterprise grows and grows extra complicated, with plans to buy dozens of latest planes and an anticipated upsurge in passenger site visitors to about 80 million boardings’s a yr, the simple technique that has been mirrored within 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 can be aggressively pursuing buyer relationship administration (CRM) strategies and has purposed to get perception into buyer’s needs and dislikes. According to an interview with its CEO Gary Keller, Southwest has its deal with enhancing in two areas – buyer’s airport expertise and in-flight expertise.

In-Flight Entertainment

In a general effort to enhance buyer’s in-flight expertise, in-flight leisure is one thing that Southwest is at the moment evaluating and which JetBlue has been very profitable at already due to its introduction in its lengthy-haul flights. In comparability, Southwest has 415 airplanes to think about and that represents a funding determination at an entirely new dimension. Additionally, Southwest has to think about how issues might match their atmosphere. At this level, 60% of its service continues to be a very quick haul. Southwest must be conscious of the truth that a sure strategy that has been profitable for its competitor will not essentially work to its benefit.

Summary:

Southwest has long been thought to be a benchmark in its business for operational excellence. Southwest Airlines is a nice instance of an organization that’s dedicated to its core competencies – environment-friendly operations to drive its low price construction, an excellent supply of customer support and progressive HR administration practices. We hope this paper offered a very good perception of Southwest operations, as a part of its general technique, to realize success and achieve aggressive benefit.

References:

1. [http://www.southwest.com] (Southwest airways official website)

2. “Southwest keeps it simple” – Air Transport World, April 2005, Pg 36

3. “Around the World on $48 (Or So): How High Can Discount Airlines Fly?“ Strategy Management – Knowledge@ Wharton Newsletter Oct 5, 2005

4. TechWeb – [http://www.techweb.com/wire/ebiz/173601227]

5. “Southwest’s Strategy for Success: Consolidate!” – Oracle Magazine (Sept/Oct 2004 version) http://www.oracle.com/technology/oramag/oracle/04-sep/o54swest.html

6. “Southwest Airlines: High Tech, Low Costs” – Eweek.com, April 2005

7. “Jet Fuel Hedging Strategies: Options Available for Airlines and a Survey of Industry Practices” – Kellogg School of Management Research Paper, Spring 2004

8. Winning Behavior: What the Smartest, Most Successful Companies Do Differently, Terry R. Bacon and David G. Pugh, 2003

9. Time Magazine, Oct 28th, 2002 subject, Vol. 160 Issue 18, p. 45

10. “Wings Of Change”, Information Week, March 28, 2005,

11. Labor Contract Negotiations within the Airline Industry, Monthly Labor Review, July 2003, web page 24

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