Challenges of Southwest Airline - Case Study Example

SOUTHWEST AIRLINE SUMMARY OF FACTS Southwest Airline faces internal and external challenges to remain a leader in the airline industry. The most apparent external poser was caused by The Airline Deregulation Act of 1978. Prior to this enactment, the United States government via the Civil Aeronautics Board regulated aviation in the areas of schedules, routes, and fares. With the removal of these controls, competition emerged anew in the world of passenger air transportation. This changed all sectors of aviation including flight patterns between cities, flight frequencies, cargo and passenger fares, financing, safety, and, ultimately, the quality of customer service. A positive affect with deregulation was that new airlines starting up could enter the market without having to abide by the demands of airlines that were already established. New routes were also able to be inaugurated. With competition in abundance, a dramatic drop in fares occurred, and operating income rose to an all-time high the following year. High costs of fuel, unrealistic overexpansion, and an economic recession brought about the negative impact of the Act of 1978. Operating losses were being recorded and the number of passengers was plummeting. Then the strike of air traffic controllers occurred, causing some airlines to crumble. (Siddiqi, Asif, Centennial of Flight) Internal challenges include such challenges as recruiting, hiring, and retaining skilled labor and being able to provide competitive salaries without compromising the company labor costs. Southwest Airlines has been operating for almost 36 years. The former CEO, Herb Kelleher, is the current chairman. He is purported to be one of the company’s greatest strengths by manufacturing employee satisfaction with profit sharing and free airfare. Per the Director of Public Relations, Ed Stewart, Southwest offers these perks along with competitive salaries and insurance benefits, thus drawing at least one hundred thousand applicants per year and having the lowest turnover rate of any airline. Add to these perks the casual office attire allowed and the low absentee and tardiness rates in the industry, Southwest was listed second in Forbes’ Best Companies to Work For. (Tripp, Tracy, Vault, the most trusted name in career information) The origin of Southwest Airline began in 1971 when Rollin King and Herb Kelleher had a dream to start a unique kind of airline. It started as a small airline in Texas and grew to be one of the largest in the United States of America. Flying about one hundred million passengers a year to sixty three American cities more than 3300 times daily, Southwest has definitely come a long way. The airline celebrated its thirty-fifth anniversary on June 18, 2006. On October 17th of the same year, the Wright Amendment became law allowing the company to sell through fares and to operate direct, one-stop flights, and connecting services between all regions of the country and Love Field, Texas. Nonstop flights are scheduled to be in operation in 2014. As of August 6, 2007, there are over thirty three thousand employees throughout the company. The net income for 2006 was 499 million dollars, and the airline now (as of July 20, 2007) runs 502 Boeing jets. Southwest originated the first profit-sharing plan in the industry in 1973 with approximately eighty seven percent unionized personnel. (Southwest Airlines, August 6, 2007) SUMMARY OF PROBLEMS How can the airline continue with its profitability, its high level of customer service, and its reputation for being safe, on time, and low-cost in the face of competition and the limited talent market of potential employees? How will the airline keep its low employee turnover rate when demand and supply of quality personnel is putting pressure on employee retention? (Case Study, page 558) CAUSE OF PROBLEMS Southwest has dominated the airline industry with their low fares. The larger airlines are now following suit and doing the same while adding amenities that Southwest has avoided, such as first class seating and meals. A key factor in the success of Southwest has been the minimal-budget mentality, now being adopted by their competitors. Airline liabilities are astronomical due to jet procurement, airline maintenance, ands fuel. There are forecasts of economic growth falling in 2008. This will definitely impact how often Americans travel. (CNN Money, December, 2007) POSSIBLE SOLUTIONS Due to high costs of fuel and predicted passenger occupancy, CEO Gary Kelly announced that Southwest is revising 2008 expansion estimates below initial plans of 6 percent. The projection is now estimated at 4 to 5 percent. (Pegasus Newswire, December 4, 2007) Southwest Airlines will be the official airline of the college football bowl season. The novel advertising campaign will be the featured venue during the Rose, Sugar, Tostitos Fiesta, and Orange Bowls. Southwest will also be presented at the Allstate Championship Game. This advertising campaign will highlight the company’s partnership with the 2008 championship series. (CNN Money, December 3, 2007) Southwest is continuing its commitment to the growth of the city of Dallas. A state-of-the-art maintenance hangar held its grand opening in that city which will house up to three jets. This accommodation plays a key factor in reducing the amount of time that aircraft is out of service, therefore aiding in revenue. The hangar’s design also exhibits improved labor conditions and the work can flow more effectively. (CNN Money, December 4, 2007) SOLUTIONS AND ITS IMPLEMENTATIONS An in-depth interview with Herb Kelleher in 2005 revealed information regarding their processes, future plans how they solve problems, and so much more. From the company’s inception, the founders offered reduced fares, as much as half of what travelers were paying. There marketing strategy was also different. Along with the destination’s marketing, they also marketed the reasons why those cities should be visited. Humor played a big role in their advertising, a strategy not widely used at that time. At Southwest, people are their competitive advantage. Planning processes are different than at other airlines. Staff used to have weeklong discussions about detailed plans. However, in this regulated business things can change so quickly, sometimes within an hour. The process was changed to embrace the definition of where the company is today and what we would like to be tomorrow. Scenario planning was effective when dealing with uncertainties. What-if scenarios created innovative brainstorming ideas. It was decided quick solutions were best even if they weren’t perfect. Imperfection can be worked on as you progress. Patience is needed in the airline industry. Some cities are not always quickly profitable; a wait of about two years is not uncommon. Southwest was the first airline in the industry to offer a profit sharing plan to its employees. This provides a sense of ownership and improves interest and efficiency. Communication is very important, and Kelleher and Kelly believe in conveying information to their people. The staff is surveyed to learn what they want to know, and that is the data imparted to them. The airline industry has a tremendous amount of metrics to measure performance of the operation. Southwest tracks complaints versus compliments on a monthly basis. They truly listen to what their staff and customers have to say. A suggestion pertaining to a cost-saving idea merits attention; however, the key factor kept in mind at all times is how it will affect the customer. New hires are paired with experienced staff for as long a period as necessary. Southwest genuinely holds true to their adage of ‘hire for attitude, train for skill’. The airline offers internships to college students to work at the Dallas, Texas headquarters while also participating at staff meetings and corporate as well as social functions. Essential qualities that recruiters look for when visiting a college campus are motivation, energy, a positive attitude, and flexibility. Top personality traits required are a sense of humor and a commitment to provide quality service to the customers. Southwest offers interns and all new hires free unlimited travel based on availability and a casual dress code. Interns are eligible to attend classes enhancing career development in the airline industry and workshops to build resumes and focus on interviewing skills. The growth of large organizations to serve additional segments and new areas means adding more staff labor. This sometimes causes the company to lose connection with company markets. Southwest has adopted a strategy to originate and retain connection these new markets. The community is first scrutinized extensively. Their goal is to know what is of importance to that area from the public relations and marketing perspective. Then, Southwest gets heavily involved immediately, such as volunteering to sponsor a community event. This involvement continues while servicing that community. Another way that Southwest remains in connection is that when calling an airline reservation center, the customer speaks with a human, not voice mail and menus, a rarity these days. Jet Blue Airways is a competitor headquartered in Queens, New York City. This airline also boasts low fares, although they are priced slightly higher than Southwest. However, they offer amenities including free television at each seat, ample legroom, and free snacks. Southwest keeps in mind the opportunity of staying power of their competition, and they believe that Jet Blue meets the criteria. Southwest constantly looks at what and how Jet Blue is doing and studies any advantages they have, or may have, over them. Southwest has considered in-flight entertainment, but believes that is may not be budget-wise to add weight and the complexity of rewiring their aircraft to accommodate television on their many short-haul flights. Possibly, wireless technology can accommodate entertainment for their passengers with less cost involved. The airline company also looks outside the industry for innovative ideas. A Disney manager was responsible for redesigning their stations to make them more comfortable and customer friendly. Herb Kelleher believes it may be worthwhile to have people go out into other industries to locate and evaluate new and different methods of operating. (Babson Insight, An Interview with Herb Kelleher, February, 2005) Profitability for Southwest relies on lower cost for short haul flights and increased fares for flights that are longer hauls. Per the Office of Aviation Analysis, their findings show that competing airlines are withdrawing from the low-cost race. They believe that as Southwest continues to expand, they will force others in the industry to change the structures of their costs. Airlines unable to compete with Southwest’s low cost create a demand for the government to provoke new entries at low cost as a disciplinary measure for Southwest’s future pricing habit. Southwest doesn’t operate their routes as other airlines do. They specialize in short-haul flights with frequent service. The dramatic price difference in comparison to other carriers is $56 versus $110 for the same flight. Southwest passengers outnumber the larger airlines, including Delta, United, and American. (Office of Aviation Analysis, The Southwest Effect) While the larger airlines are reducing their prices, the smaller ones are working into their hubs. Southwest is growing. They’re increasing their fleet, their capacity, and the lower end of their labor; positions in the lower level are less costly. Southwest is also buying boarding gates in Chicago to expand their markets. The commitment of Southwest to make their staff happy has definitely paid off. The loyalty of the staff is extremely apparent, and this has drawn the loyalty of investors as well. Everyone wants to be involved in a company where the people are happy. (Brain Storm, How Southwest Deals With Competition, May 31, 2005) At its inception, Southwest’s competition included such airlines as Braniff and Continental but quickly surpassed them in profitability. Airlines are in competition for corporate managers, leisure travelers, and travel agents. Travel agents are not needed by the traveler since Southwest’s prices are so low, and booking reservations with them are so easy, either online or by telephone. (Case Study, page 559) Airlines differ in how their routes are structured. In terminology, they are either point-to-point or hub-and-spoke. The first is direct service. The latter is more complex. Routes and schedules must be coordinated so that passengers can board at the spoke and alight at the hub (a central airport.) The hub entails the infrastructure which can be costly due to systems for handling baggage, maintenance of terminals and facilities, and inventories of parts. Complicated formulas are utilized to calculate the pricing structure in multi traffic flows. Passenger amenities can include meals, reserved seating, and flier clubs. Most airlines offer first class, coach, and business class. Southwest provides coach only with no reserved seating. In one market, a carrier can be dominant, in another be overpowered, and in another face fierce rivalry. Suppliers also have power. Unions can shut airlines down. The industry is highly costly. With all these prevailing conditions and an unpredictable economy, new entrants still find the industry appealing. The acquisition of aircraft is attained at a steep cost. Some carriers are now leasing their aircraft instead of purchasing, and Southwest is one of them. (Case Study, page 560) Leasing provides the opportunity to transfer the tax shield to the leasing company enabling the airline to manufacture value. Competitive arenas have also changed since September 11, 2001 when the public became wary of flying. Expansions in progress at low-cost carriers are increasing, and competition seems to be doing likewise. The East Coast remains dominated by the larger airlines, such as Continental and Delta. However, this leaves plenty of room for expansion in the East, as Southwest now serves Florida and Providence, Rhode Island. Operations at a low cost will expand as Airlines learn to survive the environment of the area. The northeast climate can be a complex matter to adopt. The focus of Southwest Airlines is the commitment of the staff and the mandatory high quality of customer service. Southwest claims that what sets them apart from other airlines is their spirit…………..”We are a company of People, not planes.” (Case Study, page 561) The goal of the airline is to offer low price fares and safety along with superior customer assistance. Southwest delivers a high volume of flights and on-time service. The staff aspires to make flying a fun adventure. The fun spirit involves game-paying that is in good taste and never offensive to anyone. Southwest implements many clever strategies to achieve its goals. To keep schedules relaxed and budget-conscience, they land at the smaller airports in major cities. This keeps landing fees and gate costs at a minimum. Quick turnaround time is imperative for short-haul flights due to planes being airborne for a shorter period of time. This allows more flying time with each plane daily. Southwest now faces the challenge of this practice due to the increase in the requirements involving security. Southwest’s fleet is comprised of fuel-efficient Boeing 737’s only enabling all pilots to fly any airplane. This lowers the rigors of training, service, and maintenance. The fleet also allows any airplane to fly any route. Major airports have a limited number of gates and most are taken by other airlines. Landing in the smaller airports of major cities has rid this concern for Southwest. The company buys or leases airport gates instead of renting the gates of other airlines, thus using their own crews. Ground operations are simpler because connections to other airline companies are not offered. This could also limit some access for customers. Labor is a large expenditure for an airline. The costs for Southwest are approximately 30percent of its revenues and 40 percent of its total liabilities. This calculates to about eight cents per seat per mile. The majority of Southwest employees are union members. Unions have the power to cease the operations of a carrier. A quality relationship between management and unions is critical. (Case Study, page 563) Southwest’s attitude related to customer service is “POS,” (positively outrageous service). This approach is different from other airlines and is a core strategy of the company. Passengers are happy to have the great service and low fares without the costly amenities. To ensure company success, a smart marketing strategy is crucial. Southwest has developed a process of promotions, advertising, and outstanding public relations. Companies sometimes must take risks, but Southwest has adopted a go-slow attitude. Markets are not entered until favorable conditions are perceived. These conditions range from access to a skilled labor pool to accommodating the desires of the community. The aim of airline operations is consistency and efficiency. Airplanes must always function properly and with utmost safety. Southwest supports a wide allowance related to the participation of employees. The staff is encouraged to take leeway within the boundaries of organizational procedures and rules. Employees are prodded to do what has to be done, within guidelines, to satisfy the customer. Stewards are permitted to use good judgment in attending to passenger needs. (Case Study, page 564) The human resource facility is known as the People Department. Southwest’s mission statement claims employees as their competitive edge. This explains why Southwest is touted as a great place to work and why the People Department is inundated with job applications on a daily basis. Southwest wants people with a sense of humor and an outstanding attitude, making the job of recruiters a challenge. They must be creative in locating candidates. It has been said the odds of being accepted to Harvard are higher than being accepted as a Southwest employee. (Case Study, page 565) The employment application process can sometimes take up to six weeks before there is a hiring decision, and approximately twenty percent of the recruits fail the training program at the University for People located in Dallas. The money and time spent in the process has delivered a low nine percent turnover rate, the lowest in the airline industry. (Case Study, page 567) Because fit is so important to Southwest, it only follows that maximum emphasis is placed on training and social skills. With Southwest having its own training facility where all employees, including upper management, must attend yearly training programs, it is no surprise that attendees and graduates all share the same Southwest values. Flight training being the exception, all other training is accomplished on the employees’ personal time. There are no excuses for finding the time either because the university operates seven days per week. Always cost-conscious, Kelleher was one of the lowest paid Chief Executive Officers in the Dallas area. Executives are not showered with perks such as club status or cars. They stay at the same accommodations as the flight crew when not at the Dallas headquarters. There are also no divas or elitists here. All employees help clean the aircraft, handle the baggage, and tend to the customers’ needs. (Case Study, page 568) Kelleher’s style of management is described as a Walton’s thriftiness and the wackiness of Robin Williams. He replaced formalness with chaotic reality. It remains to be seen if Kelly will follow suit; however, given the Southwest attitude, it’s likely that he will. The company even boasts a culture committee composed of people from all levels of the organization and all areas of the country. This panel meets only four times yearly, but its purpose is to preserve the culture of the company. Southwest has attained many accomplished including thirty years of safe operation, profitability for thirty years, and receiving the Triple Crown award for customer service for five consecutive years. (Case Study, page 569-570) With all this going for Southwest, it seems they will face any upcoming challenges with team spirit and humor and will persevere. REFERENCES Southwest Airlines Fact Sheet www.southwest.com/about Centennial of Flight Air Transportation: Deregulation and its Consequences Siddiqi, Asif, date unknown Vault, the most trusted name in career information Best Practices Case Study: Best Perks, Southwest Airlines Tripp, Tracy, 2007 www.vault.com/nr Pegasus Newswire Dallas-based Southwest Airlines revises growth plans downward December 4, 2007 www.pegasusnews/com/news/2007 Babson Insight Kelleher Talks About How Southwest Airlines Grew from Entrepreneurship by Professor Allan Cohen, James Watkinson and Jenny Boone February 2005 www.babsoninsight.com/contentmgr Office of Aviation Analysis US Department of Transportation The Southwest Effect Date Unknown http://ostpxweb.dot.gov/aviation Brain Storm! Business Podcast How Southwest Deals with Competition Haynes, Penny, May 31, 2005 http://quikonnex.com/channel Read More