Case 35 Southwest Airlines: Culture, Value. and Operating Practices C-6.

1"

businesspeople complain about the length of time
that it took to drive between the three cities and the
expense of flying the airlines currently serving them.
His business concept for the airline was simple: At-
tract passengers by flying convenient schedules, get
Sotlt11west Airlines: passengers to their destination on time, make sure
they have a good experience, and charge fares com-
Culttlre, Values, and petitive with travel by automobile. Though skeptical
that King's business idea was viable, Kelleher dug
into the possibilities during the next few weeks and
Because the airline industry was in the throes of
a slump in the early 19705. Muse was able to
a talented senior staff that included a number of vet-
eran executives from other carriers. He
sought out people who were innovative. wouldn'(
shirk from doing things differently or unconvention-
ally, and were motivated by the
an airline from scratch. Muse wanted his
team to be willing to think like mavericks and not
lulled into instituting practices at Southwest

C)perating Practices concluded that a new airline was feasible; he agreed

to handle the necessary legal work and also to invest
were largely imitative of how they were done at
airlines. According to Rollin King, "It was our one
$10.000 of his own funds in the venture. opportunity to do it right ... We all understood thn!
In 1967, Kelleher filed papers to incorporate the this was our opportunity to decide how to do it
new airline and submitted an application to the Texas way. Our was. and still is. do
.\1'1 A. John E. Gamble ever we have to do to get the done
Aeronautics Commission for the new company to be-
/J,e T ,1IilfJamil 7be Soutb AlaiJama gin serving Dallas. Houston, and San Antoni0 2 But
rival in Texas pulled every string they could So ut/.J ll'est's
Serlternbt:r 11 terrorist attacks trig- management to quickly borrow an additional $1.1 to block the new airline from commencing opera-
close to a 20 percent falloff in air- billion and give the company a buffer to pay all its tions. precipitating a contentious four-year, parade of jlilarket Footbold
line traffic in tbe fourtb quarter of 2001. bills and absorb any cash drains). Despite all the legal and regulatory proceedings. Her\). Kelleher led 1n June 1971. Southwest initiated its first
commercial airline industry in the United States costs associated with implementing a raft of new se- the fight on the company's behalf. eventually prevail- a schedule that soon included 6
went into a crisis borrowing curity measures and the downturn in passenger traf- ing in June 1971 after winning two appeals to the Dallas and San Antonio and I
monev to cover cash drains of $3 to $8 million daily. fic. Southwest reported a profit of $63.5 million for Texas Supreme Court and a favorable ruling from the Houston and Dallas. The introductory S20
deferring or can- the fourth quarter of 200 1 and a profit of $511.1 mil- U.S. Supreme Court. Kelleher recalled, "The constant fares to fly the Golden IN'ell 1)e1ow the
of new aircraft on order, speculat- lion for the full year-it was the only U.S. airline to proceedings had gradually come to enrage me. There and $28 fares charged by rivals, attracted
on how much to cut fares to induce passengers to operate in the black in either period. was no merit to our competitors' legal assertions. numbers of passcngers--somc
fly and on how traffic might stay depressc(i fig- And. unlike its rivals. Southwest continued to They were simply trying to use their superior eco- total for all 18 flights would be less than
out what it would take to avoid bankmptcy, and operate profitably throughout 2002 even though pas- nomic power to squeeze us dry sp we would collapse Southwest's financial resources were
to institute a host of measures. senger traffic nationwide remained below levels before we ever got into business. I was bound and de- thin that the company bought fuel for
100.000 of the approximately prior to September II. During 2002. Southwest pro- termined to show that Southwest Airlines was going on Lamar Muse's credit card.
"()OJ)Of) airline were laid off. Even after ceeded to add almost 40 ne\v daily flights and was to survive and was going into operation."] Ivas short of
federal government came thrmlgh with emergency able to boost its market share by about 2 percent. In January 1971. Lamar Muse was in as
'S 1 billIon. the ES. carriers Soutll\vcst was in 2002. Its eight CEO to get operations under way. Muse was an ag-
U.S. rivals, however. posted losses of rnore than S11 and self-confident airline veteran who knew
came in the fourth qUil!1Cr. billion in 2002. with both US Airways and Cnited the business well and who had the entrepreneurial
At Southwest /\irlines. the crisis was dealt with Airlines filing for banknIptcy skills to tackle the challenges of building the airline
no were cut and no employ- from scratch and then competing head-on with the enthusiasm remained company
were laid off. Because philosophy. major carriers. Through private investors and an ini- played can-do attitudes and "ilemne"
j(lr the pa,t two decades. had been to manage South-
COMPANY BACKGROUND tial public offering of stock in June 197 L Muse on whatever resources were available.
times so that both the company and its raised $7 million in new capital to purchase planes To try to gain market and
In late 1966, Rollin King, a San Antonio, Texas, en- and equipment and provide cash for start-up. Boeing
enln,,',vP"< C0\Jld prosper through bad times. South- more passengers. Southwest decided
trepreneur who owned a small commuter air service. agreed to supply three new 7375 from its inventory,
in a strong position when the industry got more than just run ads in the media:
marched into Herb Kelleher's law office with a plan discounting its price from $5 million to $4 million
hammered in the aftermath of September 11. It had
to start a low-costilow-fare airline that would shuttle and financing 90 percent of the S12 million deal. • Management decided to have
lowest costs U.S. airline. it had
passengers between San Antonio. Dallas, and Hous- dress in colorful hot pants and white
billion in cash. and it had the strongest balance boots with high heels. Recruiting ads for South-
ton.1 Over the years. King had heard many Texas
and credit of any tl.S. airline west's first group of hostesses read. "Attention.
:Kevin and Jackie Freiberg, NUTS.' Southwest Airlines 'era::v 'Ibid .. pp. 16-18
Thompson and J0hn E, Gamble All Recipefor Blisiness and Personal Sliccess (New York: Broad- lKatrina Brooker, "The Chairman of the Board Looks Back:'
'Freiberg and Freiherg. NUTS} p. 41
Way Books. 1998). p.IS. Fortune. May 28. 2001. p. 66.
 in Cmfhng and FXt'cuting Slratt:gj
vVclch: You can have a job if you mea- half-full plane wilhjuSl 60-65 passengers. Even
"I\vo thollsand applicants responded, so, the 25-minute average turnaround times at
se leeted for interviews were asked to Southwest in 2002 were still shorter than the
dre,;sed ill hot pants to show off their 40-60-minute turnarounds typical at other ma-
eump:.my wanted to hire long-legged airlines.)
vllth personalities. Over 30 of
• In late November 1971, Lamar Muse came up
first class of 40 night at-
with the idea of offering a $10 fare to passengers
of young women who were
on the Friday-night Houston-Dallas flight Even
and lllaJorettes in high school and
with no advertising, the 112-seat flight sold out
in from of peo-
This led Muse to realize that Southwest was
serving two quite distinct types of travelers in
the Golden Triangle market: (l) business travel-
ers who were more time-sensitive than price-
sensitIve and wanted weekday nights at times
suitable for conducting business and (2) pnce-
sensitive leisure travelers who wanted lower
and had more l1exibility about when to
He came up with a two-tier on-peak and
peak structure in which all seats on
departing before 7 PM were
priced at $26 and all seats on other i1[,,,hts were
priced at $13 traffic
systemwide on-peak and
soon became standard across the whole
• In 1972, the company decided to move its !light,;
in HOllston from the newly opened Houston In-
tercontinemal Airport (where it was losing
money and where it took 45 minutes tel
to the abandoned Houston
located much closer to downtown Hou;-
ton. Southwest was the onlv carrier to
into Houston the results w;1';; spectac-
ular--·-business travelers who new to Houston
ti-om Dallas :.md San found
the Houston locarion far more convenient
than the Intercontinental and
passenger traflie doubled almost immediately.
In early in all attempt to fill empty scats
41
on its San Antonio-Dallas flights, Southwest cut
its regular $26 fare to $13 for all seats, all days.
and all times. When Braniff International, at that
time OIle of Southwest's major rivals, anlJounced
S13 fares of its own, Southwest retaliated with a
two-page ad, run in the DalJas newspapc:rs,
to shoot Southwest
.
$13" and COll-
'lbIJ.. 3i
Case 35 Southwest Airlines: Culture, Value, and Operatlllg Pnetlc",
taining copy saying Braniff was trying to run in costly overeapaclty. S<.Juthwest countered thelt Ib
Southwest out of business. The ad announced low fares would allow more peopk to l1y and gruv,
that Southwest would not only match Br:mitT's the market. Southwest and its views
$13 fare but also give passengers the choice of about low fares expanding the market proved
buying a regular-priced ticket for $26 and re- rate. In the year before Southwest initiated sCfvice,
ceiving a complimentary fifth of Chivas Regal 123,000 passengers tlew from Harlingen Airport 111
scotch, Crown Royal Canadian whiskey, Of the Rio Grande Valley to Houston, Dallas, or San
Smirnoff vodka (Of, for nondrinkers, a leather Antonio; in the 11 months SLluthweSI', ini-
ice bucket). Over 75 percent of Southwest's Dal- tial 325.000 passengers !lew to the same
las-Houston passengers opted for the $26 fare, three cities.
although the percentage dropped as the two-
month promotion wore on and corporate cun- III tactiCS to hart!ss
trolkrs began insisting that company
use the S13 fare. The local and national media what it cU!lsidered
up the story of Suuthwest's oiler, pru- predatory tac'tics b: ItS crlld' mals In
the buttle to be a David-versus-Goliath 1')75_ Bnnitr and Texas Imerrtlilional wellc'ted
:i!nlggle in which the upstart Southwest did not by kdcrdl "i,md 11If\ lur to put Soutb-
stand much of a chance the much west uut of bllS1l1eSS II \ 10l:iUOIl ur
and lIlore wdl-establi"hed BrandT; grassromo
sentiment in Texas swung tu S,lUthwest's side.
Suutlmest reponed n5 first-ever anllual prufit til
lY73.
Mure Legalllnd
Hurdles
tu be ,1 pbonc:d
During the rest of the 19705, Southwest tllUnd itsdf
embroiled In another round of legal and The uppollcnts sobclted tire
banles. One iuvolved Southwest's refllsal to move its aid of Furt Worth congrc,S!llIHl Jim Wnght. tbe Illit-
from Dallas Love Field, located 10 minutes leader uf the t.S. HUllS;;: lIf
Dallas-Fort
re"elltatlles: a ra"h
lites from downtown Dallas. Lucal utTiciab were sud. What emerged came' tu be knllWll
furiulis because they were Ull fees hom
. \mclldrnellt of l'\u arrlme rna: prellllie nun·
South",est's in and out of DnV to service stop or (JOW U:,lius l.\)ve Fide!
to :ll1y eny I!lUll) :)tlitc' except te)r h)(dUUll, til
the debt Oll the bonds issued to finance the
constructIon. Southwest's position was that it was not kxa,. The amendment. wlnch was stil i
effect at the stan of 2003, llltCllll that SllUlll\\e:;t
to move because it had not to do Sll,
nelr had it been ordered to do ;'0, by the Texas Aero- could not ad\'eruse. schedules ,,1' ur
nautics the company', check baggage tilr lr<lv'd from [hIla:; L\)\ c FIeld tel
were located at Love Field. The courts any c'it; it serwd t.lLllSllk 'k.\ib. LuulSlanil,
Arkansas, Okbhoma. and :\k;,lC\)
eventually ruled Southwest's operallons could remain
at Love Field.
A second battle ensued when rival airlines Battles to Suruil.'e and
South west's to
sever:.tl smaller cities in Texas: thelr protest was rrtl rrio!' Jlen taliZr
based on ilrgumellls that these markets were already fhc ki'ul. rcgllbtory, and CUlllPCIlli\ C
well sened and that Southwest's elllry would result in its carly year:; pruJu'-'cd :i jUUllg
C-640 Cases in Crafting and Executing Strategy
esprit de corps among Southwest personnel and a
drive to survive and prosper despite the odds. With
newspaper and TV stories regularly reporting South-
west's difficulties, 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 out-
come that employees, Southwest's rivals, and local
government officials understood well. According to
Southwest's president, Colleen Barrett, the obstacles
thrown in Southwest's path by competitors and local
officials were instrumental in building Herb Kelle-
her's passion for Southwest Airlines and ingraining a
combative, can-do spirit into the corporate 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 survive,
is truly what created our culture. 6
The Start of the Herb
Kelleher Era
When Lamar Muse resigned in 1978, Southwest's
board wanted Herb Kelleher to take over as chair-
man and CEO. But Kelleher enjoyed practicing law
and, while he agreed to become chairman of the
board, he insisted that someone else be CEO. South-
west's board appointed Howard Putnam, a group
vice president of marketing services at United Air-
lines, as Southwest's president and CEO in July
1978. Putnam asked Kelleher to become more in-
volved in Southwest'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 ac-
tion. 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 ad-
ditional duties of CEO and president.
When Herb Kelleher took over in 1981, South-
west had 27 planes, $270 million in revenues, 2,100
employees, and flights to 14 cities. Over the next two
decades, Southwest Airlines prospered, racking up
many industry firsts and expanding geographically
6Ibid., pp. 26-27.
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-641
(see Exhibit 1). Going into 2003, Southwest was the exhibit 1 Milestones at Southwest Airlines, 1983-2002
fourth largest U.S. commercial airline in terms of
passengers flown and the sixth largest in terms of rev- 1983 additional Boeing Southwest flies over 9.5million passengers.
enues. It had revenues in excess of $5 billion annu- 1984 Southlj\lest rankildfirst satisfaction among the U.S. ajrlfnes for the fourth straight
ally and 35,000 employees, and it operated 370 jets to 1985 Service begins LoiJis and Chicago Midway airports. Southwest names the Ronald McDonald House
59 airports in 58 cities in 30 states. Southwest had as its primary chanty-the tie-in was the Jesuit of an effort by a Southwest pilot who lost a daughter to
leukemia and who believed that Ronald McDonald Houses were a worthy way to demonstrate
been profitable every year since 1973-in an indus-
Southwest's community spirit.
try noted for its vulnerability to economic cycles and
198.6 Southwest 13 million passengers.
feast-or-famine profitability. During 1990-1994-
1988 Southwesf becomes thefirit. U.S.pirline t? win the (best fewest reports of
when the airline industry had five straight money- mishandled complaints month.
losing years, laid off 120,000 employees, and lost a 1990 $l'biUion; Southwest is the. only majo'r U.S. airline to record both an operating profit and
cumulative $13 billion-Southwest earned a profit a net profit. . ' ", / ' . ........... '. .., . '. .
every quarter of every year. 1992 its first Tril?le Crpwn for best on-time record, best baggage handling, and fewest
Exhibit 2 provides a five-year summary of customer complaints;forthe second year running, Southwest is the only major U.S. airline to record both
Southwest's financial and operating performance. prom and a net profit. .... .' ..... .
Exhibits 3 and 4 provide industrywide data on airline 1993 Soutrwe;t begirs ontpeEastCoast and .wins its second Triple Crown; revenues
exceed $100 million. f0rthe third consecutive year; Southwest is the only
travel for the 1995-2002 period.
majorU.S,ilirlirie to record b?th profit and a .
1994 Southwestleadsthe if)dustry by ticketless travel in four cities; Southwest winsltsthird Triple
Crown and acquires Morris Air, based Citr:.. .
HERB KELLEHER 1995 TIcKetless travel becomes wide; SO!Jthwest wins fourth Triple Crown.
1996 servi6eto'Flofidabegins;. ... W.ii'lsmth consecutive Triple Crown; Southwest and its employees
Herb Kelleher majored in philosophy at Wesleyan contr,ibuteal rnClst$740,00.0 to help SUl?pori Ronald inclu?ing $34,000 in cash
University in Middletown, Connecticut, graduating $302,500 in free air travel for families staying at Ronald McDonald
with honors. He earned his law degree at New York incities ,served .bySouthwest '.'
University, again graduating with honors and also 1997 to sou!h'N€ls;,s 50th. q!ty; over 50 million I?eople fly Southwest:..
serving as a member of the law review. After gradu- 1998 asthe best company to for in Amenca.
ation, he clerked for a New Jersey Supreme Court 1999 Ser'lice illa..dde?to . .'
justice for two years and then joined a law firm in 2000. ,. number ofpassergerson Southwest flights exceeds 'flomillion, and surpass the $5 billion
Newark. Upon marrying a woman from Texas and .mark; the company its 28th ?onsecutive year of prClfitabilityand ninth year of
increased proms; Southwest becofl)esthefourth largest u.S; airline in terms. of carried.
becoming enamored with Texas, he moved to San
2001 the 30th consecutive year and the only U.S. airline to report a profit for 2001; a
Antonio, where he became a successful lawyer and re?ord 64.5 fly Southwest. ..' .
came to represent Rollin King's small aviation
2002 is ranked second among companies ac;rossaHinaustry groups,andfirst in the airline industry
company. in Fortune's America's MostAdmfred Companies.
When Herb Kelleher took on the role of South-
west'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 at- secret of his love for drinking Wild Turkey whiskey eran employees, "If someone says they're going to
tendants. Kelleher did not do much managing from and smoking. He loved to make jokes and engage in smack us in the face-knock them out, stomp them
his office, preferring instead to be out among the pranks and corporate antics, prompting some people out, boot them in the ditch, cover them over, and
troops as much as he could. His style was to listen, move on to the next thing. That's the Southwest spirit
to refer to him as the "clown prince" ofthe airline in-
observe, and offer encouragement. Kelleher attended at work."8 On another occasion he said, "I love bat-
dustry. He once appeared at a company gathering
most graduation ceremonies of flight attendants dressed in an Elvis costume and had arm-wrestled a tles. I think it's part of the Irish in me. It's like what
from "Southwest University," and he often appeared South Carolina company executive at a public event Patton said, 'War is hell and I love it so.' That's how
to help load bags on "Black Wednesday," the busy I feel. I've never gotten tired of fighting."9
in Dallas for rights to use "Just Plane Smart" as an
travel day before Thanksgiving. He knew the names advertising slogan. 7 Kelleher was well known inside While Southwest was deliberately combative
of thousands of Southwest employees, who held him and flamboyant in some aspects of its operations,
and outside the company for his combativeness, par-
in the highest regard. When he attended a Southwest ticularly when it came to beating back competitors.
employee function, he was swarmed like a celebrity. On one occasion he reportedly told a group of vet- 8Quoted in the Dallas Morning News, March 20, 2001.
Kelleher had an affinity for bold-print Hawaiian 'Quoted in Katrina Brooks, "The Chairman of the Board Looks
shirts, owned a tricked-out motorcycle, and made no 'Ibid., pp. 246-47. Back," Fortune, May 28, 2001, p. 64.
C-642 Cases in Crafting and Executing Strategy Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-643

Summary of Southwest Airlines' Financial and Operating exhibit 3 Commercial Airline Revenues, Scheduled Revenue Passenger Miles,
Performance, 1998-2002 (in thousands except per share amounts) and Overall Load Factor for Major U.S, Airline Carriers, 1995-2002
2002 2001 2000 1999 1998 Total Scheduled Revenue Operating L.oad
Year Revenues Passenger Miles' Profit Factort
Financial data
Operating revenues $5,521,771 $5,555,174 $5,649,560 $4,735,587 $4,163,980 1995 $73.5 billion 509.6 billion $4.92 billion 67.3%
Operating expenses 5,104,433 4,924,052 4,628,415 3,954,011 3,480,369 1996 78.5 534.7 5.27 69.8
" 1997 83.5 570.0 7.52 70.8
Operating income 417,338 631,122 1,021,1.45 781,576 683,611
1998 84.6 583.0 7.47 71.3
Other expenses (income), net 24,656 (196,537) 3,781 7,965 (21,501)
1999 89.6 616.8 6.00 71.4
Income before income taxes .392,682 827,659 1m7,364 773,611 705,112 2000 98.1 651.8 72.8
5.50
Provision for income taxes 151,713 316,512 392,140 299,233 271,681 2001 85.4 606.7 (10.2) 70.3
Net income $ 240,969 $ 511,147 $625,224 $474,378 $433,431 2002 75.4 585.0 (9.6) 72.0
Net income per share, basic $0.31 $0.67 $0.84 $0.63 $0.58 'Scheduled revenue passenger miles is the total number of miles flown by all passengers on all scheduled flights.
Net income per share, diluted $0:30 $0.63 $0.79 $0.59 $0.55 tLoad factor is the total number of passengers boarded as a percentage of total seats available.
Cash qividends pef share $0'.0180 $0.0180 $0:0147 $0.0143 $0.0126 Source: Airline Quarterly Financial Review, Majors, Department of Transportation; Office of Aviation Analysis, Fourth Quarters 1995-2002.
TO!E\I assets ,at period-end . .' $8,997,141 . $6,669,572 . $5,653,703 $4,715,996
Cash and cash equivalents at end 01 year $1,815,352 $2,279,861 '$522,995 $<1-18,819 $378,511
Current assets at .end (jfyear , . $2,231,,960 .$2,520,219
Operating Revenues of the Major U.S. Commercial Airlines,
$831,536 $632,595 $574,155
at end of year .: $1,433,828 $1,298,403 $962,056 $850,653
1996-2002 (in millions of dollars)
end.ofyear :$1,552,781 ,$1,327, 1 $760;992 $871,717 $623,309
Airline 2002 2001 2000 1999 1998 1997 1996
Stockholders'equity at end of year $4,421,617. $4,0'14,053 $3,451,326 $2,835,788 $2,397,918
Operllting data American $15,870.6 $15,638.8 $18,117.1 $16,085.5 $16,298.8 $15,855.8 $15,125.7
Revenue passengers carried ! 57,500,213 52,586,400 United" 13,915;6 16,087A 19,331.3 17,966.7 17,517.5 ·17,335.2 16,316.7
. Revenue passenger miles (OOOs) 36,479,322 ' 31,419,110 Delta 1.2,410A 13,211.2 15,320.9 14,901.4 14,629.8 14,203.9 13,317.7
Avai,lilble seatmiles (OOOs) 59,909;965 52,855,467 47,543,515 Northwest 9,151.6 9,591.8 10,956.6 9,868.1 8,706.7 9,983.7 9,751A
L.oad factor* f35.9% 68.1% US Airwaysb 6,914.9 8,253.4 9,18t.2 8:1\60.4 8,555.7 8,501.5 7,704.1
.70.5% 69.0% 66.1%
passenger haul (miles)' 720 Continental 7,407.9 '" 8,199.7 9,449.2 8,381.5 7,907.7 7,089.9 6,264.4
690 >663 634 597
Tripsf!own 947,331 940,426 Southwest 5,521.8 5,555.2 5,649.6 4,735.6 4,164.0 3,817.0 3,407.4
1303,754 846,823 806,822
TWAc 2,632.8 3,584.6 3,308.7 3,259.1 3,330.3 3,554.4
Average passenger fare $84.72 $83.46 :$85.87 $79.35 $76.26
America West 2,021.0 2,305.5 2,309.3 , 2,164.0 1,983.0 1,887.1 1,751.8
revenue per mile 11.77¢ 12.09¢ 12.95¢ 12.51¢ 1.2.76¢
Alaska 1,832.4 1,763.1 1,762.6 1,695.6 1,581.3 1,457.4 1,306.6
Operating revenue per seat mile 8.02¢ 8.51¢ 9.43¢ 8.96¢ 8.76¢
Operating expenses per seat mile 7.41¢ 7.54¢ 7.73¢ 7.48¢ 7.32¢
'Filed for Chapter 11 l>ankruptcy protection in December 2002.
Number of employees at year-end 33,705 31,580 29,274 27,653 "25,844 bFiled for Chapter 11 bankruptcy protection in August 2002.
Size of fleet at year-endt 375 355 344 312 280 'Acquired by American Airlines in 2001; data for 2002 included in figures for American Airlines.
Source: Airline Quarterly Financial Review, Majors, Department of Transportation, Office of Aviation Analysis, Fourth Quarters 1995-2001
'Revenue passenger miles divided by available seat miles, and Second Quarter 2002.
tlnciudes leased aircraft
Source: 2001 10K report and company press releases. You have to treat your employees like your cus- Another indication of the importance that Kelle-
tomers. When you treat them right, then they will her placed on employees was the message he penned
when it came to the financial side of the business straitjacket that becomes disabling in an industry treat your outside customers right. That has been a in 1990 and had prominently displayed in the lobby
Kelleher insisted on fiscal conservatism, a strong where things change radically from one day to the very powerful competitive weapon for us. You've got of Southwest's headquarters in Dallas:
balance sheet, comparatively low levels of debt, and next." Kelleher wanted Southwest managers to think to take the time to listen to people's ideas. If you just
tell somebody no, that's an act of power and, in my The people of Southwest Airlines are "the creators"
zealous attention to bottom-line profitability. While ahead, have contingency plans, and be ready to act
opinion, an abuse of power. You don't want to con- of what we have become-and of what we will be.
believing strongly in being prepared for adversity, when it appeared that the future held significant Our people transformed an idea into a legend.
strain people in their thinking. 10
Kelleher had an aversion to formal strategic plans, risks or when new conditions suddenly appeared and That legeud will continue to grow only so long as it is
saying, "Reality is chaotic; planning is ordered and demanded prompt responses. nourished-by our people's indomitable spirit,
logical. The meticulous nit-picking that goes on in Kelleher was a strong believer in the principle boundless energy, immense goodwill, and burning
most strategic planning processes creates a mental that employees-not customers-come first: "Ibid., p. 72. desire to exceL
C-644 Cases in Crafting and Executing Strategy Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-645

OUf thanks-and our love-to the people of leading carrier in intrastate air travel in California, exhibit 5 Airports and Cities Served by Southwest Airlines, Fall 2002
Southwest Airlines fOf creating a marvelous family Texas, and Florida.
and a wondrous airline. Southwest's Top 10 Airports

Southwest's Drive to Achieve Daily Departures Number of Gates Nonstop Cities Served

SOUTHWEST AIRLINES' Low Operating Costs Phoenix 181 21 38

Las Vegas 171 19 42
Southwest management fully understood that low
STRATEGY fares necessitated zealous pursuit of low operating
Houston (Hobby)
BaltimoreiWashington
141
139
15
17
24
33
costs. The company had over the years instituted a 130 14 29
From day one, Southwest had pursued a low-costllow- Chicago (Midway)
number of practices to keep its costs below those of 130 14 13
price/no-frills strategy. Its signature low fares made Dallas (Love Field)
rival carriers:
air travel affordable to a wide segment of the u.s. Oakland 123 13 19
population-giving substance to its tag line "The • The company operated only one type of air- Los Angeles 118 12 19
Freedom to Fly." Southwest was a shrewd practitioner craft-Boeing 737s-to minimize the size of Nashville 86 10 28
of the concept of price elasticity, proving in one mar- spare parts inventories, simplify the training of San Diego 80 9 14
ket after another that the revenue gains from increased maintenance and repair personnel, improve the
ticket sales and the volume of passenger traffic would proficiency and speed with which maintenance Other Airports Served by Southwest Airlines
more than compensate for the revenue erosion from routines could be done, and simplify the task of Albany EI Paso Lubbock Raleigh-Durham
reduced fares. When Southwest entered the Florida scheduling planes for particular flights. Further- Albuquerque Fort Lauderdale Manchester, NH RenolTahoe
market with an introductory $17 fare from Tampa to more, as the launch customer for Boeing's 737- Amarillo Harlingen/South Midland/Odessa Sacramento
Fort Lauderdale, the number of armual passengers fly- 300,737-500, and 737-700 models, Southwest Austin Hartford/Springfield"I' New Orleans SI. Louis
ing the Tampa-Fort Lauderdale route jumped 50 per- acquired its new aircraft at favorable prices. See Birmingham Houston (Hobby and Bush Intercontinental) Norfolk Salt Lake City
cent, to more than 330,000. In Manchester, New Exhibit 6 for statistics on Southwest's aircraft Boise Indianapolis Okl.ahoma City San Antonio
Hampshire, passenger counts went from 1.1 million in fleet. Buffalo Long Islandllslip Omaha San Jose
1997, the year prior to Southwest's entry, to 3.5 mil- Southwest encouraged customers to make reser- Burbank Jackson, MS Ontario, Canada Seattle
lion in 2000 and average one-way fares dropped from vations and purchase tickets at the company's Cleveland Jacksonville Orange County, CA Spokane
just over $300 to $129. Success in stimulating higher Web site, thus bypassing the need to pay com- Columbus, OH Kansas City Orlando Tampa
passenger traffic at airports across the United States missions to travel agents for handling the ticket- Corpus Christi Little Rock Portland, OR Tucson
via low fares and frequent flights had been dubbed the ing process and reducing the number of Detroit (Metro) Louisville Providence Tulsa
"Southwest effect" by personnel at the U.S. Depart-
"
personnel needed to staff Southwest's nine reser- West Palm Beach
ment of Transportation. vation centers. Selling a ticket on its Web site
The company designed its routes to stress flying cost Southwest roughly $1, versus $6-$8 for a Source: Southwest Airlines.
between pairs of cities ranging anywhere from 150 ticket booked through a travel agent and $3-$4
to as much as 700 miles apart where there was high for a ticket booked through its own internal
traffic potential and Southwest could offer a sizable reservation system. In January 20()1, Southwest • The company tried to steer clear of congested ters of several big metropolitan areas by flying
number of flights. As a general rule, Southwest did into nearby airports with less congested air
cut the commissions paid to travel agents to 8 airports, stressing instead serving airports rela-
not initiate service to an airport unless it envisioned percent of the price of an electronic ticket and 5 space. For example, Southwest drew some
tively near major metropolitan areas and in
the potential for originating at least eight flights a Boston-area passengers away from Boston's Lo-
percent of the price of a paper ticket (down from medium-sized cities. This helped produce better-
day there. Southwest's point-to-point route system, gan International by initiating service into
10 percent paid on both), with a commission cap than-average on-time performance and reduce
as opposed to the hub-and-spoke route systems of its of $60 for a round-trip ticket (either electronic the fuel costs associated with planes sitting in nearby Providence, Rhode Island, and Manches-
rivals, minimized connections, delays, and total trip or paper)-management estimated that the ter, New Hampshire; similarly, it initiated flights
line on crowded taxiways or circling airports
into Islip, Long Island, which siphoned some
time-its emphasis on nonstop flights between about move would save the company $40 million in waiting for clearance to land; plus, it allowed the
350 pairs of cities allowed about 77 percent of passengers away from New York's LaGuardia
200 I. In 2000 about 30 percent of Southwest's company to avoid paying the higher landing fees
Southwest's passengers to fly nonstop to their desti- and Kennedy International airports. Southwest's
revenue came from ticket sales through travel and terminal gate costs at such high-traffic air-
preference for less congested airports also
nation. Southwest's average aircraft trip in 2002 was agents (versus 40 percent in 1998), and by year- ports such as Atlanta's Hartsfield International,
540 miles long and lasted approximately 1.5 hours. helped minimize total travel time for passen-
end 2002 over 50 percent of ticket sales were oc- Chicago's O'Hare, Denver International, and
Exhibit 5 shows the cities and airports Southwest gers-driving to the airport, parking, ticketing,
curring at the company's Web site. Ticketless Dallas-Fort Worth (DFW), where landing-slots
served in late 2002. Southwest was the dominant boarding, and flight time.
travel accounted for more than 85 percent of all were controlled and rationed to those airlines
carrier at four airports (BaltimorelWashington, Las sales in 2002, which significantly reduced pa- willing to pay the high fees. In several cases, • Southwest's point-to-point scheduling of flights
Vegas, Kansas City, and Chicago Midway) and the perwork and back-office processing. Southwest was able to compete on the perime- was more cost-efficient than the hub-and-spoke
C-646 Cases in Crafting and Executing Strategy
6 Southwest's Aircraft Fleet as of Fall 2002
Type of Aircraft Number Seats
7gHOO 27 122
Boeing 737-300 194 137
Boeing 737-500 25 122
Boeing 737-700 124 137
Other Facts
Average age of aircraft fleet-close to 9 years
Average aircraft trip length-540.miles; average duration-96 minutes
A\ierage aircraft utilization in 2002-,7.2 flights per day and about 12 hours of flight time
Fleet size-1990: 106; 1995: 224;.2000: 344; 2002: 370
Firm orders for new aircraft-2003: 21; 2004: 23; 2005: 24; 2006: 22; 2007: 25
systems used by rival airlines. Hub-and-spoke
systems involved passengers on many different
flights coming in from spoke locations (or per-
haps another hub) to a central hub airport within
a short span of time and then connecting with an
outgoing flight to their destination-a spoke lo-
cation or another hub. Most flights arrived and
departed a hub across a two-hour window, creat-
ing 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 underuti-
lized in the interval awaiting the next round of
inbound!outbound flights. In contrast, South-
west'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. Fur-
thermore, with a relatively even flow of incom-
ing/outgoing flights and gate traffic, Southwest
could staff its terminal operations to handle a
fairly steady workload across a day, whereas hub-
and-spoke operators had to staff their operations
to serve peak-period requirements.
To economize on the amount of time it took ter-
minal personnel to check passengers in and to
simplify the whole task of making reservations,
Southwest dispensed with the practice of assign-
ing each passenger a reserved seat. Instead, for
many years, passengers were given color-coded
plastic cards with numbers on them when they
Comments
S()uthwest was Boeirlg's launch customer for this model.
Southwest was Boeing's launch customer for this model.
Southwest was Boeing's launch customer for this model.
checked in at the boarding gate. Passengers then
boarded in groups of 30, according to the color
and number 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 a
low number on their boarding cards and then
had to push up to the front when it was their
group's turn to board. In 2002, Southwest
streamlined the system further by simply print-
ing a big, bold A, B, or C on the boarding pass
when the passenger checked in at the ticket
counter; passengers then boarded in groups ac-
cording to the letter on their boarding pass.
• Southwest flight attendants were responsible for
cleaning up trash left by deplaning"passengers
and otherwise getting the plane presentable for
passengers to board for the next flight. (Other
carriers had cleaning crews come on board to
perform this function.)
• Southwest did not have a first -class section on
any of its planes and had no fancy clubs for its
frequent flyers to relax in at terminals. No meals
were served on flights, even long ones; passen-
gers were offered beverages and snacks-in
2002, Southwest provided passengers with
162.4 million packages of peanuts, 51.3 million
packages of other snacks, 9.9 million alcoholic
beverages, and 44.5 million cans of nonalco-
holic beverages. Serving no meals made repro-
visioning planes simple and quick.
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices
• Southwest offered passengers no baggage trans-
fer services to other carriers-passengers with
checked baggage who were connecting to other
carriers to reach their destination were responsi-
ble for picking up their luggage at Southwest's
baggage claim and then getting it to the check-in
facilities of the connecting carrier. (Southwest
booked tickets involving its own flights only;
customers connecting to flights on other carriers
had to book their connecting tickets through ei-
ther travel agents or the connecting airline.)
• In mid-200 I Southwest implemented use of new
software that significantly decreased the time re-
quired to generate optimal crew schedules and
help improve on-time performance.
• Starting in 2001, Southwest began converting
from cloth to leather seats; the team of South-
west employees who investigated the economics
of the conversion concluded that an all-leather
interior would be durable and easy to,maintain,
thus more than justifying the high costs.
Southwest's operating costs as a percentage of its
revenues were consistently the lowest in the industry
(see Exhibit 7). Exhibit 8 shows a detailed break-
down of Southwest's operating costs for the period
1995-2002.
Southwest's Focus on
Customers and Customer
Sa tis/action
Southwest went all out to make sure passengers had
a positive, fun flying experience. Gate personnel
were cheery and witty, sometimes entertaining those
in the gate area with trivia questions or contests such
as "Who has the biggest hole in his or her sock?"
Casually dressed flight attendants greeted passen-
gers coming onto planes and offered friendly advice
to customers looking for open seats. Flight atten-
dants were encouraged to let their personalities
show, to joke with passengers, and even to play gags.
On some flights, attendants played harmonicas and
sang announcements to passengers on takeoff and
landing. On one flight while passengers were board-
ing, an attendant with bunny ears popped out of an
overhead bin exclaiming "Surprise!" The entertain-
ment repertoires varied from flight crew to flight
crew.
C-647
While Southwest had built up quite a reputation
presenting a happy face to passengers and displaying
a fun-loving attitude, the company had on occasion
encouraged some of its not-so-pleasant customers to
patronize other carriers. One woman who flew
Southwest frequently became known as "Pen Pal"
because she wrote in a complaint after almost every
flight; her complaints were eventually bumped up to
Herb Kelleher, who quickly penned a short note:
"Dear Mrs. Crabapple, We will miss you. Love
Herb."" Kelleher made a point of sending congratu-
latory notes to those employees customers singled
out in complimentary letters; complaint letters were
seen as learning opportunities for employees and
reasons to consider making adjustments. Colleen
Barrett, Southwest's president, had articulated the
company's policy some years earlier:
No Employee will ever be punished for using good
judgment and good old common sense when trying to
accommodate a Customer-no matter what our rules
are. Let's start leaning towards our Customers
again-not away from them. Let's start encouraging
our line employees to be a little more flexible and to
take that extra minute to accommodate special needs.
Let's start encouraging our Supervisors to give our
Customers the benefit of the doubt.'2
Southwest was convinced that conveying the South-
west 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."13
Marketing and Promotion
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 ads and billboards were delib-
erately unconventional and attention-getting so as to
create and reinforce the company's maverick, fun-
loving, and combative image. Others promoted the
company's performance as "The Low-Fare Airline"
"Freiberg and Freiberg, NUTS', pp. 269-70.
"Ibid., p. 288.
"Brenda Paik Sunoo, "How Fun Flies at Southwest Airlines;'
Personnel Journal 74, no. 6 (June 1995), p. 70.
 Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-649
C-648 Cases in Crafting and Executing Strategy

exhibit 7 Comparative Operating Cost Statistics, Major U.S. Airlines, 1995-

Second Quarter Ending June 30,2002 (in cents per average seat mile)

0.74
3.49
2000 1.48 0.60 0.78
4.53 11.89
2001 4.55 1.57 0.47 0.87
3.75 11.12
2002' 0.40 4.97 1.33 0.35
3 ..10¢ 7.89¢ 1.17¢
Alaska 1995 0.31¢ 2.60¢ 1.07¢ 0.55¢ 1.08
3.72 10.25
2000 0.29 3.53 1.76 0.38 1.07
10.17
2001 0.31 3.81 1.45 0.35 1.02
9.95
2002' 0.32 3.83 1.21 0.30
8.67¢ 1.20¢
Continental 1995 0.22¢ 2.45¢ 1.11¢ 0.74¢ 1.23
4.21 10.20
2000 0.28 3.30 1.62 0.54 1.32
4.52
2001 0.27 3.44 1.39 0.37 1.42
0.25 5.18
2002' 0.26 3.52 1.10 0.28
3.06¢ 8.86¢ 0.81.¢
Delta 1995 0.26¢ 3.25¢ 1.11¢ 0.85¢ 0.20¢ 0.13¢
3.51 9.43 0.72
2000 0.27 3.73 1.27 0.42 0.16 0.08
10.02 0.76
0.16 0;1l 3.81
2001 0.28 4.10 1.20 0.36 0.81
0.10 4.03 10.30
2002' 0.25 4.37 1.10 0.28 0.18
'Y.29¢ 1.30¢
0.16¢ 3.07¢
America West 1995 0.19¢ 2.08¢ 0.96¢ 0.64¢ 1.58
4.17 8.57
2000 0.12 2.21 1.54 0.32 0.13 1.72
4.50 8.86
2001 0.10 2.42 1.35 0.28 0.15 0.06
4.67 8,61 1.56
2002' 0.06 2.36 1.09 0.19 0.16
9.15¢ 0.70¢
Northwest 1995 0.28¢ 3.47¢ 1.24¢ 0.93¢ 2.80¢
3.24 (:).96 0.67
2000 0.29 3.65 1.80 0.61 0.70
10.52
2001 0.27 4.15 1.73 0.45 0.77
2002' 0.24 4.18 1.40 0.36
0.71¢
Southwest 1995 0.02¢ 2.56¢ 1.0l¢ 0.39¢ 0.55
2000 0.03 2.99 1.38 0.30 0.54
7.48
2001 . 0.03 3.01 1.29 0.18
7.36 0.55
2002' 0.03 3.02 1.17 0.10
8.89¢ 0.94¢
United 1995 0.37¢ 3.34¢ 1.06¢ 0.93¢ 0.88
10.60
2000 0.38 4.16 1.43 0.59 0.90
12.02
2001 0.37 4.73 1.50 0.43 1.07
4.27 11.35
2002' 0.35 4.87 1.21 0.32
11.61¢ 1.16¢
4.18¢
US Airways 1995 0.25¢ 4.93¢ 1.04¢ 0.90¢ 1.11
5.73 13.88
2000 0.28 5.35 1.72 0.51 1.31
0:08 6.00 14.13
2001 0.28 5.62 1.56 0.39 0.20 1.30
6.57 14.45
2002' 0.21 5.93 1.20 0.25 0.23 0.06

'Based on data for first six months of 2002 only.

Note: The big increases in the operating and maintenance expenses" category for 2001 and 2002 at several airlines (most notably
United and US Airways) reflect special charges for the grounding and early retirement of aircraft and for employee severance expenses
that were Incurred In the aftermath of the September 11,2001, terrorist attacks.
Source: U.S. Department of Transportation, Bureau of Transportation Statistics, Office of Airline Information, Form 41 B, Form 41 P, Form T1 00.
 C-650 Cases in Crafting and Executing Strategy
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-651

exhibit 8 Trends in Southwest Airlines' Operating Expenses per Average exhibit 9 Four Sample Southwest Ads
1995-2002
Expense Category 2002 2001 2000 1999 1998 1997 1996 1995
benefits 2:56¢ 2.51¢ 2.41¢ 'e.39¢2.35¢ 2.26¢ 2.22¢ 2.17¢ Affer lellgtlny Jclihcl'll tiGll.
ErnploYEle retirement plans ..33 .33 040 .,36 .35
Fuel ana 6il . .
.30 .23 .23 at flat) highes1 clI.ocuiiyc bela,
1..11 U8 1.34 ,82 1.11 1.19 .1.01
;57 ,61 1J..l}& clItenalYC cl):IlsliIl1atioll
.63 ]0 :64 .58 .62 :60
., ,16 :27 :30 .33 ,35 .35 .:34 'with 01113' legal dl):p.a1'il11el1'i,
.. .rentals .29 .33 .38 .43 .45 .47 ,.47 '\'\'e hilwe a'i
fees ana other rentals A8 .44 .46' .45 .46 .46 .44
Depreciation .49 047 .47
tul ofndal corpOl'atc 1"CSjponse
.47 .44 .45 .43
expenses 1.49 1.44 1A9· 1.48 1.51 1.38 to NOl'thwn8f Airlines' claim
Total 7.54¢ 7.73¢ 7.48¢ T.32¢ 7.40¢ be nlilmber one
7.50¢ 7.0T¢

Note: Figures in this exhibit differ slightly from those for Southwest in Exhibit 7 due to an assortment of differences in Southwest's internal
in Cmst:9l1llCl'
accounting for its expenses and the Department of Transportation's expense category definitions and reporting for all commercial airlines.
Source: Company annual reports and 10-K reports,
"Liiu\ till!'. Pallts Oil

or "The All-Time On-Time Airline"; still others

highlighted its Triple Crown awards. Exhibit 9
Other Strategy Elements SOUTHWEST AIRLINES'
Just Plane Smart
provides four sample ads. One bfthe company's bill- Southwest's strategy included several other com-
board campaigns touted the frequency of the com- ponents:
pany's flights with such phrases as "Austin Auften,"
"Phoenix Phrequently," and "L.A. A.S.A.p." Each • A fare structure that was consistently the sim-
holiday season since 1985, Southwest had run a plest and most straightforward of any of the ma-

'MlJ lIKE To CAN You NAME

"Christmas card" ad on TV featuring children and
their families from the Ronald McDonald Houses
and Southwest employees,
From time to time Southwest ran special fare
promotions, To celebrate its 30th anniversary in
2001, Southwest announced special $30 one-way
fares to 30 destinations from 35 cities for travel be-
tween June 25 and October 26; Southwest's car
rental and hotel partners participated in the promo-
tion, offering $30-a-day rentals, $30-off discounts,
and $30-a-day hotel rooms at some locations, The
30-year celebration also included decorations in gate
areas, prize giveaways, and employees playing
games in the gate areas so that customers could share
in the "Southwest Spirit." Along with most other air-
lines in 2002, Southwest featured a series of special
fare promotions to stimulate ticket sales and fill up
otherwise empty seats.
In 2002 Southwest began changing the look of its
planes, updating its somewhat drab goldiorange/red
scheme to a much fresher and brighter canyon
blue/redigoldi orange scheme (see Exhibit 10),
jor Us. airlines. All of Southwest's different fare
options could easily be perused at the company's
Web site, and the company's restrictions on tick-
ets were more lenient than those of its rivals.
THEAIRUNE
• Gradual expansion into new geographic mar-
kets, Southwest generally added one or two new
cities to its route schedule annually, preferring to
MAIcHTHBR NEw WITH Low FARES
saturate the market for daily flights to the
cities/airports it currently served before entering
new markets. In selecting new cities, Southwest
fARaBUT'M1J ON EVERY SEAT
Of EVERY FUGDT,
looked for city pairs that could generate sub-
stantial amounts of both business and leisure
traffic, Management believed that lots of flights
DAVETo BAISE OURt
NO ll'.atterwhatll1e rompetition may come up wiU\SOUtl1\\'eS(
EVERYWHERE
were appealing to business travelers looking for
convenient flight times and the ability to catch a
later flight if they unexpectedly ran late.
Airlines' e\erydOy 'I:JiI unrestrIcred lares are stiIIllM'eI' than tI':e Big
Threa ti'.arcan sale youa lorofmoney e-veryda¥
And tmIi1<eourcompetirors. with ourlowunrestlicred fare:; we
don'tc:llartle you a penalty whenyourplanschange. Wh'rh makes
our fares me smartchoiceforyou aJ'id)'llUfoompany,.'Iwal's hiM!
IT FUES?
wiU be.
• Addingflights 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, believing SOUTHWESl' AIRLINES
Just Plane smart SOUTHWEST'"
-
its lower fares would attract more passengers,
\·800-HLY·SWA THE IDwFareAirlinr,f""
When Midway Airlines ceased operations in (Hl00'435-91!l21
C-652 Cases in Crafting and Executing Strategy
exbibit 10 Southwest's New Look
Old
November 1990, Southwest moved in overnight
and quickly instituted flights to Chicago's Mid-
way Airport. When American Airlines closed its
hubs in Nashville and San Jose, Southwest im-
mediately increased the number of its flights
into and out of both locations. During the first
half of 2002, as air traffic showed some signs of
picking up, Southwest was a first-mover in
adding flights on routes where rivals had cut
their offerings following the September 11,
2001, terrorist attacks.
• An attractive Fequent flier program. Southwest's
Rapid Rewards members received a free round-
trip ticket, good for travel anywhere on South-
west's system for up to one year, after purchasing
and flying eight round-trips. There were no re-
strictions on the number of free Rapid Rewards
seats on a particular flight and very few blackout
dates around holidays. Southwest was considered
to have the most generous frequent flier program
in the industry, winning awards for best award re-
demption, best bonus promotion, and best cus-
tomer service among all frequent flier programs.
• Adding longer nonstop flights to the route sys-
tem. Although over 85 percent of Southwest's
flights involved actual in-air flight times of less
than 90 minutes, the company was judiciously
adding nonstop flights to more distant destina-
tions at those airports where its classic low fares
could generate sufficient passenger traffic to
achieve high enough load factors and revenues to
be profitable. Most of the flights that the com-
pany added in 2002 were longer than750.miles __.
New
• Putting st1'Ong emphasis on safety, high-quality
maintenance, and reliable operations. In the 31
years it had been flying, Southwest had never
had a plane crash. Southwest had one of the most
extensive and thorough maintenance programs in
the commercial airline industry. The company's
state-of-the-art flight dispatch system helped
minimize weather and operational delays.
According to Southwest management, the company's
strategy of low-cost, no-frills flights and reliable,
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 reasonable price."14
SOUTHWEST'S PEOPLE
MANAGEMENT
PRACTICES AND
CULTURE
Whereas the litany at many companies was that cus-
tomers come first, at Southwest the operative princi-
ple was that "employees come first and customers
come second." The importance placed on employees
i4Statement made in a 1993 Harvard Business School video and
quoted in Roger Hallowell, "Southwest Airlines; ACase Study
Linking Employee Needs Satisfaction and Organizational Capa-
bilities to Competitive Advantage," Human Resource Manage-
. ment35, no. 4.(Winter 1996), p. 517.
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices
reflected management's belief that delivering supe-
rior service required employees who not only were
passionate about their jobs but also knew the com-
pany 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.
What Southwest management thought about the
importance of Southwest's people and their role is
reflected in the following excerpt from the com-
pany's 2000 annual report:
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 profitability, job security, and plenti-
ful Profitsharing for ourselves, is to 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 attitudes. Because
we are well known as an excellent place to wm;k with
great career opportunities and a secure future, lots of
People want to work for Southwest ... Once hired,
we provide a nurturing and supportive work environ-
ment that gives our Employees the freedom to be cre-
ative, have fun, and make 1< positive difference.
Although we offer competitive compensation pack-
ages, 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.
The company changed the personnel department's
name to the People Department in 1989.
Recruiting, Screening,
and Hiring
Southwest hired employees for attitude and trained
them for skills. Kelleher explained:
We can train people to do things where skills are con-
cerned. 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 attitude ... [to1a highly
skilled person with a bad attitude15
"Quoted in James Campbell Quick, "Crafting an Organiza-
tional Structure; Herb's Hand at Southwest Airlines," Organiza-
tional Dynamics 21, no. 2 (Autumn 1992), p. 51.
C-653
Management believed that delivering superior ser-
vice came from having employees who genuinely
believed that customers were important and that
treating them warmly and courteously was the right
thing to do, not from training employees to act like
customers are important. The belief at Southwest
was that superior, hospitable service and a fun-
loving spirit flowed from the heart and soul of
employees who themselves were fun-loving and spir-
ited, who liked their jobs and the company they
worked for, and who were also confident and em-
powered to do their jobs as they saw fit (rather than
being governed by strict rules and procedures).
Southwest recruited employees by means of
newspaper ads, career fairs, and Internet job listings;
a number of candidates applied because of South-
west's Fortune listings as one of the best companies
to work for in America and because they were im-
pressed by their experiences as a customer on South-
west flights. Recruitment ads were designed to
capture the attention of people thought to possess
Southwest's "personality profile." For instance, one
ad showed Herb Kelleher impersonating Elvis Pres-
ley and read as follows:
Work In A Place Where Elvis Has Been Spotted. The
qualifications? It helps to be outgoing. Maybe even a
oit off center. And be prepared to stay for a while. Af-
ter all, we have the lowest employee turnover rate in
me industry. If this sounds good to you, just phone
our jobline or send your resume. Attention Elvis. 16
All job applications were processed through the Peo-
ple Department.
Screening Candidates In hiring for jobs that
involved personal contact with passengers, the com-
pany looked for people-oriented applicants who
were extroverted and had a good sense of humor. It
tried to identify candidates with a knack for reading
people's emotions and responding in a genuinely car-
ing, empathetic manner. Southwest wanted employ-
ees to deliver the kind of service that showed they
truly enjoyed meeting people, being around passen-
gers, and doing their job, as opposed to delivering
the kind of service that came across as being forced
or taught. According to Kelleher, "We are interested
in people who externalize, who focus on other peo-
ple, who are motivated to help other people. We are
16Southwest Airlines; and Sunoo, "How Fun Flies at Southwest
Airlines," pp. 64-65.
 C-654 Cases in Crafting and Executing Strategy
not interested in navel gazers."17 Southwest was
drawn to candidates who, in addition to having a
"whistle while you work" attitude, appeared likely to
exercise initiative, work harmoniously with fellow
employees, and be community spirited.
Southwest did not use personality tests to screen
candidates, nor did it ask candidates what they
would or should do in certain hypothetical situations.
Rather, the hiring staff at Southwest analyzed each
job category to determine the specific behaviors,
knowledge, and motivations that job holders needed
and then tried to find candidates with the desired
traits-a process called targeted selection. A trait
common to all job categories was teamwork; a trait
deemed critical for pilots and flight attendants was
judgment. In exploring 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 embar-
rassing moment?" Southwest believed that having
applicants talk about their past behaviors provided
good clues about their future behaviors.
To test for unselfishness, Southwest interview-
ing teams typically gave a group of potential em-
ployees ample time to prepare five-minute
presentations about themselves; during the presenta-
tions, which took place in an informal conversational
setting, interviewers watched the audience to see
who was absorbed in polishing their own presenta-
tions and who was listening attentively, enjoying the
stories being told, and applauding the efforts of the
presenters. 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 themselves. All
applicants for flight attendant positions were put
through such a presentation exercise before an inter-
view panel consisting of customers, experienced
flight attendants, and members of the People Depart-
ment. Flight attendant candidates who got through
the group presentation interviews then had to com-
plete a three-on-one interview conducted by a re-
cruiter, a supervisor from the hiring section of the
People Department, and a Southwest flight atten-
dant; following this interview, the three-person panel
tried to reach a consensus on whether to recommend
or drop the candidate.
I7Quick, "Crafting an Organizational Structure," p. 52.
In 2002, the company reviewed 243,657 re-
sumes and hired 5,042 new employees.
Training
Apart from the Federal Aviation Administration's
mandated training for certain employees, training ac-
tlVlt1es at Southwest were designed and conducted
by Southwest's University for People, a part of the
company's People Department. The curriculum in-
cluded courses for new recruits, employees, and
leadership training programs for both new and expe-
nenced managers. Leadership courses emphasized a
management style based on coaching and encourag-
mg, rather than supervising or enforcing rules and
regulations. All employees who came into contact
with customers, including pilots, received customer
care training. There were also courses on safety,
communications, stress management, career devel-
opment, performance appraisal, decision making,
and employee relations. From time to time supervi-
sors and executives attended courses on corporate
culture that were intended to help instill, ingrain, and
nurture such cultural themes as teamwork, trust, har-
mony, and diversity.
Depending on the influx of new employees, ori-
entation courses were conducted two to five times a
week for between 20 and 100 new recruits. The ori-
entation program included videos on Southwest's
history, an overview of the airline industry and the
competitive challenges that Southwest faced, and an
introduction to Southwest's culture and management
practices. One of the program's highlights was a
video called the Southwest Shuffle, whieh featured
hundreds of Southwest employees rapping about the
fun they had on their jobs. Orientation programs at
the Dallas headquarters typically included exercises
designed to demonstrate the role of creativity and
teamwork and a scavenger hunt in which new hires
were given a time line with specific dates in South-
west's history and were asked to fill in the missing
details by viewing the memorabilia decorating the
corridors and getting information from people work-
ing in various offices. Much of the indoctrination of
new employees into the company's culture was done
by coworkers and the employee's supervisor. South-
west made active use of a one-year probationary em-
ployment period to help ensure that new employees
fit in with its culture and adequately embraced the
-company's cultural values.
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices
One of Southwest's supervisory training pro-
grams involved three teams; one member of each
team was blindfolded and asked to throw a ball into
a bucket. Unknown to the throwers, the other mem-
bers on one team could say nothing about where the
bucket was, members of the second team were in-
structed to say only "Good job" or "Keep trying,"
and the third group was allowed to give its thrower
detailed information about where the bucket was.
Not surprisingly, the third group's thrower had the
most success-an outcome that was intended to
demonstrate the value of good coaching on the part
of supervisors and good listening on the part of
supervisees.
Promotion
Approximately 80 to 90 percent of Southwest's su-
pervisory positions were filled internally, reflecting
management's belief that people who _had "been
there and done that" would be the likely to
appreciate and understand the demands that people
under them were experiencing-and also most likely
to enjoy the respect of their peers and higher-level
managers. Employees could either apply for supervi-
sory positions or be recommended by their present
supervisor. New appointees for low-level manage-
ment positions attended a three-day "Leading with
Integrity" class aimed at developing leadership and
communication skills. Employees being considered
for managerial positions of large operations (Up and
Coming Leaders) received training in every depart-
ment 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
provided with 360-degree feedback from department
heads, peers, and subordinates; representatives of the
People Department analyzed the feedback in decid-
ing on the specific assignment of each candidate. 18
Compensation
Southwest's pay scales were at levels close to the in-
dustry average and its benefit packages were good l
relative to other airlines. According to a 1997-98
survey, Southwest's pilots earned, on average, about
10 percent above the industry average; however,
flew an average of 85 hours per month versus an in-"--
dustry average of 80.2 hours.
18Sunoo , "How Fun Flies at Southwest Airlines," p. 72.
C-655
Southwest introduced a profit-sharing plan for
senior employees in 1973, the first such plan in the
airline industry. By the mid-l 990s the plan had been
extended to cover most Southwest employees. As of
2001, Southwest had 12 different stock option pro-
grams for various employee groups, a 401(k) em-
ployee savings plan that included company-matching
contributions, and a profit-sharing plan that covered
virtually all employees and consisted of a money
purchase defined contribution plan and an employee
stock purchase plan. Company contributions to em-
ployee 410(k) and profit-sharing plans totaled
$167.1 million in 1998, $192.0 million in 1999,
$241.5 million in 2000, $214.6 million in 2001, and
$155.6 million in 2002. In recent years, these pay-
ments had represented 8 to 12 percent of base pay.
Employees participating in stock purchases via
payroll deduction bought I million shares in 2000;
1 million shares in 2001; and 1.4 million shares in
2002-at prices equal to 90 percent of the market
value at each payroll period. Southwest employees
owned about 10 percent of Southwest's outstanding
shares and held options to buy some 138 million ad-
ditional shares over the next 10 years.
Employee Relations
About 80 percent of Southwest's 35,000 employees
belonged to a union, making it one of the most
highly unionized U.S. airlines. The Teamsters Union
represented Southwest's airline mechanics, stock
clerks, and aircraft cleaners; the Transport Workers
Union (TWU) represented flight attendants; Local
555 of the TWU represented baggage handlers,
ground crews, and provisioning employees; and the
International Association of Machinists represented
the customer service and reservation employees.
There was one in-house union-the Southwest Air-
line Pilots Association, which represented pilots. De-
spite having sometimes spirited disagreements over
particular issues, Southwest's relationships with the
unions representing its employee groups were for the
most part harmonious and nonadversarial-the com-
pany had experienced only one brief strike by ma-
chinists in the early 1980s.
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 relatively free of
restrictive work rules and narrow job classifications
C-656 Cases in Crafting and Executing Strategy
,that might impede worker productivity. All 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 and
make flight cabins more presentable for passengers
boarding the next flight.
In 2000-2001 the company had contentious ne-
gotiations with Local 555 of the TWU (representing
about 5,300 Southwest employees) over a new wage
and benefits package; the previous contract had be-
come open for renegotiation in December 1999, and
a tentative agreement reached at the end of2000 was
rejected by 64 percent of the union members who
voted. A memo from Kelleher to TWU representa-
tives said, "The cost and structure of the TWU 555
negotiating committee's proposal would seriously
undermine the competitive strength of Southwest
Airlines; endanger 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 said, "We asked for a de-
cent living wage and benefits to support our fami-
lies, and were told of how unworthy and how greedy
we were." The ongoing dispute resulted in informa-
tional picket lines in March 2001 at several South-
west locations, the first picketing since 1980. Later
in 2001, with the help of the National Mediation
Board, Southwest and the TWU reached an agree-
ment covering Southwest's ramp, operations, and
provisioning employees.
Prior to September 11, 2001, Southwest's pilots
were somewhat restive about their base pay relative
to pilots at other U.S. airlines. The maximum pay for
Southwest's 3,700-plus pilots (before profit-sharing
bonuses) was $148,000, versus maximums of
$290,000 for United's pilots; $262,000 for Delta's pi-
lots; $206,000 for American's pilots; and $199,000
for Continental's pilots. 19 Moreover, some veteran
Southwest employees were grumbling 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
"Shawn Tully, "From Bad to Worse," Fortune, October 15,
2001, p. 124.
underdog status were said to feel entitled to "big air-
line" pay now that Southwest had emerged as a ma-
j or U. S. carrier.20
The No-Layoff Policy
Southwest Airlines had never laid off or furloughed
any of its employees since the company began oper-
ations in 1971. The company's no-layoff policy was
seen as integral both to how the company treated its
employees and to management efforts to sustain and
nurture the culture. According to Kelleher,
Nothing kills your company's culture like layoffs. No-
body has ever been furloughed here, and that is un-
precedented 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 var-
ious times and been more profitable, 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 little more money in the short term.
Not furloughing people breeds loyalty. It breeds a
sense of security. It breeds a sense oftrUSt. 21
Southwest had built up considerable goodwill with
its unions over the years by avoiding layoffs.
Management Style
At Southwest, management strived to do things in a
manner that would make Southwest employees
proud of the company and its workforce practices.
Managers were expected to spend at least one-third
of their time out of the office, walking around the fa-
cilities under their supervision, observirl:g firsthand
what was going on, listening to employees and being
responsive to their concerns. A former director of
people development at Southwest told of a conver-
sation 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. I responded by
saying, "Sure-why don't you put up a suggestion
box right here on this wall and then admit you are a
20Melanie Trottrnan, "Amid Crippled Rivals, Southwest Tries to
Spread Its Wings," The Wall Street Journal, October 11,2001,
p.AIO.
2IBrooks, "The Chairman of the Board Looks Back;' p. 72.
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices
failure 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 listening 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.
I think that most people employed here know that
they can call anyone of our vice presidents on the
telephone and get heard, almost immediately.
The suggestion box gives managers an out; it re-
linquishes their responsibility to be accessible to their
people, and that's when we have gotten in trouble at
Southwest-when we can no longer be responsive to
our flight attendants or customer service agents,
when they can't gain access to somebody who can
give them resources and answers.22
Company executives were very approachable,
insisting on being called by their first names. At new
employee orientations, people were told, '.'We do not
call the company chairman Mr. Kellebr; we call
him Herb." Managers and executives had an open-
door policy, actively listening to employee concerns,
opinions, and suggestions for reducing costs and im-
proving 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 ttmployee 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 determined that
they could buy the parts and assemble the PCs them-
selves 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 tick-
ets and shifting to e-tickets.
There were only four layers of management be-
tween a frontline supervisor and the CEO. South-
west'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 struc-
tures 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
"Freiberg and Freiberg, NUTS!, p. 273.
C-657
on their own. They can take individual responsibility
for it and know they will not be crucified if it doesn't
work out. Our leanness requires people to be com-
fortable in making their own decisions and undertak-
ing their own efforts. 23
From time to time, there were candid meetings
offrontline employees and managers where operat-
ing problems and issues between or among workers
and departments were acknowledged, openly dis-
cussed, and resolved.24 Informal problem avoidance
and rapid problem resolution were seen as manager-
ial virtues.
Southwest's Core Values
Two core values-LUV and fun-permeated the
work environment at Southwest. LUV was much
more than the company's ticker symbol or a recur-
ring theme in Southwest's advertising campaigns.
Over the years, LUV grew into Southwest's code
word for treating individuals-fellow employees and
customers-with dignity and respect and demon-
strating a caring, loving attitude. The word LUVand
red hearts commonly appeared on banners and
posters at company facilities, as reminders of the
compassion that was expected toward customers and
other employees. Practicing the Golden Rule, inter-
nally 'imd externally, was expected of all employees.
Employees who had to struggle to live up to these
expectations were subjected to considerable peer
pressure and usually were asked to seek employment
. elsewhere if they did not soon leave of their own
volition.
Fun at Southwest meant exactly what the word
implies. Fun occurred throughout the company 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. 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 ahnost every week. Accord-
ing to one manager, "We're kind of a big family here,
and family members have fun together."
23Ibid., p. 76,
"Hallowell, "Southwest Airlines: A Case Study," p. 524.
 C-658 Cases in Crafting and Executing Strategy
The Culture Committee
Southwest formed a Culture Committee in 1990 to
promote "Positively Outrageous Service" and devise
tributes, contests, and celebrations intended to nur-
ture and perpetuate the "Southwest Spirit." The com-
mittee, chaired by Colleen Barrett, was composed of
up to 100 employees representing a cross-section of
departments and locations; members served a two-
year term. Members, chosen for their zeal in exhibit-
ing the Southwest Spirit and their commitment to
Southwest's mission and values, functioned as cul-
tural ambassadors, missionaries, and storytellers.
The committee had four all-day meetings annually;
ad hoc subcommittees, formed throughout the year,
met more frequently. Over the years, the committee
had sponsored and supported hundreds of ways to
promote and ingrain the Southwest Spirit, with
members 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 com-
mittees we do have, the Culture Committee is the
most important."25
Efforts to Nurture the Southwest Culture
Apart from the Culture Committee, Southwest rein-
forced its core values and culture via such efforts as a
CoHearts mentOling program; a Day in the Field pro-
gram, in which employees spent time working in an-
other area of the company's operations; a Helping
Hands program, in which volunteers from around the
system traveled to work two weekend shifts at other
Southwest facilities that were temporarily short-
handed or expeliencing heavy workloads; and peri-
odic Culture Exchange meetings to celebrate the
Southwest Spirit and company milestones. Almost
every event at Southwest was videotaped, which pro-
vided footage for creating such multipurpose videos
as Keepin' the Spirit Alive that could be used in train-
ing courses and shown at company events all over the
system. Many of the committee's activities revolved
around promoting the use of red hearts and the word
LUV to embody the spirit of Southwest employees
caring about each other and Southwest's customers.
The concepts ofLUV and fun were spotlighted in all
of the company's training manuals and videos. There
was an annual "Heroes of the Heart Award."
25Freiberg and Freiberg, NUTS', p. 165.
Southwest's monthly newsletter, LUV Lines, of-
ten spotlighted the experiences and deeds of particu-
lar employees, reprinted letters of praise from
customers, and reported company celebrations 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 messages from customers,
employees, and executives. The company had pub-
lished a book for employees describing "outrageous"
acts of service. Sometimes important infonnation
was circulated to employees in "fun" packages such
as Cracker Jack boxes.
Southwest executives believed that the com-
pany's growth was primarily a function of the rate at
which it could hire and train people to fit into its cul-
ture and mirror the Southwest Spirit. With about 150
cities annually petitioning Southwest to initiate ser-
vice to their airports, management believed that the
company's growth was not constrained by a lack of
market opportunities to expand into other geo-
graphic locations. About 15,000 of Southwest's
35,000 employees had been hired since 1995.
Employee Productivity
Management was convinced that the company's
strategy, culture, esprit de corps, and people man-
agement practices fostered high labor productivity
and contributed to Southwest's low labor costs com-
pared to other airlines (see again Exhibit 7). 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 av-
erage turnaround times were about two-thirds the in-
dustry average. One study found that Southwest had
an average of2.2 station personnel per 1,000 passen-
gers in 1994 versus an industry average of about
4.2.26 According to the Air Transport Association, la-
bor costs were the airlines' biggest cost component,
accounting for 38 percent of operating costs in 2002;
the average airline employee had an estimated cost
of$75,200 in 2002, including pension, payroll taxes,
26J. H. Gittell, "Cross-Functional Coordination and Human Re-
source Systems: Evidence from the Airline Industry," doctoral
dissertation, Massachusetts Institute ofTechnology, cited in
Hallowell, "Southwest Airlines: A Case Study," p. 527.
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices
health care, and insurance benefits. In 2000, South-
west's labor productivity compared favorably WIth
the average of its eight biggest U.S. rivals:
Average of
Southwest's
Productivity Eight
Measure Southwest U.S. Rivals
Passengers enplaned
per employee 2,145 1,119
Employees per plane 83.4 121.7
Awards, Recognition, and
Operating Performance
Comparisons
Southwest's strategy and approaches to conducting its
business had resulted in numerous over the ation with Herb Kelleher going back 23 years to the
years. Southwest ranked number one sat-
isfaction among U.S. major airlines every year from
1991 though 2000. In Fortune magazine
Southwest had been ranked as the most admlr7d aIr-
line in the world every year since 1997. In 1998, For- counsel had been relatively low, but he was
tune named Southwest number 1 in its listing of the
100 best companies to work for in America;. South-
west was ranked number 4 in 1999, number 2 m 2000,
and number 4 in 2001-the company elected not to
go through the screening process for the awards gIven tive planning committee; his experie?ces
out in early 2002. Southwest's Web site had top
awards from both Business Week and PC Magazme. In . team to the company's alliances with vendors
2001, Business Ethics included Southwest Alrlmes on
its "100 Best Corporate Citizens" list. ..
Exhibit II provides comparative statIstIcs on
Southwest's performance versus that of other major
commercial airlines during the 1998-2002 penod.
SOUTHWEST'S NEW
LEADERSHIP TEAM
In June 2001 Southwest Airlines, responding to anx-
ious investor concerns about the company's leader-
ship succession plans, began an orderly t:ansfer of
power and responsibilities from Its longtIme CEO
and cofounder, Herb Kelleher, age 70, to two of hIS
most trusted proteges. James F. Parker, 54, South-
west's general counsel, was elevated to CEO. Colleen
C-659
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. Kelleher stayed on as chaIr-
man of Southwest's board of directors and the head of
the board's executive committee and continued to be
in charge of strategy, expansion to new cities and air-
craft scheduling, and governmental and af-
fairs' his contract called for him to remam m those
role; through December 2003 at an annual salary of
$450,000, plus bonuses and stock options. Many ob-
servers and longtime employees did not expect Kelle-
her to ever fully remove himself from management of
the company as long as his health held up-Kelleher
had undergone treatment for prostate cancer in 1999.
James Parker
Southwest's new CEO, James Parker, had an associ-
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
company as Southwest's vice president and general
west's chief labor negotiator and much of the credit
for Southwest's good relations with employee unIOns
beldnged to him. Prior to his appointment ,as CEO,
Parker had been a member of the company s execu-
from properties and facilities to techmcal serVIces
partners. Parker and Kelleher were saId to thmk
much alike and Parker was regarded as havmg a
good sense' of humor, although he did not have as
colorful and flamboyant a personality as Kelleher.
Parker was seen as an honest, straight-arrow kmd of
person who had a strong grasp of Southwest's culture
and market niche and who could be mce 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 expenenced
leadership team. We've all worked together for a long
time. There will be evolutionary changes m South-
west, just as there have always been in our hIstory.
We're going to stay true to our busmess model of be-
ing a low-cost, low-fare airline 27
"Quoted in the Seattle Times, March 20, 2001, p. C3.
 C-660 Cases in Crafting and Executing Strategy
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-661

exhibit 11 On-Time Flights, Mishandled Baggage, Oversales, and Passenger exhibit II (continued)
Complaints for Major U.S. Airlines, 1998-2002
Involuntary Denied Boardings per 10,000 Passengers Due to Oversold Flights
Percentage of Scheduled Flights Arriving within 15 Minutes of the Scheduled Time
Carrier Jan.-Sept. 2002 2001 2000 1999 1998
Carner
.
Jan.-Sept 2002 2001 2000
1. 1m Alaska Airlines 1.24 1.36 1.53 0.99 1.49
Alaska Airlines 75.8% 69.0% 68.1% 71.0% 72.0% America West 0.21 0.38 1.27 1.38 1.12
America West 78.5 74.8 65.5 69.5 68.5 American 0.22 0.36 0.44 0.42 0.42
American 78.9 75.9 72.9 73.5 80.1 Continental 0.93 1.51 1.44 0.28 0.13
. Continental 78.7 80.7 78.1 76.6 77.3 Delta 0.87 0.77 0.34 1.98 1.24
Delta 77.5 78.0 75.3 78.0 79.6 Northwest 0.53 0.45 0.43 0.20 0.33
Northwest 79.7 79.7 77.4 79.9 70.6 Southwest 1.06 1.50 1.84 1.40 1.84
. Southwest 82.3 81.7 75.2 80.0 80.8 TWA' 1.83 2.76 0.88 1,69
TWA' 80.8 76.9 80.9 78.3 United 0.65 0.92 1.64 0.69 0.59
United 75.5 73.5 61.4 74.4 73.8 US Airways 0.26 0.34 0.67 0.57 0.23
US Airways 78.4 78.2 72.3 71.4 78.9
Complaints per 100,000 Passengers Boarded
Mishandled Baggage Reports per 1 000 Passengers
Carrier Jan.-Sept. 2002 2001 2000 1999 1998
Carner Jan.-Sept. 2002 2001 2000 1999 1998
Alaska Airlines Alaska Airlines 1.02 1.27 2.04 1.64 0.54
2.68 3.00 3.48 5.75 7.27 America West 1.88 3.72 7.51 3.72 2.11
America West 3.47 4.22 6.62 4.52 3.88 American 1.41 2.51 3.54 3.49 1.14
American 4.32 4.60 5,50 5.21 4.40 Continental 1.46 2.23 2.84
Continental 2.62 1.02
3.06 4.29 5.35
Delta 4.42 4.06 Delta 1.51 2.16 2.01 1.81 0.79
3.61 4.11 4.49
Northwest 4.39 4.27 Northwest 1.60 1.97 2.61 2.92 2.21
4.79 4.19 5.24
Southwest 4.81 6.63 Southwest 0.37 0.38 0.47 0.40 0.25
3.54 4.77 5.00
TWA* 4.22 4.53 TWA' 2.54 3.47 3.44 1.29
6.35 6.06 5.38
United 5.39 United 1.90 3.24 5.3 2.65 1.28
3.69 5.07 6.57
US Airways 7.01 7.79 US Airways 1.24 1.81 2.59 3.13 0.84
3.01 3.86 4.76 5.08 4.09
•Acquired by American Airlines in 2001; TWA data for 2002 included in American Airlines statistics.
Source: Office of Aviation Enforcement and Proceedings, Air Travel Consumer Report, multiple issues.

Colleen Barrett
Barrett began working with Kelleher as his legal sec-
retary III 1967 and had been with Southwest since
1978. As executive vice president of customers Bar-
rett had a high profile among Southwest
and spent most of her time on culture building,
morale bU!ldlllg, and customer service. She and
Kelleher were regarded as Southwest's guiding
hghts, and some analysts said she was essentially
functlOmng as the company's chief operating officer
pnor to her fonnal appointment. Much of the credit
for the company's strong record of customer service
and its strong culture belonged to Barrett.
Barrett had been the driving force behind lining
the hallways at Southwest's headquarters with photos
of company events and trying to create a family at-
mosphere at the company. Believing it was"important
to make employees feel cared about and important
Barrett had put together a network of contacts
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, word quickly got to Bar-
rett-the information went into a database and an
appropriate greeting card or gift was sent. Barrett
had a remarkable ability to give individualized gifts
that connected her to the recipient. 28
Barrett :vas the first woman appointed as presi-
dent and chIef operating office of a major U.S. air-
28Freiberg and Freiberg, NUTSi, p. 163.
line. In October 2001, Fortune included Colleen Bar- tember 11, 2001, the commercial air travel system in
rett on its list of the 50 most powerful women in the United States was suddenly and unexpectedly in
American business (she was ranked number 20). shambles. The unprecedented three-day shutdown of
flights, the sudden erosion of passenger traffic, and
strict new security measures threw maj or airlines
into a financial crunch of huge proportions and trig-
CRISIS CONDITIONS gered a struggle to revamp flight schedules and re-
STRIKE THE AIRLINE spond to sharply lower passenger travel. During the
three days that flights were suspended by the Federal
INDUSTRY: THE Aviation Administration, airlines burned through an
estimated $220 million a day in cash to cover ongo-
AFTERMATH OF ing expenses.
SEPTEMBER 11 On the first day of trading after the terrorist at-
tacks, investor worries about almost empty flights,
In the days and weeks following the terrorist attacks higher costs from added security measures, and a
on the World Trade Center and the Pentagon on Sep- clouded financial future for the whole airline industry
 C-662
Cases in Crafting and Executing Strategy
caused airline stock prices to plunge. With about
$26.1 billion in debt as of2001; billions more in cap-
itallease obligations for planes that had been leased
rather than purchased; and ongoing costs for labor,
terminal facilities, and maintenance, U.S. commercial
airlines typically had to fill close to 65 percent of the
available seats in order to reach breakeven. For the
four weeks immediately following the attacks, load
factors at most airlines were in the 40-60 percent
range. Most airlines responded by cutting the number
of flights by about 20 percent, grounding the un-
needed planes, and laying off employees.
Many airline executives expressed concerns
about an impending liquidity crunch, rapid burns of
cash on hand, and the potential for a number of car-
riers to end up in bankruptcy without some kind of
relief from the federal government. Industry analysts
speculated that losses for U.S. airlines in the wake of
the terrorist attacks could reach $7 billion in 200 I
and that slack demand for air travel could last well
into 2002. Congress responded by passing a $15 bil-
lion aid package that (1 ) provided $5 billion in cash
grants to help airlines cover losses and negative cash
flows stemming from traffic declines and (2) al-
lowed airlines to apply for $10 billion in loan guar-
antees to bolster their balance sheets and provide
needed liquidity.
During the last three months of 2001, airlines
scrambled to revise their flight schedules to better
match the reduced traffic patterns. Delta, American,
and TWA cut 40 percent of their international flights
out of New York's Kennedy International, suspend-
ing all service to a number of destinations until
March 2002. Late-night domestic flights and domes-
tic flights on weak performing routes bore the brunt
of the flight cutbacks. Some routes served by full-
size jets were converted to commuter jet service.
United Airlines announced that it would cease oper-
ating its Shuttle by United service on the West Coast,
which overlapped with Southwest in such markets as
Las Vegas, Oakland, and Los Angeles. US Airways
announced that it would close down its low-fare
MetroJet subsidiary, which operated on the East
Coast and overlapped with Southwest's service in
Providence and Baltimore (one of Southwest's
fastest-growing locations). US Airways also an-
nounced that it would eliminate 51 of its 75 mainline
jet flights from Baltimore, including all nonstop
flights to Florida. Delta Airlines announced that it
would cut the operations of its low-fare operation,
Delta Express, by 50 percent; Delta Express served
three locations also served by Southwest-Orlando,
Tampa, and Hartford. In Orlando, Delta Express said
it would cut back from 49 daily flights to 21 (South-
west operated 52 daily nonstop flights out of Or-
lando to 24 cities).
Southwest's Situation
Southwest, however, continued to fly its full sched-
ule of 2,772 flights even though its load factors for
the four weeks ending October 14,2001, were 38.5
percent, 52.4 percent, 62.5 percent, and 67.0 per-
cent-for the period July 1,2001, until the attacks,
Southwest's load factor was 74.6 percent. The com-
pany initiated new service to Norfolk, Virginia, on
October 7, as planned. Southwest's primary re-
sponses involved a temporary freeze on hiring until
January 2002, deferring nonessential capital spend-
ing and nonessential operating costs, and negotiating
a revised delivery schedule for the 132 Boeing 737
jets it had on order.
In January 2002, Southwest Airlines reported its
29th consecutive year of profitability, with aunual
net income of $511.1 million ($0.63 per diluted
share), compared to 2000 net income (excluding the
cumulative effect of a change in accounting princi-
ple) of $625.2 million ($0.79 per diluted share)-a
decline of 18 percent. Southwest's 2001 net income
included a special pretax gain of$235 million from
a federal grant received pursuant to the Air Trans-
portation Safety and System Stabilization Act and
special pretax charges of $48 million arising from
the terrorist attacks on September II, 200 I. Exclud-
ing the special gain, special charges, llnd related
profit-sharing and income tax effects, the company's
2001 net income was $412.9 million, or $0.51 per
diluted share.
Then in early 2002 Southwest announced that it
would begin expanding its flight schedule during the
February-June 2002 period; the new schedule in-
clUded the addition of21 new daily nonstop flights,
many of which were on long-distance routes that
Southwest had not previously served with nonstop
flights. Later in 2002, Southwest aunounced the ad-
dition of 10 more new long-distance, nonstop flights.
Many of the newly added flights were round-trip
flights between points in the Northeast and Florida
and Texas and between two of Southwest's most im-
portant airports, Baltimore/Washington and Chicago
Case 35 I Southwest Airlines: Culture, Value, and Operating Practices C-663
Midway, and points west-Las Vegas, Phoenix, Oak- val airlines remained below pre-September II levels.
land, Seattle, and Los Angeles. In December 2002, Southwest announced another
Chicago Midway was targeted by Southwest as a round offare sales for January-April 2003.
particularly lucrative place for expanded fl:ghts.
Southwest's share of flight departures from ChIcago
(both O'Hare and Mi.dway) was much hIgher In Southwest's Financially
April 2002 than in Apnl 2001:
Troubled Rivals
The financial picture at rival airlines was grim.
April 2001 April 2002 Every passenger airline in the Umted States. except
Southwest lost money in 2002. US AIrways filed for
Chicago-Tampa
Southwest 20% 27% Chapter II bankruptcy in August 2002; It was trymg
to persuade its unions to agree to deeper wage and
United 50 38
American 30 27 salary cuts in order to qualify for. a $900 mllhon fed-
eral loan and to secure $500 mIllion In mtenm fI-
Chicago-Seattle
Southwest 0 9 nancing from the Retirement Systems of Alabama,
which had recently purchased a 37.5 percent 0:vner-
United 60 51
American 34 29 ship stake. US Airways managen:ent had mdlcated
that the company was abandoning .Its strategy
Chicago-Phoenix
Southwest 9 17 and would focus instead on provldmg regIOnal ser-
vice with smaller jets primarily on the East Coast
United 27 22
American 27 25 and in the Caribbean.
United Airlines filed for Chapter 11.
'Percentages include all flights from both O'Hare and Midway; in December 2002 and was in dire straIts. Umted s
Southwest flights all were into and out of Midway. • costs per available seat mile in the thIrd quarter of
2002 were $0.11, the highest in the industry, and Its
. Parker, Southwest's CEO and vice chairman,
J1m .. labor costs were $0.046, the second hIghest In the 1Il-
said, "We are approaching growth opportunItIes con- dtiiftry. While management had called on Its umon
· Iy, but we know our customers have hbeen and nonunion employees to agree to wage salary
servatlYe h
anxious for this new nonstop serVIce. Althoug t e cuts totaling $9 billion over six years: the umons.so
airline is still in the recovery process, we cannot forget far had pledged to give up only $5.2 bllhon over fIve
the wishes of our customers to continue to bnng low. years-United's employees owned 55 percent of the
fares and affordable travel to more people WIth company's stock; however, under the bankr;ptciI
. t flI'ghts " Parker indicated that,
Southwest laws the union agreements could be declare nu
convemen. . .. . s
emp1oyees had been working fevenshly on mitIatives
. . h and (United management was expected .to take
to make the airport experience more convement m t e such a step if necessary to estabhsh fInancla: so:-
new environment of heightened secunty. vency). Federal officials had turned down Umted
request for a $1.8 billion loan, Indlcatmg the com
Introductory fares for the flights on the new
routes were in the range of $89-$99 each way.. The pany's business plan for getting the company back
fares were well below the fares comparable flIghts on solid financial footing was unsound and con-
of rival airlines. On the high-traffIC ChIcago-Los An- tained unreasonably optimistic revenue proJectIOns.
geles route, an unrestricted, fly-anytIme fare ?r a last- A number of observers had predicted that IfUmted
minute fare (no advance purchase) on Umted and
Amencan. ran $2 ,480 . To try to rebuild traffIC dunng
2002 Southwest had fare sales in January, Marc ,
h
did not get its financial house In order by Apn12003,
the company would have to be liquidated because
would run out of cash-the company had lost near y
t
Aprii, July, August, October, and December; It had $4 billion in the past two years, was In on
also instituted some special vacatIOn to resort $920 million loan, and was bleeding milhons m cas
destinations like Las Vegas and CalifornIa s Dlsney- ever day. Most industry observers believed that, 1Il
I nd. But as 2002 drew to an end, passenger traffic on ordery to surVIve,
. Unl'ted would have to scale back . hItsd
;outhwest's flights (see Exhibit 2) and on those ofn- operations significantly-since September II, It a
C-664 Cases in Crafting and Executing Strategy

already cut its daily flights by 25 percent and laid off

about 20,000 employees. lines. American's pilots were among the best paid in
the Industry and flew an average of 700 h
. American Airlines, with the highest labor costs year, well under the federal limit of I 000 hours per
In themdustry ($0.0462 per available seat mile) was nuall . th k ' ours an-
negotIatIng work rule changes with its unions t ;0 y, ey wor ed an average of 14 days a month
In 2002, spent about $2.5 billion to a
to boost labor productivity and had requested all
ployees to forgo
. any pay raise in 2003-manage-
the salanes, and benefits of its 10' 000 PlOtS;
company s total payroll for its 109 000
'1 P Ythe
1
Benziger Family Winery
ment was' trYIng
.to achieve $3-$4 bI'II"IOn In annua1
savIngs to bnng American's costs more in line about $8.4 billion.
WIt those of Southwest and other lower-cost air-
0 percent would save American about $500 '1- Murray Silverman Tom Lanphar
lIon annually. mi
San Francisco State University California Department of Toxic
Substances Control

att Atkinson, ranch manager at Benziger had been the primary participants developing the sys-

M Family Winery (BFW), was overseeing the

development of the winery's enviromnental
management system (EMS). Matt was working with
Chris Benziger, parmer and national sales manager, to
ensure that development of the EMS was consistent
with BFW's operational and strategic direGtion. It was
February 2003 and Matt and Chris
vested countless hours in the EMS, which was being
developed with assistance from the California Envi-
romnental Protection Agency (CallEPA). Through its
EMS winery pilot project, CallEPA hoped to design
an EMS template that eventually could be made avail-
able to other wineries. Furthennore, Cal/EPA was
attempting to develop a template that was consis-
tent with ISO 14001, an internationally recognized
standard for enviromnental management systems.
Cal/EPA had selected BFW in June 2000 as one of
two pilot wineries because of the winery's proactive
commitInent to enviromnental policies and the signif-
icant enviromnental advances it had already made.
Matt believed that considerable progress had
been made on the company's EMS. With CalIEPA's
assistance, BFW had developed a fonnal environ-
mental policy, identified and prioritized its environ-
mental impacts, and established objectives and
targets. However, there were still many steps to be
carried out in establishing a full-fledged EMS. Fur-
ther development would require time-consuming ef-
forts in writing standardized operating procedures
and in establishing document control and record-
keeping procedures. Also, because Matt and Chris
Copyright © 2003 by Murray Silverman and Tom Lanphar. The authors
gratefully acknowledge a Business and International Education (BIE)
grant from the US. Department of Education and a matching grant from
the College of Business at San Francisco State University in support of
this case research.
tem, the rest of the organization would have to be-
come involved and staff training would be required.
In light of the financial investments and time that
would be required from management and employees,
Matt and Chris had to decide whether to aggressively
pursue ISO 14001 certification. The alternative was
in- to continue to develop an EMS as time and resources
pennitted, leaving open the possibility of eventually
pursuing ISO 14001 certification.
BENZIGER FAMILY
WINERY'S HISTORY
Mike Benziger, general partner and founder of Ben-
ziger Family Winery, grew up working in his father's
wine import business in New York City. His dream
was to grow his own grapes and make his own wine.
Mike was the oldest of Helen and Bruno Benziger's
seven children. Bruno worked for 23 years in the
wine import business, starting out with his father,
Joseph, who founded the Park-Benziger Import
Company in 1933 in New York City. Mike and his
siblings worked in the family business, selling and
delivering wine throughout the city's five boroughs.
After graduating college in 1973, Mike relocated to
Europe with his wife, Mary; the couple worked in
vineyards and cellars as they moved from region to
region. In 1975, Mike took a cellar position with
Stony Ridge Winery in California, where as assistant
winemaker he took a giant leap forward in appreciat-
ing the craft end of the business, sparking his contin-
uing passion for the creation of truly great wine.
As their desire to start their own winery grew
more insistent, Mike and Mary spent their free time
C-665