Case of southwest airlines
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The Challenges AheadSouthwest Airlines is no Johnny-come-lately. Its basic strategy of consistent low-cost, no-frills, high frequency, on-time air transportation with friendly service is a recipe that has been refined throughout the company's 30-year life. It has worked for the company in periods of catastrophic losses for the industry as well as in times of abundance. Southwest has been able to compete successfully both with the major airlines and those that have been formed to copy its formula. Opportunities for Growth. Southwest apparently recognizes the potential saturation of its historic markets, and the limited number of attractive short-haul markets. Therefore, it has expanded into some longer-haul markets. Longer-haul not only provides avenues for future growth, but also provides potentially higher margins. On average, the company's cost per ASM is just below 7.5 cents. However, on its longer routes costs are as low as 4 cents per ASM. Furthermore, as mentioned, the 10% ticket tax has been replaced with a combination ticket tax and takeoff fee. This increases the attractiveness of longer-haul flights. Analysts see growth directions in the invasion of new markets, such as Florida, as well as in the addition of new city-pairs to Southwest's point-to-point network. In 1996, Southwest entered four new markets: Tampa, Ft. Lauderdale, and Orlando, Florida, and Providence, Rhode Island. At year-end 1996, 22 percent of the carrier's ASMs were deployed on the west coast; 33 percent in the remainder of the western region (west of Texas); 19 percent in the heartland region (Texas, Oklahoma, Arkansas, and Louisiana); 16 percent in the Midwest region; and ten percent on the east coast (Providence, Baltimore, and Florida). Southwest is adding longer routes, such as the recently inaugurated Albuquerque to Orlando route, and operations from Nashville all the way to the west coast. Seven new nonstop flights from Nashville International Airport began in April of 1997 and two additional departures became effective in June. The new nonstop routings are Nashville to Detroit, Los Angeles, Oakland, and Columbus, and enhanced nonstop service from Nashville to Las Vegas and Tampa. Southwest began service to Jacksonville, Florida on January 15, 1997. Southwest is now flying into Islip, Long Island in New York. Limits to Growth. As critics have noted, there are many challenges on the horizon. Southwest will eventually saturate its historic niche. The company currently flies into more than 52 airports with an average of 2,600 flights per day. Its old strategy of focusing on good climates and smaller, less congested airports has contributed to Southwest's low costs. Many believe that poor weather conditions can affect Southwest's ability to maintain on-time performance and can significantly impact down-line operations. This is magnified by a schedule based on a rapid turnaround, which leaves little leeway for flight delays. Southwest entered and then left the Denver market when bad weather forced an unacceptable number of delays and canceled flights. This puts a limit on growth because there are only a finite number of markets that can satisfy these criteria. Thus, Southwest has begun to enter markets in poorer climates and to introduce longer-haul flights. Providence, RI, one of the newer locations, is not a good weather location. There are about 56 airports in good weather locations with populations of over 100,000. Southwest currently serves 36. It is unclear how much demand for point-to-point service exists in the remaining 20. If Southwest decides to introduce food services as an amenity for longer haul flights it would require galleys and onboard services that would significantly boost the cost of operation of those airplanes. Longer flights also result in fewer flights per day and may serve to drive down yield. A mixture of galleyed and non-galleyed aircraft will also make fleet scheduling less flexible. Furthermore, there will be a greater need for functions in the organization responsible for new elements such as national marketing, the frequent flyer program, interline agreements, new geographic operations and possibly food services. People and culture also are major concerns to further expansion. Southwest is highly selective, it consequently needs a large pool of applicants in order to find a few people good enough for the culture. With labor shortages across the country, it may be difficult to attract large pools of applicants. Without the selectivity, Southwest may not be able to get the human resources it needs in order to differentiate itself from others. The unique culture of Southwest helps make the company really fly. As companies expand, particularly in geographic location, the often find that it becomes increasingly more difficult to maintain the same culture. This is particularly true if the culture is built around the persona of one major leader such as Herb. Competition. During the last several years, the gap between Southwest and the rest of the majors has narrowed as other carriers have attempted to emulate Southwest's formula. Larger airlines have developed lower cost short-haul divisions. Continental, United and Delta have all introduced an "airline within an airline" to lower costs for short-haul flights, and American is likely to follow. These separate divisions may hire their own pilots and ground support at much lower cost under separate contractual relations with unions. Under these arrangements pilots can often be employed for less than half the cost of the parent airline. This, not surprisingly, has led to some bitter disputes between management and unions. For example, at American Airlines the unions have seen this as a management tactic for shifting their members from high to low paying jobs with the same duties. At the same time, Southwest has adopted many of the features that the majors use to support their large networks. As Southwest has grown in scope, it has introduced national advertising, including NFL sponsorship; a frequent flyer program, including a branded credit card; and interline and marketing agreements with international carriers. Southwest's operations at Nashville are developing into a hub. The carrier's average stage length has also increased over the last several years. Southwest has now expanded into geographic markets and climates that are not as compatible with its original fair-weather, low-congestion strategy. Its flights now compete head to head with some of the major carriers. Succession. Few CEO's are more closely identified with company success than Herb Kelleher. As the company gets larger, and as he gets older -- and by the way, he boasts of his passion for bourbon (Wild Turkey) and cigarettes (five packs a day) -- will organizational weaknesses begin to emerge? For example, Southwest's boast about hard working employees provoked 92 percent of its flight attendants to reject a new contract in June 1997. As Paul Sweetin, the flight attendants' union chief stated: "After being told for a long time that they were the best employees in the business, flight attendants are saying 'Well show me I'm the best in terms of compensation.'"5 Analysts worry about the degree to which Southwest's future is dependent on one person -- although the company claims that this is not the case. In fact, articles in Fortune and The New York Times Magazine have identified the issue as an obstacle to the company's long-term success. Although Kelleher says he won't retire until about 2010, Rollin King, a board member and close friend, predicts he will likely retire at the end of his five-year contract in 2003.6 Board members, concerned about his health, cut back on the number of people reporting to Kelleher several years ago and have questioned him about succession planning. However, he still does not have a clear second in command. To some extent, the board also sees his lack of an apparent successor as a virtue, claiming that it keeps contenders from leaving. As a safeguard, Southwest has also put in place a Culture Committee of more than 100 corporate missionaries who have been charged with institutionalizing Kelleher's influence. Still, invoking the case of Walt Disney, analysts wonder whether Southwest's greatest risk after Kelleher is gone might be letting that influence grow too strong.7 Whoever will lead Southwest in the coming years will need to deal with significant challenges: a set of increasingly able competitors, potentially weakened labor relations, and the strain of national growth that will accompany Southwest's departure from previously successful strategies. Southwest is committed to introducing "safe, affordable, Triple Crown service to even more Americans in order to allow them to go, see, and do things never before dreamed possible." In effect, this means doing for the United States what the high-speed rail network did for Western Europe. To keep this dream from turning into a nightmare, the company's management will need to think very carefully about the challenges ahead and the actions that will be critical for future success. For Your Team’s Case Presentation focus on these questions (there is not enough time to do a full industry analysis and to do extensive information searches; the textbook is useful here): To what extent is the success of Southwest Airlines because of how it manages it people? Perhaps the success is just due to the weather conditions and its short-haul flight strategy. What human resource practices are most important to Southwest Airlines? How inter-related are these practices? Describe and evaluate the following HR practices: recruitment and selection; performance appraisal, and total compensation. Should Southwest Airlines worry about the succession of Herb Kelleher? How important is the quality of the HR department in Southwest Airlines? Describe and evaluate the partnership in managing human resources at Southwest. APPENDIX Glossary of Terms
 Exhibit 1ENDNOTES
Ari Ginsberg and Richard Freedman originally prepared this case with the research assistance of Bill Smith.. This case appears in S.E. Jackson and R.S.Schuler, Managing Human Resources:for Strategic Partnership, 8e (Cincinnati: Southwestern: 2003). The case is intended to serve as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. A glossary of key terms appears in the case Appendix. 1 JP Morgan, Short-haul Competitive Update (April 16, 1996) 3; Wendy Zellner, “Southwest’s New Direction,” Business Week, February 8, 1999. 2 Vivian Lee, "Impacts of Deregulation and Recent Trends on Aviation Industry Management," Bankers Trust Research (August 30, 1996): 16. 3 A. R. Myerson, "Air Herb," New York Times Magazine, (November 9, 1997): 36. 4 J. Freiberg and K. Freiberg, NUTS! Southwest Airlines' Crazy Recipe for Business and Personal Success. (Bard Books, 1996). 5 Allen R. Myerson, "Air Herb," p. 39. 6 Ibid. 7 Ibid. Also see Ken Brooker, “Can Anyone Replace Herb?” Fortune, April 17, 2000. Be sure to visit the website: www.iflyswa.com Directory: file -> view view -> Western Europe after wwii view -> Author study: paul fleischman view -> Qpa1 7ela study Guide view -> Arctic Oil/Gas Neg view -> November 1970 Approximately 150,000-500,000 deaths Bhola Cyclone Bangladesh view -> Grade Level: 6 Unit of Study: Caribbean glce view -> Citation: Duffield, Katy view -> Table of Contents Lesson # view -> Chinese Wind Energy Disad Download 124.67 Kb. Share with your friends:
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