Case of southwest airlines

The industry is again in a period of high demand and expanding profitability. Despite the volatile conditions and many organizational failures, one carrier grew and prospered throughout this entire period -- Southwest Airlines.

Southwest was controversial from its inception. Although the Texas Aeronautics Commission approved Southwest's petition to fly on February 20, 1968, the nascent airline was locked in legal battles for three years because competing airlines -- Braniff, TransTexas, and Continental -- fought through political and legal means to keep it out of the market. Through the efforts of Herb Kelleher, a New York University law school graduate and the airline's current chief executive officer, Southwest finally secured the support of both the Texas Supreme Court and the United States Supreme Court.

Southwest emerged from these early legal battles with its now famous underdog fighting spirit. The company built its initial advertising campaigns around a prominent issue of the time as well as its airport location. Thus "Make Love, Not War" became the airline's theme, and the company became the "Love" airline. Fittingly, LUV was chosen as the company's stock ticker symbol. Southwest went on to see successful growth through three distinct periods. The "Proud Texan" period (1971-1978) saw the establishment of a large city-service network within its home state of Texas. Because it did not engage in interstate commerce, the fledgling carrier was not subject to many federal regulations, particularly those imposed by the Civil Aeronautics Board (CAB). The second phase, "Interstate Expansion" (1978-1986), was characterized by the opening of service to fourteen other states. Interstate expansion was made possible by, and thus coincided with, the deregulation of the domestic airline industry. The most recent phase, "National Achievement" (1987-1997), has been a time of considerable growth, distinguished recognition and success.

Despite its past success, Southwest Airlines now faces new challenges that raise concerns about its continued ability to grow. Ironically, many of these concerns are a result of changes brought about by Southwest itself. Some of them are external, such as imitation by competitors who are becoming more efficient and the limited size of the shorter haul flight markets in which Southwest developed a core competency. Others are internal, including the emergent problems of managing a larger, more complex organization, and a culture that may be too dependent on the charisma of a single individual or that may not play well to the new audiences needed for future growth. Will Southwest Airlines be able to continue its remarkable success or will emerging conditions seriously threaten Southwest's future prosperity?

The Airline Industry

The competitive environment in which Southwest operates can be subdivided into different value-added stages, customer and service segments, and competitor groups.

Airlines engage in several value-adding activities. These include aircraft procurement, aircraft maintenance, reservation systems, schedule and route planning, in-flight services, and after-flight services. Competitors may differ in their involvement in these activities. For example, Southwest performs some in-house maintenance but offers no post-flight services. By contrast, American Airlines owns and markets its own reservation system, and Allegis, as United Airlines was known briefly in 1987, at one time operated a car rental agency (Hertz) and two hotel chains (Hilton and Westin).

Airlines compete for three primary types of customers: travel agents, corporate travel managers, and individual travelers. The two major categories of passengers are leisure travelers, who tend to be quite price-sensitive, and business travelers, who are more concerned with convenience. To satisfy the different needs of some or all of these groups, airlines present a wide variety of services, depending on their strategy.

Passenger service can be categorized along a number of dimensions. For example, airlines differ by geographical coverage; some specialize in short-haul service while others provide a vast network of interconnected long-haul and short-haul flights on a global basis through a network of strategic alliances. They also differ in how their routes are structured within the territories they serve. The two extremes are point-to-point and hub-and-spoke. The former is characterized by direct service between two points. The latter is characterized by complex, coordinated routes and schedule structures that channel passengers from numerous far-flung airports (the spokes) through a central airport (the hub). The hub itself has many costly infrastructure requirements (baggage handling systems, large terminals, maintenance facilities and parts inventories). To address the pricing complexity created by multiple traffic flows through a hub, hub-spoke carriers conduct complicated yield and inventory management calculations. The result of this complexity is that the hub-spoke pricing structure is systematically different from point-to-point pricing. These added complexities allow a carrier to offer flights between more "city-pairs" than it could under a point-to-point network. For a company that relies on a network, like an airline or telephone company, competitive advantage accrues from economies of scope, i.e., the geographic reach of that network. Economies of scope do not necessarily complement economies of scale, and in fact are often achieved at the expense of scale economies and vice versa. Thus, although the hub-and-spoke system is driven by economies of scope, each strategy, hub-and-spoke or point-to-point, has its own inherent cost and organizational implications.

Passenger service can also be characterized in terms of breadth. An airline may choose to provide a broad gamut of services including meals, advance seat assignments, and frequent flier programs (full service), or it can offer only Spartan services (no-frills). A further differentiation is the number of service classes offered. Most airlines have two classes of service, First and Coach. Some offer three classes, First, Business and Coach (United and American on select flights), others offer only Coach (Southwest), and a few offer only First Class (Midwest Express). In addition to the direct cost of providing differentiated service, amenities such as First Class seating and in-flight meals indirectly affect the cost structure of an airline by limiting the number of seats its aircraft can hold. Because Southwest does not currently offer meals or First Class service, its 737-300 holds 137 seats whereas a United Airlines 737-300 holds only 128 seats.

US airlines can be categorized into three major competitor groups based on geographical coverage. First are the "major" national airlines. They include: America West Airlines, American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, United Airlines, USAir, Southwest Airlines, and TWA. Second are the regionals, which include Reno Air, Airtran (formerly ValuJet), Frontier Airlines, Alaska Airlines, Horizon Airlines, Western Pacific Airlines, Inc., Kiwi International, Air South, and many others. Third is the commuter or "feed" carriers, most of which operate as extensions of the majors. These carriers use mostly turboprop or regional jet equipment and fly routes that are generally less than 500 miles. Some of these carriers include Atlantic Coast Airlines, which operates as United Express, Atlantic Southeast Airlines, which operates as Delta's Business Express, Comair Holdings, another Delta commuter, Mesa Air Group, which operates its own flights as well as feeder flights for United, Mesabi Holdings, Inc., SkyWest, Inc., and numerous others.

Competitive Environment. The Airline Deregulation Act of 1978 redefined the industry by eliminating the ability of the Civil Aeronautics Board (CAB) to set fares, allocate routes, and control entry and exit into markets. Unfortunately, most airlines were hamstrung by high cost structures, including exorbitant labor costs, and highly inefficient planes and infrastructure facilities. In the aftermath of the complete removal of entry and price controls by 1980, competition intensified considerably as new entrants cherry-picked the large carriers' most profitable routes. This led to an extended period of severe industry shakeout and consolidation.

Structural characteristics. The industry's structural characteristics make it a tough place to be very profitable. The overall industry is not highly concentrated, although it has become more concentrated since deregulation. Nevertheless, most discrete markets are served by a limited number of carriers. In the oligopolistic markets in which most airlines compete, the pricing actions of one company affect the profits of all competitors. Intense price wars have been a frequent event in the industry. Because competition varies from route to route, a carrier can dominate one market, be dominated in another and face intense rivalry in a third. As a result of the hub-and-spoke system, airlines face head-to-head competition with more carriers in more markets.

Suppliers tend to have relatively high bargaining power. Certain unions are in a position to shut down airlines. Airplane manufacturers (Boeing, Airbus) have considerable power in altering the terms of purchase for planes. Furthermore, the business is capital intensive and requires very large expenditures for airplanes and other infrastructure.

Despite difficult economics, the industry is still attractive to new entrants. There are few substitutes for long-haul air travel. In addition, most of the incumbents have high cost structures that are exceedingly difficult to improve significantly. Carrier failures and downsizing have also created a large supply of relatively new "used" aircraft and the cost of acquiring aircraft is reduced further by the practice of aircraft leasing. Given high debt levels and low profitability in comparison to other industries, most airlines, including Southwest, have begun to lease their planes rather than purchase them. In light of high debt and low profits, the depreciation tax shield is not as valuable to the airlines. By leasing, carriers can "sell" that tax shield to the leasing company, actually creating value for the carrier. As a result, entry barriers are not as high as one would expect in other capital-intensive industries.

Furthermore, new entrants generally gain significant cost advantage by securing lower labor costs because they are not burdened by the unfavorable union contracts that affect many older airlines. Many of the union contracts agreed to by the major airlines call for higher pay and contain work rule provisions that reduce labor productivity. In addition, new entrants are sometimes able to gain favorable terms by purchasing excess capacity of other airlines, such as training and maintenance.

Profitability = [yield X load factor] - cost

The major airlines have faced intensive competition from low price airlines in the 1990s. While these low priced airlines expanded the market for air travel they also placed great downward pressure on the prices of the majors, thereby reducing their yields. To compete, the majors engaged in great cost cutting efforts. Delta announced the goal of reducing its cost/ASM to 7.5 cents by June 1997. It fell from 9.6 cents in April 1994 to 8.75 cents in March 1997. While this resulted in significant savings, it did not prevent Delta's stock price from falling after the company announced earnings well below Wall Street's expectations. Strains arose between Delta CEO Ronald Allen and the board as a consequence of the damage done to Delta's reputation for stellar service, due in part to the cost cutting. This apparently contributed to the board's decision in May 1997 to replace Allen.

Capacity. JP Morgan analysts believe that the most important factor influencing pricing in the long-term will be the falling industry cost curve. They point out that low-cost airlines have already lowered and inverted the traditionally downward sloping industry cost curve. "With it they have pressured fares industry-wide, but particularly in short-haul markets where their impact on costs have been most dramatic...the airlines that are increasing capacity are those lowest on the industry's cost curve.¹ This shift has occurred because of the growth in low-cost, short-haul travel.

Outlook. Lehman Brothers analysts concluded in 1996 that the US airline industry was entering a mature and more stable phase, as the major restructuring it required was largely accomplished. In their view, this restructuring was driven by two key developments. First was the retrenchment of the majors into their core hubs. Second was technology diffusion, which occurred when the weaker airlines upgraded their systems technology regarding pricing and yield management and eliminated many disparities among major carriers.

Arenas of competition have also shifted. Low-cost carriers, including Southwest Airlines and Shuttle by United, dominate short-haul capacity in the west. Expansion of the low-cost carriers seems to be slowing, and competition appears to be stabilizing. Meanwhile the East Coast is still dominated by high-cost carriers such as USAir. Consequently, it is not surprising that the low-cost airlines have targeted the east as a major arena for expansion. Southwest's invasion of Florida and Providence, RI is a noteworthy example. In the Northeast, capacity reduction by high-cost competitors such as American, USAir, and Continental has also enhanced the opportunities for low-cost airlines. As carriers learn to adapt the low-cost formula to the geographic, climatic, and market intricacies of the Northeast, low-cost operations will likely continue to expand.

Southwest Airlines’ Mission and Objectives

Southwest Airlines' mission focuses to an unusually large degree on customer service and employee commitment. According to its annual report, the mission of Southwest Airlines is "dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit." Indeed, Southwest proudly proclaims, "We are a company of People, not planes. That is what distinguishes us from other airlines and other companies." In many respects, the vision that separates Southwest from many of its competitors is the degree to which it is defined by a unique partnership with, and pride in, its employees. As stated in its Annual Report:

The airline's goal is to deliver a basic service very efficiently. This translates into a number of fundamental objectives. A central pillar of its approach is to provide safe, low price transportation in conjunction with maximum customer convenience. The airline provides a high frequency of flights with consistent on-time departures and arrivals. Southwest's employees also aspire to make this commodity service a "fun" experience. Playing games is encouraged, such as "guess the weight of the gate agent." The fun spirit is tempered so that it is never in poor taste and does not alienate business travelers.

Long-term financial objectives include a 15% operating margin, 7.5%-8.0% net margin, return on equity (ROE) of 15%, and a debt/equity ratio below 60%.

Southwest Airlines’ Strategy

Southwest Airlines is categorized as a Low Fare/No Frills airline. However, its size and importance have led most analysts to consider it to be one of the major airlines despite its fit in the low fare segment. In a fundamental sense Southwest's business level strategy is to be the cheapest and most efficient operator in specific domestic regional markets, while continuing to provide its customers with a high level of convenience and service leveraged off its highly motivated employees. Essentially, Southwest's advantage is that it is low-cost and has a good safety reputation.

Cost Leadership. Southwest operates the lowest cost major airline in the industry. The airline devised a number of clever stratagems to achieve this low-cost structure. For example, by serving smaller, less congested secondary airports in larger cities, which tend to have lower gate costs and landing fees, Southwest can maintain schedules cheaply and easily. Southwest's approach is also facilitated by its focus on the southwest and other locations with generally excellent weather conditions, which leads to far fewer delays. Moreover, by following a point-to-point strategy, Southwest need not coordinate flight schedules into connecting hubs and spokes, which dramatically reduces scheduling complexity and costs.

Route Structure. Historically, Southwest has specialized in relatively short-haul flights and has experienced considerable threat from providers of ground transportation (cars, trains and buses) because the buyers of these short-haul services tend to be quite price sensitive. Southwest has widened the market for air travel by attracting large numbers of patrons who previously relied on ground transportation. For example, before it entered the Louisville to Chicago market, weekly traffic totaled 8,000 passengers. After Southwest entered the market, that number grew to over 26,000. This increase in traffic is now recognized as "The Southwest Effect." Emphasis on short-haul flights has also allowed them to pare costly services such as food, which passengers demand on longer flights. Passengers are provided with only an "extended snack" -- cheese, some crackers and a Nutri-Grain bar.

Turnaround Time. Its route structure has helped Southwest to experience the most rapid aircraft turnaround time in the industry (15-20 minutes vs. an industry average of 55 minutes). Interestingly, Southwest's "10 Minute Turnaround" can be traced directly to the carrier's first days of operation in Texas when financial pressures forced the company to sell one of the four Boeing 737s it had purchased for its initial service. Having only three planes to fly three routes necessitated very rapid turnaround.

Rapid turnaround time is essential for short-haul fights because airplanes are airborne for a smaller percentage of time than on long-haul flights. Faster turnaround also allows Southwest to fly more daily segments with each plane, which in turn increases its assets turnover.

In choosing the fuel efficient 737, Southwest developed a close relationship with Boeing that enabled it to develop comparatively favorable purchase terms. Although Southwest flies a number of model variations of the 737, the cockpits of the entire fleet are standardized. Therefore, any pilot can fly any plane and any plane can be deployed on any route. In addition to helping capture scale economies at a much smaller size than its larger competitors, the homogenous fleet composition reduces the complexities of training, maintenance and service. It is difficult to calculate the large savings associated with this approach but they exist in almost all operating areas including scheduling, training, aircraft deployment and use, wages and salaries, maintenance and spare parts inventories.

While this reduces the company's breadth of distribution, it helps to reduce commission payments and Computer Reservation System (CRS) fees, which are approximately $2.50 per flight segment.

What is unique in the industry is Southwest's partnership between its management and its unions. Southwest's strategy has been a combination of profit sharing and participation. In 1992 employees owned 10% of stock and in 1995 pilots were granted options to purchase 14.5 million shares of stock (an additional 10.1% of outstanding common stock). Pilots will be eligible for profit bonuses of up to 3% of compensation in three of the first five years and in two of the second five years of the recently signed 10-year contract.

Organization

Reporting to Chief Executive Officer (CEO) Herb Kelleher are three Executive Vice Presidents. Perhaps the most influential is Colleen C. Barrett who is in charge of such key functions as marketing, sales, advertising, human resources, customer relations and governmental affairs. John G. Denison is Executive Vice President in charge of Corporate Services, which includes finance, legal, facilities, reservations, revenue management (pricing) and systems (including computer services and telecommunications). Gary Barron is Executive Vice President and Chief Operations Officer. His responsibilities include schedule planning, flight operations, fuel and administrative purchasing, ground operations, in-flight services, and maintenance and engineering. There is one other Vice President reporting to Kelleher, Al Davis, who is in charge of internal auditing and special projects. For operations controller functions he reports to Gary Barron.

How has Southwest Airlines maintained high levels of customer and employee satisfaction in the context of a functional organization? The company uses a number of mechanisms to allow employee participation. The fundamental concept is the notion of a "loose-tight" design. Within the context of tight rules and procedures, employees are encouraged to take a wide degree of leeway. The company maintains rather informal job descriptions and decentralizes decision making regarding customer service. So while there is very high standardization regarding operations, it is low with respect to customer service. Employees are empowered to do what is necessary to satisfy customers. Flight attendants are allowed to improvise cabin instructions and employees play practical jokes on each other and customers. Positively Outrageous Service in action! The company management operates with an informal open door policy that allows employees to circumvent the formal hierarchy. Employees are encouraged to try things, knowing they will not be punished.

Southwest's organization is considerably simpler than its major competitors. Most of its competitors must manage the spatial complexity of far flung international operations and contend with the added intricacies of hub-and-spoke systems. These large international carriers are also involved in complex alliances with other airlines in foreign markets to augment the scope of their services. They manage code sharing arrangements with small regional domestic carriers. In short, the large carriers are complex networks, with more complicated organizational management issues.

In an organization where attitudes, culture and fit are so important it is natural that the company places such a great emphasis on socialization and training. McDonald's has its Hamburger University, Southwest has its University for People. Everyone at Southwest has a responsibility for self-improvement and training. Once a year, all Southwest employees, including all senior management, are required to participate in training programs designed to reinforce shared values. Except for flight training, which is regulated and certified, all training is done on the employee's own time. Nonetheless, the training department operates at full capacity, seven days a week. The fun spirit of Southwest emerges in graduates very early. For example, a class of new pilots stumbled into Kelleher's office wearing dark glasses and holding white canes.

The importance of labor relations cannot be underestimated in a company that is almost 85% unionized. Here again Kelleher's unusual abilities emerge. Somehow he has been able to convince union members and officials to identify with the company.

It is also noteworthy that in an era when chief executive pay has escalated to huge amounts, Kelleher, in 1994, was named one of the lowest-paid chief executive officers in Dallas on a performance-adjusted basis. Furthermore, company officers do not get the perks often enjoyed by their counterparts in comparable organizations -- no cars or club memberships -- and they even stay in the same hotels as flight crews. Southwest has refused to compete for executive talent based on salary. This is not to suggest that Kelleher is impoverished. Like many Southwest employees, he has become wealthy from its stock.

One of the shared values is the importance of having fun at work. Humor is a significant aspect of the work environment. Such attributes are believed by senior management to enhance a sense of community, trust, and spirit and to counterbalance the stress and pressures of the mechanistic demands of airline operations.

Another characteristic is the cooperative relationship among employee groups. This can be an advantage in functional structures, which are notorious for generating coordination problems. In other airlines, work procedures clearly demarcate job duties. However, at Southwest everyone pitches in regardless of the task. Stories abound of pilots helping with baggage and of employees going out of their way to help customers. In one particularly bizarre story, an agent baby-sat a passenger's dog for two weeks so that the customer could take a flight on which pets were not allowed. Employee cooperation impacts the bottom line. When pilots help flight attendants clean the aircraft and check in passengers at the gate, turnaround time, a cornerstone of the low-cost structure, is expedited.

Because of its team-oriented culture, Southwest is not stifled by the rigid work rules that characterize most competitors. As a result, Southwest has tempered the stringent demands of a functional structure with the liberating force of an egalitarian culture. One excerpt from Southwest's "The Book on Service: What Positively Outrageous Service Looks Like at Southwest Airlines" is rather instructive:

This approach certainly contributes significantly to the lowest employee turnover rate in the industry (7%) and the highest level of consumer satisfaction.

Despite all of the freedom that the culture permits, in some areas the company also employs very stringent controls. Perhaps the best example is that Herb Kelleher himself must approve all expenditures over $1,000!

Forged over 26 years, Southwest's culture has been a source of sustainable competitive advantage. A Bankers Trust analyst put it this way:

Herb Kelleher, age 67, started Southwest with a former client, Rollin King, who is still a member of the Board of Directors. King supposedly presented his idea for a low-cost Texas-only airline based on the success of Pacific Southwest Airlines in California to Kelleher over dinner at the St. Antony Club in San Antonio. The original "Love Triangle," the foundation of Southwest's strategy, was drawn on a cocktail napkin.

Kelleher's management style, which has been described as a combination of Sam Walton's thriftiness and Robin Williams's wackiness,³ seems to have been consistent right from the beginning. Direct, visible, and, some would say, even bizarre, he has attended company parties dressed in drag and appeared in a company ad as Elvis. Known for constantly showing the flag in the field and interacting with large numbers of employees and customers, Kelleher is reputed to have engaged people in conversations for hours, at all hours, about company and industry issues, often with a drink in his hand. He almost always seems ready for a party, and this fun-oriented atmosphere pervades the organization. The company newspaper, LUV Lines, has a column, "So, What Was Herb Doing All This Time?" recounting the CEO's activities. Kelleher regularly works 16-hour days and seven-day weeks. Following his example, Southwest employees are well known for going the extra mile. Among the stories of such behavior is that of a customer service representative who stayed overnight at a hotel with an elderly woman who was afraid to stay alone when her flight was grounded due to fog. The agent "knew" that was what Herb would have done.

Kelleher has replaced formal strategic planning with "future scenario generation," arguing that "reality is chaotic, and planning is ordered and logical. The meticulous nit-picking that goes on in most strategic planning processes creates a mental-straight jacket that becomes disabling in an industry where things change radically from one day to the next."⁴

One of the most powerful departments is the Customer Department headed by Colleen Barrett, Executive Vice President, and Kelleher's right-hand. She is the senior female in the airline industry, and provides the organizational balance for Kelleher. While he is reputed to have a chaotic style, she is known to be a stickler for details. She plays another unofficial role, acting as an ombudsman for customers and as an internal management expert.

In the early 1990s Barrett set up a company culture committee, comprised of people from all geographic areas and levels of the company. The committee, which meets four times a year, is charged with preserving and enhancing the company culture. One of the committee's successes is illustrated by the company organization. It is well known that functional structures such as Southwest's are designed to promote specialization and scale economies, but often at the expense of teamwork and coordination. As these organizations grow they become even more difficult to operate in an integrated manner. The committee developed a number of initiatives to improve cross-functional cooperation. One example is that all company officers and directors have to spend one day every quarter in the field -- working a real "line job."

This network supports a reservation system that has enabled Southwest to be the first carrier to offer ticketless travel on all of its flights. They now average more than 15,000 ticketless passengers per day, according to Robert W. Rapp, Vice President of Systems. The ticketless system offers significantly improved customer service by eliminating lines at ticket counters. The system also reduces costs; it is estimated that it costs an airline from $15 to $30 to produce and process a single paper ticket.

Customers using the Southwest ticketless system can purchase a seat on a Southwest flight by telephone or on the Internet. Customers receive a confirmation code, which is traded for a boarding pass at the airport. The concept of ticketless travel originated at Morris Air, a Salt Lake City airline acquired by Southwest in 1993. Although policy and operational differences prevented Southwest from adopting the Morris system, the company was able to accelerate the development of its own system with the assistance of Evan Airline Information Services, a consulting firm that helped to develop Morris Air's system. The first ticketless passenger boarded a Southwest plane only four months after development began.

All Internet activities are concentrated under Kevin Krone, Manager of Marketing Support. Marketing activities explicitly build on the Internet as a primary marketing channel. Krone's activities are closely coordinated with the requirements and support facilities of Rapp's department. Southwest was the first carrier to host a web site, WWW.IFLYSWA.COM, which was deemed "Best Airline Web Site" by Air Transport World. It recently launched a joint venture with Worldview Systems to enhance its Internet presence.

Performance

There are many different criteria that can be used to evaluate Southwest's success in achieving its basic objectives. Certainly Southwest's different constituencies look at its performance in different ways. Southwest takes particular pride in the following accomplishments:

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  30 years of safe, reliable operations;
  
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  Five consecutive years of Triple Crown Customer Service;
  
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  Five consecutive years of record profits and 24 consecutive years of profitability;
  
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  Recognition as one of the top ten places to work in Robert Levering and Milton Moscowitz's book, The Best 100 Companies To Work For In America;
  
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  Top ranking in the Airline Quality Survey conducted by The National Institute for Aviation Research for two of the last three years;
  
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  Launch customer for three different Boeing airplanes, providing thousands of jobs in the aerospace industry; and
  
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  A route system that has grown to 52 airports in 25 states, carrying more than 50 million customers on 243 Boeing 737 aircraft.
  

Of course, Southwest's customers remain one of the company's main constituencies. Despite its "no-frills" orientation, Southwest consistently receives the highest rankings for customer satisfaction. This is achieved through the successful management of customer expectations. By emphasizing low price and consistency, Southwest has successfully redefined the concept of quality airline service. For example, the "Triple Crown Award" goes to the airline, if any, which has the best on-time record, best baggage handling and fewest customer complaints according to statistics published in the Department of Transportation (DOT) Air Travel Consumer Reports. First won by Southwest in 1988, the airline has won the award every year since 1992. No other airline has ranked on top in all three categories for even a single month.

Given its mission, employee satisfaction is another important indicator of company success. Personnel are a crucial determinant of organizational performance throughout the industry. Labor costs are about 40% of operating costs in the industry, while at Southwest they are considerably lower. As noted, labor relations is an important determinant of company survival. Southwest has one of the lowest personnel turnover ratios in the industry. It began the first profit sharing plan in the industry, and employees now own more than 10% of the stock. Fortune has named Southwest as one of the best companies for attracting, developing and keeping talented people. In 1997 Fortune ranked Southwest first on its list of the "100 Best Companies to Work For in America."

Southwest has had generally peaceful and cooperative labor relations throughout most of its history. One salient result of management-labor harmony is that Southwest employees are the most productive in the industry. A single agent usually staffs gates, where competitors commonly use two or three. Ground crews are composed of six or fewer employees, about half the number used by other carriers. Despite the lean staffing, planes are turned around in half the time of many rivals. Southwest pays its pilots wages that are comparable to the major carriers, but pilot productivity (e.g., number of flights per day, number of hours worked) is considerably higher.

Despite its low-cost structure, Southwest is not able to control all costs. Perhaps the most important uncontrollable element is fuel, which has varied from 21.8% of operating expenses in 1990 to 14.0% in 1995 (it is estimated at 15.3% in 1996). One advantage that larger, broader scope carriers have is a more limited exposure to fuel price volatility. Broader scope allows them to take advantage of geographic differences in fuel prices and deeper pockets allow them to hedge against future price increases. However, Southwest does have the advantage of a younger and more fuel-efficient fleet than its larger competitors.

Southwest has also performed well on many financial criteria. The company's net earnings were $207.3 million in 1996 compared to $182.6 million in 1995, capping five consecutive years of record profits and 24 consecutive years of profitability. This record includes 1991 and 1992, when every other major airline lost money. It has an "A" rating on unsecured debt, and its debt to equity ratio is one of the best in the industry (.25 versus .6 industry average). Its interest coverage is one of the best (6.75 versus an industry average of 2).

Market share is another indicator of an organization's performance. By this criterion, Southwest also ranks at the top of the industry. For example, it consistently ranks first in market share in 80-90 of its top 100 city-pair markets, with a passenger share of 60-70%. Because of the "Southwest Effect," the carrier gains this share by growing the size of each of its markets -- this is achieved by a fare structure that is on average $60 lower than the majors.