Southwest Airlines Operations: A Strategic Perspective

Background:

Southwest Airlines is the largest airline measured by the number of passengers carried each year in the United States. Also known as discount airline & # 146; compared to its big rivals in the industry. Rollin King and Herb Kelleher founded Southwest Airlines on June 18, 1971. Their first flights were from Love Field in Dallas to Houston and San Antonio, short breaks with no service, and a simple fare structure. The airline started with a simple strategy: & # 147; If your passengers arrive at their destinations when they want to arrive on time, at the lowest possible rates and make sure they have a good time, people will. fly your airline. & # 148; This approach has been key to Southwest's success & # 146; s. Southwest currently serves about 60 cities (in 31 states) with 71 million passengers transported (in 2004) and a total operating revenue of $ 6.5 billion. The Southwest is publicly traded under the & # 147; LUV & # 148; on the NYSE.

Facts:

* The first major airline to fly a single aircraft type (Boeing 737s)

* The first major airline to offer a large ticketless travel system, including a frequent flyer program based on the number of trips and the number of miles flown.

* The first airline to offer a benefit-sharing program to its employees (established in 1973).

* The first major airline to develop a website and offer online reservations. In 2001, about 40 percent ($ 2.1 billion) of its passenger revenue was generated through online bookings at (http://www.southwest.com). The cost of Southwest per booking over the Internet is about $ 1, compared to a cost per booking through travel agents from $ 6 to $ 8.

Main competitive advantages:

* Low operating costs / High operating efficiency

* Award winning customer service

* Human resources practices / Work culture

Operations Analysis & # 150; Competitive dimensions:

Southwest clearly has an advantage compared to other airlines in the industry when executing an effective and efficient operating strategy that is an important pillar of its overall corporate strategy. The following are some competitive dimensions that will be studied in this paper.

1. Operational costs and efficiency

2. Customer service

3. Employee / labor relations

4. Technology

1. Operational costs and efficiency

After all, the airline industry in general is in the running. But how does Southwest Airlines remain profitable? Southwest Airlines has the lowest costs and strongest balance sheet in its industry, according to President Kelleher. The two highest operating costs for any airline are & # 150; labor costs (approximately 40%) followed by fuel costs (approximately 18%). Some other ways that Southwest is able to keep its operating costs low are: flying point-to-point routes, choosing secondary (small) airports, transporting consistent aircraft, maintaining high-use aircraft, encouraging sending electronic tickets, and so on.

Labor costs

Labor costs for Southwest typically account for about 37% of its operating costs. Perhaps the most critical element of the success of the low-cost airline business model is achieving significantly higher labor productivity. According to a recent HBS case study, Southwest Airlines are the most unionized & # 147; The US airline (about 81% of its employees belong to a union) and their wage rates are considered above or above average compared to the US airline. The advantage of low-fare carrier work is in much more flexible working standards that allow the cross-use of virtually all employees (except when licensing and security rules are not allowed). This cross-utilization and a long culture of cooperation between the working groups results in lower unit labor costs. In Southwest, in the 4th quarter 2000, total labor cost per available seat mile (ASM) was more than 25% below US and US and 58% lower than US Airways.

Operators like Southwest have a huge cost advantage over network airlines simply because their workforce generates more output per employee. In a 2001 study, Southwest employee productivity was more than 45% higher than in the United States and the United States, despite substantially longer flight times and average aircraft size of these network operators. Therefore, with its relentless pursuit of lower labor costs, Southwest is able to positively impact its revenue.

Fuel costs

Fuel cost is the second highest expense for airlines after labor and accounts for about 18 percent of the company's operating costs. Airlines that want to avoid major changes in operating expenses and bottom line profitability choose to cover fuel prices. If airlines can control the cost of fuel, they can more accurately estimate budgets and revenue forecasts. As competition and air travel grow into a freight business, being competitive in price has been key to any airline's survival and success. It has become difficult to pass on higher fuel costs to passengers by raising ticket prices due to the highly competitive nature of the industry.

Southwest has been able to successfully implement its fuel coverage strategy to save fuel costs in a major way and has the highest coverage position among other carriers. In the second quarter of 2005, the unit costs of Southwest & # 146; s fell 3.5% despite 25% of gas fuel costs. During 2003, Southwest had a much lower fuel cost (0.012 per ASM) compared to other airlines, with the exception of JetBlue, as illustrated in Exhibit 1 below. In 2005, 85 percent of the airline's fuel needs were covered at $ 26 a barrel. World oil prices in August 2005 reached $ 68 per barrel. In the second quarter of 2005 alone, Southwest achieved $ 196 million in fuel savings. The state of the industry also suggests that the airlines that are covered have a competitive advantage over the airlines that do not charge. Southwest announced in 2003 that it would add Blended Winglets to improve performance to its current and future Boeing 737-700 & # 146 fleet; s. Visually distinguishable Winglets will improve performance by expanding the aircraft's reach, saving fuel, reducing engine maintenance costs and reducing take-off noise.

Timely service

Southwest operates its point-to-point flight service to maximize operational efficiency and remain profitable. Most of its flights are short-haul with an average of 590 miles. It uses the strategy to keep its flights in the air more often and thus to make better use of the capacity.

Secondary airports

Southwest flies to secondary / small airports in an effort to reduce travel delays and thus provide excellent service to its customers. Lead industry in timely performance. Southwest has also been able to reduce the costs of airport operations relatively better than its rival airlines.

Consistent aircraft

At the heart of Southwest's success lies its unique aircraft strategy: its fleet consists exclusively of Boeing 737 jets. Having a common fleet significantly simplifies flight scheduling, operations and maintenance. The training costs for pilots, ground crews and mechanics are lower because only one aircraft has to be learned. Purchases, supplies and other operations are also greatly simplified, reducing costs. Consistent aircraft also allow Southwest to use its crew more efficiently.

T-ticket

The idea of ​​ticket-free travel was an important advantage for the Southwest because it could reduce your distribution costs. Southwest became electronic or ticketless in the mid-1990s and is currently approximately 90 to 95% with no ticket entry. Customers who use credit cards are eligible for online transactions, and today Southwest.com bookings account for about 65% of total revenue. Chief Executive Officer Gary Kelly thinks this idea would grow even more, and he wouldn't be surprised if the ticket accounted for 75% of Southwest's revenue. s at the end of 2005. In the past, there was a 10% travel agency fee paid, costing about $ 8 a reservation. But Southwest is currently paying between 50 cents and $ 1 per booking for electronic transactions, which translates into huge cost savings.

2. Employee relations and work

Southwest has been highly regarded for its innovative management style. He maintains a relentless focus on high performance relationships and his people management practices have been the key to his unparalleled success in the airline industry.

Mission Statement

For our employees

& # 147; We are committed to providing our employees with a stable work environment with equal opportunities for personal learning and growth. Creativity and innovation are encouraged to enhance the effectiveness of Southwest Airlines. Above all, employees will be provided with the same concern, respect and care within the organization that they are expected to share externally with all Southwest clients. & # 148;

Southwest's mission statement shows that the company has a strong commitment to its employees. The company offers the same respect to its employees as it does to its customers. Southwest's mission statement is unique in that it recognizes the importance of its employees within a broader business strategy, which emphasizes excellent customer service and operational efficiency. Employees receive the respect, loyalty and trust shown by the Southwest. Southwest employees are known for their loyalty, dedication, attitude and innovation. Employees are the differentiating factor between the Southwest and the rest of the airline industry.

Recruitment

Southwest's hiring policy is unique not only in the airline industry, but also broader and revolves around finding people with the right attitude who will thrive in Southwestern culture. For your support is a positive attitude and dedication, extensive procedures are used. Those who do not possess those qualities are removed. Colleen Barrett, a non-operating Southwest official, says

& # 147; Hiring is critical because behavior cannot be institutionalized. Instead, you should identify those people who are already practicing the behaviors you are looking for. Then you can allow employees to be themselves and make customer service decisions based on common sense and their natural inclinations. & # 148; 1

Hiring and interviewing in Southwest is a two-step process. The first step is a group interview, conducted by employees, which assesses the communication skills of potential candidates. The following steps in this process are one in an interview, which assesses the attitudes and orientation of the candidates towards others. These hiring criteria apply to all job functions, as all Southwest employees play a customer service role. A critical part of Southwest's operating strategy is that all of Southwest's work is a customer service position, whether applied directly to the customer or internally.

The following table shows that although Southwest is the most heavily unionized airline, at about 80%, that contract negotiations between the unions and Southwest have a much shorter duration than other major carriers. This shows the quality of Southwest's relationship with its employees and the unions that represent them.

Culture and openness

Southwest was created as a different type of company and from its inception a unique culture has been created. In 1990 Colleen Barrett formed the Southwest Culture Committee. This is unique within the industry and among all large companies. The committee also has a mission statement:

& # 147; The purpose of this group is to help create the spirit and culture of the Southwest where needed; enrich it and make it better where it already exists; and brighten it up in places where it can be "overwhelming." In short, the goal of this group is to do "whatever it takes" to create, enhance and enrich the special Southwestern spirit and culture that has made this such a wonderful company / family. & # 148;

It is this unique approach to company values ​​that has created a culture that differs from others. Southwestern culture & # 146; s is the reason you are successful.

3. Customer Service

The Mission of Southwest Airlines

The mission of Southwest Airlines is the dedication to the highest quality of customer service offered with a sense of warmth, friendliness, individual pride and company spirit.

Approach

Herb Kelleher, founder of Southwest, said, "We are in the customer service business; we simply offer air transportation." 2 Winning customer service is a distinctive feature of Southwest and refers internally to & # 147; Positively outrageous service & # 148 ;. It means that from top to bottom everyone does everything they can to satisfy the customer. This includes Herb Kelleher, who has been known to help luggage handlers on Thanksgiving. It is to emphasize to the customer and employee that Southwest is able to differentiate itself from the others in the airline industry. On a more technical level, every Southwest employee or group has its own customer. This means that all employees & # 145; serve & # 146; in one way or another despite not being directly related to the passenger. The customer of the mechanic is the pilot and the hotelier is the flight attendant.

Results

It can be said that Southwest's exclusive "positively outrageous service" & # 147; it is not the result of a department, or a program, or a mandate from management. It is not secondary to the product; is the product. & # 148; This approach creates the conditions in which employees are most likely to treat customers in a way that sets the company apart from others. There are numerous passenger accounts that have received exceptional treatment from Southwestern employees.

The question that needs to be answered is the difference in Southwest customer service & # 146; s and why? Is it common for customers of other airlines to show their special service? The answer is that it is not. Although Southwest does not have a monopoly on kind people and who are willing to go above and beyond to satisfy a customer, this behavior is largely nurtured in Southwest.

It can then be concluded that customer service that is inherent to Southwest is part of its culture. This culture is supported through the encouragement of employees to make more resources to satisfy the customer. This approach inspires people who usually only occasionally go out of their way to help someone, become consistent performers who deliver exceptional service all the time. Southwest employees are the ones who differentiate customer service from other airlines.

4. Technology

Southwest uses technology in many ways to meet its business goals and maintain efficient operations. According to its CEO, technology equals productivity. Launched in 1996, the Southwest first introduced ticketless travel. On May 1, 2000, Southwest Airlines introduces "SWABIZ", a portal that helps company travel managers book and track trips made through its website (http://www.southwest.com). There are many new technology initiatives underway and some are underway.

Bar codes on boarding passes

Southwest Airlines has invested $ 12 million over the past three years to standardize corporate and terminal operations on nearly 10,000 Dell OptiPlex desktop and Latitude laptops, according to company executives. Southwest wanted to replace its well-known, brightly colored plastic boarding cards with an electronic system with barcode boarding cards. So it has installed about 350 touch screen banknote readers powered by Dell OptiPlex desktops. The barcode provides more southwest information to automatically match the number of boarding passes with the number of passengers actually boarding the aircraft.

While the technology will help Southwest Airlines stay efficient by consolidating passenger information for the company's 3,000 daily flights, there were issues that could lengthen the time for passengers on board. However, it was found that searching for each barcode on boarding cards did not increase or shorten boarding schedules, but minutes of administrative processes passed, such as searching for customer records. The new paper barcode system is giving Southwest ticket agents the ability to combine customer registration within having to scroll and register on multiple software screens. The process is much more automated. Once the boarding pass barcode is scanned at the terminal door, check the person on the passenger list in real time.

The old process was a manual that involved searching for information, going through various software screens from reservations to check-in to boarding. Barcode hardware has been deployed to scan boarding cards. The company is in the process of replacing customer service office equipment at airports, including its Dallas headquarters.

Software updates

Software applications, such as those used by employees for passenger check-in, are replaced. Expected to launch Southwest Airlines "Airport Application Suite" next year, the company will switch from green screens to the Window-based user interface. Similar to Wal-Mart Stores Inc., Southwest Airlines believes in developing in-house software that manages its operations. The company uses very little off-the-shelf software. Each year there are between 75 and 100 projects in projects supported by approximately 900 IT staff.

RFID

Radiofrequency identification technology, a favorable bar-coding alternative to suitcase identification, is also on the Southwest radar. It plans to test RFID technology sometime in 2006. Although, Southwest is playing a bit of a day with other airlines such as Air Tran, Alaska and Champion Airlines, in many cases they are able to jump to more sophisticated applications easily expecting more. time.

Challenges:

The Southwest has emerged very successful, despite the most troubled times in the airline market. However, it faces new challenges in the face of increased competition from other low-cost airlines such as JetBlue, ATA Airlines, America West.

Reserved places

As safety guidelines have increased since September 2001, Southwest will need to prepare for (reserved) seating to track its passengers during the flight. This change will mean large investments in technology and could adversely affect the operations of its doors, as the current form of unassigned seats has helped in rapid gate changes.

Demand for passengers

The "Keep-it-simple" philosophy served the Southwest well. But as its own business grows and becomes more complex, with plans to buy dozens of new aircraft and an expected increase in passenger traffic to about 80 million boarding & # 146; one year, the simplicity strategy reflected in the evolving airline's IT philosophy. CIO Tom Nealon says "It's time to adapt business processes for efficiency. As our airline scales to provide the same high-level customer service, we have to automate many things we could do without technology beforehand. The challenge is to do this without giving the customer the touch. " Southwest is also aggressively pursuing customer relationship management (CRM) techniques and has applications to meet customers' wants and dislikes. According to an interview with its CEO Gary Keller, Southwest is focused on improving in two areas: airport experience and customer flight experience & # 146;

In-flight entertainment

In a global effort to improve customers' in-flight experience, in-flight entertainment is something Southwest is currently valuing and JetBlue has been very successful since its introduction to long-haul flights. By comparison, Southwest has 415 aircraft to consider and this is an investment decision in a whole new dimension. In addition, Southwest has to consider how things can fit into their environment. Right now, 60% of your service is still very short. Southwest needs to be aware that a particular approach that has been successful for its competitor may not necessarily be the one to benefit.

Summary:

Southwest has long been regarded as a benchmark in its industry for operational excellence. Southwest Airlines is a good example of a company that is committed to its core competencies – efficient operations to drive its low-cost structure, excellent customer service delivery and innovative HR management practices. We hope this article has a good overview of Southwest operations, as part of their overall strategy, to achieve success and gain competitive advantage.

References:

1. (http://www.southwest.com) (Official Website of Southwest Airlines)

2. & # 147; Southwest keeps it simple & # 148; – World Transport Air, April 2005, p. 36

3. & # 147; Around the World for $ 48 (or more): How high can discount airlines fly? & # 147; Strategies Management – Knowledge Newsletter @ Wharton October 5, 2005

4. TechWeb – (http://www.techweb.com/wire/ebiz/173601227)

5. & # 147; Southwestern Success Strategy – Consolidate! & # 148; – Oracle Magazine (September / October 2004 issue) http://www.oracle.com/technology/oramag/oracle/04-sep/o54swest.html

6. & # 147; Southwest Airlines: High-tech, low-cost & # 148; – Eweek.com, April 2005

7. & # 147; Jet Fuel Coverage Strategies: Options Available to Airlines and an Industry Practice Survey & # 148; & # 150; Kellogg School of Management Research Paper, Spring 2004

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

9. Time Magazine, October 28, 2002, vol. 160 Issue 18, p. 45

10. & # 147; Wings Of Change & # 148; Information Week, March 28, 2005,

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