Background:

Southwest Airlines is the biggest airline measured by variety of passengers carried every year throughout the United States. It is often known as a ‘low cost airline’ in contrast with its giant rivals within the trade. Rollin King and Herb Kelleher based Southwest Airlines on June 18, 1971. Its first flights had been from Love Field in Dallas to Houston and San Antonio, brief hops with no-frills service and a easy fare construction. The airline started with one easy technique: “If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline.” This method has been the important thing to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million whole passengers carried (in 2004) and with a complete working income of $6.5 billion. Southwest is traded publicly beneath the image “LUV” on NYSE.

Facts:

* The first main airline to fly a single kind of plane (Boeing 737s)

* The first main airline to supply ticketless journey system huge together with a frequent flier program based mostly on variety of journeys and never variety of miles flown.

* The first airline to supply a revenue-sharing program to its Employees (instituted in 1973).

* The first main airline to develop a Web website and provide on-line reserving. In 2001, about 40 p.c ($2.1 billion) of its passenger income was generated by way of on-line bookings at [http://www.southwest.com]. Southwest’s price per reserving through the Internet is about $1, in contrast to a price per reserving by way of journey brokers of $6 to $eight.

Key aggressive benefits:

* Low Operational prices / High Operational Efficiency

* Award profitable customer support

* Human Resource practices / Work tradition

Operations Analysis – Competitive Dimensions:

Southwest clearly has a definite benefit in comparison with different airways within the trade by executing an efficient and environment friendly operations technique that types an essential pillar of its general company technique. Given beneath are some aggressive dimensions that will likely be studied on this paper.

1. Operational Costs and Efficiency

2. Customer Service

three. Employee/Labor Relations

four. Technology

1. Operational Costs and Efficiency

After all, the airline trade general is in shambles. But, how does Southwest Airlines keep worthwhile? Southwest Airlines has the bottom prices and strongest steadiness sheet in its trade, in accordance with its chairman Kelleher. The two greatest working prices for any airline are – labor prices (approx 40%) adopted by gas prices (approx 18%). Some different ways in which Southwest is ready to preserve their operational prices low is – flying level-to-level routes, selecting secondary (smaller) airports, carrying constant plane, sustaining excessive plane utilization, encouraging e-ticketing and many others.

Labor Costs

The labor prices for Southwest sometimes accounts for about 37% of its working prices. Perhaps essentially the most vital ingredient of the profitable low-fare airline enterprise mannequin is attaining considerably greater labor productiveness. According to a latest HBS Case Study, southwest airways is the “most heavily unionized” US airline (about 81% of its staff belong to an union) and its wage charges are thought of to be at or above common in comparison with the US airline trade. The low-fare service labor benefit is in far more versatile work guidelines that enable cross-utilization of nearly all staff (besides the place disallowed by licensing and security requirements). Such cross-utilization and an extended-standing tradition of cooperation amongst labor teams translate into decrease unit labor prices. At Southwest in 4th quarter 2000, whole labor expense per accessible seat mile (ASM) was greater than 25% beneath that of United and American, and 58% lower than US Airways.

Carriers like Southwest have an amazing price benefit over community airways just because their workforce generates extra output per worker. In a research in 2001, the productiveness of Southwest staff was over 45% greater than at American and United, regardless of the considerably longer flight lengths and bigger common plane measurement of those community carriers. Therefore by its relentless pursuit for lowest labor prices, Southwest is ready to positively affect its backside line revenues.

Fuel Costs

Fuel prices is the second-largest expense for airways after labor and accounts for about 18 p.c of the service’s working prices. Airlines that wish to forestall big swings in working bills and backside line profitability select to hedge gas costs. If airways can management the price of gas, they’ll extra precisely estimate budgets and forecast earnings. With rising competitors and air journey changing into a commodity enterprise, being aggressive on value was key to any airline’s survival and success. It turned onerous to move greater gas prices on to passengers by elevating ticket costs because of the extremely aggressive nature of the trade.

Southwest has been capable of efficiently implement its gas hedging technique to avoid wasting on gas bills in a giant method and has the biggest hedging place amongst different carriers. In the second quarter of 2005, Southwest’s unit prices fell by three.5% regardless of a 25% enhance in jet gas prices. During Fiscal 12 months 2003, Southwest had a lot decrease gas expense (zero.zero12 per ASM) in comparison with the opposite airways except JetBlue as illustrated in exhibit 1 beneath. In 2005, 85 per cent of the airline’s gas wants has been hedged at $26 per barrel. World oil costs in August 2005 reached $68 per barrel. In the second quarter of 2005 alone, Southwest achieved gas financial savings of $196 million. The state of the trade additionally means that airways which might be hedged have a aggressive benefit over the non-hedging airways. Southwest introduced in 2003 that it could add efficiency-enhancing Blended Winglets to its present and future fleet of Boeing 737-700’s. The visually distinctive Winglets will enhance efficiency by extending the airplane’s vary, saving gas, decreasing engine upkeep prices, and lowering takeoff noise.

Point-to-Point Service

Southwest operates its flight level-to-level service to maximise its operational effectivity and keep price-efficient. Most of its flights are brief hauls averaging about 590 miles. It makes use of the technique to preserve its flights within the air extra usually and subsequently obtain higher capability utilization.

Secondary Airports

Southwest flies to secondary/smaller airports in an effort to scale back journey delays and subsequently present glorious service to its prospects. It has led the trade in on-time efficiency. Southwest has additionally been capable of trim down its airport operations prices comparatively higher than its rival airways.

Consistent plane

At the center of Southwest’s success is its single plane technique: Its fleet consists completely of Boeing 737 jets. Having frequent fleet considerably simplifies scheduling, operations and flight upkeep. The coaching prices for pilots, floor crew and mechanics are decrease, as a result of there’s solely a single plane to be taught. Purchasing, provisioning, and different operations are additionally vastly simplified, thereby decreasing prices. Consistent plane additionally permits Southwest to make the most of its pilot crew extra effectively.

E-Ticketing

The thought of ticketless journey was a serious benefit to Southwest as a result of it might decrease its distribution prices. Southwest turned digital or ticketless again within the mid-1990s, and at present they’re about 90-95% ticketless. Customers who use bank cards are eligible for on-line transactions, and at present Southwest.com bookings account for about 65% of whole income. The CEO Gary Kelly thinks that this concept would develop additional and that he would not be stunned if e-ticketing accounted for 75% of Southwest’s revenues by finish of 2005. In the previous, when there was a 10% journey company fee paid, it used to price about $eight a reserving. But presently, Southwest is paying between 50 cents and $1 per reserving for digital transactions that translate to large price financial savings.

2. Employee and Labor Relations

Southwest has been extremely regarded for its revolutionary administration model. It maintains a relentless concentrate on excessive-efficiency relationships and its folks-administration practices have been the important thing to its unparalleled success within the airline trade.

Mission Statement

To Our Employees

“We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.”

The Southwest mission assertion exhibits that the corporate has a powerful dedication to its staff. The firm affords the identical respect to its staff that’s supplied to its prospects. The Southwest mission assertion is exclusive in that it acknowledges the significance of its staff throughout the broader enterprise technique, which emphasizes very good customer support and operational effectivity. The staff reciprocate the respect, loyalty and belief that Southwest demonstrates. Southwest staff are identified for his or her loyalty, dedication, angle and innovation. The staff are the distinguishing issue between Southwest and the remainder of the airline trade.

Hiring

Southwest hiring coverage is exclusive not solely throughout the airline trade, but additionally extra broadly, and revolves round discovering folks with the proper angle that may thrive within the Southwest tradition. Extensive procedures are employed to rent for constructive angle and dedication. Those who don’t posses these qualities are weeded out. Colleen Barrett, a non-operational officer at Southwest, states that

“Hiring is critical, because you cannot institutionalize behavior. Instead, you must identify those people who already practice the behaviors you are looking for. Then you can allow Employees to be themselves and make decisions about Customer service based on common sense and their natural inclinations.” 1

Recruiting and interviewing at Southwest is a two-step course of. The first step is a bunch interview, performed by staff, the place communication abilities of potential candidates are evaluated. The subsequent steps on this course of are one on one interview, the place the candidates’ attitudes and orientation towards serving others are evaluated. These hiring standards apply to all job features since all Employees at Southwest play a customer support function. A vital a part of Southwest operational technique is that each job at Southwest is a customer support place, whether or not it immediately applies to the shopper or whether or not it’s inner.

The desk beneath exhibits that despite the fact that Southwest is essentially the most closely unionized airline, at roughly 80%, that contract negotiations between the unions and Southwest are a lot shorter in period than of the opposite main carriers. This exhibits the standard of relationship that Southwest has with its staff and with the unions that characterize them.

Culture

Southwest was created as a special sort of firm and from its beginnings a novel tradition was nurtured. In 1990 Colleen Barrett shaped the Southwest Culture Committee. This is exclusive throughout the trade and amongst all giant firms. The committee additionally has a mission assertion:

“This group’s goal is to help create the Southwest spirit and culture where needed; to enrich it and make it better where it already exists; and to liven it up in places where it might be “floundering”. In short, this group’s goal is to do “whatever it takes” to create, enhance, and enrich the special Southwest spirit and culture that has made this such a wonderful Company/Family.”

It is that this distinctive method to firm values that has created a tradition that differentiates itself from others. Southwest’s tradition is the rationale why it’s profitable.

three. Customer Service

The Mission of Southwest Airlines

The mission of Southwest Airlines is dedication to the best high quality of Customer Service delivered with a way of heat, friendliness, particular person satisfaction, and Company Spirit.

Approach

Herb Kelleher, founding father of Southwest, has been quoted as saying that “We’re in the Customer service business; we just happen to provide airline transportation”.2 Award profitable customer support is a distinguishing attribute of Southwest and it’s referred to internally as “Positively Outrageous Service”. It signifies that from the highest to backside everybody does no matter she or he can to fulfill the shopper. This contains Herb Kelleher, who has been identified for serving to out baggage handlers on Thanksgiving. It is thru emphasizing the shopper and worker that Southwest is ready to differentiate itself from others within the airline trade. On a extra technical degree, every worker or group inside Southwest has his or her personal buyer. This signifies that each worker ‘serves’ in a method or one other regardless of not being immediately concerned with the passenger. The mechanic’s buyer is the pilot and the caterer’s is the flight attendant.

Results

It will be mentioned that the “Positively Outrageous Service” that’s distinctive to Southwest “is not the result of a department, or a program, or a mandate from management. It is not secondary to the product; it is the product.” This method creates the situations the place Employees usually tend to deal with prospects in ways in which distinguish the corporate from others. There are quite a few accounts of passengers who’ve obtained distinctive remedy from Southwest staff.

The query that must be answered is how Southwest’s customer support is totally different and why? Is it frequent for purchasers of different airways to rave about their particular service? The reply is that it isn’t. While Southwest doesn’t have a monopoly on people who find themselves sort and who’re prepared to go above and past to fulfill a buyer, such habits is nurtured at Southwest to a a lot higher extent.

It can then be concluded that the customer support that’s inherent to Southwest is part of its tradition. This tradition is supported by way of worker encouragement to do the additional to fulfill the shopper. This method evokes individuals who would ordinarily solely from time to time exit of their method to assist somebody, to turn out to be constant performers that provide distinctive service on a regular basis. Southwest staff are what differentiate its customer support from the opposite airways.

four. Technology

Southwest makes use of know-how in some ways to satisfy its enterprise goals and preserve its environment friendly operations. According to its CEO, know-how equals productiveness. Launched in 1996, ticketless journey was first launched by Southwest. On May 1st 2000, Southwest Airlines introduces “SWABIZ,” a portal that assists firm journey managers in reserving and monitoring journeys made by way of its site [http://www.southwest.com]. There are many new know-how initiatives being undertaken presently and a few are within the pipeline.

Bar codes in Boarding Passes

Southwest Airlines has invested $12 million throughout the previous three years to standardize company and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude pocket book computer systems in accordance with its firm executives. Southwest needed to exchange its well-known, brightly coloured plastic boarding passes with an digital system with bar-code paper boarding passes. So it put in about 350 contact display ticket readers powered by Dell OptiPlex desktops. The bar code provides Southwest extra data to routinely reconcile the variety of boarding passes with the variety of passengers that truly board the airplane.

Although the know-how will assist Southwest Airlines stay environment friendly by consolidating passenger data for the corporate’s three,000 every day flights, there have been issues it might lengthen the time to get vacationers on board. However it was discovered that scanning every bar code on the boarding passes did not enhance or shorten boarding schedules, however it did take minutes from administrative processes, resembling trying up buyer information. The new paper bar code system is giving Southwest ticket brokers the flexibility to match a buyer file inside having to scroll by way of and log into a number of software program screens. The course of is far more automated. Once the bar code on the boarding move is scanned on the terminal gate it checks off the particular person from the passenger checklist in actual time.

The outdated course of was guide that concerned discovering the data, scrolling by way of a number of software program screens from reservations to verify-in to boarding. The bar code to scan the boarding passes has been deployed. The firm is within the means of changing customer support again-workplace tools at airports together with at its headquarters in Dallas.

Software Upgrades

Software functions, resembling these utilized by clerks to verify in passengers, are being changed. Southwest Airlines’ internally written “Airport Application Suite” is anticipated to rollout subsequent 12 months as the corporate transitions from inexperienced screens to Window-based consumer interface. Similar to Wal-Mart Stores Inc., Southwest Airlines believes in growing in-home the software program that runs its operations. The firm makes use of little or no off-the-shelf software program. There are between 75 and 100 initiatives within the works every year supported by roughly 900 IT staff.

RFID

Radio frequency identification know-how, a positive different to bar-coding for baggage identification, can be on Southwest’s radar. It plans to check RFID know-how someday in 2006. Even although, Southwest is taking part in a little bit catch-up with different airways resembling Air Tran, Alaska and Champion Airlines, in lots of instances they’re ready leapfrog to extra refined functions simply having waited longer.

Challenges:

Southwest has emerged very profitable, regardless of essentially the most troubled occasions within the airline market. However, it faces new challenges within the face of accelerating competitors from different low fare airways resembling JetBlue, ATA airways, America West.

Reserved Seating

Due to growing safety tips since September 2001, Southwest would want to arrange for assigned (reserved) seating to trace its in-flight passengers. This change will contain giant know-how investments and should affect its gate operations negatively because the present method of unassigned seating has helped in fast gate turnarounds.

Passenger Demand

The preserve-it-easy philosophy has served Southwest properly. But as its personal enterprise grows and grows extra advanced, with plans to buy dozens of latest plane and an anticipated upsurge in passenger site visitors to about 80 million boarding’s a 12 months, the simplicity technique that has been mirrored within the airline’s IT philosophy is evolving. The CIO Tom Nealon says that “It’s time to adapt our business processes for efficiency. As our airline scales for us to provide the same kind of high-touch customer service, we have to automate a lot of things we’ve been able to do without technology previously. The challenge is doing that without conceding the customer touch.” Southwest can be aggressively pursuing buyer relationship administration (CRM) strategies and has functions to get perception into buyer’s desires and dislikes. According to an interview with its CEO Gary Keller, Southwest has its concentrate on bettering in two areas – buyer’s airport expertise and in-flight expertise.

In-Flight Entertainment

In an general effort to enhance buyer’s in-flight expertise, in-flight leisure is one thing that Southwest is presently evaluating and which JetBlue has been very profitable at already due to its introduction in its lengthy-haul flights. In comparability, Southwest has 415 airplanes to contemplate and that represents an funding resolution at a complete new dimension. Additionally, Southwest has to contemplate how issues might match into their atmosphere. At this level, 60% of its service continues to be very brief haul. Southwest must be conscious of the truth that a sure method that has been profitable for its competitor might not be essentially work to its benefit.

Summary:

Southwest has lengthy been considered a benchmark in its trade for operational excellence. Southwest Airlines is a nice instance of an organization that’s dedicated to its core competencies – environment friendly operations to drive its low price construction, excellent supply of customer support and revolutionary HR administration practices. We hope this paper supplied an excellent perception into Southwest operations, as a part of its general technique, to attain success and achieve aggressive benefit.

References:

1. [http://www.southwest.com] (Southwest airways official site)

2. “Southwest keeps it simple” – Air Transport World, April 2005, Pg 36

three. “Around the World on $48 (or So): How High Can Discount Airlines Fly?“ Strategy Management – [email protected] Wharton Newsletter Oct 5, 2005

four. TechWeb – [http://www.techweb.com/wire/ebiz/173601227]

5. “Southwest’s Strategy for Success: Consolidate!” – Oracle Magazine (Sept/Oct 2004 version) http://www.oracle.com/technology/oramag/oracle/04-sep/o54swest.html

6. “Southwest Airlines: High Tech, Low Costs” – Eweek.com, April 2005

7. “Jet Fuel Hedging Strategies: Options Available for Airlines and a Survey of Industry Practices” – Kellogg School of Management Research Paper, Spring 2004

eight. Winning Behavior: What the Smartest, Most Successful Companies Do Differently, Terry R. Bacon and David G. Pugh, 2003

9. Time Magazine, Oct 28th 2002 situation, Vol. 160 Issue 18, p. 45

10. “Wings Of Change”,Information Week, March 28, 2005,

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

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