Case Study of Southwest Airlines

Team Project:  Team Aconcagua

 

Introduction

Air travel first emerged in 1903 when Wilbur and Orville Wright sustained flight for only 12 seconds in the first ever air craft.  Since then, thousands of airline companies worldwide have come and gone (Folger, 2010).  The airline industry is no different from any other industry in the stressors it faces with employee and customer satisfaction and retention.  However the airline industry also has some unique challenges with combinations of variable costs for fuel, maintenance of planes, and environmental issues such as security and weather.  The airline companies have all faced these stressors and some have remained hardy while others have closed their doors and gone out of business.  In this case study we will look at what Southwest Airlines has done to remain resilient while facing tough stressors impacting cost and the overall employee and customer satisfaction. 

In the 1920’s air traffic was primarily used for mail transport.  By the 1950’s air travel was primarily a commodity only the rich could afford.  The 1970’s brought deregulation to the industry and the federal government was tasked with setting prices and restricting competition among airlines.  Southwest Airlines emerged in the 1970’s along with several other major players and “flying was forever democratized” (McFarlane, 2012).  “The commercial airline industry is volatile, and a company's ability to adapt to changing regulations and consumer needs is paramount to its success” (Folger, 2010, para. 13).  Is Southwest Airlines a hardy organization and, if so, what factors contributed to their hardiness?[AP1]   Southwest Airlines has risen to the industry challenges and has a mission statement summarizing their philosophy being a dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride and company spirit.  Southwest’s current CEO Gary Kelly discovered doing the right thing usually turns out to be the smart thing (Kelly, 2013).  Their culture has bred customer satisfaction with both the internal employees and external fliers.  This case study will use material from interviews, employee statements, and cultural philosophies to focus in on what Southwest Airlines has done to remain forward thinking and prepare for industry and organizational challenges, thus contributing to their overall success and continued profit. [AP2] 

Industry and Organizational Stressors

Organizations face situations that can cause distress to many areas of their business and have varying degrees of impact.  The challenge for these organizations is to foresee and plan for as many of these challenges as possible.  The airline industry has a certain level of uncertainty to plan for.  Some common experiences are differences in number of passengers per day per flight.  For example as the economy improves, people fly more, and as the economy declines, people fly less but there are still people flying.  This uncertainty creates stress on the logistics of offering more or less flights, and trying to optimize flight schedules.  Southwest Airlines has focused their planning on two primary areas for both industry and organizational stressors which are cost and satisfaction.[AP3]  Southwest Airlines has taken specific steps in each of these areas to combat traditional problem areas for the airline industry.  First we [AP4] will look at the stressors that have impacted Southwest Airlines in both of these areas.

Cost

The airline industry faces regular challenges such as weather, fuel cost, maintenance, and labor costs.  All of these items dynamics impact the cost margins for the companies in large ways and the terrorist events on September 11, 2001 introduced another element to the vulnerability of the industry as a whole (“Top 3 Drivers”).

Weather - Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down airports and cancel flights, costing airlines money.

Fuel Cost - According to the Air Transportation Association (ATA), fuel is an airline's second largest expense.  Tony Tyler the director general and CEO of IATA (International Air Transport Association) says “Fuel now represents 33 percent of our operating budget” (Vanderborg, 2013, para. 5).

Labor - According to the ATA, labor is the an airline's No.1 cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others (“The Industry Handbook”).

            Little can be done to control the cost for these items and several airlines have taken the approach of building increases in these areas into the ticket prices for customers.  However this has an adverse effect on customer satisfaction and retention which is another area Southwest Airlines is dedicated to constantly improving.   

Employee and Customer Satisfaction

The airline industry is primarily unionized which can introduce a set of challenges all on its own.  With unions, come high turnover, low employee satisfaction and the possibility of employee strikes.  All of these issues can have devastating impacts on the success of an organization.  According to Warner and Schmincke (2008) the list of “dangerous, unproductive, and dysfunctional behaviors (DUD)… is endless: protection of sacred cow projects, blaming, avoiding accountability, back-stabbing, political maneuvering … turf wars, silo protection, hidden agendas, taking credit for another’s ideas, trashing others ideas to promote your own, withholding information, looking good to the boss, playing favorites, finger-pointing, power plays, passing the buck, gossiping, entitlement attitudes, and grin faking” (p. 32).  DUD behaviors “suck 20 to 80% of productive time out of organizations, with the overall average hovering around 50%” (p. 32).  Even without the aspect of labor unions Maddi, Khoshaba and Parmenter (1999) state “For many people, the workplace is becoming a hostile environment in which they do not feel valued, protected, or even recognized” (p. 119).  Maddi et al. (1999) use research showing “people caught in the vicious cycle of vulnerable attitudes, regressive coping, and exploitative social interaction suffer in performance, conduct, morale, and health” (p. 118).  Employee and customer satisfaction is a stressor in some degree to every organization and these behaviors can destroy an organization from the inside out.  

These stressors have various impacts on the organizations profits and culture.  We[AP5]  will now look at how Southwest Airlines has put hardy practices in place to create a hardy culture which has transformed Southwest Airlines into a resilient organization. These practices have allowed them to thrive and continue to make a profit in an otherwise difficult industry.

Resilience and Hardiness

There are three specific attitudes Maddi and Khoshaba (2005) describe as being present in groups exhibiting resilience.  These three “C’s” are commitment, control and challenge (p. 3).  “Building resilience into the organization improves the company’s chances to survive the moments of weak leadership and to get through, eventually inevitable, strategy shifts” (Valikangas, 2010, p. 89).   In order to be resilient, Maddi et al. (2005) state “…it is best for you to stay involved with the people and events around you (commitment) in which you are involved (control) rather than to give up, and to try to discover how you and others can grow through the stress (challenge) rather than to bemoan your fate”[AP6]  (p. 13).  Southwest Airlines has demonstrated these three C’s in one way or another to combat the stressors to continue to make a profit and to build a strong culture. 

Profit

Victor Frankl (2006) when describing his situation in the concentrations camps states, what really matters in difficult situations is “to transform a personal tragedy into a triumph, to turn one’s predicament into a human achievement (p. 112).   Southwest Airlines began with a strong commitment to the three P’s: Performance, People and Planet.  These three pillars create a “triple bottom line approach” (Kelly, 2013, p. 3) which has allowed them to turn the cost burden of the industry into a triumph.  This was demonstrated when they installed e-leather seats and vertical winglets on the wings of their planes.   E-leather is an eco-friendly, lightweight leather made from an engineered composition leather which is durable and comfortable.  By using e-leather, Southwest Airlines reduced the weight of their aircraft which helped them save on fuel (“Southwest Citizenship”).  Vertical winglets also help to reduce their fuel expense which positively affects the environmental impact and creates job security through financial savings (“Southwest Citizenship”).    

Southwest Airlines has stood apart in remaining true to offering a low cost option to their customers despite the economic pressures to raise prices.  They also continue not charging extra for baggage on flights.  When asked about their “bags fly free” policy, Chris Wahlenmeier, the VP of ground operations replied “When you charge people to check bags they try to carry more on, sometimes more than can fit in the overhead bins which results in more bags being checked at the gate, right before departure.  And that wastes time” (Stevenson, 2012, para. 5).  They haveSouthwest has been able to do these things because they have beenwere prepared for industry challenges and have structured themselves in such a way that they were able to take a hit when other companies were not.  Even after the unthinkable aftermath of the 9/11 terrorist attacks, “While the rest of the industry laid off thousands of people and lost more than $22 billion… Southwest didn't furlough a single employee and remained in the black every quarter” (Serwer & Bonamici, 2004, para. 17).  Southwest Airlines is also the “Record-holder for the longest-running profitability streak in the U.S airline industry, with an unprecedented string of 40 consecutive years of profitability” (Kelly, 2013, p. 3). 

Another example of Southwest Airlines remaining in control of variable cost situations was when they “hedged as much as 85% of its annual fuel usage over the past six years. The move effectively locked in consumption at $26 per barrel of oil, which in turn saved shareholders an estimated $1.8 billion (from 1999 to 2005)” (Curtis, 2009, para. 3).  Serwer et al. (2004) outline some of the other ways Southwest Airlines has controlled cost by:

flying point to point or city to city, ignoring the hub-and-spoke model of most other airlines. It flies only 737s. It serves no meals, only snacks (peanuts, mostly). It charges no fees to change same-fare tickets. It has no assigned seats. It has no electronic entertainment on its planes, relying instead on relentlessly fun flight attendants to amuse passengers. (para. 5)

All of these seemingly simple cost savings things in Southwest Airlines’ business model have allowed them to increase their margins and withstand industry challenges while continuing to make a profit.  Herb Kelleher, Southwest’s founder, stated during an interview, “we run this company to prepare ourselves for the bad times, which always come in the business” (Serwer et al., 2004).  Herb Kelleher’s statement aligns with the idea of transformational coping, [AP7] “which is the technique and strategy for actually turning changes from potential disasters into opportunities” (Maddi et al., 2005, p. 192).

Culture

Southwest combats employee and customer satisfaction issues directly with a strong culture of customer service.  This begins with the internal employees using the philosophy, “If the internal Customer is happy, it will naturally flow to the external Customer in the form of good service” (Lessons in Loyalty, 2010, p. 3).  “If the employees come first, then they’re happy…. A motivated employee treats the customer well. The customer is happy so they keep coming back” (Visser, 2011, para. 6). 

To keep the employees engaged Warner et al. (2009) state “Humans need a compelling saga: a story or drama that inspires passion for a strategic result, a passion that overwhelms the selfishness common in humans” (p. 38).  Southwest Airlines has created their saga by implementing a bold five year plan which states “Vision to become the world’s most loved, most flown, and most profitable airline” (Kelly, 2013, p. 3).  Southwest Airlines is committed to what they’ve branded as The Southwest Way:  A Warrior Spirit, A Servant’s Heart and a Fun-LUVing Attitude (“Southwest Citizenship”).  Examples of a Warrior Spirit include: work hard, desire to be the best, be courageous, display urgency, persevere and innovate.  Southwest Airline’s Mission Statement exemplifies the Warrior Spirit: We tell our Employees we are in the Customer Service business—we just happen to provide airline transportation. It is a privilege to serve your air travel needs (“Southwest Citizenship”).  A Servant’s Heart is one who will follow the Golden Rule, adhere to the principles, treat others with respect, put others first, be equalitarian, demonstrate proactive customer service and embrace the Southwest Airlines family.  “It is your involvement with the people and events going on around you that lend meaning and fulfillment to your life.  Your still involved to the best of your ability and continue to do so no matter how stressful the circumstances” (Maddi et al., 1999, p. 51).  Every year, Southwest throws large and small celebrations for things like new airport openings or the best server of the year award.  They care about each other and even the president has been known to reach out when an employee is sick and needs encouragement (“The Soul of Southwest Airlines”, 2013).  “Relationships of mutual assistance and encouragement bring the best out of all parties, and in ways that are especially important when stressful changes need to be turned to advantage” (Maddi et al., 2005, p. 153).  Southwest Airlines fun-LUVing attitude promotes: having fun, not taking yourself too seriously, maintaining perspective, celebrating successes, enjoying your work and being a passionate team player.  [AP8] 

The culture and resilient attitudes all began with Southwest Airline’s founder Herb Kelleher.  Early in Southwest Airline’s history, Herb made the choice to sell a plane rather than lay off employees.  This set the precedence at Southwest, and to this day the company has never had a major layoff (Reingold, 2013).  In order for the organization to become hardy and resilient, it takes a leader to model the behavior of commitment, challenge, and control and to lead by example by practicing socially supportive interactions like providing assistance and encouragement.   It is in this giving and receiving of mutual support and encouragement between management and subordinates that Maddi et al. (2005) say builds resilience at work (p. 153).  Kelleher also says, “A company is stronger if it is bound by love rather than by fear” (Carchidi, 2012, para. 10).  Herb Kelleher exemplifies this type of altruistic behavior from the top down leading by example.  In an interview with Success, Herb is quoted, “Attitude is very important and has to be weighed with experience and skills,” he goes on to say “someone with a high IQ who is a backbiter is a disaster for your organization.  Someone who is outgoing and altruistic and can work convivially will be a huge asset” (Vinnedge, 2008, para. 8). 

At Southwest, the culture and beliefs are not only practiced by the employees once they are hired they are also criteria used during the hiring process to ensure they are recruiting the right people with the right attitude for the organization.  Southwest’s human resources department, also called “The People Department,” has its own principles to select employees. The motto is, “Employees are hired for attitude [AP9] and trained for skill” (“Southwest Citizenship”).  “These hardy attitudes and skills form an interlocking system, in that the HardiAttitudes provide the motivation to practice the HardiSkills continually, and feedback about one’s effectiveness that comes from practicing the HardiSkills deepens the HardiAttitudes” (Maddi et al., 1999, p. 118). 

“In line with initially hiring the right attitude, when looking for leaders, we sought humble, altruistic, compassionate mindsets that could be tough when needed” (“Southwest Citizenship”).  A former Southwest employee shared “Leaders should get to know their people. Southwest was one of the few companies where leaders could get fired by their teams[AP10] . It was paramount that leaders stayed in touch with their teams to ensure teams received the support needed. The upper management of Southwest Airlines possessed one common trait…they did not have big egos” (Lessons in Loyalty, 2010, p. 5).  One thing Southwest leaders seem to remember is “Leadership is a political act, and it must earn, for its effectiveness, followers’ willingness.  Resilience cannot be commanded” (Valikangas, 2010, p. 89).  Leadership is the driving force for the overwhelming culture hardiness within Southwest Airlines and this has fed down through the ranks starting with the original founder.

From various employee statements, we have found the majority of Southwest’s employees indicate they love what they do because they have a sense of freedom, value their work, and have fun doing it (“Southwest Citizenship”).  This freedom does not come without responsibility, as explained by Herb Kelleher, “Power should be reserved for weightlifting and boats, leadership really involves responsibility” (Reingold, 2013, para. 5).  Giving employees’ freedom along with a sense of responsibility empowers them to work harder and cope with industry stressors and difficulties better than their competitors.   Reflecting on his experience, Kelleher says many entrepreneurs fail because they expect business-sustaining profits too soon and they "underestimate the sweat equity they’ll need” (Vinnedge, 2008, para. 16).  From the founder, to the leadership and mission statements, demonstrated through the hiring practices and celebrations, there is no question Southwest Airlines has a culture promoting resilience and practicing commitment, control and challenge every day.

Conclusion

How does Southwest consistently outperform others in their industry?  All the airlines experience the same stressors, uncertainty, variable costs, and employee and customer satisfaction.  The answer lies in Southwest’s hardiness and personal and organizational resilience, built on the individual freedom granted them [AP11] by their leadership beginning with the founder, Herb Kelleher.  Instilled with individual freedom, a responsibility to have fun and solve problems Southwest Airlines demonstrates what it means to be a hardy organization.

Southwest Airlines has a simplistic model which seems to be common sense however it is not easily replicated.  They have embraced and practiced hardiness over the years and Miles and Mangold (2005) found that because of these practices Southwest has the:

lowest employee turnover rate and the highest level of employee satisfaction in the industry. According to Colleen Barrett, Southwest’s employee turnover is consistently under 5%, with 4.59% for the years 2003 and 2004. In an article in Fortune magazine, Nicholas Stein (2000) indicates that the average turnover rate for the airline industry is 20 to 30%. Jet Blue, Southwest’s closest market competitor, has a turnover rate of 10 to 12%, according to a Workforce Management article by Eve Tahmincioglu (2004).  They also enjoy high levels of customer satisfaction. Southwest’s customer relations department reports that it receives, on average, less than one complaint for every 10,000 passengers boarded. The American Customer Satisfaction Index (Transportation/Communications/Utilities and Services, 2005) indicates that Southwest, with a customer satisfaction score of 73, has significantly higher levels of customer satisfaction than the other major airlines reported. (p. 9)

Southwest’s people come to work with a strong sense of purpose.  Hiring mostly on attitude allows meaning to be forged through indoctrination of Southwest’s mission statement, Triple Bottom Line principle, and “LUV” slogans.  Herb Keller stated the competitors often missed the mark because they “can buy all the physical things. The things you can’t buy are dedication, devotion, loyalty—the feeling that you are participating in a crusade” (Marsh, 2012, para. 9).

From the beginning, Herb Kelleher nurtured confidence at Southwest Airlines.  In an interview he has explained it this way, “Well, the people did it.  I just stayed out of their way.  Be there when they're having problems, and stay out of their way when things are going well” (Reingold, 2013, para. 3).  With the freedom to solve problems on their own, Southwest’s employees engage their environments, and even stressful circumstances are learning opportunities and can be fun.  As leaders inspire and nurture commitment, control, and challenge in themselves and others, these attitudes give birth to organizational cooperation, credibility, and creativity (Maddi, et al., 1999, p. 3).   At Southwest this can be seen in the culture, as employees at every level are all encouraged and empowered to make choices to keep the customers at the forefront of what they do.  They are committed to cost effectiveness, a sense of community and most importantly, always having fun.

The Future[AP12] 

For the first 40 years Southwest Airlines has proven to be a hardy organization full of resilience in the face of adversity in a hostile industry.  From Southwest’s annual report, the upcoming challenges are enormous: 1. Integration of AirTran people, systems, and equipment, 2. A new software reservations system, 3. New Rapids Reward system, 4. Revamping old planes, and 5. Buying new planes (Kelly, 2013).  Each challenge for Southwest will require it to maintain its organizational hardiness.  Leadership at Southwest should be concerned with sustaining such remarkable organizational hardiness in order to continue to thrive in the airline industry.   Southwest can gauge its current state of hardiness by monitoring levels of customer and employee loyalty, stress levels, workman’s compensation claims, discrimination, harassment, and wrongful termination suits (Maddi et al., 1999, p. 119).   [AP13] “The bottom line is that companies and the people who compose them must accept and anticipate the rising tide of change that is taking place and discover how to turn it to advantage with vigor and enthusiasm rather than be debilitated, outmaneuvered, or left behind” (Maddi et al., 1999, p. 119).  In short, Maddi et al. (1999) believe that there is an urgent need for HardiOrganizations.  At Southwest Airlines, the urgent need is to monitor, gauge, and sustain its hardy culture, structure, and most importantly, its resilient workforce.

 

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