Read the case below and answer the case discussion questions
Southwest Airlines
Southwest Airlines has long been one of the standout performers in the U.S. airline industry. It is
famous for its low fares, which are often about 30% beneath those of its major rivals. These are
balanced by an even lower cost structure, which has enabled it to record superior profitability
even in bad years such as 2002, when the industry faced slumping demand in the wake of the
September 11 terrorist attacks. Indeed, during 2001 to 2005, quite possibly the worst four years
in the history of the airline industry, when every other major airline lost money, Southwest made
money every year and earned a return on invested capital of 5.8%.
What is the source of Southwest’s competitive advantage? Many people immediately point to the
company’s business model and low cost structure.
With regard to their business model, while operators like American Airlines and United route
passengers through congested hubs, Southwest Airlines flies point-to-point, often through
smaller airports. By competing in a way that other airlines do not, Southwest has found that it
can capture enough demand to keep its planes full. Moreover, because it avoids many hubs,
Southwest has experienced fewer delays. In the first eight months of 2006, Southwest planes
arrived on schedule 80% of the time, compared to 76% at United and 74% at Continental.
As for Southwest’s low cost structure, this has a number of sources. Unlike most airlines,
Southwest flies only type of plane, the Boeing 737. This reduces training costs, maintenance
costs, and inventory costs while increasing efficiency in crew and flight scheduling. The
operation is nearly ticketless and there is no seat assignment, which reduces cost and back-office
accounting functions. There are no meals or movies in flight, and the airline will not transfer
baggage to other airlines, reducing the need for baggage handlers.
The most important source of the company’s low cost structure, however, seems to be very high
employee productivity. One way airlines measure employee productivity is by the ratio of
employees to passengers carried. According to figures from company 10-K statements, in 2005,
Southwest had an employee-to-passenger ratio of 1 to 2,400, the best in the industry. By
comparison, the ratio at United Airlines during 2005 was 1 to 1,175 and at Continental, it was 1
to 1,125. These figures suggest that holding size constant, Southwest runs its operation with far
fewer people than competitors. How does it do this?
First, Southwest devotes enormous attention to the people it hires. On average, the company
hires only 3% of those interviewed in a year. When hiring, it emphasizes teamwork and a
positive attitude. Southwest rationalizes that skills can be taught but a positive attitude and a
willingness to pitch in cannot. Southwest also creates incentives for its employees to work hard.
All employees are covered by a profit-sharing plan, and at least 25% of an employee’s share of
the profit-sharing plan has to be invested in Southwest Airlines stock. This gives rise to a simple
formula: the harder employee work, the more profitable Southwest becomes, and the richer the
employees get. The results are clear. At other airlines, one would never see a pilot helping to
check passengers onto the plane. At Southwest, pilots and flight attendants have been known to
help clean the aircraft and check in passengers at the gate. They do this to turn around an aircraft
as quickly as possible and get it into the air again because an aircraft doesn’t make money when
it is sitting on the ground. This flexible and motivated work force leads to higher productivity
and reduces the company’s need for more employees.
Second, because Southwest because flies point-to-point rather than through congested airport
hubs, there is no need for dozens of gates and thousands of employees to handle banks of fights
that come in and then disperse within a two-hour window, leaving the hub empty until the next
flights a few hours later. The result: Southwest can operate with far fewer employees than
airlines that fly through hubs.
Case Discussion Questions:
Question 37: What are the resources, capabilities of Southwest Airlines?
Question 38: What are the distinctive competencies of Southwest Airlines?
Question 39: What are barriers to imitation of the distinctive competencies of Southwest
Airlines?
