114 Part One The Management Control Environment

Case 3-1
Southwest Airlines Corporation
By January 2005, Southwest Airlines Corporation's (Southwest)year-end results marked a.
consecutive years of profitability, a record unmatched in the airline industr,.
was 1ncorporated in Texas, commenced customer service on June 18, 1971, with
737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. In 2004,,it
Soutthree
hwest,Boeiwhincgh
fleet of 417 Boeing 737 jets and provided service to 60 airports in 31 states boastedthae
United States. Southwest was well entrenched as the nations' low-fare, high customer sot: throughout
faction airline. (Refer to Exhibit 1 for five-year financial highlights.)
Southwest had the lowest operating-cost structure in the domestic airline industry and oon
sistently offered the lowest and simplest fares. In 2004, the airline had 31,000 emplovees and
generated total operating revenues of $6.5 billion from a passenger load factor of 69.5 percent
Its stock exchange symbol was LUV, representing Southwest's home at Dallas Love Field. as
wellas the themne of its employee and customer relationships.
In 2005, for the ninth year in a row, Fortune magazine recognized Southwest Airlines as the
most admired airline in the world and among all industries, listed Southwest Airlines as num
ber five among America's Top Ten most admired corporations. Since 2002, Business Ethics
magazine listed Southwest Airlines in its 100 Best Corporate Citizens", a list that ranks pub
lic companies based on their corporate service to various stakeholder groups. In 2005, The

EXHIBIT 1 ComparativeFinancial Data on Selected Companies

Five-Year Average: 1999-2004
Southwest United American Delta JetBlue
Return on equity (percentage) 10.91 NA NA -85.33 NA
Sales growth (percentage) 6.64 -1.88 -1.14 1.01 NA

2004 Data
Sales ($B) 6.5
16.4 1.3
14.3 18.6
As percentage of sales:
Cost of goods sold 68.8 77.3 98.1 81.1
63.3
Gross margin 29.2 22.7 33.5
Operating income 8.5 1.9 18.9
-5.2 9.0
Net income 4.8 -23.3 -0.8
-10.5 3.8
Return on equity (percentage) 6.6 -36.4 -4.1
5.3
NA NA NA
This case was written by Professor Vijay Govindarajan, Julie B. Lang (T'93) and Suraj Prabhu (T06) of the Tuck School of
Business at Dartmouth. Trustees of
Dartmouth College.
Sources: [Link]; "What
Management Is: How
qretta, O2002 The Free Press. NUTS! Southwest Airlines´ Crazy It Works
Recipe for Business
and Why andIt'sPersonal Success, by Kevin
Business, " byFreiberg
loan Ma-and
Everyone's
Jackie Freiberg, O1996 Bard Prress, Inc., Southwest Aims East (Condensed), case study written by Steven Sullivan underthesi
pervision of Paul W. Harris, University of Virginia Darden School, Case no. UVA-M-0464. The Talent Myth, The NewYoDer
luly 22, 2002.
 Chapter 3 Behavior in Organizations 115

AmericanCustomer Satisfaction Index (ACSI) recognized

customer Southwest Airines as leading the in-
dustryin satisfaction and
InsideFlyer magazine
best bonus promotion, and best award awarded Southwest airlines for best
Customer Service,
redemptions in 2004.
The Southwest Difference
Southwest did not employ the
"hub-and-spoke" approach used by
United, American, and Delta. Instead, its approach was short other major airlines, such as
haul and medium haul and
point-to-point (e.g., Dallas to Houston, Los Angeles to
assengers flew non-stop and the overall average passengerPhoenix). As a result about 80% of its
trip
orgge airfare of $91.15. Southwest had no assigned seats, paidlengthits
was 758 miles and an
loss congested airports (e.g., Baltimore instead of Washington's Dulles crews
or
by trip, and used
NH instead of Boston, Mass.). About 60% percent of Reagan; Manchester,
Southwest's passenger revenue was gen
oated by online bookings via [Link]. PhoCus Wright reported that [Link] was
the number oneairline website by revenue and Nielsen /Net Rating identified it as the
largest
airline site in terms of unique visitors. In 2005, Southwest continued to push its online pres
ence and launched several automation services, including Ding!, a desktop application that
provided exclusive deals.
Southwest consistently sought out ways to improve its efficiencies and pass on the cost sav
ings to its passengers. In 2004, Southwest had reduced the headcount per aircraft to 74 from
85 in [Link] hedged about 85% of its fuel and oilneeds and as a result saved about $455 mil
lion. It entered new airports after a process of diligence and with a sense of commitment to the
people it served (In its entire history, Southwest hasonly pulled out of five airports).
Southwest pilots were among the only pilots of major U.S. airlines who did not belong to a
national union. National union rules limited the number of hours pilots could fly. But South
west's pilots were unionized independently, allowing them to fly far more hours than pilots at
other airlines.
Other workers at Southwest were nationally unionized (total workforce unionization was at
Si% in 2005), but their contracts were flexible enough to allow them to junmp in and help out, re
Bardless of the task at hand. From the time a plane landed until it was ready for takeoff took ap
PrOximately 20-25 minutes at Southwest, and required a groundcrew of four plus two people at
the gate. By Comparison, turnaround time at United Airlines was closer to 35 minutes and re-
quired a ground crew of 12 plus three gate agents.
CEO Herb Kelleher, who founded Southwest, was deeply committed to a philosophy of
putting
good careemployees
they're happy, satisfied, dedicated, and energetic, they'll take real
first. "If When the customers are happy, they come back. And that makes the
of the customers.
walls were flled with photographs of its employees. More
sharehol d
than 1,000ers Southwest's
happy:"lcouples
married (2,000 employees) worked for the airline. Southwest employees
were among the highest paid in the industry and the company enjoyed low employee turnover
Telative to the airline industry.
loan Magretta, What Management Is: HowIt Works and WhyIt's Everyone's Business (The Free Press, 2002), 199.
 Environment
1i6 Part One The Management Control
Southwest's culture of hard work, high-energy, fun, local autonomy, and creativity was rer
People, encouragement of in-fight
forced through training at its
recognition of personal
Being in the
University of
[Link] a rigorous approach to hiring new employees. In 2094
people business
and, contesta,
Southwest reviewed 225,895 resumes and hired 1,706 new employees. The company's hinne
candidates and conducted
proceSs was somewhat unique:
hired pilots, and gate agents hired
Peers
gate
screened
agents. To better understand what the
in candidates, Southwest interviewed its top employees in
each job function
plots
sought
in(e.g.,company
terviews,
agents, baggage handlers, ground crew) and identified their common
strengths.
used
gate
profiles to identify top candidates during the interview process. Southwest hired for attitudetheseas then pilots,
much as aptitude. Noted CEO Kelleher, We want people who do things well, with
grace,"2 laughter and
Southwest initiated the first profit-sharing plan in the U.S. airline industry in 1974 and t
fered profit sharing to its employees every year since then. Through this plan, employes
owned about 10percent of the company stock. For fiscal 2003, Southwest offered its emploees
$126Mn in profit sharing.

Discussion Questions
1. What is Southwest's strategy? What is the basis on which Southwest builds its
competitive
advantage?
2. How do Southwest'scontrol systems help executethe
firm's strategy?

2Kevin Freiberg and Jackie Freiberg, NUTS! Southwest

Inc., 1996), 65.
Airlines' Crazy Recipe for Pres
Business and Personal Success(Bard