As the value proposition that the company was based on, the attractiveness of flying when it is equal to or less than the cost of gasoline for the comparable trip has helped to create a unique niche for this airline. Their reliance on regional airports within 500 miles of each other has also contributed to the unique value proposition being realized for millions of customers a year.
Southwest Airlines Internal Analysis
SWA is well-known for its ability to keep costs down by concentrating on smaller, less expensive and less congested airports in conjunction with relying only on one type of aircraft, which is the Boeing 737. It has been well-documented that SWA achieves significant training and maintenance cost reductions as a result of relying on a single type of plane (Southwest Airlines Investor Relations, 2009). Standardization on a specific type of jet has also enabled the company to streamline and make more efficient the online reservation system and also allowed the company to keep its labor costs relatively low compared to competitors. Currently company employees own 13% of the entire company and while there have been unionization efforts, it is the most non-unionized company in the entire airline industry.
At present SWA has defined its point-to-point model to include 64 cities across 34 states and has approximately 520 Boeing 737 aircraft operating throughout this network. SWA's business model concentrates on rapid turn-around of their jets in the gate, with revenue from frequency of flights and not specifically from high passenger ticket prices.
Intensive investment in it and price and logistics optimization software to ensure the highest possible efficiencies are gained throughout their networks of aircraft, maintenance equipment and the use of fuel is also a strategic priority for the company going forward as well. These optimization techniques and strategies are aimed at increasing overall profitability and Return on Invested Capital (ROIC).
SWA also has a very heavy reliance on the loyalty of their customers including the continual enhancement and growth of their Rapid Rewards Program has further differentiated the company in the competitive airlines industry. During 2008 a total of 2.8 million tickets were awarded (Southwest Airlines Investor Relations, 2009). The addition of programs for dining and vacation planning has also continued to grow the popularity of the program as well.
As a result of loyalty being such a critical component of overall profitability there is continued competitive pressure to increase the use of e-commerce and Web-based systems for customer service, online ordering of tickets, flight status and processing of Rapid Rewards credits. Taken together all of these factors contribute to SWA concentrating on how to initiate an maintain a stronger it structure that can scale out to their website and also support its e-commerce strategies. Part of this is support for WiFi in their gate areas and also supports fir wireless standards to specifically support mobile devices that customers rely on including PDAs and cell phones.
Continued reliance on point-to-point service throughout their network of locations ensures a high level of cost reduction into the future yet also forces an intelligent plan for expansion. For SWA the fact that 78% of their customers fly non-stop (Southwest Airlines Investor Relations, 2009) validates the point-to-point model. With the average flight being 629 miles and 1.8 hours, SWA continues to be focused on their core unique value proposition. Yet for the company to continue to grow, it must selectively choose which airports it will fly into while still staying with the point-to-point model. As a strategic issue this is the most difficult for SWA to define - and while it uses many forms of customer listening systems and marke5t research to see which destinations its customers want most to be added - the company still struggles with the build-out of its route map.
Regulations regarding safety and health, and also security are continually adding new costs to their operating expenses, and will have to be underwritten by fair increases if they continue. The costs of being in compliance to the FAA regulations was $10M in 2007 for oversights in the inspections of approximately 50 737s the FAA had approved as flight worthy when in fact they were not (Wade, 2008). The threats of government auditing and compliance reviews for SWA are becoming more likely due to these oversights with regard to FAA screenings.
Continued pressure and reliance on jet fuel cost hedging is critical for the company's long-term profitability. SWA was fortunately able to gain fuel hedging advantages prior to the last rise in fuel and oil prices and will need to do so in the future to retain their profitability over time.
Assessment of Southwest Airlines Management and Leadership
At the center of the leadership strategies of Southwest Airlines is the culture founder Herb Kelleher diligently worked to create with the other founders and first employees of the airline (Keidel, 2005). The founders realized that defining the values they wanted their company based on would best be permeated throughout the company culture through their example. They all, including Mr. Kelleher, are strong believers in leading through example (Hardage, 2006). What differentiated the leadership approach of Southwest relative to other low-cost airlines is the focus on a high-trust, knowledge-based strategies that give employees the freedom to transcend rules to serve customers as efficiently and completely as possible (Kochan, 2006). Integral to the success of the Southwest business model is their low-cost, high service value proposition (Rhoades, 2006). Mr. Kelleher and the founders of Southwest made the business model work by continually stressing the delivering of exceptional service every day an integral part of the company's culture.
Dr, Drucker's "old fashioned" leadership included the attributes of integrity and earned credibility on the part of leaders, in addition to the ability to define and establish a sense of mission. Leaders who are very effective also have the ability to set realistic yet challenging goals, objectives and priorities. Effective and exemplary leaders see leadership as a responsibility and not a right based on title alone.
Herb Kelleher has successfully been able to create a strong sense of leadership within Southwest by first putting the center of focus not on him but on the customers and in turn defining freedom of service to them excellently. Mr. Kelleher realized that exceeding customers' expectations was more critical than gaining any status or significance from his title alone. Excellent leadership requires selflessness and an attitude of service, and these values permeate an organization if they are genuine. These values when adhered to consistently create credibility and trust over time and transform a manager into a leader. All of these factors contributed to the rapid maturation of the Southwest culture and its strength today.
Founder and CEO Herb Kelleher often regarded internal power struggles and company politics as a cancer (Gittel, 2003) and felt that only by breaking down the silo walls between departments could internal power struggles and the negative aspects of politics be averted. He felt very strongly about this and insisted that only group-level measures of performance be used to evaluate accomplishment and progress (Smith, 2004). Kelleher also devised key performance indicators (KPIs) that captured cross-department collaboration and performance. These measures of performance are still used on electronic dashboards found on the company's Intranet sites today (Smith, 2004).
Combining the company's ability to create effective communications strategies, Kelleher and the senior management team put together a series of Employee Advisory Councils that purposefully brought together departments that conflicted with one another. Maintenance crews and the supply chain teams, often at odds over which type of tools, replacement parts and service products, would rotate workers through the Advisory Council every six months, as would pilots and schedulers, and human resources vs. crews were also Advisory Council groupings. Any friction point in the company qualifies for an Advisory Council. Rotating employees from these departments through the Advisory Councils led to greater appreciation and understanding of the pressures on departments each had been in conflict with. These Advisory Councils also became grievance airing sessions that helped to get more fundamental conflicts between the teams out in the open.
In diffusing political power in Southwest, the senior management team was very careful to put performance to customers above all else in what they give the most praise to (Krames, 2003) and Gittel (2003). The mindset is one of getting past internal conflicts and internal politics so the customer can be better served and the team wins. Getting back to shared measures of performance, this has proven to be very effective in troubleshooting occurrences when Southwest flights are late to leave the gate. These shared metrics have in fact given the company the ability to complete root-cause analysis of the factors that needed to be improved on to increase overall performance. The result has…