Southwest Airlines business model and operations

Southwest Airlines Analysis

Discuss the corporate culture at Southwest Airlines and how it leverages its culture to achieve a competitive advantage.

The nature of Southwest Airlines' culture is one predicated on creating as much transparency and trust as possible, as the company has learned that this is critical for overcoming resistance to change and meeting the many challenges it faces going forward. As a result, the company's continued successful, profitable performance in one of the most challenging industries globally shows that creating clear, easily understood links between decision making styles, supporting accurate and honest communication, and a bias towards minimizing the negative effects of politics and internal power struggles all can contribute to greater long-term profitability. Because the Southwest culture is so firmly rooted in these core values it is often seen as nonconformist to traditional global cultures and approaches to decision-making (Rhoades, 2006). The company was founded with a strong belief in egalitarianism or the rights of every employee to know the current condition of the company and its future direction, and as a result there is a culture of trust that permeates the organization today (Kochan, 2006). This culture of trust is also responsible for the development of a culture that greatly values service and support to customers, with no reasonable or legal request ever denied for service (Krames, 2003).

There are many benefits to have a culture so firmly grounded in accountability, transparency and trust. One of them that have served Southwest Airlines very well in the decades it has been operating is the willingness to allow for risk-taking on the part of its employees. This has become such an engrained activity in the company that risk-taking on behalf of customers is expected and rewarded (Rhoades, 2006). Tolerating risk-taking on behalf of customers is what has led to many stories permeating the company's culture, further supporting this value. The stories of Southwest Airlines attendants going above and beyond their roles to make passengers comfortable on flights, complete trips in schedule, and overcome travel obstacles is part of the legendary service expectations that fuel this unique culture. The stories of flight attendants going on vacation giving up their seats on flights that had sold out for customers are commonplace (Rhoades, 2006). There are also stories of pilots giving children from Make-a-Wish Foundation a thorough tour of their jets before take-off, taking them on the inspection walk each pilot does before leaving on each flight (Rhoades, 2006). Stories are the most powerful aspect of how people change their expectations and learn from corporate cultures what is baseline or typical performance what constitutes exceptional service -- in other words, stories set the bar of performance and define how employees can exceed it by their performance (Hardage, 2006). The founders and senior management team did not set out to deliberately create a culture that celebrates service; it emanates out of the set of thirteen core values the company is based on. The culture in 2010 is a direct result of these thirteen values permeating the culture and leading to employees having the confidence to pursue what they see as exceptional service on behalf of passengers. The result has been a culture that celebrates selfish service to passengers while seeking to give them an exceptionally positive experience with the airline. This has indeed been fortuitous for Southwest Airlines, as over the last two decades have seen a continual emphasis and investment in customer experience management in airlines globally, often with mixed results because executives lack true passion for attaining the benefits of these programs (Lopez-Fresno, 2010). While other airlines paid lip service to customer experience management and continued to have draconian cultures that pushed employees often beyond their limits to save on costs, Southwest Airlines honored the relationship with the customers and employees. Even when Southwest Airlines was hit with major cost increases over the last five years in this global recession, they never wavered or quit on their core thirteen principles. In addition, today they are the only airline who has never declared bankruptcy operating in the U.S. Is there a correlation between such a strong, passionate commitment to values and being real with your employees and profitability? Can a company's viability be tied to the culture it has created? The founders of Southwest Airlines and its managers and employees would certainly agree with that statement, and have the results to prove it. This correlation between a consistently held series of values as a culture and the ability to overcome significant financial challenges is what makes the Southwest Airlines culture so noteworthy as a corporation.

The center of the Southwest Airlines culture are the thirteen core values that the founders defined at the launch of the company (Freiberg, Freiberg, 1996). These value include seeking out low cost yet high value solutions to customers' challenges and problems, profitability, family, fun, hard work, individuality, ownership, legendary service, egalitarianism, common sense and good judgment in serving customers, simplicity, and altruism. As these values are so critical to the company's identity and their preservation critical to the company's continued success, the hiring process concentrates on finding those employees who have a strong servant mentality or mindset and a warrior mindset to delivering outstanding over any obstacle (Hardage, 2006). These values are so critical to the future of the company that the interview process often includes 360-degree feedback on each new employee to make sure they will fit into the culture. It is common for Southwest Airlines to screen employees rigorously during the interview process to make sure they only hire the employees with the potential to live their core values (Krames, 2003).

Senior management is often asked about how their values equate to their financial performance. The finding from the series of interviews completed on this topic further underscore the fact that creating a unique, highly customer-centric organization can consistently deliver viable financial performance (Rhoades, 2006). The link of the Southwest Airlines culture to the ability to withstand economic turbulence is also seen in how risk-taking on behalf of customers has led to one of the most loyal customer bases throughout all of the airline industry globally and the lowest cost per flight ratio to paying customers in the U.S. airline industry (Hardage, 2006).

In conclusion, Southwest Airlines senior management realized that the long-term effects of creating a culture that celebrated customer service and held up stories of exceptional performance would over time, reduce their operating costs and evolve to a culture that made traveling with them fun. The thirteen cultural values set the foundation for a unique, highly differentiated corporate culture that also nurtured trust, which created a level of communication that other competitors in the U.S. airline industry could not match. The long-term effects of this high level of trust led to greater operational efficiencies and reduced costs, leading to Southwest Airlines being profitable despite a prolonged recession affecting every one of its competitors.

Evaluate the company's financial performance by calculating and interpreting the profitability ratios (operating profit margin, net profit margin, return on total assets, and return on stockholders. equity).

Southwest Airlines' profitability ratios of Operating Margin Before Depreciation, Operating Margin After Depreciation, Pretax Profit Margin, Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE), and Return on Investment (ROI) for the years 2004 to 2009 are shown in Table 1, Southwest Airlines Ratio Analysis. When compared in aggregate all of these ratios indicate how effective the operational efficiencies and cost reduction strategies continue to be in improving process performance. Throughout 2008 and 2009, Southwest Airlines continues to concentrate on business process re-engineering (BPR) efforts to reduce time taken on key customer-facing tasks including turn-around time of jets in gates, the use of more effective programs for managing customer complaints online, in-person and over the telephone. All profitability ratios reflect the impact of the economic downturn throughout 2009, with the exception of Return on Equity (ROE). Where other competitors in the U.S. air market hedge approximately 20% of their fuel costs by purchasing futures on oil and fuel contracts, Southwest Airlines hedges up to 80% of purchases on a routine basis (Carter, Rogers, Simkins, 2006). This strategy has been credited by senior management in their annual reports as being the single greatest contributor to their continued profitability and ability to withstand cost increases over time. Fuel hedging has a direct effect on the ROE Southwest Airlines has been able to attain despite a global recession.

Analysis of the Operating Margin performance before and after Depreciation shows that top-line revenue growth continues to be consistent while the depreciation charges over the last five years continue to escalate. Top-line revenue growth is why the Operating Margin before Depreciation is stable despite dropping from 16.156% in 2004 to 9.121% in 2009. The continued build-out routes, the decision to move more aggressively into top-tier markets by purchasing gates in major airports including Boston's Logan as of the Fall of 2009 have led the top-line revenue growth and led to this measure of gross margin not falling due to economic conditions. The secondary gross margin measure, Gross Margin after Depreciation, shows the costs of having a rapidly growing infrastructure to support new routes and the purchase of additional planes over the five-year period. The reduction Gross Margin after Depreciation would be flat or slightly down during a strong economic period as well. This measure of gross margin indicates that the capital investments that are often amortized over seven years as fixed assets are being depreciated on the Southwest Airlines balance sheets through the 2004 -- 2009 period. In summary, the Southwest Airlines financial statements reflect how effective the strategies of continually improving productivity through process improvement are which are tied very closely to the culture the company has worked so hard to create. The activity-based ratios shown in Table 1 including Inventory Turnover, reduction of Operating Cycles and stabilizing Days to Sell Inventory stabilized at 9 days is impressive. This says that despite the rapid growth the company has achieved, they are still as efficient as when they were significantly smaller in 2004.

Table 1: Southwest Airlines Ratio Analysis

Describe the characteristics of company's culture and how it affects company performance.

The thirteen core values of the companies mentioned earlier define a strong foundation on which trust is established and maintained between managers, employees, senior management and service partners throughout the airline's network. This trust acts as an accelerator of key business processes, as it enables much greater tolerance and resiliency to change on the part of its employees. It is noteworthy that Southwest Airlines is one of the few airlines that is not completely managed from unions at the mechanics level of operations, and the commitment to values is a major factor in contributing to keeping unions from overtaking this company (Krames, 2003). If there is a cornerstone to the culture that directly contributes to the company's ability to translate its values to profits, it is its egalitarian nature and openness, and the trust that pervades communications (Sadri, Lee, 2001). This cultural attribute above all others has led to fewer mistakes being made, fewer problems with operations, greater insight into how to improve the efficiency of key customer-facing processes form ticketing to disembarking from aircraft. Southwest Airlines' culture has shown that trust is an exceptional accelerator change, and the financial ratios on operational efficiency illustrate this.

Another aspect of the culture that has directly contributed to improved financial performance is the focus on egalitarian mindsets pervading every aspect of company operations including decisions on which airlines to standardize on and why. Herb Kelleher involved his mechanics and the entire operations staff in the decision of which model of airliner to standardize on, with the goal being a turn-around time of 40 minutes or less for each flight. Given this goal, the operations teams and mechanics studied the many different jets and chose the Boeing 737 due to its excellent reliability record, ease of maintenance, low Mean-Time-to-Repair (MTTR) and its excellent Maintenance, Repair and Overhaul (MRO) record with other airlines (Rhoades, 2006). This decision alone has saved the company literally millions of dollars over the last two decades the planes have been in service. Management theories predicted Southwest Airlines would be the single profitable airline decades ago due to their extreme standardization on a single jet model when the type airline had several models to manage and support (Bovier, 1993). All of these benefits would not have been realized if the company had not adopted their core set of values and stayed passionately committed to them over time.

Given the strategic decisions in the case, recommend actions that Southwest's management should take to sustain/strengthen the culture (or implement a change) based on the situation given.