Southwest Airlines in 2008

Southwest Airlines (LUV)

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

Southwest Airlines is a culture-driven enterprise. Management has established a tradition for charismatic, tactically innovative leadership that facilitated the company's evolution from a somewhat scrappy operation with an unproven business model into one of the top U.S. carriers. Flexibility and engagement are rewarded; strategic planning and committee-based procedures are discounted as a form of "navel gazing." While an early "warrior mentality" has mellowed somewhat over the decades, efforts to codify the "legends" surrounding the company have helped to preserve a surprising amount of entrepreneurial spirit at all levels of the organization.

Rank-and-file employees are considered central to the company's performance and are hired for attitude rather than skill set; management believes that skills can be taught but an authentic service mindset cannot. Enthusiasm and day-to-day improvisation are encouraged as the keys to a better customer experience, differentiating what could otherwise become a commoditized no-frills offering. Compensation is relatively high by industry standards, but productivity is extraordinary, which protects margins in the face of the company's primarily price-driven competitive strategy. Labor is emotionally invested in the company's performance and has originated several cost-saving measures, some with revolutionary impact (paperless ticketing). Management is exhorted to remain accessible to both concerns and suggestions, and a relatively flat and informal corporate structure encourages a relatively free circulation of ideas.

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

As of 2008, LUV was relatively profitable by peer standards, although rising fuel prices and a sluggish domestic travel market made year-over-year comparisons difficult. On full-year 2007 revenue of $9.9 billion, the company generated $791 million in gross income for an 8.02% operating margin, or $645 million in net income for a 6.54% net margin. (Compare to larger but vastly less efficient rivals such as AMR, which generated operating and net margins of 4.21% and 2.20%, respectively, over the same period.)

Given the asset-intensive nature of the aviation business, management was reasonably effective in adding value to the company's $16.7 billion in assets and $6.9 billion in shareholder equity. Year-end return on assets (ROA) was 3.86% and return on equity (ROE) was 9.34%. (Compare to the deeply indebted and weakly capitalized AMR's anemic 1.76% ROA and artificially inflated 18.96% ROE; fresh losses would wipe out equity entirely in 2008.)

Year-over-year operational performance was somewhat disappointing as operating margins dropped from the 10.3% reported in 2006, but the company's fuel hedges drove some improvement on a net margin basis. This in turn allowed a small but appreciable improvement in ROA and ROE.

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

As mentioned above, Southwest Airlines' nimble culture allows it to manage costs to its economic circumstances; recent innovations in this area include fuel-saving jet design changes and the institution of an aggressive hedge book to contain fuel price risk. (The hedge book was even a profit center in 2007, defraying rising fuel costs substantially.) More diffuse cost-saving initiatives included the employee-driven "Operation Kick Tail," which rewarded ground-level suggestions for improving efficiencies.

A long-term aversion to layoffs also helps to buoy the company through the economic cycle by preserving morale (and productivity) through periods of slow business while ensuring a fast ramp-up when conditions improve. More specifically, since Southwest invests heavily in both training and the "attitude" of its employees, the fact that all economically motivated employee separations are voluntary buyouts allows the company to protect that investment.

A happy workforce is more productive, which further helps the company manage its costs. Compared to the industry average, Southwest serves more than twice as many customers per employee and gets by with 8% fewer employees per plane. Moreover, the company's all-hands-on-deck approach allows it to turn its planes substantially faster than the competition, getting these extremely expensive assets back into the air where they can generate revenue.

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

In the face of recent safety-related setbacks to the company's previously unblemished brand, both employee and public confidence in the maintenance system must be rebuilt. More broadly, since culture is the centerpiece of the company's competitive proposition, the most natural resources available to overcome the situation are likely to be cultural in focus. Simultaneous, risks to the culture must be identified and addressed.

A secondary concern is the possibility that the public will identify Southwest as a "fun" or party-oriented low-cost airline with a willingness to cut corners on safety. Such perceptions must be actively challenged through a campaign that demonstrates that while the carrier avoids wasting money on frills, it still provides substantial value for the price of a ticket.

5. Given the strategic decisions in the case, identify three leadership actions that the company would need to be consider to implement the decisions. Explain why these are critical to implementing the strategic decision.

1. Broaden the labor force's mandate to report concerns and suggest operational improvements to matters of equipment. Implemented in a sensitive way, this would knit maintenance personnel more closely into the corporate "family" where they might otherwise be scapegoated for the company's problems. It would also transmute the failure of a single area of the business into a teachable moment for all, reinforcing the core engagement with customer service and pride in the brand.