Southwest Airlines' strategy for balancing low costs and employee satisfaction

Southwest Airlines

Since the early 1970's, Southwest Airlines began a mission of redefining the airline industry. Where, the founder and Chairman started the company off of the basic foundation of: low costs and offering a positive atmosphere. ("Southwest Airlines," n.d.) These two elements are important, because they would underscore a shift that was occurring in the airline industry. As there was more of an emphasis, on providing travelers with: low fares and great service. The problem was that this could pose a conflict in addressing the needs of employees, while maintaining its core business model. With many of the larger international and domestic carriers, following a standard formula that would keep costs in line with the industry average. As a result, Southwest would have to engage in bold strategy to address these two potential conflicts that exist. To fully understand the way this strategy works requires: examining how it is applied across every segment of company. Once this takes place, it will provide the greatest insights as to how Southwest was able to maintain this balance, to redefine air travel.

Facts and Assumptions

Prior to 1978, the airline industry was highly regulated, with the federal government playing a major role in determining what carriers would fly major routes and the structure of the industry. This created a situation, where many of the different carriers would have high labor costs and would be protected from fierce competitors. However, the introduction of the Boeing 747 and a desire to have lower airfares, would force a reversal in this policy. As the federal government would deregulate the industry, which would allow a host of new carriers to quickly emerge. For some of the traditional carriers (such as Continental) this would mark a shift that would underscore serve divisions between labor and management. To reduce labor costs, Frank Lorenzo (the CEO of Continental at time) would use the bankruptcy laws to break the various union contracts. This would set off heated divisions within the industry between management and labor. (Gillen, 2004) In the case of Southwest, the problem was that they needed to avoid the stringent union demands, while at the same time encouraging employees to go the extra mile for customers.

Statement of the Problem

The problem that Southwest Airlines is constantly facing is: being able to maintain a low cost structure. Given the fact that the majority of carriers are unionized, meant that various union regulations could prevent the airline from maintaining its low cost structure. This could create a similar situation that the other carriers are facing, by having key positions in labor unionized. Over the course of time, the limitations on flying hours and the increases in salaries / benefits posed a threat to Southwest. When you put this in the backdrop of what occurred with Continental in the 1980's, meant that a similar situation could spiral out control. (Gillen, 2004) Especially, when you consider the fact that labor costs are one the biggest factors affecting ticket prices.

Alternatives

The different alternatives Southwest could engage in would be: to independently negotiate with the various employees. The idea was that by having the airline negotiate a reasonable contract rate with the different groups of employees (i.e. pilots, flight attendants etc.), you can be able to establish labor costs that are reasonable, while allowing the company to achieve its objectives. At the same time, the airline needs to be able to attract and retain talented employees, who will go the extra mile for customers. These two elements are important, because they are bridging the traditional gaps between labor and management. If you can establish an effective way of communicating and establishing labor costs that are reasonable, the odds improve that the overall levels of service will remain high.

Decisions

The process of negotiating independently with the different groups of employees provides an effective frame work for labor costs. However, the actual implementation of the strategy could create other situations that may arise. The most notable would include: a renegotiation of the contract rates and benefits for employees. This is problematic, because if the staff begins to see that managers are making irresponsible decisions or are becoming disconnected with employees, it will create the setting for increased amounts of animosity to occur. Once this take place, it means that the company could lose talented employees and may be forced to renegotiate with unions (which would undermine its business model). ("Southwest Airline Corporation," 2002)

Case Report

The formula that is being utilized by Southwest would help to effectively resolve various conflicts, before they have a chance to become major issues. This is a different strategy from what was being utilized by various airlines, as they would allow these divisions to continue to build up. Then, when they are renegotiating the various union contracts, management and labor are so far apart that the chances decrease they will be able to find an agreeable solution. If management can take the lead and follow a similar negotiating strategy, then any organization will increase the chances of being able to find a balance between: the underlying costs of labor and ensuring that the airline is economically viable. That being said, during this process managers / employees must keep an open mind and have flexibility. If these conditions can be met, then the odds increase that agreeable labor costs will be negotiated with the various unions. At the same time, this process will allow the airline to be able to ask more of their employees than traditional carriers. Where, managers will demand high standards of performance and want to hire those people who would work effectively, in helping the company to achieve this objective. This will improve the professionalism of the organization and allow the company to provide better services, while maintaining low ticket costs. This would create a change of culture within an organization, as management and labor will have positive relations, which reflect upon the environment itself. A good example of this can be seen when someone is first hired by Southwest Airlines. Where, everyone will work to welcome new employees to the company, because they were chosen for their particular skill sets. This helps to eliminate any kind of fears and to instill the idea that everyone needs to work together, to help improve the experience for customers. As a result, the use of the strategy that was outlined above helps Southwest to be able to overcome the various challenges that are common within the industry. This is accomplished by reaching out to employees before the situation spirals out of control. ("New Employee Orientation," 2002)