Southwest Airlines (NYSE: LUV) is the largest carrier in the U.S., serving more than 100 million customers annually with 3,600 flights a day. Since its founding in 1971, Southwest has been one of the most respected airlines in the world, delivering an era of unprecedented affordability in air travel. The carrier’s influence has been so dramatic that the U.S. Department of Transportation has named the “Southwest Effect” to describe the lowering of fares and increase in passenger traffic prevalent wherever the carrier serves. While the business of providing scheduled air transportation has historically been extremely competitive and volatile, causing many other players to drop from the industry, Southwest recently celebrated its 42nd consecutive year of profitability. This success has been a direct result of effective alignment between its business model and operating model.
A number of facets of the Southwest operating model uniquely position the company to continuously capture value while being a low-cost, low-fare carrier:
Processes – Service delivery
A key component of Southwest’s low-cost operating model is their point-to-point route structure, rather than the traditional hub-and-spoke model. By not concentrating operations through one or more central transfer points, the operation allows for more direct nonstop routing and enables it to provide its markets with frequent, conveniently timed flights. Southwest’s route structure often includes service to and from secondary airports, which are generally less congested and contribute to the carrier’s ability to minimize ground time and therefore increase asset utilization.
Another key to Southwest’s high asset utilization is their capital investment in the aircraft fleet. Southwest flies just a single type of Boeing aircraft – the 737. The uniform fleet simplifies scheduling, maintenance, flight operations and training activities. We know from numerous examples that reducing variability can have a significant impact on the efficiency of an operation. By standardizing the fleet and working with highly productive employees on the ground, Southwest has clocked flight turn-around times 20-60% faster than the industry standard.
Human Capital and Culture
Having been named the best company to work for in America, Southwest uses a variety of human resource practices to create value for employees and convert that value to quality customer service. The company recognizes that at the core of a service industry like air travel, the people make the difference. The culture at Southwest provides employees the freedom to be themselves, to generate creative ideas and to make decisions at the front line when they need to make things right for a customer. Solidified in the mission statement, “Employees will be provided the same concern, respect and caring attitude within the organization that they are expected to share externally with every Southwest Customer.” The teamwork, cross-functional responsibility, and employee hustle that give Southwest a competitive advantage on the front lines begin with a disciplined hiring process that emphasizes cultural fit and team attitude over skill set. Throughout the organization, stress is placed on the value of “family” and mutual respect. In turn, employees’ high level of job satisfaction translates to superior productivity and ultimately superior customer service. In some cases, aircraft pilots have gotten off the plane to help baggage handlers so that the plane gets off the ground on time. Teamwork is simply paramount.
Also central to the culture is the notion of on-going learning. Instead of telling employees what to do, the supervisor’s role at Southwest is primarily to facilitate learning and help the front line do their jobs. Rather than assigning blame to individuals when delays or other issues come up, the entire team works to understand what went wrong and how to do it better next time. As a result of the cross-functional responsibility and front-line discretion at the terminals, the team rather than the individual takes responsibility for doing better, and for going above and beyond customer service expectations.
Southwest was the first airline to enable customers to make reservations and purchase tickets online. Online sales represent the lowest-cost means of transacting with customers, enable the airline to fill seats and react quickly to shortfalls in seat demand on any particular flight. Rate changes can be posted instantly and messages can be tailored for specific customers. While other airlines have since moved to the web as well, Southwest continues to benefit from a higher percentage of direct to passenger sales, which avoids the margin erosion inherent to travel agencies and third-party booking sites.
Southwest’s business model has always centered on making quality air travel accessible to many through low fares. To support this business model, the company has achieved a low-cost operating structure with lower unit costs than the vast majority of major domestic carriers. This low cost model hinges on an alignment between numerous facets of the operations, including point-to-point routes, standardized aircraft, a culture of teamwork, highly productive employees, continuous learning, and the use of technology. As a result of this highly effective alignment, Southwest has managed to continue to provide value to employees, customers and shareholders, and prove the sustainability of its competitive advantages during both volatile and unpredictable periods in the airline industry.
- LUV 2014 Form 10-K
- Southwest Airlines Success: A case Study Analysis (Dr. Ashutosh Muduli)
- Disruptive Innovation: the Southwest Airlines case revisited (Michael Raynor)
- Strategic Logistics Management: twenty-first century service industries (International Journal of Physical Distribution & Logistics Management)
- Paradox of Coordination and Control (Jody Gittell, California Management Review)
- Why and How Southwest Airlines Uses Consultants (Libby Sartain, Journal of Management Consulting)