I need you to skim thru the attached document and answer questions 1 and 2. The document is to answer question 1 and question two is just a general question. 7-8 detailed sentences per question for an
Southwest Airlines: In a Different World
On a bright day in October 2008, Gary Kelly, Executive Chairman, President, and CEO of
Southwest Airlines, listened intently to the arguments of those seated around the conference table in
his Dallas, Texas, office. They were arguing for and against Southwest’s possible acquisition of slots
and gates that the bankrupt ATA Airlines had vacated at LaGuardia terminal in New York City.
Executives from both Marketing and Scheduling argued for going into LaGuardia. Those from
Properties and Legal worried about getting the slots. Those in Operations were concerned about
delays. Kelly was not surprised by the vigor of the discussion. He recognized that such a move would
further test just how far Southwest could expand its network to meet the needs of its Customers.1 It
represented just one of many decisions that the team would have to make in the context of its
continuing efforts to transform Southwest’s strategy in the face of rising costs, stiffer low-fare
competition, and changing Customer needs and behaviors.
Background
Once considered an upstart in the airline industry, Southwest had grown to become the airline
serving the most U.S. customers with the most flights and seats, but to only 64 U.S. cities to which
Southwest targeted its service. In the process, it had come to stand for, in the words of Kelly,
“outstanding, passionate, caring Customer Service combined with an efficient, simple, low-fare
Customer experience provided with high reliability and operating expertise.”
Founded in 1967, Southwest’s operations were delayed for nearly four years due to lawsuits that
competitors brought to block the new carrier’s entrance into the Texas intrastate market. Since its first
regular flight in June 1971, Southwest had compiled the most consistently profitable record in the
world’s airline industry. By 2001, shortly after September 11, the airline’s market value exceeded that
of all other U.S. air carriers together, suggesting the dominance of the strategy developed over time
by Southwest’s founders, Rollin King (an investment counselor and pilot), Herb Kelleher
(Southwest’s attorney), and Lamar Muse (former CEO of another small airline who became
Southwest’s first operating President and CEO). By then, Southwest had literally changed the rules
by which air carriers worldwide operated and competed. By 2008, many airlines had been created
based more or less on the Southwest model, including Air Asia, Air Deccan, Go Airlines, Spice-jet,
and Indigo in Asia; Ryanair and Easy-Jet in Europe; and JetBlue, Ted, and Song (since merged back
into Delta) in the U.S.
Southwest’s beginnings were not auspicious. Because of their plan to charge fares that were at
least 60% lower than the average coach fare, its founders did not want to be regulated by the Civil
Aeronautics Board, which set airline routes and fares for interstate carriers. Having seen the success
of intrastate carriers Pacific Southwest Airlines (PSA) and Air Cal, Southwest’s founders mapped a
triangular intrastate route connecting Dallas, Houston, and San Antonio, cities located about an hour
(by air) from each other, and in 1967 applied for authority from the Texas Aeronautics Commission to
serve them. Two interstate competitors, Braniff and Texas International, sued to enjoin Southwest
from flying, a suit that was eventually resolved in Southwest’s favor by the U.S. Supreme Court in
1971.
King, Muse, and Kelleher consulted with Air Cal on a number of issues, including the decision
initially to purchase three aircraft. (They bought a fourth shortly thereafter.) The Boeing Company,
which had overproduced its Boeing 737 twin jet (a result of an overestimation of the market), was
willing to sell each plane for $4.1 million, $500,000 below the initial asking price, and provide
favorable financing terms. Thus began a relationship that would create Boeing’s best customer. It also
launched Southwest as a carrier that utilized only Boeing 737s, 537 of them by 2008.
Price competition from interstate competitors was ferocious. According to Colleen Barrett,
President Emeritus, “we knew that we were going to have to have substantially lower fares on day
one of our operation than were currently being charged because that was our only chance of winning
a niche in the business.” The goal was to charge fares at all times that were below the cost of driving
an automobile from one Texas city to another. (Later, in most of the airports in which Southwest
initiated service, traffic on the routes it served increased three or four times. Over the years,
Southwest enjoyed a long waiting list of airport managers seeking out the airline to initiate service to
their airports.)
Management had to sell one of its four planes at a profit to survive the first year. This led to
another key element of Southwest’s eventual strategy, the 10-minute turnaround. In order to operate
with three planes rather than four, it became even more necessary to get maximum utilization out of
the fleet. As a result, Southwest made efforts to reduce the turnaround time (from arrival at the gate
to push-back from the gate) to 10 minutes, barely one-fifth that of competitors. While average
turnaround time increased over the years due to more seats (typically 130 per plane), higher load
factors (seats filled per available seats), and the carriage of freight, it remained less than 30 minutes,
about half the industry average in North America.2
Southwest’s business model, as it quickly evolved, became well known for its contrarian approach
to air transportation—what it didn’t provide that other carriers did. Because its flights were typically
90 minutes or less, it served no food (other than peanuts). There was no first class, no assigned seats,
no interlining (with other airlines) of bags or passengers, no code sharing (with other airlines’ flights
to extend routes), and no use of the popular hub-and-spoke route structure. Instead, Southwest
offered low fares, frequent flights, on-time arrivals, and point-to-point service, often from airports not
served by other airlines, some of which were less congested and more easily accessible to business
travelers.3 Its strategy was fueled by the low fares that it made possible. Southwest executives
regarded the private automobile, not other airlines, as its competitor. They set fare levels accordingly.
The Focus on People and the Culture
Frequent on-time service to and from convenient airports for business travelers, provided at fares
rivaling the costs of driving an auto, were only some of the elements Southwest sought to deliver to
Customers. Just as important was the service provided. The founders wanted the service to be both
memorable and inexpensive to deliver. They had enlisted the help of a regional advertising agency,
The Bloom Agency, to come up with, among other things, a personality for the airline. As a result,
Southwest became “the airline that made it fun to fly. Young, friendly, refreshing, and exciting.”
Thus, the LUV (later, Southwest’s stock designation on the New York Stock Exchange) airline was
born, featuring things that today might be regarded as blatantly sexist: love potions (for drinks), the
love machine (for tickets), and ads with female cabin attendants in hot pants who invited travelers to
fly an airline that provided something only Southwest could offer, “me.”
From the outset, Southwest’s management focused on hiring agents and cabin staff with positive
personalities, senses of humor, and the willingness to make humorous intercom announcements and
otherwise innovate on behalf of Customers. These antics replaced meal service on flights that were
relatively short anyway. Employees had to be able to use good judgment in implementing
Southwest’s policy of “do whatever you feel reasonable doing for a Customer.” In return, the
company paid wages that were roughly standard for a start-up carrier and gave Employees an
opportunity to participate in the airline’s success through membership in its profit-sharing and stock
ownership programs.
The organization was imbued with a sense of ownership. Jeff Lamb, Senior Vice President
Administration and Chief People Officer, told a story that illustrated it. He had just joined the
organization, leaving his former job in real estate because he was intrigued by the chance to be part of
the Southwest experience, when a member of his staff came by the office to drop off a cowbell and
announce that “everybody is gathering in the lobby in 15 minutes to welcome Bob back from the
hospital.” Lamb said, “I didn’t get the memo.” The reply was, “We don’t send memos for this sort of
thing. See you there.” According to Lamb, hundreds of people assembled in the lobby, greeted Bob,
and were back at work as if nothing had happened, all in the space of 15 minutes, while a skeleton
staff maintained “coverage” to ensure that nothing stopped entirely.
A “Culture Committee,” drawn from all levels of the organization, reviewed Employee ideas for
recognition and celebration, and used the Southwest Way to guide its efforts. (See Exhibit 1 for
Southwest’s mission and values.) Many of the projects were self-funded, with Employees raising
money to buy T-shirts and other paraphernalia with bake sales and other events. Employees
extended their team efforts when away from the job as well, engaging in community-based activities
together. The organization as a whole officially supported the Ronald McDonald House Charities for
sick children and their families.
There was a constant effort to maintain what came to be known as a “Warrior Spirit” at
Southwest. A typical, strongly worded memo from Herb Kelleher encouraging everyone to reduce
costs to maintain the airline’s low-cost leadership position was intended, in the words of the memo,
to make sure we don’t “rest on our laurels and get a thorn in our ass.”
A “Servant’s Heart” and a “Fun-LUVing Attitude” characterized much of the airline’s culture, as
shown in Exhibit 1. Cofounder Kelleher, who had become Chairman in 1978 and CEO in 1981, and
Barrett, who for many years served as Executive Vice President Customers and, later, President, led
efforts to preserve the culture. Kelleher’s antics were legendary. They included dressing in outlandish
costumes; riding a motorcycle into the headquarters lobby; arm-wrestling another airline executive in
a highly publicized “Malice in Dallas” match over the rights to the use of an advertising slogan, “Just
Plane Smart”; and serving as the lead celebrant at the many awards parties that Southwest
Employees held. Visitors to Southwest’s headquarters were impressed by the thousands of photos of
Employees taken at these events, as well as frequent hugging and use of the word “LUV.” As one
visitor put it, “the longer it went on, the longer I concluded that the behavior was real. No one could
keep up a pretense for that long.”
Southwest remained the most heavily unionized airline in the industry. Both national unions such
as the International Association of Machinists and “associations,” such as the one formed by the
Pilots, represented its Employees. In its negotiations with these organizations, management had
always sought to provide reasonable compensation and secure flexible work rules. The flexible work
rules enabled Employees to perform many different jobs as members of teams. For example, Pilots
could handle baggage if the situation demanded it. Teams were assigned to gate operations, with
responsibility for turning planes around rapidly. If a plane was delayed on the ground, it was the
team’s responsibility to make sure it didn’t happen again. As a result, Southwest heavily emphasized
the selection of Employees with abilities to relate to both Customers and other Employees. Regardless
of rank, they were then required to complete team-based training activities.
By 2007, Lamb’s People Department was responsible for hiring roughly 4,000 people per year in
an organization of more than 35,000. This was sufficient to support growth and replace departures in
an organization with a relatively low Employee turnover rate of less than 5%. That year, it received
329,000 applications for employment. A significant number of hires were from current Employees’
referrals. Recognized by Fortune magazine as one of the best places to work in the U.S. for several
years running, Barrett discontinued Southwest’s participation, declaring that it required too much of
an investment in time.
Leadership and Succession
Former CFO Kelly became CEO in 2004, with attendant responsibilities for maintaining the
organization’s momentum. He added President and Chairman to his title in 2008. Among other
things, he had been credited with instituting a very successful fuel hedging strategy (described
below) that had saved Southwest more than $4 billion between 2000 and 2008 and further
differentiated the airline’s financial performance from its competitors. Chairman Kelleher and
President Barrett retired in 2008. The Board, to reward their legendary service, named both to
Emeritus status, with rights to maintain their offices at headquarters for five years. They appeared
frequently at Employee gatherings. Kelly appeared to be sanguine about the prospect of having two
giants of the industry in close proximity, if not looking over his shoulder.
Controlled Growth
Southwest saw its revenue grow from $5.9 million in 1972 to $5.7 billion in 2000, a compound
growth rate of more than 25%. By the late 1990s, however, the airline sought a controlled growth rate
of about 8% to 10% per year in order to make it possible to hire enough of the right people to preserve
Southwest’s service, personality, and culture. Southwest was the only airline ever to win the “triple
crown” of service, recording the highest levels of Customer Satisfaction, the best on-time arrival
record, and the lowest level of lost baggage. Further, it accomplished the feat in five consecutive
years between 1992 and 1996. (See Exhibits 2 and 3 for the airline’s financials and operating data for
selected years.) The Company rewarded Employees for this achievement with a specially painted
aircraft, called “Triple Crown One,” that included the names of all Employees at the time on the
overhead bins.
The terrorist attacks of September 11, 2001, posed challenges for Southwest as well as other
airlines. But unlike its competitors, Southwest’s management did not furlough anyone. Nevertheless,
new security rules for boarding passengers threatened to slow a process particularly important to an
airline operating with a significant percentage of last-minute “walk up” passengers and short
turnaround times.
As a result of management’s decision to maintain its flight schedule and staff, Southwest’s
revenues declined less than 2% in 2001 compared to the previous year. It emerged from the
September 11 crisis in a competitively stronger position than before, with by far the highest-valued
stock of any U.S. airline.
Transforming the Core Strategy
Opportunities for future growth within the highly focused strategy centered around low fares and
point-to-point flights were less certain. Kelly summarized the challenges this way:
One challenge in particular is overarching: a more than 35% rise in operating costs since
2005 caused simply by increased energy costs. For years, we had stable costs, low fares, and
traffic stimulation. Now, higher costs mean higher fares, which mean traffic de-stimulation,
which means less capacity needed, etc. One way or the other, for legacy carriers to survive,
they had to get their costs (and their fares) down. Demand was soft and the legacies’ days of
living off fat, high fares were over. Those sensing the opportunity formed a new generation of
low-cost/low-fare carriers. Now, our legacy competitors (through bankruptcy) and new
entrant low-cost carriers have lower labor rates than ours. Better, sophisticated revenue
management and customer fare shopping via the Internet make it easier for legacy airlines to
compete. This represents a threat to our market niche. We know we have to adjust to this
looming competitive reality.
Also, it’s a new world with security.
We have to transform our business model and expand our revenue-generating capabilities.
To do that, we have to transform or even construct our capabilities to offer new products and
services.
Changing the Customer Experience
As a result, management set out to increase revenue without raising fares and damaging its cherished
low-fare brand. To do this, it sought to win more Customers by improving the Southwest Customer
Experience. This meant adding flights among cities the airline currently served, expanding routes to
meet Customer needs for service to important U.S. destinations, adding code-share destinations (outside
the U.S.), and adding more sophisticated route scheduling and revenue management of seat inventories
and fares. It also meant completely transforming the supporting technology and challenging decades-old
paradigms, like open versus assigned seating, as well as introducing an array of new fares, products,
onboard services, and a “bags fly free” policy.
Adding Flights
In 1984, Southwest added its first flight segment of more than three hours. Until then, it had assumed
that service with minimal onboard catering (snacks and beverages) was not suitable for longer flights. But
the new service between, for example, Los Angeles and Houston proved to be popular. Further,
Customer Service scores on the flights dropped very little as Southwest’s low fares and Customeroriented,
fun Employees (who were known for initiating games such as “who’s got the biggest hole in
your sock contest”) outweighed other service factors. By the fall of 2008, with the addition of new stations
further and further east, the proportion of Southwest’s flights greater than 1,200 miles in length had risen
to approximately 25%. Popular routes, for example, were those between Phoenix and St. Louis,
Chicago/Midway and Las Vegas, and Denver and Orlando.
Aside from more flights to more distant locations, there were many opportunities to add shorter
flights to schedules connecting existing stations in the network.
New Markets
Southwest first extended its route structure to the northeast U.S. in 1993 with the initiation of
service to Baltimore. (Exhibit 4 shows the list of cities Southwest served throughout its history.)
Many questioned whether the airline would be able to maintain its culture of enthusiastic, fun-loving,
Customer-oriented Employees working in teams both on the job and in community activities after
work. Pete McGlade, Vice President Schedule Planning, stressed that Southwest would pass over a
city if it could not retain the airline’s “LUV” culture by operating there. As he put it in 2002, “[e]very
schedule decision we make must be consistent with our strategy. Our Employees need to internalize
the strategy, and consistency is necessary to ensure that everyone understands the scheduling
decisions.”4
With care in hiring, combined with the transfer of Southwest veterans from elsewhere in the
system to Baltimore for short- or long-term assignments, the company found it could transport the
Southwest culture even to the East Coast. It helped that Baltimore’s airport was not congested and
that the community welcomed the new service. As a result, Southwest continued its advance
northeastward, successfully introducing service to Long Island through Islip airport and to the
Boston area through airports in Providence, Rhode Island, and Manchester, New Hampshire, all
uncongested.
While Southwest made these moves to fuel its continued growth, it needed to make other moves
to counter new competitors that attempted to emulate the airline’s fare structure and operating
strategy, making both less distinctive. Fare and service differences between Southwest and
competitors declined substantially after 2005. With higher load factors, average turnaround times for
Southwest’s aircraft had increased to approximately 25 minutes (as opposed to an average of about
60 minutes for the U.S. airline industry). And, after 2007, average daily aircraft utilization of more
than 11 hours of operating time per day was declining, as airlines trimmed unprofitable flights from
the schedule.
CEO Kelly had begun to emphasize “the power of the network. It allows us to go into a market
with just a few flights to benefit the network. I call it playing ‘small ball.’” He cited a possible move
into Minneapolis as an example. It involved a new service in competition with Delta, the dominant
carrier out of that station, to only one other location, Chicago’s Midway airport. It would allow
Southwest’s Chicago passengers to book into Minneapolis. Other Customers could also do so if they
were willing to fly through Midway.
4 See James L. Heskett, “Southwest Airlines, 2002: An Industry Under Siege,” HBS No. 803-133
Code-Sharing Agreements
In 2004, a strategic opportunity to grow in Chicago presented itself. ATA Airlines filed for
bankruptcy. In addition to buying certain airport assets at Chicago Midway, Southwest agreed to
code share with ATA for the first time in Company history.5
The service began in February 2005 for code-share service to multiple domestic destinations,
including New York LaGuardia and Hawaii. In April 2008, ATA ceased scheduled service, and the
code-share agreement with it ended. The ATA code share was a success, generating nearly $40
million in additional revenue in 2007. So with the potential for substantial growth to nearinternational
markets and work underway to develop new technology to accommodate code sharing,
Southwest began to actively pursue other airline partnership opportunities. In July 2008, Southwest
announced a Memo of Understanding with WestJet, a Canadian carrier with an award-winning
corporate culture. It was in the process of finalizing a similar Memo of Understanding with Volaris
for code-share flights to Mexico. Volaris was known for its competitive pricing and a reputation as
Mexico’s most on-time airline.
Developing Supporting Technology
By 2002, Southwest’s management knew that it had to, in Kelly’s words, “take the airline product
up a notch, to remain unique and still inspire Customers.” To do this, it knew that it had to have new
systems and processes that would enable it to change both the network and various operating
practices. As one example, the existing system would not allow management to schedule and pay a
cabin crew of more than three people. So it was impossible, without technology changes, to consider
flying planes larger than 150 passenger seats (something the airline at the time of the case was not
actively considering). Similarly, in 2002, the system would not accommodate code sharing with other
airlines, thereby ruling out that strategic move. By 2008, systems were in place or in development that
would allow management to examine a wide range of strategic initiatives, such as the impact of new
routes and changes in operating procedures, like the boarding process.
Challenging Old Paradigms: The Boarding Process
One strategic question was whether Southwest should change its boarding procedure. Since the
early 1970s, Southwest had boarded its flights on a first-come, first-served basis, with no assigned
seats. In those days, load factors were light, and there was little need for assigned seating. Customers
had to stand in three lines, representing the groups of Customers that would board sequentially. The
process fostered quick boarding, as Customers hurried to get into their preferred seats. But some
Customers, particularly those not used to the system, regarded it as annoying, because they had to
arrive early and stand in line. They judged it as inferior to other airlines’ practices of allowing
passengers to reserve seats. In the words of one Southwest executive, the Marketing Department
“was not proud about” the boarding process and felt that the company could improve it. But there
was a fear of change.
Southwest’s objective was to improve the boarding process in the Customers’ minds, at the same
or lower costs. It organized an experiment in 2007 in San Diego. It allowed passengers to reserve seats
in advance. It filmed the actual boarding processes and then asked passengers several questions
about their experience. It found that veteran Southwest Customers, in particular, were not
enthusiastic about the change. Some said, for example, that they didn’t mind getting to the airport in
time to get the best seat choices. What they were really concerned about was chaos at the gate. Others
were more concerned about being able to choose who they sat next to than where they sat. After
extensive Customer research, Southwest found that Customers preferred its open seating by two to
one. Of equal significance was that assigned seats, which removed the incentive to board quickly,
slowed the boarding process by four to six minutes.
As a result of the experiment, perhaps the most important that the airline had ever undertaken,
management decided to maintain open seating. But it began allowing Customers to “reserve” places
in the waiting line so that they no longer needed to arrive at the gate early or stand in line to get
preferred boarding treatment. This new boarding procedure, launched in November 2007, paved the
way for a priority boarding product called “Business Select,” something Southwest had never
offered, for a slight premium above the carrier’s full fares.
New Fares, Products, Services, and Policies
Other efforts to transform the Customer experience involved changes in fares, products, services,
and policies. For example, in addition to instituting a Business Select program to provide greater
convenience to business flyers, Southwest began offering Early Bird fares to those booking early
(enabling Southwest to continue emphasizing low fares in its advertising), and altered the Rapid
Rewards (frequent flyer) program to make it quicker to earn free flights. Management was
considering new services such as onboard Internet and a “cashless [credit cards only] cabin” for
onboard purchases. It decided not to charge fees for changing tickets. But perhaps the policy
receiving the most attention from Customers, in view of other airlines’ growing charges for checked
luggage, was Southwest’s “bags fly free” policy, which allowed passengers to check up to two bags at
no cost. It was clear that with mounting competition, the number of innovations required to
differentiate Southwest’s service offering would only grow. It was important that the public view
these as consistent with Southwest’s low-fare, high-service image.
Cost Management: Fuel Hedging
Southwest’s finance department had been hedging fuel prices for decades. The practice helped the
airline accomplish several financial objectives:
1. Plan toward profitability. Hedging reduced the risk that Southwest’s fuel expenses would
swing wildly out of control. Hedging was like a form of insurance against volatile swings and rising
energy costs that threatened profitability.
2. Plan cash flows. Hedging helped the company plan cash flows more accurately, in order to
have enough cash in the bank to cover bills and maintain liquidity.
3. Lower overall fuel expenses. Hedging helped Southwest acquire jet fuel at lower prices. Since
fuel was such a huge expense for Southwest—actually one of the largest components of its cost
structure—it made sense to guard against the possibility of catastrophic fuel price increases.
Southwest was among the first in the industry to hedge the majority of its fuel. Even more surprising,
it continued to be the leader among U.S. airlines in the practice for years, even as Southwest’s
successful relative performance became more and more noticeable. (See Exhibit 5 for the size and
economic impact of Southwest’s fuel hedging on its financial performance for 2006 and 2007.)
The Philadelphia Story
In 2004, Southwest saw an opportunity to institute service to one of US Air’s hubs, in
Philadelphia. It predicated its decision to enter Philadelphia on two primary considerations. One,
Philadelphia was the largest market served by only one airport (as opposed to being divided among a
few airports). Two, travelers in the Philadelphia market were displeased with the higher fares and
poor customer service that US Air provided. The move attracted attention because it was clear from
the start that Southwest intended to establish extensive service between Philadelphia, an airport with
greater congestion and more frequent delays than any out of which it had operated to date, and
several other cities. Many observers assumed that the move, unlike some others that Southwest had
made, was intended to divert significant amounts of traffic from US Air, if not drive it out of its
Philadelphia hub altogether. Instead of acquiring permission to operate out of two or three gates,
Southwest occupied eight, with a capacity of at least 80 flights. But after its merger with America
West, US Air was able to stabilize its financial performance sufficiently to maintain a significant
presence in Philadelphia. By late 2008, Southwest had grown aggressively to 65 flights daily out of its
Philadelphia station. (See Exhibit 6a for Philadelphia’s operating statistics.) However, with high fuel
prices and the economy in recession, it put further plans for growth in Philadelphia on hold.
Philadelphia posed an operating challenge. As Mike Van de Ven, Executive Vice President and
Chief Operating Officer, put it, “We seem to operate either on time or with three-hour delays. But
we’re getting better at sequencing our flights. Our teams work closely with air traffic control. And we
will impose our own traffic flow delay program if the conditions warrant, so our planes will wait on
the ground rather than in the air.”
The LaGuardia Decision
With ATA Airlines Inc. ceasing operations in April 2008, its 16 LaGuardia time slots would
become available, prompting Kelly to initiate analyses to guide Southwest’s management in deciding
whether or not to bid for the slots. Given a winning bid, LaGuardia would become the first airport
with a practice of slotting flights that Southwest served. This would require negotiating with the Port
Authority of New York. Each time slot would allow for an arrival or departure within a 30-minute
window during the day. But once the airline agreed on the times, it could trade specific slots with
other airlines operating out of LaGuardia to create a logical schedule.
As the discussion continued around the table in Kelly’s office, those arguing for the acquisition
pointed out the need for continued growth, both for financial reasons and for the health of the
Southwest organization, as well as the need for service to New York that Southwest’s operations out
of Islip airport, some 30 miles from the city, did not currently meet. They also emphasized the
benefits to route network traffic that service to LaGuardia would provide.
Supporters argued that if Southwest could get the slots for the relatively small investment
represented by the recommended bid of $7.5 million, it could generate enough revenue from eight
flights daily to cover costs, merely by spending a little money to promote the LaGuardia service to
Southwest Customers in cities the airline currently served.
Some expressed concerns about the further departure from Southwest’s original strategy of
operating out of non-congested, low-cost airports that a LaGuardia service would represent. While
not necessarily disagreeing with a decision to go, Bob Montgomery, Vice President of Properties,
pointed out that “50% of all delays in the U.S. are driven by delays experienced in the three major
New York airports.”
Others raised questions about LaGuardia’s high cost structure (including costs resulting from
flight delays, high landing fees, and high wages) as well as the potential threats to Southwest’s
culture and its reputation for good Customer Service that a LaGuardia operation posed. Several
expressed concerns about the challenges of operating out of LaGuardia, with its frequent flight delays
and high cost structure. On the other hand, Daryl Krause, Senior Vice President Customer Services,
believed that “long-termers at the high end of the wage scale might be more interested in bidding
into a job at LaGuardia, at least for 6 to 12 months, just because they’ve always wanted to experience
New York.”
Landing costs alone at LaGuardia would be significantly higher than those Southwest incurred at
Islip airport. (See Exhibit 6b for data comparing LaGuardia’s operating record and economics with
those of other major airports.)
Supporters of the move countered that the service would represent only seven or eight flights out
of the roughly 3,200 the airline operated and that Southwest had learned how to operate out of
“difficult” terminals when it moved into Philadelphia in 2004.
Some raised questions about whether the Philadelphia experience was even relevant to
LaGuardia. In Philadelphia, Southwest had made a major commitment to establish competitive
dominance, potentially creating some operating stress on the rest of the Southwest network. As
Montgomery put it, “if LaGuardia is served from only one or two other cities, we can effectively
isolate the operation by shuttling planes between those cities and LaGuardia and make sure that
problems don’t flow through the network.”
Kelly was determined to push toward a decision by the end of October. It was only the first step in
a process that could take months. First, Southwest would have to bid on ATA’s operating certificate,
which included access to the slots. It was not clear whether there were other potential bidders, and
there was no assurance that $7.5 million would be a winning bid. The bankruptcy process and the
disposition of ATA’s assets were not expected to be completed before March 2009. At that point, a
team led by Montgomery would have to complete negotiations with airport management for the
specific gate to be used and with the Port of New York Authority for the time slots.
With a successful bid, Southwest could be serving LaGuardia by the end of 2009. But it had to
make the decision in the context of increasing competition for Southwest’s low-cost, low-fare
position; higher fuel costs; uncertain demand; and changing Customer needs and their use of
information technologies.
Available capacity did not seem to be an issue. At the time, Southwest was operating 537 planes,
more than 20 of which typically were not eligible for scheduled flying due to routine scheduled
maintenance. In addition, Southwest had 13 new Boeing 737 aircraft due for delivery in 2009 that it
could fly, retire, sublease, or use as a cushion to maintain capacity, while accelerating maintenance on
the rest of the fleet. High fuel costs had changed the cost structure from one dominated by fixed costs
to one driven by variable costs, in which it was sometimes more economical to park an aircraft than
operate it. In response, Southwest was adjusting to a higher cost structure by aggressively
optimizing its network in an effort to minimize the underutilization of aircraft and maximize route
profitability. This was typical of efforts all airlines were making to retrench to accommodate the
volatile fuel market and possible declines in demand resulting from what could be a prolonged
global recession.
Exhibit 1 Southwest Airlines Mission and Values Mission
The mission of Southwest Airlines is dedication to the highest quality of Customer Service
delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.
The Southwest Way
Warrior Spirit:
Work hard
Desire to be the best
Be courageous
Display a sense of urgency
Persevere
Innovate
Servant’s Heart:
Follow the Golden Rule
Adhere to the Basic Principles*
Treat others with respect
Put others first
Be egalitarian
Demonstrate proactive Customer Service
Embrace the SWA Family
Fun-LUVing Attitude:
Have FUN
Don’t take yourself too seriously
Maintain perspective (balance)
Celebrate successes
Enjoy your work
Be a passionate Teamplayer
*The basic principles are: (1) Focus on the situation, issue, or behavior, not on the person,
(2) Maintain the self-confidence and self-esteem of others, (3) Maintain constructive
relationships with your Employees, peers, and Managers, (4) Take initiative to make things
better, and (5) Lead by example.
Source: Adapted from the Company’s website, Southwest.com
QUESTION 1- to HBS case reprint, "Southwest Airlines: In a Different World." The case study makes it clear that a significant shift in organizational strategy requires collaboration across multiple departments, or functions, within a business. Review the case and discuss how you think Southwest's plan to serve La Guardia would impact two primary business functions (e.g., marketing, operations, human resources, finance, accounting, and IT). Consider how coordinating efforts of the two functions to successfully serve La Guardia might affect management and decision making. How integral is collaboration among business functions to the success of Southwest's plan? Cite specifics from the case in your response.
QUESTION 2- Provide an example in which managerial decision making has positively or negatively affected you? How did the personal decision-making styles used by managers apply to the situation? What is your take away from the example you provided after your reading about managerial decision making in this topic?
