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Southwest Airlines Business Analysis

Brandy Magee - 4228
Southwest Airlines is an airline company that has prospered throughout the recent recession and has steadily grown since it was founded in the 1970s. The companys business model revolves around customer service: having the cheapest and most efficient product available. Can Southwest Airlines continue to prosper after making the large acquisition of AirTran Airways? After examining the case of Southwest Airlines in Managing Human Resources and the Southwest Airlines website among other sources, despite many threats facing the airline, it seems the company will prosper for many years to come, while retaining the companys founding values.

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Table of Contents
External Environment ............................................................................................... 3 Industry Outlook ....................................................................................................... 4 Southwest Strategy .................................................................................................... 5 HRM Strategy ............................................................................................................ 7 Southwest Training Process ....................................................................................... 8 Labor Relations ......................................................................................................... 9 Compensation, Benefits, and Performance Management ......................................... 10
Compensation ................................................................................................................................. 10 Benefits ........................................................................................................................................... 10 Performance Management .............................................................................................................. 11

Open Seating ............................................................................................................. 11 Fuel Prices and Profitability ........................................................................................ 12 Bags Fly Free .............................................................................................................. 13 Southwest Airlines Future Profit Sustainability ........................................................... 13 Bibliography ............................................................................................................... 16

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External Environment
There are several aspects of the external environment of any industry. The first aspect to look at involves the customers. Airline customers can be categorized into two groups. The first group is the leisure travelers. This group includes mostly people going on vacation and visiting cities, family, and friends. This group of individuals tends to be very price sensitive, as they are using their discretionary income, or income after taxes, bills, and necessities, to pay for the trip. The second group consists of business travelers, who are most concerned with convenience (Jackson). They want to get from point A to point B and back in a timely fashion with no unnecessary hassles. Now that customers have been examined, move on to the competitors. The next area to look at is the competitor group. When looking at competitors in the airline industry it is best to segment companies based on their geographical coverage. First there are the national airlines that fly all over the country, like American Airlines, Delta, and Southwest. Next, the regional airlines that keep travels centralized in a specific area, such as Spirit Airlines and Alaska Airlines. Finally there are the commuter or feeder carriers that travel only short distances. These are usually extensions of major carriers like Atlantic Coast Airlines that operates as United Express or Atlantic Southeast Airlines operating as Deltas Business Express. Each of these groupings can also be further categorized into traditional carriers with business and coach classes and low-fare/lowfrills single class carriers (Jackson). Next, look at the route structure of airlines. There are two types of route structures: point-to-point and hub-and-spoke. The point-to-point structure is exactly what it sounds like, direct service between two points. This is the route structure Southwest
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Airlines use. Hub-and-spoke is slightly more complicated than point-to-point. In this structure the airport itself is the hub and each gate leads to another spoke, that is, each flight. This structure can be very costly (Jackson). Now we can take a look at passenger services. There are two main areas to focus on, the first being a broad service. This is common of national airlines that provide long flights. Broad service includes frequent flier programs, in-flight meals, and advance seat assignment. The second is called Spartan service. The airlines that provide this kind of service are mainly focused on getting passengers from point A to point B. These are generally shorter flights; therefore, there is no need for things like in-flight meals or other costly frills (Jackson). For the most part, airlines offer two classes (coach and business); some airlines go so far to offer three classes, and a few smaller flights/companies offer only one seating class.

Industry Outlook
The outlook of the airline industry is positive compared to past years. After the Airline Deregulation Act of 1978, airlines flailed for two years, trying to get costs down to a manageable rate. After the government could no longer control fare prices, routes, or market entry or exit, costs leveled out. In total, since deregulation, the airline industry has incurred more losses than profits, to the point that most airlines are now leasing their planes to save on costs (Jackson). Compared to the first five years after 9/11, the current future outlook for the industry is positive. Most carriers have gotten their costs under control and the number of passengers has returned to pre-recession levels. Though things are going well, there are 4 Southwest Airlines Business Analysis Magee

several threats to the current calm. Just about anything can happen to increase costs. Also, any changing economic conditions, technology failures, or safety issues (such as a terrorist attack) are all issues that can reduce the number of passengers. After many airlines declared bankruptcy, they became much more competitive in order to keep themselves in business and they become more competitive each day. Through the years airlines have also had to consolidate through mergers and have become more competitive through that.

Southwest Strategy
Southwest Airlines has a very extensive strategy that centers on exceptional customer service. It is considered a low-fare/low-frills airline but manages to be a major airline despite this fact. The business strategy is focused on being the cheapest and most efficient airline available. One of its biggest advantages is that though it is low cost, it has a great safety reputation and a high level of customer service. There are many ways Southwest Airlines achieves its strategic goals. The first thing to look at is cost leadership; a company cannot be a low-fare without minimizing its costs. One of the ways Southwest reduces its costs is that it only uses Boeing 737 planes with standardized cockpits (Jackson). This means that any pilot can fly any plane since no special training is required for any differences in controls. Any plane can also depart on any route without issue. This means less costs are incurred in training, maintenance, or service. Another way Southwest minimizes costs is through its route structure. It usually specializes in short-haul flights, which means there is no worry about an in-flight meal, though snacks and drinks are provided. The airline also works to
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keep the turnaround time of its planes down to about 15 to 20 minutes. This means planes come into the airport and leave on another flight in less time, allowing more flights per day. Labor costs are also minimized in any way possible, they only account for 35% of total costs incurred. That is not to say Southwest is cheap when it comes to their employees, they have found a way to keep both parties fairly happy. Southwest Airlines have never experienced a strike, lockout, layoff, or pay-cut; they must be doing something right. These are all ways the company keeps its costs down so they do not transfer to the customers. Southwest Airlines is well known for its exceptional customer service. If something goes wrong on a customers flight, he or she will get a letter from the company explaining what went wrong and apologizing for inconveniences, all within days of the incident. When you call Southwest, a person will be there to answer the phone, not some machine. They recently added Wi-Fi to most planes and they inducted their Rapid Rewards Program, a frequent flier program. The company also specially selects applicants and trains new employees to fit the Southwest ideal to provide excellent customer service. With any company there are plans for growth, though with Southwest Airlines, growth has never been the top of its priorities. Until 2010, with the purchase of AirTran Airways for $1.4 billion, Southwest never actively sought to expand its business. The annual growth rate up to that point was about 10% to 15%; upon purchase of AirTran, Southwest grew by 25%. Finally, Southwest Airlines has always been aware and active when it comes to social responsibility. The company is keen on helping the community. In 2009 the

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company donate $11 million and 45,000 employee volunteer hours to charities. The company has invested in the Green Plane that is made with environmentally friendly cabin materials, which exists on all Southwest planes. They have been involved in emissions reduction research and have fuel saving wing modifications on all planes. The have even inducted an on-board recycling program.

HRM Strategy
Southwest Airlines takes human resources to be a very serious topic. The HR department at Southwest is titled the People Department. Since the people that work at Southwest are one of the most important assets available to the company, they spend a lot of time with the recruiting and selection processes to make sure they get people that fit with the company and its ideals. The company wants to make sure it hires and retains the best people for the job. For Southwest, the recruitment process is really a continuing effort that never actually ends. Most of the recruitment, the most important recruitment, is done through word of mouth. The company has a great reputation for being a terrific place to work and they offer amazing benefits. In 2009 the company received over 90,000 applications for 831 total job openings. Less than 1% of the people who applied for the jobs actually got one. The selection process is the one on which the People Department really spend their time. The company has a 5% turnover rate, which happens to be the lowest in the industry. Southwest makes sure it hires the right people and keeps them. One thing they use during the selection process is a personality test. If the applicant scores below a three
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on any of the seven focus areas, they will not receive the job. This is one way they make sure that the people hired will fit in to the company culture. Another method they use is, of course, interviewing. While interviewing applicants they look for people who are team oriented and lacking an attitude of superiority. The latter may seem odd, but someone lacking this trait is more likely to treat all coworkers with respect and speak down to them. Now that the right person is hired, how do they go about training them and integrating them into the culture?

Southwest Training Process

Now that they have hired the right person for the job, they must teach them necessary skills to be successful at Southwest Airlines. For new hires, training mostly focuses on building interpersonal competence. They first have one to two weeks of classroom training followed by two to three weeks of on the job training. New hire orientation is centered on helping them to understand their coworkers and learning how their job fits into the organization. Southwest is an advocate of personal learning for its employees. The company has a University for People to allow its employees to gain more knowledge on how to better themselves on the job and the company strongly encourages external learning. Some of the courses available to employees through the University for People include:

Freedom, LUV, and You: A comprehensive 1-day orientation Leadership 101: Employees can explore any interests they might have in leadership

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Leadership Southwest Style: A 4 session course for front-line leaders Next Level Leadership: Course for management level leaders Power Speak: A public speaking course Successful Performance Appraisals: Details how managers should evaluate subordinates

Every Customer Matters: A new initiative on customer service

Once every year each employee, front line and senior level managers alike, attend a training program that focuses on working at Southwest Airlines, how to fit in with the culture and to supply the best customer service possible.

Labor Relations
Southwest Airlines, being one of the most employee-friendly companies available, does very well when it comes to labor relations. Southwest is one of the only airlines able to say it has never, in its history, had an employee strike. The company has always been keen to do well by its employees, as they are the backbone of the company. While historically, the pay of employees has always been at or below the market, the company provides opportunities for above market earnings. They do this by offering employees a stock purchase plan and a shared profits initiative. The company has always been very accommodating when it comes to working with unions. Every quarter the CEO sits down with the union to discuss the goings-on of the company and anything else that needs to be discussed. Though the employees started out with at or below market pay, with the help of a ten-year contract with one of the
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unions, the employees are now paid at or above market pay plus the extra options to earn on top of that.

Compensation, Benefits, and Performance Management

Compensation
There are many ways in which Southwest Airlines provides for their employees. First the company offers both employee stock plans and profit sharing. The stock purchase plan allows employees to buy company stock shares from payroll deductions at a discounted price. Overall, employees own about 8% of Southwest stock. The profit sharing plan entails the company putting up to 15% of its pretax earnings into the profit sharing account. This is an account to which employees cannot contribute but they will obviously benefit from. The company also utilizes award programs. Employees can receive award ranging from plaques and monetary payments to a photo with the CEO and a mention in the company newsletter. There is also the Agent of the Month Award for each department, which can lead to the Agent of the Quarter recognition. Those who win Agent of the Quarter have an award luncheon in their honor and are presented with a plaque. The company also partakes in a spot award system of $5 meal vouchers.

Benefits
Southwest Airlines offers its employees many benefits, most of which the employees do not have to pay for. Along with employees and their families flying free with Southwest and at a discount with other airlines, the company offers insurance 1 Southwest Airlines Business Analysis 0 Magee

coverage. Benefits include medical, dental, life, and long-term disability insurance along with vision coverage, dependent care, adoption assistance and mental health assistance. There is no lack of assistance for employees at Southwest, the company is willing to help its employees in any way possible.

Performance Management
Southwest Airlines uses employee evaluations to determine employee performance. These evaluations are partly based on the employees Southwest Spirit of Outrageous Customer Service. In order for managers to give an exemplary rating there must be documented examples of terrific work. The company likes to focus on teamwork and tries to keep the employees in a cooperation rather than competition mindset.

Open Seating
Open seating is a concept that is unique to airlines with only one class of seating that can have its positives and negatives. In theory it is a great strategy for keeping the airline low-fare/low-frills. In action it is still a fairly good approach, though it does have its flaws. The system allows passengers to sit wherever they wish upon boarding the plane with no worries about window or aisle seat. When passengers check in at the airport, they are assigned to group and a number. This indicates when they will board the plan. For example B13 will board with the second group and will be 13th in that line to board. This means you have to arrive early in order to get a decent seat, similar to that of a movie theater on a Saturday night. Its a logical system that gives favor to the early bird.

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To avoid the first come, first serve thrill of boarding, Southwest recently unveiled its Business Select program. A customer who upgrades to Business Select has the privilege of being one of the first 15 passengers to board the plane. There is also an opportunity to pay a little extra for early check-in and optimum seating through the Early Bird Check-In. With the Early Bird Check-In program, passengers will be checked-in 36 hours before their flight. Passengers not utilizing this program can check in up to 24 hours before their flight. One problem a passenger experienced in the past was when takeoff was delayed when a family could not find seats together (Hobica). You can imagine the frustration of the other passengers on that flight who had arrived early or had checked in on time. This appears to be a unique experience to this flight as there are no other examples of this happening, though it is a very realistic example of a possible issue with open seating. Looking at the overall perception of Southwest Airlines open seating strategy, it has been implemented well. Open seating is a very fair concept and is great at keeping costs down. Every implemented strategy is bound to have flaws, but the flaws are so few and far between that open seating is a good strategy for Southwest Airlines.

Fuel Prices and Profitability

Fuel prices are obviously a big cost for airline companies, Southwest has kept fuel costs at bay with the use of fuel hedges (Jackson). A fuel hedge is a contract between a company, such as Southwest Airlines, and a fuel company to pay for fuel at a fixed price for a given period of time (Wikipedia). If fuel prices drastically increase and are expected

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to stay high, their costs will obviously rise. A fuel hedge can help to curb some expenses, especially if the prices continue to rise throughout the given period.

Bags Fly Free

Southwest Airlines has implemented a program called Bags Fly Free that allows passengers to check luggage for free. The program is limited to two bags and these bags must meet certain requirements. The bags may not weigh more than 50 pounds or be larger than 62 inches in any dimension. Any oversized luggage will incur a cost of $75 per bag. The program has no reason not to continue. Many people look for airlines that will be the most cost efficient and this is one way to keep customers. The only problem will come if a passenger checks a bag that weighs more than 50 pounds that incurs the $75 charge (Southwest Airlines).

Southwest Airlines Future Profit Sustainability

Many things can affect the future profitiability of Southwest Airlines. The recent acquisition of AirTran Airways is the most prominent event that comes to mind. Many problems can arise with the merge of the two companies. The first issue to discuss is that Southwest and AirTran have different approaches to boarding. Southwest has open seating, while AirTran has assigned seating with business and coach classes. Until the merger is completely finished, boarding procedures are based on the operating flight, or which company the flight was booked through. Another issue is with the AirTran employees who are now considered Southwest employees. These employees have not gone through the specialized customer service training nor have they been hired through
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the intensive selection process that Southwest goes through to get all the right people. This people problem is probably the biggest issue Southwest will face in coming years. Another issue that might arise involves the new availability of international travel and new planes. The planes acquired from AirTran are not the Boeing 737s to which Southwest employees and customers are accustomed. Southwest Airlines will get through the merger successfully and better off, eventually. It will take time to immerse the new employees from AirTran into the Southwest family, but it will eventually work out. Some will leave or be fired because they will not fit into the culture or will refuse to accept changes. Many will stay and enjoy working for Southwest. The boarding issues will fade once the merger is completed in the summer of 2013. Some policies will change with the inclusion of international flights but most things will remain constant. The issue with the different planes can go one of two ways. Southwest could simply train its employees to work with the new planes and incur the extra costs it has tried to avoid since the founding. Southwest could alternatively, slowly sell the planes and make new deals with Boeing for more planes. Given that the company already owns or leases 540 Boeing 737s, has orders for 91 more through 2016, and has the purchase rights to 113 more planes through 2018, the latter option seems to be the most sensible. This way the company can keep with the cost efficiency of standardized cockpits and can keep up with their green initiative. Provided the AirTran acquisition goes well, Southwest will eventually attempt at further growth when another purchase opportunity arises. Granted it will be five to ten years from now before another acquisition is made. If the company keeps up the cost

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efficiency and does not let growth impede the initial mission of Southwest Airlines and its founders, the company will continue to prosper for years to come.

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Bibliography
Hobica, George. Southwest, you either have open seating or you don't! 11 January 2011. 15 April 2013 <www.airfarewatchdog.com/blog/6549115/southwest-either-youhave-open-seating-or-you-dont/>. Jackson, Schuler, Werner. Managing Human Resources. 11th. Cengage Learning, 2012. Southwest Airlines. Southwest Airlines. 15 April 2013 <www.southwest.com>. Wikipedia. Fuel Hedging. 22 December 2012. 15 April 2013 <en.wikipedia.org/wiki/Fuel_hedging>.

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