Southwest Airlines Operations - A Strategic Perspective

Background:

Southwest Airlines Operations - A Strategic Perspective

Southwest Airlines Operations - A Strategic Perspective

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Southwest Airlines Operations - A Strategic Perspective

Southwest Airlines Operations - A Strategic Perspective

Southwest Airlines is the largest airline measured by whole of passengers carried each year within the United States. It is also known as a ‘discount airline’ compared with its large rivals in the industry. Rollin King and Herb Kelleher founded Southwest Airlines on June 18, 1971. Its first fLights were from Love Field in Dallas to Houston and San Antonio, short hops with no-frills assistance and a easy fare structure. The airline began with one easy strategy: “If you get your passengers to their destinations when they want to get there, on time, at the bottom inherent fares, and make darn sure they have a good time doing it, habitancy will fly your airline.” This coming has been the key to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) and with a total operating income of .5 billion. Southwest is traded publicly under the symbol “Luv” on Nyse.

Facts:

* The first major airline to fly a particular type of aircraft (Boeing 737s)

* The first major airline to offer ticketless tour ideas wide together with a frequent flier schedule based on whole of trips and not whole of miles flown.

* The first airline to offer a profit-sharing schedule to its Employees (instituted in 1973).

* The first major airline to organize a Web site and offer online booking. In 2001, about 40 percent (.1 billion) of its passenger income was generated straight through online bookings at [http://www.southwest.com]. Southwest's cost per booking via the Internet is about , compared to a cost per booking straight through tour agents of to .

Key competing advantages:

* Low Operational costs / High Operational Efficiency

* Award winning customer service

* Human reserved Supply practices / Work culture

Operations diagnosis – competing Dimensions:

Southwest clearly has a inescapable advantage compared to other airlines in the commerce by executing an effective and effective operations strategy that forms an foremost pillar of its widespread corporate strategy. Given below are some competing dimensions that will be studied in this paper.

1. Operational Costs and Efficiency

2. Customer Service

3. Employee/Labor Relations

4. Technology

1. Operational Costs and Efficiency

After all, the airline commerce widespread is in shambles. But, how does Southwest Airlines stay profitable? Southwest Airlines has the bottom costs and strongest equilibrium sheet in its industry, agreeing to its chairman Kelleher. The two biggest operating costs for any airline are – labor costs (approx 40%) followed by fuel costs (approx 18%). Some other ways that Southwest is able to keep their operational costs low is - flying point-to-point routes, choosing secondary (smaller) airports, carrying consistent aircrafts, maintaining high aircraft utilization, encouraging e-ticketing etc.

Labor Costs

The labor costs for Southwest typically accounts for about 37% of its operating costs. Possibly the most principal element of the flourishing low-fare airline firm model is achieving significantly higher labor productivity. agreeing to a new Hbs Case Study, southwest airlines is the “most heavily unionized” Us airline (about 81% of its employees belong to an union) and its wages rates are considered to be at or above mean compared to the Us airline industry. The low-fare carrier labor advantage is in much more flexible work rules that allow cross-utilization of virtually all employees (except where disallowed by licensing and protection standards). Such cross-utilization and a long-standing culture of cooperation among labor groups translate into lower unit labor costs. At Southwest in 4th quarter 2000, total labor price per ready seat mile (Asm) was more than 25% below that of United and American, and 58% less than Us Airways.

Carriers like Southwest have a gigantic cost advantage over network airlines simply because their workforce generates more output per employee. In a study in 2001, the productivity of Southwest employees was over 45% higher than at American and United, despite the substantially longer fLight lengths and larger mean aircraft size of these network carriers. Therefore by its relentless pursuit for bottom labor costs, Southwest is able to nothing else but impact its bottom line revenues.

Fuel Costs

Fuel costs is the second-largest price for airlines after labor and accounts for about 18 percent of the carrier's operating costs. Airlines that want to preclude huge swings in operating expenses and bottom line profitability select to hedge fuel prices. If airlines can operate the cost of fuel, they can more accurately assessment budgets and forecast earnings. With growing competition and air tour becoming a commodity business, being competing on price was key to any airline’s survival and success. It became hard to pass higher fuel costs on to passengers by raising marker prices due to the very competing nature of the industry.

Southwest has been able to successfully implement its fuel hedging strategy to save on fuel expenses in a big way and has the largest hedging position among other carriers. In the second quarter of 2005, Southwest’s unit costs fell by 3.5% despite a 25% growth in jet fuel costs. During Fiscal year 2003, Southwest had much lower fuel price (0.012 per Asm) compared to the other airlines with the irregularity of JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent of the airline’s fuel needs has been hedged at per barrel. World oil prices in August 2005 reached per barrel. In the second quarter of 2005 alone, Southwest achieved fuel savings of 6 million. The state of the commerce also suggests that airlines that are hedged have a competing advantage over the non-hedging airlines. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to its current and hereafter fleet of Boeing 737-700’s. The visually distinctive Winglets will enhance doing by extending the airplane’s range, salvage fuel, lowering engine maintenance costs, and reducing takeoff Noise.

Point-to-Point Service

Southwest operates its fLight point-to-point assistance to maximize its operational efficiency and stay cost-effective. Most of its fLights are short hauls averaging about 590 miles. It uses the strategy to keep its fLights in the air more often and therefore perform good capacity utilization.

Secondary Airports

Southwest flies to secondary/smaller airports in an exertion to sell out tour delays and therefore provide perfect assistance to its customers. It has led the commerce in on-time performance. Southwest has also been able to trim down its airport operations costs relatively good than its rival airlines.

Consistent aircrafts

At the heart of Southwest's success is its particular aircraft strategy: Its fleet consists exclusively of Boeing 737 jets. Having base fleet significantly simplifies scheduling, operations and flight maintenance. The training costs for pilots, ground crew and mechanics are lower, because there's only a particular aircraft to learn. Purchasing, provisioning, and other operations are also vastly simplified, thereby lowering costs. Consistent aircrafts also enables Southwest to utilize its pilot crew more efficiently.

E-Ticketing

The idea of ticketless tour was a major advantage to Southwest because it could lower its distribution costs. Southwest became electronic or ticketless back in the mid-1990s, and today they are about 90-95% ticketless. Customers who use prestige cards are eligible for online transactions, and today Southwest.com bookings catalogue for about 65% of total revenue. The Ceo Gary Kelly thinks that this idea would grow added and that he wouldn't be surprised if e-ticketing accounted for 75% of Southwest’s revenues by end of 2005. In the past, when there was a 10% tour agency commission paid, it used to cost about a booking. But currently, Southwest is paying between 50 cents and per booking for electronic transactions that translate to huge cost savings.

2. Worker and Labor Relations

Southwest has been very regarded for its innovative supervision style. It maintains a relentless focus on high-performance relationships and its people-management practices have been the key to its unparalleled success in the airline industry.

Mission Statement

To Our Employees
“We are committed to provide our Employees a carport work environment with equal opportunity for studying and personal growth. Creativity and innovation are encouraged for enhancing the effectiveness of Southwest Airlines. Above all, Employees will be in case,granted the same concern, respect, and caring attitude within the society that they are imaginable to share externally with every Southwest Customer.”

The Southwest mission statement shows that the firm has a strong commitment to its employees. The firm affords the same respect to its employees that is in case,granted to its customers. The Southwest mission statement is unique in that it recognizes the significance of its employees within the broader firm strategy, which emphasizes superb customer assistance and operational efficiency. The employees reciprocate the respect, loyalty and trust that Southwest demonstrates. Southwest employees are known for their loyalty, dedication, attitude and innovation. The employees are the distinguishing factor between Southwest and the rest of the airline industry.

Hiring

Southwest hiring procedure is unique not only within the airline industry, but also more broadly, and revolves around looking habitancy with the right attitude that will thrive in the Southwest culture. widespread procedures are employed to hire for inescapable attitude and dedication. Those who do not posses those qualities are weeded out. Colleen Barrett, a non-operational officer at Southwest, states that

“Hiring is critical, because you cannot institutionalize behavior. Instead, you must identify those habitancy who already institution the behaviors you are looking for. Then you can allow Employees to be themselves and make decisions about customer assistance based on base sense and their natural inclinations.” 1

Recruiting and interviewing at Southwest is a two-step process. The first step is a group interview, conducted by employees, where communication skills of inherent candidates are evaluated. The next steps in this process are one on one interview, where the candidates' attitudes and orientation toward serving others are evaluated. These hiring criteria apply to all job functions since all Employees at Southwest play a customer assistance role. A principal part of Southwest operational strategy is that every job at Southwest is a customer assistance position, whether it directly applies to the customer or whether it is internal.

The table below shows that even though Southwest is the most heavily unionized airline, at practically 80%, that compact negotiations between the unions and Southwest are much shorter in period than of the other major carriers. This shows the potential of connection that Southwest has with its employees and with the unions that rehearse them.

Culture

Southwest was created as a separate kind of firm and from its beginnings a unique culture was nurtured. In 1990 Colleen Barrett formed the Southwest Culture Committee. This is unique within the commerce and among all large companies. The committee also has a mission statement:

“This group's goal is to help generate the Southwest spirit and culture where needed; to enrich it and make it good where it already exists; and to liven it up in places where it might be "floundering". In short, this group's goal is to do "whatever it takes" to create, enhance, and enrich the extra Southwest spirit and culture that has made this such a remarkable Company/Family.”

It is this unique coming to firm values that has created a culture that differentiates itself from others. Southwest’s culture is the presuppose why it is successful.

3. customer Service

The Mission of Southwest Airlines
The mission of Southwest Airlines is dedication to the top potential of customer assistance delivered with a sense of warmth, friendliness, private pride, and firm Spirit.

Approach

Herb Kelleher, founder of Southwest, has been quoted as saying that "We're in the customer assistance business; we just happen to provide airline transportation".2 Award winning customer assistance is a distinguishing characteristic of Southwest and it is referred to internally as “Positively Outrageous Service”. It means that from the top to bottom everybody does anything he or she can to satisfy the customer. This includes Herb Kelleher, who has been known for helping out baggage handlers on Thanksgiving. It is straight through emphasizing the customer and Worker that Southwest is able to differentiate itself from others in the airline industry. On a more technical level, each Worker or group within Southwest has his or her own customer. This means that every Worker ‘serves’ in one way or an additional one despite not being directly complex with the passenger. The mechanic’s customer is the pilot and the caterer’s is the flight attendant.

Results

It can be said that the "Positively Outrageous Service" that is unique to Southwest “is not the supervene of a department, or a program, or a mandate from management. It is not secondary to the product; it is the product.” This coming creates the conditions where Employees are more likely to treat customers in ways that distinguish the firm from others. There are numerous accounts of passengers who have received exceptional treatment from Southwest employees.

The examine that needs to be answered is how Southwest’s customer assistance is separate and why? Is it base for customers of other airlines to rave about their extra service? The reply is that it is not. While Southwest does not have a monopoly on habitancy who are kind and who are willing to go above and beyond to satisfy a customer, such behavior is nurtured at Southwest to a much greater extent.

It can then be concluded that the customer assistance that is inherent to Southwest is a part of its culture. This culture is supported straight through Worker encouragement to do the extra to satisfy the customer. This coming inspires habitancy who would generally only on opportunity go out of their way to help someone, to become consistent performers that offer exceptional assistance all the time. Southwest employees are what differentiate its customer assistance from the other airlines.

4. Technology

Southwest utilizes technology in many ways to fulfill its firm objectives and avow its effective operations. agreeing to its Ceo, technology equals productivity. Launched in 1996, ticketless tour was first introduced by Southwest. On May 1st 2000, Southwest Airlines introduces "Swabiz," a portal that assists firm tour managers in booking and tracking trips made straight through its web site [http://www.southwest.com]. There are many new technology initiatives being undertaken currently and some are in the pipeline.

Bar codes in Boarding Passes

Southwest Airlines has invested million During the past three years to standardize corporate and concluding operations on about 10,000 Dell OptiPlex desktop and Latitude notebook computers agreeing to its firm executives. Southwest wanted to replace its well known, brightly colored plastic boarding passes with an electronic ideas with bar-code paper boarding passes. So it installed about 350 touch screen marker readers Powered by Dell OptiPlex desktops. The bar code gives Southwest more information to automatically reconcile the whole of boarding passes with the whole of passengers that nothing else but board the plane.

Although the technology will help Southwest Airlines remain effective by consolidating passenger information for the company's 3,000 daily flights, there were concerns it could lengthen the time to get travelers on board. However it was found that scanning each bar code on the boarding passes didn't growth or shorten boarding schedules, but it did take minutes from menagerial processes, such as looking up customer records. The new paper bar code ideas is giving Southwest marker agents the potential to match a customer report within having to scroll straight through and log into multiple software screens. The process is much more automated. Once the bar code on the boarding pass is scanned at the concluding gate it checks off the person from the passenger list in real time.

The old process was hand-operated that complex looking the information, scrolling straight through any software screens from reservations to check-in to boarding. The bar code hardware to scan the boarding passes has been deployed. The firm is in the process of replacing customer assistance back-office equipment at airports together with at its headquarters in Dallas.

Software Upgrades

Software applications, such as those used by clerks to check in passengers, are being replaced. Southwest Airlines' internally written "Airport Application Suite" is imaginable to rollout next year as the firm transitions from green screens to Window-based user interface. Similar to Wal-Mart shop Inc., Southwest Airlines believes in developing in-house the software that runs its operations. The firm uses very tiny off-the-shelf software. There are between 75 and 100 projects in the works each year supported by practically 900 It employees.

Rfid

Radio frequency identification technology, a convenient alternative to bar-coding for luggage identification, is also on Southwest's radar. It plans to test Rfid technology sometime in 2006. Even though, Southwest is playing a tiny catch-up with other airlines such as Air Tran, Alaska and Champion Airlines, in many cases they are able leapfrog to more sophisticated applications nothing else but having waited longer.

Challenges:

Southwest has emerged very successful, despite the most troubled times in the airline market. However, it faces new challenges in the face of expanding competition from other low fare airlines such as JetBlue, Ata airlines, America West.

Reserved Seating

Due to expanding protection guidelines since September 2001, Southwest would need to prepare for assigned (reserved) seating to track its in-flight passengers. This turn will involve large technology investments and may impact its gate operations negatively since the current way of unassigned seating has helped in quick gate turnarounds.

Passenger Demand

The keep-it-simple religious doctrine has served Southwest well. But as its own firm grows and grows more complex, with plans to purchase dozens of new aircraft and an imaginable upsurge in passenger traffic to about 80 million boarding’s a year, the simplicity strategy that has been reflected in the airline's It religious doctrine is evolving. The Cio Tom Nealon says that "It's time to adapt our firm processes for efficiency. As our airline scales for us to provide the same kind of high-touch customer service, we have to automate a lot of things we've been able to do without technology previously. The challenge is doing that without conceding the customer touch." Southwest is also aggressively pursuing customer connection supervision (Crm) techniques and has applications to get insight into customer’s wants and dislikes. agreeing to an interview with its Ceo Gary Keller, Southwest has its focus on enhancing in two areas - customer’s airport feel and in-flight experience.

In-Flight Entertainment

In an widespread exertion to enhance customer’s in-flight experience, in-flight entertainment is something that Southwest is currently evaluating and which JetBlue has been very flourishing at already because of its introduction in its long-haul flights. In comparison, Southwest has 415 airplanes to reconsider and that represents an investment decision at a whole new dimension. Additionally, Southwest has to reconsider how things may fit into their environment. At this point, 60% of its assistance is still very short haul. Southwest needs to be mindful of the fact that a inescapable coming that has been flourishing for its competitor may not be necessarily work to its advantage.

Summary:

Southwest has long been regarded as a benchmark in its commerce for operational excellence. Southwest Airlines is a fine example of a firm that is committed to its core competencies - effective operations to drive its low cost structure, excellent delivery of customer assistance and innovative Hr supervision practices. We hope this paper in case,granted a good insight into Southwest operations, as part of its widespread strategy, to perform success and gain competing advantage.

References:

1. [http://www.southwest.com] (Southwest airlines official web site)

2. “Southwest keeps it simple” - Air transport World, April 2005, Pg 36

3. “Around the World on (or So): How High Can allowance Airlines Fly?“ Strategy supervision - Knowledge@ Wharton Newsletter Oct 5, 2005

4. TechWeb - [http://www.techweb.com/wire/ebiz/173601227]

5. “Southwest's Strategy for Success: Consolidate!” - Oracle Magazine (Sept/Oct 2004 edition) http://www.oracle.com/technology/oramag/oracle/04-sep/o54swest.html

6. “Southwest Airlines: High Tech, Low Costs” - Eweek.com, April 2005

7. “Jet Fuel Hedging Strategies: Options ready for Airlines and a gawk of commerce Practices” – Kellogg School of supervision explore Paper, Spring 2004

8. Winning Behavior: What the Smartest, Most flourishing associates Do Differently, Terry R. Bacon and David G. Pugh, 2003

9. Time Magazine, Oct 28th 2002 issue, Vol. 160 Issue 18, p. 45

10. “Wings Of Change”,Information Week, March 28, 2005,

11. Labor compact Negotiations in the Airline Industry, Monthly Labor Review, July 2003, page 24

Southwest Airlines Operations - A Strategic Perspective

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