Finding LUV at Southwest Airlines

Southwest Airlines continues to touch the sky in low-cost operations and superior customer service — proving the ability to sustain competitive advantages in the face of fierce industry competition by effectively aligning its operating and business models.

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.

Technology

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.

Conclusion

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.

 

Sources:

  • 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)

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3 thoughts on “Finding LUV at Southwest Airlines

  1. Southwest airlines business model is very interesting!! It clearly shows how southwest is a cost oriented leader in a very competitive market, where customers view flight travel services as a commodity. In the last 4 years the average profit margin on the airline industry in the U.S was a negative 5%, yet Southwest had a significantly better performance than the rest of the industry due to its unique operating and business model. Another fact that I find noteworthy about Southwest airlines is that they do not sell their tickets through third party websites, such as Expedia, Travelocity, or Priceline. This goes along with their strategy of having high efficiency and low cost provider and direct customers directly to their website, instead.

  2. Great write-up, Scott. I think you hit the nail on the head in detailing Southwest’s success in the industry to date. I wanted to emphasize a point you touched on in your note: the importance of a single model plane and uniform fleet. My prior employer considered investments in several airline companies. Two of the key factors in considering an investment were the cost of airplane maintenance (typically significant) and overall labor cost. As you mentioned, a single airplane type lowers maintenance costs through standardization. There are significant benefits that include streamlined maintenance practices across the firm, lower costs to train maintenance employees, lower equipment costs, etc. Additionally, the labor cost savings from a single airplane type are immense. Unions play a huge role in the airline industry and often put restrictions on which pilots can fly which type of planes (often based on seniority) and when. When a company has several airplane models, this leads to almost forced training for pilots across all plane types as airlines have some restrictions as to how they staff planes.

    A couple of questions I think about in terms of Southwest’s continued profitability and success are:

    Do you think Southwest’s current model is sustainable in the face of increasing consolidation in the industry? Do you think consolidation will impact gate or terminal pricing or availability in the long-term? How would Southwest cope?

  3. This is a great example of a company whose overall strategy is perfectly aligned with its operating model. Tradeoffs that may seem negative at face value (e.g. not offering flights through 3rd party sites likely causes them to lose some business) end up working out well for them (they can offer cheaper tickets because they don’t sell through intermediaries). Plenty of other budget airlines around the world use similar business models (e.g. FlyDubai and Air Arabia in the UAE).

    One of those tradeoffs that I found interesting was their choice to operate only one type of aircraft, the Boeing 737. I definitely see the cost upside there, e.g. same maintenance, same training, interchangeability of aircrafts across routes, etc. However, I wonder if that limits Southwest’s ability to operate certain short/unpopular routes. The 737s that Southwest operates typically seat 143-175 passengers. I’m not sure what is the breakeven number of passengers per flight, but I have to assume that they cannot profitably operate certain less popular routes because they don’t have smaller aircrafts.

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