Seamus Moore

South West Airline: A case study in putting people at the heart of a strategy

Can the example of Southwest be developed into every business, or is the model set in the airline industry and bound to stay there.

One of my favourite corporate success stories happens to be that of Southwest airlines based in Dallas Texas Formed in 1971 their 2010 revenues are estimated at $10,350 million their success has been built on employees value leveraged on a strong working culture. Because of this culture they have a business model which competitors are unable to mimic. The growth to its current size has happened without stumbling and has consistently delivered stellar performance over the years since formation.

Business Strategy:

Southwest’s business strategy concentrates on airports that are underutilised and close to metropolitan areas. The fleet of aircraft they use are fuel efficient 737s. Their service is based on frequent, on-time departures and low cost fares. The airline emphasises point to point routes, with no central hub. Key to the success of Southwest is that they compete against surface transportation companies, rather than other airlines. In changing their business model, they changed their competitive threat.

Competitive Advantage:

Southwest has managed to stay ahead of the game and maintain a competitive advantage by focusing on 3 key areas:

  1. Salaries: Employees are paid a lower salary than competitors and work more hours. Southwest however offer collective rewards involving profit sharing and stock ownership. Pilots and flight attendants are paid by trip, with flight attendants the second highest paid group in the industry. Seniority brings higher salaries. The CEO’s pay is one of the lowest in Dallas. Southwest offers employees a discounted stock purchase programme in which 85-90% of employees own stock i.e. 12% of Southwests total share.
  2. Utilisation: Each plane in the fleet flies extra flights per day, saving on maintenance and training costs. Utilisation of cost effective revenue streams have been critical to their success. Southwest were one of the first airlines to have a website in early 1995. In 2006 70% of Southwest’s revenue were generated from bookings online.  Southwest gained a reputation for outside the box thinking and proactive risk management, including the use of fuel hedging to insulate against fuel price fluctuation. From a cost point of view, Southwest have maintained a cost per seat mile of $0.12, which is around 25% cheaper than competitors.  Aircraft turnaround time is 15 minutes, this is facilitated by multi tasking crews, with pilots and air crew cleaning the plan while on the ground. On average there are 94 employees per aircraft in contrast to competitors who have 130, and the south west staff serve on average 2500 passengers per year compared to competitors 1000.
  3. Customer Service: Southwest still dominates the triple crown awards in that they deliver the best on time performance, fewest lost bags and fewest customer complaints. Fares are kept simple, with no interline connections however code share has been introduced in recent years.

People:

Central to Southwest’s success has been the people to run the airline, in order to maintain their position, Southwest need to recruit the best to the industry. This is done through an extraordinarily selective process. Typically there are 200,000 applications for roles. Of these 35,000 are interviewed and 4,000 are hired. The focus of interviews is attitude and teamwork with an emphasis on peer recruiting. There is a preference for those without exstensive industry experience, where nepotism is encouraged. Southwest was also one of the first companies to introduce employee referrals. Once in the door training takes over, where the emphasis is on doing things better, faster, cheaper. In doing this each employee is expected to understand other colleagues jobs in order to delivery an outstanding customer experience, which in turn keeps the culture of South West alive.

From a labour relations point of view, Southwest have an interesting model. It is the most unionised airline in the US with 84% membership. They have in place a 10 year agreement with emphasis in gaining stock rather than wages, there are no work rules in the union contract. Southwest has ranked in Fortunes Best Companies to work for in America (1st in 97, 98, 2nd in 99 and 4th in 2000, however since then they have not entered).

Conclusion:

Southwest is a great case study of how to get employee buy in, to a growth developing business. The key to the success of the southwest model has been asset utilisation and low variable costs, married with strong company culture to aligning values, systems, structures and strategy. By doing this Southwest has been able to sustain competitive advantage by unleashing the potential in their workforce. Could this be developed and maintained in other organisations? I believe so.

Seamus Moore is Business Product Manager with O2 Ireland.

Tags: , , , , , , ,

No comments yet - Leave a reply