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TEACHING NOTE
CASE 25
Southwest Airlines in 2014
Overview
In 2014, Southwest Airlines was the market share leader in domestic air travel in the United States; it transported
more passengers from U.S. airports to U.S. destinations than any other airline and it offered more regularly
scheduled domestic flights than any other airline. Southwest also had the enviable distinction of being the
only major air carrier in the U.S. that was consistently profitable, having reported a profit every year since 1973.
From humble beginnings as a scrappy underdog with quirky practices that flew mainly to “secondary” airports
(rather than high traffic airports like Chicago O’Hare, Dallas-Fort Worth, and New York’s Kennedy airport),
Southwest had climbed up through the industry ranks to become a major competitive force in the domestic
segment of the U.S. airline industry. It had weathered industry downturns, dramatic increases in the price of jet
fuel, cataclysmic falloffs in airline traffic due to terrorist attacks and economy-wide recessions, and fare wars
and other attempts by rivals to undercut its business, all the while adding more and more flights to more and
more airports. Since 2000, the number of passengers flying Southwest had increased from 72.6 million to 115.4
million, whereas domestic passenger traffic had remained flat or declined at American Airlines, Delta Airlines,
United Airlines, and US Airways.
From day one, Southwest had pursued a low-cost/low-price/no-frills strategy to make air travel affordable to a
wide segment of the population. While specific aspects of the strategy had evolved over the years, three strategic
themes had characterized the company’s strategy throughout its existence and still had high profiles in 2014:
■Charge fares that were very price competitive and, in some cases, appealingly lower than what rival airlines
were charging.
■Create and sustain a low-cost operating structure.
■Make it fun to fly on Southwest and provide customers with a topnotch travel experience.
Southwest employed a relatively simple fare structure displayed in ways that made it easy for customers to
choose the fare they preferred. In 2014, Southwest’s fares were bundled into four major categories: “Wanna Get
Away®,” “Anytime,” and “Business Select®,” and fares for Seniors (people 65 and older).
Southwest management fully understood that earning attractive profits by charging low fares necessitated the use
of strategy elements that would enable the company to become a low-cost provider of commercial air service.
There were three main components of Southwest’s strategic actions to achieve a low-cost operating structure:
using a single aircraft type for all flights, creating an operationally-efficient point-to-point route structure, and
striving to perform all value chain activities in a cost-efficient manner.
In September 2010, Southwest announced that it had entered into a definitive agreement to acquire all of the
outstanding common stock of AirTran Holdings, Inc. (NYSE: AAI), the parent company of AirTran Airways
(AirTran), for a combination of cash and Southwest Airlines’ common stock. Like Southwest, AirTran was also
a low-fare, low-cost airline. AirTran served 70 airports in the United States, Mexico, and the Caribbean; nineteen
:
Culture, Values, and Operating Practices
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of these coincided with airports already served by Southwest. AirTran’s hub was Atlanta’s Hartsfield-Jackson
International Airport, the busiest airport in the United States and the largest domestic airport not served by
Southwest; AirTran had 202 daily departures out of Atlanta.
In 2011, Southwest CEO Gary Kelly initiated a five-year strategic plan that featured five strategic initiatives:
■Integrating AirTran into Southwest.
■Modernizing Southwest Airlines existing aircraft fleet.
■Adding over 100 new Boeing 737-800 aircraft to the Southwest fleet.
■Launching international service and a new reservation system.
■Growing membership in the company’s Rapid Rewards® frequent flyer program.
In his Letter to the Shareholders in Southwest’s 2013 Annual Report, Kelly said:
We are now in the fourth year of a bold five-year strategic plan that began in 2011. We believe our five
Strategic Initiatives are transformative with the potential to drive more revenue, reduce unit costs, and
make Southwest more competitive. The world has changed dramatically since 2000. Our competitors took
draconian measures, including massive layoffs and pay cuts, to adjust to today’s economic realities and have
been given new life through the use of federal bankruptcy laws. Thanks to the hard work and extraordinary
efforts of our Southwest Warriors, Southwest has adjusted through incredible Teamwork and unwavering
resolve to execute our strategic plan. We have survived the onslaught of challenges to remain profitable
for 41 consecutive years, remain the nation’s largest airline in terms of domestic originating passengers
boarded, and operate the largest Boeing fleet in the world. The transformation hasn’t been easy, but it was
necessary, and we made significant and successful progress in 2013.
This case sets forth Southwest’s strategy, then describes in some detail all the various policies, practices and
operating approaches that management has employed to implement and execute the strategy. Southwest’s values
and culture are also covered in some depth.
Suggestions for Using the Case
The Southwest Airlines case is an exceptionally good case to assign in conjunction with your module on
implementing and executing strategy. It can be assigned at any time following your lectures and coverage of
the material in Chapters 10–12. You’ll find the Southwest case to be a terrific vehicle for exposing students to
the hows of implementing and executing a low-cost leadership strategy and how core values and a strategy-
supportive corporate culture can be deeply planted. As an added element of interest, a number of students in
your class will likely have flown on Southwest and thus be in a good position to testify how flying Southwest
compares to other airlines they have flown and to express their opinions about the positive/negative aspects of
their Southwest experiences. But Southwest’s CEO Gary Kelly has some challenges in sustaining Southwest’s
success, completing the merging of AirTran’s operations into Southwest’s system, and successfully integrating
AirTran employees into Southwest’s culture. Thus, toward the end of class there’s considerable opportunity
to press class members for action recommendations on what actions are needed at Southwest to continue to
improve the company’s market success and profitability.
Videos for Use with the Southwest Case. There are two videos available for use with the Southwest case.
■ One is a 1:17-minute July 10, 2014 video entitled “Airline Goes Extra Mile for Veterans,” accessible at http://
www.cnn.com/video/data/2.0/video/bestoftv/2014/07/10/newday-veteran-good-stuff.cnn.html. We suggest
show ing this video in conjunction with your discussion of Southwest’s values and culture and sense of
corporate citizenship.
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■ The second is a 3:14-minute June 17, 2014 YouTube video entitled “Tom Peters: Lessons from an Airline”
that can be accessed at http://www.youtube.com/watch?v=6u86ZNZUXjQ. It is probably best shown near
the end of class, right before you ask the class for action recommendations.
If you prefer that students simply watch the videos on their own, all you have to do is provide them with
the links.
The Connect-based Exercise for the Southwest Case. We developed an exercise for Southwest for
inclusion in the publisher’s Connect™ Management web-based assignment and assessment platform to provide
you with a vehicle for pushing class members to connect the content of Chapters 10–12 on implementing and
executing the chosen strategy to the policies, operating practices, and managerial approaches used by Southwest
to implement and execute the company’s low-cost provider strategy.
In completing this exercise, class members will need to draw on the material covered in Chapters 10–12 and
evaluate how well Southwest is implementing and executing its chosen strategy. The exercise is framed around
the following questions:
1. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the
competitive approach that Southwest is employing?
2. What are the key policies, practices, business principles, and procedures that underlie how Southwest
management has implemented and executed the company’s strategy?
3. What are the key elements of Southwest’s culture? Is Southwest a strong culture company?
4. Which of Southwest’s strategy execution approaches and operating practices do you believe have been most
crucial in accounting for the success that Southwest has enjoyed in executing its strategy?
5. What weaknesses, problems, or strategic issues do you see at Southwest Airlines that need to be addressed
by top management?
6. What recommendations would you make to Gary Kelly?
Student answers to the first 4 questions are automatically graded. Answers to the last two questions are open-
ended and require short answers on the part of students. You will have to evaluate their answers to this part of
the exercise.
All six of the questions in this Connect exercise are part of the recommended assignment questions for the case
that appear in the following section of the TN.
What to Tell Students in Preparing the Southwest Case for Class. To give students guidance in
what to do and think about in preparing the Southwest case for class discussion, we strongly recommend
two things:
1. Have class members complete the Connect-based exercise for the Southwest case.
OR
2. Provide class members with assignment questions (in addition to what is covered in the Connect
exercise) and insist that they prepare good notes/answers to these questions before coming to class.
Our recommended assignment questions for the Southwest case are presented in the next section of this
TN. Since there are 9 assignment questions, you may want to have students focus on a subset of the
questions (depending on how you want to conduct the class discussion).
It is really very difficult to have an insightful and constructive class discussion of an assigned case unless
students have not only read the case but also conscientiously worked their way through a set of well-conceived
assignment or study questions before they come to class. In our classes, we expect students to bring their notes
to assigned study questions to use/refer to in responding to the questions that we pose. Moreover, students often
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find having a set of assignment or study questions useful in helping prepare oral team presentations and written
case assignments—in addition to whatever directive questions you supply for these assignments.
To facilitate your use of assignment questions and making them available to students, we have posted a
file of the Assignment Questions contained in this teaching note on the instructor resources section of the
Connect Library.
Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have
class members read the Guide to Case Analysis that immediately follows Case 31 in the text. The content of this
Guide should be particularly helpful to students if your course is their first experience with cases and they are
unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.
Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis. The
Southwest Airlines case merits consideration for either a written case assignment or an oral team presentation.
Below are four suggested assignment questions for a written case or oral team presentation:
nWhat grade would you give Southwest management for the job it has done over the years in implementing
and executing Southwest’s strategy? Please prepare a 2–3 page report detailing and fully supporting your
evaluation. Your report must absolutely reflect command of and use of the material covered in Chapters 10–12.
nWhat 3–4 policies, procedures, and operating practices have been the most important in accounting for the
success that Southwest has enjoyed in executing its low-cost, low fare strategy? Prepare a 3–4 page report
that identifies the factors you deem to be pivotal and that presents convincing and forceful support for why
they have mattered so much?
nSouthwest CEO Gary Kelly has asked you to advise him on what policies, procedures, and operating practices
at Southwest are working particularly well and what changes might be needed to improve Southwest’s
performance in 2014 and beyond. Please present Mr. Kelly with a 3–5 page report detailing the things
that Southwest does right, the problems that you see and the areas where it needs to improve, and your
recommendations to further improve Southwest’s performance prospects. It is imperative that your report
demonstrate command of the material in Chapters 10–12 and that each of your action recommendations be
supported with reasoned arguments and factual evidence.
nWhat recommendations would you make to Gary Kelly and Southwest’s executive management team as the
company heads toward year-end 2014 and on into 2015?
Assignment Questions
1. Is there anything that you find particularly impressive about Southwest Airlines?
2. What grade would you give Southwest management for the job it has done in crafting the company’s
strategy? What is it that you like or dislike about the strategy? Does Southwest have a winning strategy?
3. What are the key policies, procedures, operating practices, and core values underlying Southwest’s efforts
to implement and execute its low-cost/no frills strategy?
4. What are the key elements of Southwest’s culture? Is Southwest a strong culture company? Why or why
not? What problems do you foresee that Gary Kelly has in sustaining the culture now that Herb Kelleher, the
company’s spiritual leader, has departed?
5. What grade would you give Southwest management for the job it has done in implementing and executing
the company’s strategy? Which of Southwest’s strategy execution approaches and operating practices do
you believe have been most crucial in accounting for the success that Southwest has enjoyed in executing its
strategy? Are there any policies, procedures, and operating approaches at Southwest that you disapprove of
or that are not working well?
6. What weaknesses or problems do you see at Southwest Airlines as of mid-2014?
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7. Do you approve of the AirTran acquisition and the way that Southwest has gone about integrating AirTran
into its operations? Is the integration taking too long? Why go so slow?
8. What strategic issues and problems do Gary Kelly and Southwest executives need to address as they complete
the integration of AirTran’s operations into Southwest’s operations and migrate AirTran’s employees into
the Southwest organizational and ways of doing things?
9. What recommendations would to Gary Kelly and Southwest executives as the company heads towards the
end of 2014 and on into 2015?
Teaching Outline and Analysis
1. Is there anything that you find particularly impressive about Southwest Airlines?
Well-prepared students should have little trouble coming up with some impressive things about Southwest
Airlines. Any of the following would seem to qualify:
■ Southwest’s low fares.
■ The Southwest spirit and fun company culture—The esprit de corps among Southwest employees is
pretty impressive. Southwest’s employees seem unusually committed and engaged in doing their part
■ The tight strategy-culture fit.
■ The competitive power of the company’s strategy and the tight fits among the pieces of the strategy—
Southwest’s strategy is quite well-crafted and well-conceived, having been thought through down to
the last detail. And it has produced a low-cost competitive advantage based. In virtually every market
■ Southwest’s very capable top management team—this is a very well-managed company any way you
look at it, with few missteps and bumps in the road over the years. Herb Kelleher’s leadership was
■ The approaches to low-cost operations the company has put in place—it is one thing to espouse low-
cost leadership and quite another to figure out how to pull it off. Southwest has done a terrific job of
■ Southwest’s execution of its strategy has been superb.
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2. What grade would you give Southwest management for the job it has done in crafting
the company’s strategy? What is it that you like or dislike about the strategy? Does
Southwest have a winning strategy?
Most likely, there will be a very strong class consensus that Southwest deserves an A or an A+ on crafting
the company’s strategy. But the important teaching lesson here is for class members to understand what is
Several points need to be emphasized here:
■ Southwest’s low-cost/low-fare strategy strikes a chord with fare-conscious flyers. Southwest has grown
over the years to become the number 1 airline in terms of domestic passengers carried. As shown in case
■ Southwest has put some muscle behind its desire to be a low-cost airline, having come up with a host of
strategic moves to actually create and sustain a low-cost advantage. This is a good time to call attention
to the figures in case Exhibit 8 and to have students identify all of the cost areas where Southwest has a
low-cost advantage over all or most of its rivals—specifically, maintenance, general administration, and
■ Southwest’s cost advantage gives it a modest degree of pricing power—Southwest can charge low fares
and make money. Rivals, if they choose to match Southwest’s low fares for competitive reasons, will
■ Southwest’s fuel hedging strategy was successful in 2008, but much less so in 2009–2013.
■ It is no accident that Southwest has been profitable while rivals have lost billions of dollars. This is
powerful testimony to just how astute and on target Southwest’s low-cost/low-fare strategy is and has
been. In some very real sense, Southwest has a recession-proof strategy—when times are tough, it is
■ There can be no doubt that Southwest has prospered with its low-cost provider strategy. The company
has enjoyed steady, though not spectacularly rapid, growth. It has been profitable every year since 1973.
■ Southwest’s geographic expansion strategy has worked beautifully. And now it is launching a strategy
■ There does not appear to be any major airline competitor that can duplicate or imitate Southwest’s
strategy—profitably matching Southwest’s low-fare structure appears out of reach of United, Delta, and
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We believe—and the evidence in the case confirms—that Southwest does have a winning strategy. The
strategy is very much in tune with the marketplace. The strategy has delivered competitive advantage.
Southwest’s financial performance has been the best in the U.S. airline industry over the long-term and
3. What are the key policies, procedures, operating practices, and core values underlying
Southwest’s efforts to implement and execute its low-cost/no frills strategy?
Southwest’s execution of its low-cost/no frills/low fares strategy is underpinned by some critically
important policies, procedures, operating practices, and core values that students should be called upon to
■Southwest management’s strong conviction and operative principle that “employees come first and
customers come second” has been a crucial factor in achieving high levels of customer satisfaction
and high employee productivity. The importance placed on employees reflected management’s belief
■Management’s beliefs that employees were the company’s most important asset were visibly symbolized
by designating the personnel department as the People Department (and, most recently the People and
Leadership Department) and titling the head of the department as the vice president of people. The
message Herb Kelleher penned in 1990 that was prominently displayed in the lobby of Southwest’s
■The strength and depth of management’s commitment to deliver high quality customer service—as
stated in the company’s mission statement in case Exhibit 4 (which company management gives every
appearance of having lived up to and tried to achieve):
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CEO Gary Kelly was continuing to stress the importance of top-rate customer service, as evidenced by
the four factors he saw as being keys to Southwest’s recipe for success:
•Hire great people, treat ’em like family.
■ Southwest management’s zealous pursuit of low operating costs, which had led to a number of practices
to achieve lower costs than rival airlines like American, Delta, United and US Airways:
•The company operated only one type of aircraft—Boeing 737s—to minimize the size of spare parts
inventories, simplify the training of maintenance and repair personnel, improve the proficiency and
speed with which maintenance routines could be done, and simplify the task of scheduling planes
• Southwest is in the midst of a major capital spending initiative to upgrade its fleet of Boeing 737s;
• Southwest has been aggressively in installing first “blended winglets, and, most recently, newly-
designed split scimitar winglets on its fleet of planes—see case Exhibit 7—that reduce lift drag, allow
•Southwest was the first major airline to introduce ticketless travel (eliminating the need to print
and process paper tickets) and also the first to allow customers to make reservations and purchase
tickets at the company’s website (thus bypassing the need to pay commissions to travel agents
•The company deemphasized flights to congested airports, stressing instead serving airports near
major metropolitan areas and in medium-sized cities. This helped produce better-than-average
on-time performance and reduce the fuel costs associated with planes sitting in line on crowded
taxiways or circling airports waiting for clearance to land, plus it allowed the company to avoid
•Southwest’s point-to-point scheduling of flights was more cost-efficient than the hub-and-spoke
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•To economize on the amount of time it took terminal personnel to check passengers in and to simplify
the whole task of making reservations, Southwest had never adopted the practice of assigning each
•Southwest flight attendants were responsible for cleaning up trash left by deplaning passengers and
•Southwest did not have a first-class section in any of its planes and had no fancy clubs for its
•Southwest offered passengers no baggage transfer services to other carriers—passengers with
•Southwest regularly upgraded and enhanced its management information systems to speed data
• Starting in 2001, Southwest began converting from cloth to leather seats; the team of Southwest
• Southwest was a first-mover among major U.S. airlines in employing fuel hedging and derivative
contracts to counteract rising prices for crude oil and jet fuel. From 1998 through 2008, the company’s
fuel hedging activities produced fuel savings of about $4 billion over what it would have spent had
it paid the industry’s average price for jet fuel. But unexpectedly large declines in jet fuel prices in
■Southwest management’s conviction that delivering superior service required employees who not only
were passionate about their jobs but who also knew the company was genuinely concerned for their
Our people are warm, caring and compassionate and willing to do whatever it takes to bring the
Freedom to Fly to their fellow Americans. They take pride in doing well for themselves by doing
good for others. They have built a unique and powerful culture that demonstrates that the only
At Southwest, our People are our greatest assets, which is why we devote so much time and