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Case 25 Teaching Note Southwest Airlines in 2014
607
Southwest……Once hired, we provide a nurturing and supportive work environment that gives
our Employees the freedom to be creative, have fun, and make a positive difference. Although we
Since becoming the company’s CEO, Gary Kelly had continuously echoed the views of his predecessors:
“Our People are our single greatest strength and our most enduring long term competitive advantage.”
What needs to be emphasized here is that top management’s statements about the importance and role
of the company’s employees is that they do not just represent a bunch of nice high-sounding words
As a test of how strongly students agree, you may poll the class for answers to the following question:
On a scale of 1 to 10 (where 1 = low and 10 = high), to what extent has Southwest’s approach
In our view, the best answer is a 9 or 10.
■The careful attention paid to recruiting, screening, and hiring new employees. Southwest hired
employees for attitude and trained for skills. Southwest received 90,043 résumés and hired 831 new
■Management’s success in involving and engaging employees in seeking out and implementing ways
to save on costs. Southwest’s pilots had been instrumental in developing new protocols for takeoffs
and landings that conserved fuel. Another frontline employee had suggested not putting the company
■The company’s no layoff policy—important because employees did not have to fear for their jobs in
pursuing cost-saving initiatives. Southwest Airlines had never laid off or furloughed any of its employees
■Southwest’s compensation policies and practices. Southwest’s pay scales tended to be above the industry
■Southwest’s employees enjoyed substantial authority and decision-making power. The company relies
heavily upon empowerment of employees and decentralized decision-making. According to former
CEO Herb Kelleher:
We’ve tried to create an environment where people are able to, in effect, bypass even the fairly
lean structures that we have so that they don’t have to convene a meeting of the sages in order
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■Southwest’s supervisory positions were filled internally, reflecting management’s belief that people who
had “been there and done that” would be more likely to appreciate and understand the demands that
■Management’s strong commitment to and skills in building a strong strategy-supportive culture,
accompanied by efforts to ingrain core values that were equally strategy supportive. Southwest
■Southwest managers were expected to spend at least one-third of their time out of the office, walking
around the facilities under their supervision, observing firsthand what was going on, listening to
employees and being responsive to their concerns. This helped keep managers well-informed about
From time to time, there were candid and sometimes heated meetings of frontline employees and
■Management encouraged union members and negotiators to research their pressing issues and to
conduct employee surveys before each contract negotiation. Southwest’s contracts with the unions
representing its employees were relatively free of restrictive work rules and narrow job classifications
Southwest’s relationships with the unions representing its employee groups were harmonious and non-
■ Top management’s ongoing emphasis—from Kelleher through Kelly—on “operating excellence.”
Under Herb Kelleher, instituting practices, procedures, and support systems that promoted operating
Much time and effort over the years had gone into finding the most effective ways to do aircraft
maintenance, to operate safely, to make baggage handling more efficient and baggage transfers more
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?
Students certainly ought to be able to point to a number of features that characterize and define Southwest’s
corporate culture. The “spirit of Southwest” has a number of important elements:
■A fun atmosphere and work environment—Fun at Southwest was exactly what the word implies and
it occurred throughout the company in the form of the generally entertaining behavior of employees
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■A pep rally atmosphere and “can do” attitude—this is a company where people willingly pitch it to make
■LUV—evidence of the Golden Rule and a caring, supportive environment abounds in many places. The
■The culture is combative and feisty and a “warrior mentality” prevails—a carryover from the company’s
■A cost-conscious and thrifty approach to operating—both management and employees are attentive to
keeping costs down and to operating in a lean fashion. Everyone at the company understands that the
company’s profitability and success, giving its low-cost provider strategy, requires constant diligence to
eliminate wasteful or unnecessary costs and ongoing efforts to identify new and better ways of operating.
All of this is a way of saying that employees cooperate fully in the companywide effort to trim costs
and maintain a lean approach to operations. In this sense, the culture is very strongly supportive of
■The tradition of employee empowerment and decentralized decision-making—this aspect of the culture
■ The longstanding top management emphasis on achieving operating excellence, coupled with the extent
■ All of the traits embodied in Living the Southwest Way—see case Exhibit 11.
The Strong and Deeply Embedded Corporate Culture at Southwest Students should have no
trouble seeing that Southwest Airlines is very much a “strong culture” company. There is plenty of evidence
in the case indicating the lengths to which Southwest management has gone to nurture and ingrain the
■Southwest formed a Culture Committee in 1990 to promote “Positively Outrageous Service” and
devise tributes, contests, and celebrations intended to nurture and perpetuate the Southwest Spirit and
The Corporate Culture Committee had four all-day meetings annually; ad hoc subcommittees formed
throughout the year met more frequently. Over the years, the committee had sponsored and supported
hundreds of ways to promote and ingrain the traits and behaviors embedded in Living the Southwest
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■Apart from the Culture Committee, Southwest had come up with a wide variety of ways to nurture its
core values and perpetuate its unique culture.
• There was a Culture Services Team in Southwest’s executive office dedicated solely to ensuring that
the culture of Southwest Airlines remained alive and well; the team’s duties included coordinating
• Each major department and geographic operating unit had a Local Culture Committee charged with
• Recently, the company had created a new position in each of its major operating departments
and largest geographic locations called Culture Ambassador; the primary function of cultural
ambassadors was to nurture the Southwest Spirit by helping ensure that the Local Culture Committee
• Southwest management sought to reinforce the company’s core values and culture via a series of
employee recognition programs to single out and praise employees for their outstanding contributions
• Other culture-supportive activities included a CoHearts mentoring program, a Day in the Field
program where employees spent time working in another area of the company’s operations, a Helping
• Almost every event at Southwest was videotaped, which provided footage for creating such
■Southwest’s monthly newsletter, LUV Lines, often spotlighted the experiences and deeds of particular
employees, reprinted letters of praise from customers, and reported company celebrations of milestones.
A quarterly news video, As the Plane Turns, was sent to all facilities to keep employees up to date on
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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 the any policies, procedures, and operating approaches at Southwest that you
disapprove of or that are not working well?
Our vote for a grade is an A+. It is hard to see what Southwest could have done much better. Nor do we see
much for students to dislike.
Indeed, the pedagogical value/purpose of this case is to give students a solid benchmark for judging what
a good job of strategy execution involves and recognizing a job well done when they see it.
We don’t see any reason to dislike or object to virtually any of Southwest’s policies, procedures, operating
practices, and core values. There isn’t much evidence to support criticism. Nonetheless, there’s merit in
6. What weaknesses or problems do you see at Southwest Airlines?
Southwest is a company with no glaring weaknesses or critical operating problems. But there are indeed
areas of legitimate concern:
■The cost trends in case Exhibits 8 and 9 are troubling—Southwest has lost some of its cost advantage in
recent years. There are some reasons for this:
• Rival airlines have been slashing costs in order to survive, particularly in the areas of pilot salaries
and employee salaries. Southwest, which once had lower labor costs now finds itself confronted
• Southwest has been moving into airports with higher landing fees (Denver, Philadelphia, Boston
• The company’s fuel hedging losses in 2009–2013.
• The high wages and benefits that Southwest pays relative to American Airlines, Delta, and United
(case Exhibit 12).
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■Southwest’s embarrassing safety lapse in inspecting its planes is a bit disconcerting, but we suspect that
■ Southwest’s operating performance in case Exhibit 13 is not unduly impressive or that much better than
7. Does the AirTran acquisition make good strategic sense for Southwest?
We think the answer is a solid “yes” for several reasons:
■ AirTran also is pursuing a low-cost strategy, so there is good cross-company fit from the standpoint of
their core competitive approaches.
■ AirTran has flights to a number of attractive geographic areas and airports not served by Southwest. This
offers good growth opportunity for Southwest.
■ Southwest’s reputation and good customer service should help it win added customer traffic in most,
if not all, of the locations that AirTran serves that Southwest does not—Atlanta Hartsfield is a good
example where very sizable market share gains may be won.
8. What strategic issues and problems do Gary Kelly and Southwest executives need
to address as they complete the integration of AirTran’s operations and AirTran’s
employees into Southwest?
This is always an important question to pose to class members because it forces them to diagnose what a
company’s management needs to be worried about and what needs to be front-burner items for management
action. It’s a summing up of all the prior learning during the class discussion.
We think several issues should be identified:
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9. What recommendations would to Gary Kelly and Southwest executives as the company
heads into 2011?
There are a number of reasonable actions that class members can recommend:
■ Initiate a companywide campaign in 2014–2015 to rapidly improve Southwest performance on the 4
■ Gary Kelly and other Southwest executives need to be very visible at those former AirTran airports
not served by Southwest. They need to meet regularly with all AirTran employees that have become
Southwest employees (or are about to become Southwest employees). They need to stress the Southwest
■Hold culture training classes for all former AirTran employees (if they have not already been to such
■ Make sure that all former AirTran employees have been adequately trained in Southwest’s policies,
■ Seed the work force at former AitTran locations not served by Southwest with Southwest employees who
■ Make a special effort—where practical—to transfer qualified former AirTran employees to fill selected
■ Get the Culture Committee actively involved in regularly holding events at former AirTran locations to
■ Recruit ardent culture-enthusiastic Southwest employees to help mentor former AirTran employees in
■ Use the AirTran acquisition and integration to revitalize the quest for cost reductions and to ferret out
cost savings. Get AirTran managers and employees involved in the search for ways to reduce costs
■ Continue to spend on ads to draw the attention of air travelers to the baggage fees and change fees
■ Begin an on-going strategic initiative to expand into 2–3 additional airports/locations in the Caribbean/
Mexico and on into Canada, Hawaii, Alaska(?),and Central America in each of the next 5 years. Then
begin to think about whether Southwest can/should initiate flights between the U.S. and Europe. Adding
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Epilogue
In October 2014, Southwest announced the following performance results:
■ For the nine months ended September 30, 2014, total operating revenues increased 5.3 percent to $14.0
billion, and total operating expenses were $12.4 billion, resulting in operating income of $1.6 billion,
compared to $893 million in operating income for the same period in 2013.
■ Excluding special items, operating income was $1.7 billion for the nine months ended September 30, 2014,
compared to $1.0 billion for the same period in 2013.
■ Net income for the nine months ended September 30, 2014, was $946 million, or $1.36 per diluted share,
compared to $542 million, or $.75 per diluted share, for the first nine months of 2013.
■ Net income for the nine months ended September 30, 2014, was $993 million, or $1.42 per diluted share,
compared to $569 million, or $.79 per diluted share, for the first nine months of 2013.
■ Total passengers enplaned in the first nine months of 2014 of 101.7 million (versus 100.0 million in the first
nine months of 2013).
■ Revenue passengers carried in the first nine months of 2014 of 88,191,322 in 2010 (versus 86,310,229 in the
first nine months of 2013).
■ A load factor in the first nine months of 2014 of 82.6% (versus 79.9% in the first nine months of 2013).
■ An average passenger fare in the first nine months of 2014 of $160.39 (versus $154.28 in the first nine
months of 2013).
■ A pretax return on invested capital of 19% for the twelve months ended September 30, 2014, versus 10.6%
for the twelve months ended September 30, 2013.
■ Net cash provided by operations for the first nine months of 2014 was $2.7 billion, versus $2.2 billion for the
first 9 months of 2013.substantially driven by the $459 million in net income, and $628 million in non-cash
depreciation and amortization expense.
■ Capital expenditures for the first nine months of 2014 were $1.34 billion (compared to $995 million for the
first nine months of 2013.
■ At the end of Q3 2014, Southwest had 685 aircraft in service, versus 688 at the end of Q3 2013.
In September 2014, Southwest launched construction of a $508 million project to modernize its Terminal 1
facilities at Los Angeles International Airport (LAX).
In September 2014, Southwest filed an application with the U.S. Department of Transportation to add its first
destination in Central America with daily roundtrip service between Baltimore/Washington Thurgood Marshall
International Airport (BWI) and Juan Santamaria International Airport (SJO) in San Jose, Costa Rica, beginning
March 7, 2015. In November 2014, Southwest filed an application with the U.S. Department of Transportation
to provide daily, nonstop service between John Wayne Airport, Orange County (SNA) and Lic. Gustavo Diaz
Ordaz International Airport (PVR) in Puerto Vallarta, Mexico, beginning June 7, 2015, subject to the approval
of relevant governmental agencies.
Southwest Airlines’ most recent recognitions and honors included the following:
■Recognized as a Top 100 Military Friendly Employer by Victory Media.
■Southwest’s Rapid Rewards frequent flyer program was named one of the top airline rewards programs in
U.S. News & World Report’s 2014 rankings of the Best Airline Rewards Programs.
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■2014 Women’s Choice Award® for America’s Best in Travel. Southwest was selected by American women
as the most recommended for: best overall customer service, best value, best frequent flyer/loyalty programs,
best pet-friendly travel, and best in-flight service.
■Gold Award for Strategy in CLO Magazine’s Learning in Practice Awards.
■Named to Glassdoor.com’s list of top 25 companies for culture and values.
■Highly Commended for Best in Customer Service using Social Media by SimpliFlying.
■Southwest Cargo received Logistic Management Magazine’s Quest for Quality Award.
For more recent developments at Southwest Airlines, please check the company’s latest financial results and
press releases at www.southwest.com.
