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TEACHING NOTE
CASE 25
Southwest Airlines in 2016: Culture,
Values, and Operating Practices
Overview
In 2016, Southwest Airlines was the world’s second largest airline in terms of total passengers boarded
(144.6 million in 2015), trailing only Delta Airlines, which boarded just over 180 million passengers in 2015
(counting those on flights operated by Delta’s regional and international joint venture partners). However,
based on the most recent data available from the U.S. Department of Transportation, the number of originating
domestic passengers boarding Southwest flights exceeded those of Delta and its other two biggest rivals—
American Airlines and United Airlines (see Exhibit 1). Southwest also had the enviable distinction of being
the only major air carrier in the world that had been profitable for 43 consecutive years (1973-2015). In 2015,
Southwest was named to Fortune’s list of the World’s Most Admired Companies for the 22nd consecutive year,
coming in at number 7.
From humble beginnings in 1971 as a scrappy underdog with quirky practices that once flew mainly to
“secondary” airports (rather than high traffic airports like Chicago O’Hare, Los Angeles International, Dallas-
Fort Worth International, and Hartsfield International Airport in Atlanta), 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. The number of passengers flying
Southwest had increased from 72.6 million in 2000 to 144.6 million in 2015. At year-end 2015, Southwest had
a fleet of 704 Boeing 737 aircraft serving 97 destinations in 40 states, the District of Columbia, Puerto Rico,
Mexico, Costa Rica, Belize, Jamaica, The Bahamas, Aruba, and the Dominican Republic. Southwest planned to
begin flights to Cuba in 2016, if approved by the U.S. Department of Transportation.
In 2015, Southwest earned record after-tax profits of $2.2 billion on revenues of $19.8 billion, easily surpassing
the 2014 record after-tax profits of $1.2 billion on revenues of $18.6 billion. In May 2016, Southwest’s Board of
Directors authorized a $2.0 billion share repurchase program (on top of a recently completed $1.5 billion share
repurchase program announced in May 2015) and increased the quarterly dividend to $0.10 per share starting
June 2016, up from $0.075 per share (starting in June 2015) and $0.06 per share in 2014. The June 2016 dividend
payment marked the 159th consecutive quarter Southwest had paid a dividend to shareholders.
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.
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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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
low-cost operating structure, its culture, and its growth in passenger traffic and revenues. 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.
n One is a 5:20-minute 2015 video that involves Southwest’s CEO discussing how the “Competitive
Environment Affects Fares.” It can be accessed at https://www.youtube.com/watch?v=FI6dT0zMRB4.
n The second is a 7:24-minute 2016 video involving Southwest’s CEO discussing the company’s
relationship with Transportation Security Administration and the Federal Aviation Administration. It
can be accessed at https://www.youtube.com/watch?v=j0ibULnU8_s.
Both can be shown at the beginning of class. If you prefer that students simply watch the videos on their own
before or after the class discussion, 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.
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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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 in the event
you have opted to make the Connect supplement for the 21th Edition a part of the materials
required for your course.
OR
2. Provide class members with assignment questions 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 8 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).
To facilitate assigning study questions and making them available to students, we have posted a file of the
Assignment Questions contained in this teaching note in the instructor resources section of the Connect
Library. (You should be aware that there is a set of assignment questions posted in the Connect Library for
each of the cases included in the 21th edition.) In all instances, these assignment questions correspond to the
assignment questions in the teaching note for the case.
In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned
case unless students have conscientiously have made use of pertinent core concepts and analytical tools in
preparing substantive answers to a set of well-conceived study questions before they come to class. In our
classes, we expect students to bring their notes to the study questions to use/refer to in responding to the
questions that we pose. Moreover, students often find that a set of study questions is useful in helping them
prepare oral team presentations and written case assignments—in addition to whatever directive question(s)
you supply for these assignments. Hence, we urge that you provide students with assignment questions—
either those we have provided or a set of your own questions—for all those aspects of a case that you
believe are worthy of student analysis or that you plan to cover during your class discussion of the case.
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 appears at the end of Case 31. 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?
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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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 2016 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 2016 and on into 2017?
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 long-time 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-2016?
7. What strategic issues and problems do Gary Kelly and Southwest executives need to address as of mid-
2016?
8. What recommendations would you make to Gary Kelly and Southwest executives as the company heads
towards the end of 2016 and on into 2017?
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:
n Southwest’s low fares as compared to those of rivals.
n The Southwest spirit and fun company culture—The esprit de corps among Southwest employees is
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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n 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
exemplary and instrumental in the company’s success. Gary Kelly seems to be doing quite a nice job—
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
so good about the strategy. Just why is the strategy a winner? What is there to like? What is the justification
for an A or an A+?
Several points need to be emphasized here:
nSouthwest’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 total passengers enplaned. As shown in case
Exhibit 1, more people have flown on Southwest’s domestic flights than on American, Delta, and United,
and US Airways since 2005—and Southwest’s lead over these rivals is growing. This is testimony to the
market effectiveness of Southwest’s strategy.
nSouthwest has put some muscle behind its desire to be a low-cost airline, having come up with a host of
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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nSouthwest’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 probably lose money on some/many of these routes. This is indeed a potent competitive edge for
page C-317.
nIt is no accident that Southwest has been profitable while rivals in a number of years during the 1995-2010
period lost billions of dollars. This is powerful testimony to just how astute and on target Southwest’s
nThere can be no doubt that Southwest has prospered with its low-cost provider strategy. The company
than “rapid.”
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 eorts 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
identify (making a list on the board is useful here because it will facilitate connecting Southwest’s strategy
implementing and executing approaches tightly to the topics covered in Chapters 10-12).
The following policies, procedures, operating practices, and core values stand out:
nSouthwest 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
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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a wondrous airline.
nThe 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):
nSouthwest management’s zealous pursuit of low operating costs:
• 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
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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• 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
paying the higher landing fees and terminal gate costs at such high-traffic airports like Chicago’s
player at Atlanta’s Hartsfield International Airport.
•Southwest’s point-to-point scheduling of flights was more cost-efficient than the hub-and-spoke
systems used by rival airlines.
• Southwest regularly upgraded and enhanced its management information systems to speed data
flows, improve operating efficiency, lower costs, and upgrade its customer service capabilities.
