Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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late 2008 and 2009 resulted in reported losses of $408 million on the fuel hedging contracts that
the company had in place during 2009. Since then, the company’s fuel hedging activities have
continued to be ineffective in reducing fuel expenses; the company recognized losses on its fuel
hedging activities of $324 million in 2010, $259 million in 2011, $157 million in 2012, and $118
nSouthwest 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
well-being and committed to providing them with job security. Management’s thesis was simple: Keep
employees happy—then they will keep customers happy. In Southwest’s 2000 annual report, senior
management explained why employees were the company’s greatest asset:
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
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
and managerial pontification. Rather, the words seem to truly reflect what management believes and
the people management principles and approaches that executives employ in their relationships and
dealings with the company’s workforce.
As a test of how strongly students agree, you may poll the class for answers to the following question:
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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nSouthwest’s compensation policies and practices. Southwest’s pay scales tended to be above the industry
average—sometimes even at or near the top of the industry (see case Exhibit 12), and its benefit packages
compared favorably with those at other airlines. Southwest also had an attractive profit-sharing plan.
nSouthwest’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
to get something done. In many cases, they can just go ahead and do it on their own. They can
take individual responsibility for it and know they will not be crucified if it doesn’t work out. Our
leanness requires people to be comfortable in making their own decisions and undertaking their
own efforts.
nSouthwest’s supervisory positions were filled internally, reflecting management’s belief that people who
nManagement 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
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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Southwest’s relationships with the unions representing its employee groups were harmonious and non-
adversarial for the most part—even though there were sometimes spirited disagreements over particular
issues.
n Top management’s ongoing emphasis—from Kelleher through Kelly—on “operating excellence.”
Under Herb Kelleher, instituting practices, procedures, and support systems that promoted operating
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:
nA 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
nThe culture is combative and feisty and a “warrior mentality” prevails—a carryover from the company’s
battle to survive in its early years and something that is reflected in its ads.
nA 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
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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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
nSouthwest 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
Living the Southwest Way. Members, chosen for their zeal in exhibiting the Southwest Spirit and their
commitment to Southwest’s mission and values, functioned as cultural ambassadors, missionaries, and
storytellers.
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
nApart 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
local office and the corporate office on culture-related matters.
• 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
to customer service, operational excellence, cost efficiency, and display of the Southwest Spirit. In
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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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.
To us, the 3 most important strategy-executing approaches and operating practices are:
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:
nThe 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
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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However, Southwest’s cost trends in case Exhibit 9 look somewhat better. But Southwest definitely is
suffering because of internal cost increases that are narrowing its cost advantage over some key rivals
nSouthwest’s operating performance in case Exhibit 13 is not unduly impressive or that much better than
7. What strategic issues and problems do Gary Kelly and Southwest executives need to address
as of mid-2016?
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:
n What specific things to do to successfully indoctrinate AirTran employees into the Southwest culture
8. What recommendations would to Gary Kelly and Southwest executives as the company
heads into late 2016 and 2017?
There are a number of reasonable actions that class members can recommend:
n Initiate a companywide campaign in 2017 to rapidly improve Southwest performance on the 4 operating
performance measures in case Exhibit 13. Make successful execution of this campaign a top priority.
n Gary Kelly and other Southwest executives need to meet regularly with all AirTran employees that have
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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n 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
the same period in 2015.
n Net income for the nine months ended September 30, 2016, was $1.7 billion, or $2.70 per diluted share,
compared to $1.65 billion, or $2.45 per diluted share, for the first nine months of 2015.
n 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).
n A pretax return on invested capital of 32.3% for the twelve months ended September 30, 2016, versus
31.1% for the twelve months ended September 30, 2015.
n Net cash provided by operations for the first nine months of 2016 was $3.6 billion, versus $2.9 billion
Case 25 Teaching Note Southwest Airlines in 2016: Culture, Values, and Operating Practices
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Southwest Airlines’ most recent recognitions and honors included the following:
20th consecutive year.
n Named to Fortune’s 2016 list of World’s Most Admired Companies. Southwest was ranked as the No.
7 Most Admired Company on the entire list, and was the only commercial airline to make the Top 10;