Overview
In 2010, 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 U.S. air carrier that was consistently profitable. The U.S. airline industry had lost money in 15 of the 30 years from 1980 through 2009, with combined annual losses exceeding combined annual profits by $43.2 billion. Yet Southwest had reported a profit every year since 1973, chiefly because of its zealous pursuit of low operating costs, low fares, and customer-pleasing service.
From humble beginnings as a quirky but scrappy underdog that flew mainly to secondary airports (rather than high-traffic airports like Chicago O’Hare, Dallas–Fort Worth, Atlanta Hartsfield, and New York’s LaGuardia and Kennedy airports), 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 prices 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 by more than 28 million annually, whereas passenger traffic on domestic routes had declined at such carriers as American Airlines, Delta, Continental, United, and US Airways.
From day one, Southwest had pursued a low-cost/low-price/no-frills strategy. Its signature low fares made air travel affordable to a wide segment of the U.S. population—giving substance to its tag line “The Freedom to Fly.” It employed a relatively simple fare structure, with all of the fare options plainly displayed at the company’s website. The lowest fares were usually nonrefundable but could be applied to future travel on Southwest Airlines without incurring a change fee (rival airlines charged a change fee of $100 to $175), and the company’s advance purchase requirements on tickets were more lenient than those of its rivals. Many Southwest flights had some seats available at deeply discounted fares, provided they were purchased online at the company’s website.
In November 2007, Southwest introduced a new Business Select fare to attract economy-minded business travelers; Business Select customers had early boarding privileges, received extra Rapid Rewards (frequent flyer credits), and a free cocktail. In 2008, rival airlines instituted a series of add-on fees—including a fuel surcharge for each flight, fees for checking bags, fees for processing frequent flyer travel awards, fees for buying a ticket in person at the airport or calling a toll-free number to speak with a ticket agent to make a reservation, fees for changing a previously purchased ticket to a different flight, and fees for in-flight snacks and beverages—all allegedly to help defray skyrocketing costs for jet fuel (which had climbed from about 15 percent of operating expenses in 2000 to 40 percent of operating expenses in mid-2008). Southwest, however, choose to forgo à la carte pricing and stuck with an all-inclusive fare price. During 2009, Southwest ran an ad campaign called “Bags Fly Free” to publicize the cost savings of flying Southwest rather than paying the $20 to $50 fees that rival airlines charged for a first or second checked bag.
When advance reservations were weak for particular weeks or times of the day or on certain routes, Southwest made a regular practice of initiating special fare promotions to stimulate ticket sales on flights that otherwise would have had numerous empty seats. For instance, the company had used fare sales to combat slack air travel during much of the recession of 2008–2009.
The combined effect of Southwest’s “Bags Fly Free” ads and periodic fare sales resulted in company-record load factors for every month from July through December 2009. (A load factor was the percentage of all available seats on all flights that were occupied by fare-paying passengers.) Southwest continued to run the “Bags Fly Free” ads during the first half of 2010.
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. The transaction was valued at about $1.4 billion; Southwest planned to fund approximately $670 of the acquisition cost out of cash on hand. For the twelve months ending June 30, 2010, AirTran had revenues of $2.5 billion and operating income (excluding special items) of $128 million. Like Southwest, AirTran was also a low-fare, low-cost airline. AirTran served 70 airports in the United States, Mexico, and the Caribbean; nineteen 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. Some analysts believed that Southwest’s entry into the Atlanta market alone could translate into 2 million additional passengers for Southwest annually. AirTran had 8,033 employees, 138 aircraft, and 177 nonstop routes; in 2009 AirTran transported 24.0 million passengers, the seventh largest number of all U.S. airlines. Based on current operations, the combined organization would have nearly 43,000 employees and transport more than 100 million passengers annually. In addition, the combined carriers’ all-Boeing fleet consisting of 685 active aircraft would include 401 Boeing 737-700s, 173 Boeing 737-300s, 25 Boeing 737-500s, and 86 Boeing 717s, with an average age of approximately 10 years, one of the youngest fleets in the industry. The companies hoped to close the merger deal in early 2011 and then begin integration of AirTran into the Southwest Airlines brand—a process which Southwest management said might take as long as two years in order to maintain Southwest’s standards for customer service.
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.
QUESTIONS
- Describe some of the factors needed to reengineer corporate thinking that Southwest Airlines already exhibits.
- What are specific elements of a corporate entrepreneurial strategy apparent within Southwest Airlines?
- How was Herb Kelleher instrumental in structuring a climate conducive to entrepreneurial activity?
