SOUTHWEST AIRLINES

Southwest Airlines Case Study

Southwest Airlines

Introduction

Southwest Airlines, which began as a small Texas airline in 1971, had grown to become one of the largest airlines in the United States. (Southwest Airlines, Annual Report, 2003, 9) As of 2004, Southwest flew more than 65 million passengers a year to 59 cities in 30 states, more than 2,800 times a day. While the airline industry reported greater than $5 billion in losses during 2003, that year marked Southwest Airlines's 31st consecutive year of profitability.

For more than three decades, Southwest's competitive advantage stemmed from its unique business model together with its unorthodox management style, especially that of former CEO Herb Kelleher. For example, in March 1992, Kelleher settled a dispute with Stevens Aviation over the right to use the ad slogan “Just Plane Smart,” which Stevens maintained it had developed first. Kelleher and Kurt Herwald, the chairman of Stevens Aviation, had decided they would settle things the “old-fashioned way” in a best-of-three arm-wrestling match in the Dallas Sportatorium.

In Texas, 1972 became the year of the fare war. To compete with Southwest, rivals slashed fares and began offering more in terms of service (e.g., free beer, hot and cold towels, $1 drinks on Southwest's routes, and more-frequent service). When Braniff decided to offer a half-price fare, Muse countered with a giveaway: free bottles of premium liquor to passengers who paid the full fare; passengers who did not want the liquor would pay half fare.

Because corporations were accustomed to paying full fare, business travelers became the happy recipients of premium liquor. During the promotion, Southwest became not only the largest distributor in Texas of Chivas Regal, Crown Royal, and Smirnoff, but also the winner in the fare war. After 1972, Southwest consistently made a profit.

In March 1979, Lamar Muse resigned as president and CEO of Southwest Airlines, and Herb Kelleher was named as his replacement. Kelleher, who had been a student of philosophy and literature in college and later graduated at the top of his law-school class at New York University, was wedded to the Southwest cause from the very beginning.

Operations

Start-up

The first key decision for the airline concerned the purchase type and number of aircraft. After weeks of negotiations with representatives of several airplane manufacturers, Southwest decided to purchase three Boeing 737-200 aircraft. This decision proved to be a crucial one, as Southwest wanted to use the same type of aircraft in all its operations, allowing for future expansion. The Boeing 737-200 required fewer crewmembers than the aircraft used by Southwest's competitors. Maintenance costs were also lower because the airline had to maintain only one type of plane.

Strategy and service

Southwest's no-frills policy included no baggage transfers, no meals, no assigned seats, and reusable boarding cards. When a passenger decided to fly Southwest, he or she would show up at the airport at the designated time, get a ticket at the counter printed out by a machine (at the time, the competition was issuing handwritten tickets), take a reusable boarding card, and board ...