Case 25

CASE 25
Southwest Airlines in 2014: Culture,

Values, and Operating Practices
Arthur A. Thompson John E. Gamble

The University of Alabama Texas A&M University–Corpus Christi
I
n 2014, Southwest Airlines was the market share Houston.1 Over the years, King had heard many
leader in domestic air travel in the United States; Texas businessmen complain about the length of
it transported more passengers from U.S. airports time that it took to drive between the three cities
to U.S. destinations than any other airline, and it and the expense of flying the airlines currently serv-
offered more regularly scheduled domestic flights ing these cities. His business concept for the airline
than any other airline. Southwest also had the envi- was simple: Attract passengers by flying convenient
able distinction of being the only major air carrier schedules, get passengers to their destination on
in the United States that was consistently profitable, time, make sure they have a good experience, and
having reported a profit every year since 1973. charge fares competitive with travel by automobile.
From humble beginnings as a scrappy underdog Kelleher, skeptical that King’s business idea was
with quirky practices that flew mainly to “secondary” viable, dug into the possibilities during the next few
airports (rather than high-traffic airports like Chicago weeks and concluded a new airline was feasible; he
O’Hare, Dallas–Fort Worth, and New York’s Ken- agreed to handle the necessary legal work and also
nedy airport), Southwest had climbed up through the to invest $10,000 of his own funds in the venture.
industry ranks to become a major competitive force In 1967, Kelleher filed papers to incorporate the
in the domestic segment of the U.S. airline indus- new airline and submitted an application to the Texas
try. It had weathered industry downturns, dramatic Aeronautics Commission for the new company to
increases in the price of jet fuel, cataclysmic falloffs begin serving Dallas, Houston, and San Antonio.2 But
in airline traffic due to terrorist attacks and economy- rival airlines in Texas pulled every string they could
wide recessions, and fare wars and other attempts by to block the new airline from commencing opera-
rivals to undercut its business, all the while adding tions, precipitating a contentious four-year parade
more and more flights to more and more airports. of legal and regulatory proceedings. Herb Kelleher
Since 2000, the number of passengers flying South- led the fight on the company’s behalf, eventually pre-
west had increased from 72.6 million to 115.4 million, vailing in June 1971 after winning two appeals to the
whereas domestic passenger traffic had remained flat Texas Supreme Court and a favorable ruling from the
or declined at American Airlines, Delta Air Lines, U.S. Supreme Court. Kelleher recalled, “The con-
United Airlines, and US Airways—see Exhibit 1. stant proceedings had gradually come to enrage me.
There was no merit to our competitors’ legal asser-
tions. They were simply trying to use their superior
COMPANY BACKGROUND economic power to squeeze us dry so we would col-
In late 1966, Rollin King, a San Antonio entre- lapse before we ever got into business. I was bound
preneur who owned a small commuter air service, and determined to show that Southwest Airlines was
marched into Herb Kelleher’s law office with a going to survive and was going into operation.”3
plan to start a low-cost, low-fare airline that would Copyright © 2014 by Arthur A. Thompson and John E. Gamble.
shuttle passengers between San Antonio, Dallas, and All rights reserved.
CASE 25 Southwest Airlines in 2014: Culture, Values, and Operating Practices C-341
EXHIBIT 1 Total Number of Domestic and International Passengers Traveling on

Select U.S. Airlines, 2000, 2005, 2010–2013 (in thousands)
Total Number of Enplaned Passengers1
Carrier 2000 2005 2010 2011 2012 2013
American Airlines
Domestic 68,319 77,297 65,774 65,253 65,027 65,070
International 17,951 20,710 20,424 20,887 21,430 19,962
Total 86,270 98,007 86,198 86,140 86,457 85,032
Delta Air Lines2
Domestic 97,965 77,581 90,141 92,864 95,641 98,590
International 7,596 8,359 19,390 19,344 19,568 18,925
Total 105,561 85,940 109,531 112,208 115,209 117,515
Southwest Airlines (domestic only,
has no international flights)3 72,568 88,436 106,270 110,624 112,277 115,377
AirTran (Domestic)3 — — — 23,781 20,453 16,146
AirTran (International) — — — 937 1,301 1,534

Southwest Airlines total 135,342 134,031 133,057
United Airlines4
Domestic 72,450 55,173 43,323 39,551 67,629 65,221
International 10,625 10,356 9,727 10,091 23,998 22,209
Total 83,075 65,529 53,050 49,642 91,627 87,430
US Airways5
Domestic 56,667 37,040 45,180 46,208 47,481 50,037
International 3,105 4,829 6,670 6,749 6,794 6,480
Total 59,772 41,869 51,850 52,957 54,275 56,517
1
Includes both passengers who paid for tickets and passengers who were traveling on frequent-flyer awards.
2
Delta Air Lines and Northwest Airlines merged in October 2008; however, combined reporting did not begin until 2010.
3
Southwest Airlines acquired AirTran in late 2010; by year-end 2014, all AirTran flights were scheduled to be rebranded as Southwest
Airlines flights.
4
United Airlines acquired Continental Airlines in 2010, and the two companies began joint reporting of passenger traffic in 2012. Prior to
2012, traffic count data are for only United flights.
5
US Airways and America West merged in September 2005, but joint reporting of traffic counts did not begin until 2007; hence, data for
2000 and 2005 do not include America West, whereas the data for 2010–2013 do include the traffic counts of the combined companies.
US Airways and American Airlines merged in December 2013 but continued to operate under their separate names through 2014.
Source: U.S. Department of Transportation, Bureau of Transportation Statistics, “Air Carrier Statistics,” Form T-100.
In January 1971, Lamar Muse was brought in as discounting its price from $5 million to $4 million and
the CEO to get operations under way. Muse was an financing 90 percent of the $12 million deal. Muse
aggressive and self-confident airline veteran who knew was able to recruit a talented senior staff that included
the business well and who had the entrepreneurial a number of veteran executives from other carriers. He
skills to tackle the challenges of building the airline particularly sought out people who were innovative,
from scratch and then competing head-on with the wouldn’t shirk from doing things differently or uncon-
major carriers. Through private investors and an ventionally, and were motivated by the challenge of
initial public offering of stock in June 1971, Muse building an airline from scratch. Muse wanted his
raised $7 million in new capital to purchase planes executive team to be willing to think like mavericks
and equipment and provide cash for startup. Boeing and not be lulled into instituting practices at South-
agreed to supply three new 737s from its inventory, west that imitated what was done at other airlines.
C-342 PART 2 Cases in Crafting and Executing Strategy
Southwest’s Struggle to (Later, when the company went public, it chose

“LUV” as its stock-trading symbol.)
Gain a Market Foothold
• To add more flights without buying more planes,
In June 1971, Southwest initiated its first flights with the head of Southwest’s ground operations came
a schedule that soon included 6 round-trips between up with a plan for ground crews to off-load pas-
Dallas and San Antonio and 12 round-trips between sengers and baggage, refuel the plane, clean the
Houston and Dallas. But the introductory $20 one- cabin and restock the galley, on-load passengers
way fares to fly the Golden Triangle, well below the and baggage, do the necessary preflight checks
$27 and $28 fares charged by rivals, attracted dis- and paperwork, and push away from the gate in 10
appointingly small numbers of passengers. To try to minutes. The 10-minute turnaround became one
gain market visibility and drum up more passengers, of Southwest’s signatures during the 1970s and
Southwest undertook some creative actions to sup- 1980s. (In later years, as passenger volume grew
plement its ad campaigns publicizing its low fares: and many flights were filled to capacity, the turn-
• Southwest decided to have its flight hostesses around time gradually expanded to 30 minutes—
dress in colorful hot pants and white knee-high because it took more time to unload and load 135
boots with high heels. Recruiting ads for South- passengers compared to a half-full plane with just
west’s first group of hostesses headlined “Atten- 60 to 65 passengers. Even so, the average turn-
tion, Raquel Welch: You can have a job if you around times at Southwest during the 2000–2013
measure up.” Two thousand applicants responded, period were shorter than the 35- to 50-minute
and those selected for interviews were asked turnarounds typical at other major airlines.)
to come dressed in hot pants to show off their • In late November 1971, Lamar Muse came up
legs—the company wanted to hire long-legged with the idea of offering a $10 fare to passengers
beauties with sparkling personalities. Over 30 on the Friday night Houston-Dallas flight. With
of Southwest’s first graduating class of 40 flight no advertising, the 112-seat flight sold out. This
attendants consisted of young ladies who were led Muse to realize that Southwest was serving
cheerleaders and majorettes in high school and two quite distinct types of travelers in the Golden
thus had experience performing skimpily dressed Triangle market: (1) business travelers who were
in front of people. more time-sensitive than price-sensitive and
• A second attention-getting action was to give pas- wanted weekday flights at times suitable for con-
sengers free alcoholic beverages during daytime ducting business, and (2) price-sensitive leisure
flights. Most passengers on these flights were travelers who wanted lower fares and had more
business travelers. Management’s thinking was flexibility about when to fly.4 He came up with
that many passengers did not drink during the a two-tier on-peak and off-peak pricing structure
daytime and that with most flights being less than in which all seats on weekday flights departing
an hour’s duration it would be cheaper to simply before 7 p.m. were priced at $26 and all seats on
give the drinks away than collect the money. other flights were priced at $13. Passenger traf-
• Taking a cue from being based at Dallas Love fic increased significantly—and systemwide on-
Field, Southwest began using the tagline “Now peak and off-peak pricing soon became standard
There’s Somebody Else Up There Who Loves across the whole airline industry.
You.” The routes between Houston, Dallas, and • In 1972, the company decided to move its flights
San Antonio became known as the “Love Tri- in Houston from the newly opened Houston Inter-
angle.” Southwest’s planes were referred to as continental Airport (where Southwest was losing
“Love Birds,” drinks became “Love Potions,” money and where passengers faced a 45-minute
peanuts were called “Love Bites,” drink coupons trip to the city’s downtown area) to the abandoned
were “Love Stamps,” and tickets were printed on Houston Hobby Airport, located much closer to
“Love Machines.” The “love” campaign set the downtown Houston. Despite being the only car-
tone for Southwest’s approach to its customers rier to fly into Houston Hobby, the results were
and its efforts to make flying Southwest Airlines spectacular— business travelers who flew to Hous-
an enjoyable, fun, and differentiating experience. ton frequently from Dallas and San Antonio found
the Houston Hobby location far more convenient, company’s headquarters were located at Love Field.
and passenger traffic doubled almost immediately. The courts eventually ruled that Southwest’s opera-
• In early 1973, in an attempt to fill empty seats on tions could remain at Love Field.
its San Antonio–Dallas flights, Southwest cut its A second battle ensued when rival airlines pro-
regular $26 fare to $13 for all seats, all days, and tested Southwest’s application to begin serving sev-
all times. When Braniff International, at that time eral smaller cities in Texas; their protest was based
one of Southwest’s major rivals, announced $13 on arguments that these markets were already well
fares of its own, Southwest retaliated with a two- served and that Southwest’s entry would result in
page ad, run in the Dallas newspapers, headlining costly overcapacity. Southwest countered that its
“Nobody is going to shoot Southwest Airlines out low fares would allow more people to fly and thus
of the sky for a lousy $13” and containing copy would grow the market. Again, Southwest prevailed,
stating that Braniff was trying to run Southwest and its views about low fares expanding the market
out of business. The ad announced that South- proved accurate. In the year before Southwest initi-
west would not only match Braniff’s $13 fare but ated service, 123,000 passengers flew from Harlin-
would also give passengers the choice of buying a gen Airport in the Rio Grande Valley to Houston,
regular-priced ticket for $26 and receiving a com- Dallas, or San Antonio; in the 11 months following
plimentary fifth of Chivas Regal scotch, Crown Southwest’s initial flights, 325,000 passengers flew
Royal Canadian whiskey, or Smirnoff vodka (or, to the same three cities.
for nondrinkers, a leather ice bucket). Over 75 per- Believing that Braniff and Texas International
cent of Southwest’s Dallas-Houston passengers were deliberately engaging in tactics to harass
opted for the $26 fare, although the percentage Southwest’s operations, Southwest convinced the
dropped as the two-month promotion wore on and U.S. government to investigate what it considered
corporate controllers began insisting that com- predatory tactics by its chief rivals. In February
pany employees use the $13 fare. The local and 1975, Braniff and Texas International were indicted
national media picked up the story of Southwest’s by a federal grand jury for conspiring to put South-
offer, proclaiming the battle as a David versus west out of business—a violation of the Sherman
Goliath struggle in which the upstart Southwest Antitrust Act. The two airlines pleaded “no contest”
did not stand much of a chance against the much to the charges, signed cease-and-desist agreements,
larger and well-established Braniff; grassroots and were fined a modest $100,000 each.
sentiment in Texas swung to Southwest’s side. When Congress passed the Airline Deregulation
Act in 1978, Southwest applied to the Civil Aero-
All these moves paid off. The resulting gains in pas- nautics Board (now the Federal Aviation Administra-
senger traffic enabled Southwest to report its first- tion) to fly between Houston and New Orleans. The
ever annual profit in 1973. application was vehemently opposed by local gov-
ernment officials and airlines operating out of DFW
More Legal and Regulatory Hurdles because of the potential for passenger traffic to be
During the rest of the 1970s, Southwest found itself siphoned away from DFW. The opponents solicited
embroiled in another round of legal and regulatory the aid of Fort Worth congressman Jim Wright, then
battles. One battle involved Southwest’s refusal to the majority leader of the U.S. House of Representa-
move its flights from Dallas Love Field, located tives, who took the matter to the floor of the House;
10 minutes from downtown, out to the newly opened a rash of lobbying and maneuvering ensued. What
Dallas–Fort Worth (DFW) Regional Airport, which emerged came to be known as the Wright Amend-
was 30 minutes from downtown Dallas. Local offi- ment of 1979: No airline may provide nonstop or
cials were furious because they were counting on through-plane service from Dallas Love Field to
fees from Southwest’s flights in and out of DFW to any city in any state except for locations in Texas,
help service the debt on the bonds issued to finance Louisiana, Arkansas, Oklahoma, and New Mexico.
the construction of the airport. Southwest’s posi- Southwest was prohibited from advertising, pub-
tion was that it was not required to move because it lishing schedules or fares, or checking baggage for
had not agreed to do so or been ordered to do so by travel from Dallas Love Field to any city it served
the Texas Aeronautics Commission—moreover, the outside the five-state “Wright Zone.” The Wright
amendment was expanded in 1997, when Alabama, Sustained Growth Transforms

Mississippi, and Kansas were added to the five-state
zone; in 2005, Missouri was added to the Wright
Southwest into the Domestic
Zone. In 2006, after a heated battle in Congress, leg- Market Share Leader, 1981–2013
islation was passed and signed into law that repealed When Herb Kelleher took over in 1981, Southwest
the Wright amendment beginning in 2014. was flying 27 planes to 14 destination cities and had
$270 million in revenues and 2,100 employees. Over
The Emergence of a Combative, the next 20 years, Southwest Airlines prospered
Can-Do Culture at Southwest under Kelleher’s leadership. When Kelleher stepped
The legal, regulatory, and competitive battles that down as CEO in mid-2001, the company had 350
Southwest fought in its early years produced a strong planes flying to 58 U.S. airports, annual revenues of
esprit de corps among Southwest personnel and a $5.6 billion, over 30,000 employees, and 64 million
drive to survive and prosper despite the odds. With fare-paying passengers annually.
newspaper and TV stories reporting Southwest’s dif- Under the two CEOs who succeeded Kelleher,
ficulties regularly, employees were fully aware that Southwest continued its march to becoming the mar-
the airline’s existence was constantly on the line. Had ket share leader in domestic air travel, growing to
the company been forced to move from Love Field, it 2013 revenues of $17.7 billion and 44,800 employ-
would most likely have gone under, an outcome that ees, flying 680 planes to 96 airports in 41 states and
employees, Southwest’s rivals, and local government 7 destinations outside the United States, and trans-
officials understood well. According to Southwest’s porting more than 108 million fare-paying passen-
former president, Colleen Barrett, the obstacles thrown gers and over 133 million total passengers (including
in the company’s path by competitors and local offi- those traveling on frequent-flyer awards) in 2013. In
cials were instrumental in building Herb Kelleher’s the process, the company won more industry Triple
passion for Southwest Airlines and ingraining a com- Crown awards—for best on-time record, best bag-
bative, can-do spirit into the corporate culture:5 gage handling, and fewest customer complaints—
than any other U.S. airline. While Southwest fell
They would put twelve to fifteen lawyers on a case and short of its on-time performance and baggage-
on our side there was Herb. They almost wore him to handling goals in 2013, it still led the domestic airline
the ground. But the more arrogant they were, the more industry in customer satisfaction and received other
determined Herb got that this airline was going to go
awards and recognitions, including Best Domes-
into the air—and stay there.
The warrior mentality, the very fight to survive, is
tic Airline for Customer Service, one of Executive
truly what created our culture. Travel Magazine’s Leading Edge awards; Brand of
the Year in the Value Airline Category, from the Har-
When Lamar Muse resigned in 1978, South- ris Poll; and Best Customer Service and Best Loy-
west’s board wanted Herb Kelleher to take over as alty Credit Card, from InsideFlyer Magazine.
chairman and CEO. But Kelleher enjoyed practic- Exhibit 2 provides a five-year summary of
ing law, so while he agreed to become chairman of Southwest’s financial and operating performance.
the board, he insisted that someone else be CEO. Exhibit 3 on page C-347 provides select operating
Southwest’s board appointed Howard Putnam, a and financial data for major U.S. air carriers during
group vice president of marketing services at United the 1995–2013 period.
Airlines, as Southwest’s president and CEO in
July 1978. Putnam asked Kelleher to become more
involved in Southwest’s day-to-day operations, HERB KELLEHER: THE CEO
and over the next three years, Kelleher got to know
many of the company’s personnel and observe them
WHO TRANSFORMED
in action. Putnam announced his resignation in fall SOUTHWEST INTO A MAJOR
1981 to become president and COO at Braniff Inter-
national. This time, Southwest’s board succeeded in
AIRLINE
persuading Kelleher to take on the additional duties Herb Kelleher majored in philosophy at Wesleyan
of CEO and president. University in Middletown, Connecticut, graduating
EXHIBIT 2 Summary of Southwest Airlines’ Financial and Operating Performance,

2009–2013 (in millions, except per share and operating data)
Year Ended December 31
2013 2012 2011 2010 2009
Financial data
Operating revenues $ 17,699 $ 17,088 $ 15,658 $ 12,104 $ 10,350
Operating expenses 16,421 16,465 14,965 11,116 10,088
Operating income 1,278 623 693 988 262
Other expenses
(income), net 69 (62) 370 243 98
Income before taxes 1,209 685 323 745 164
Provision for income
taxes 455 264 145 286 65
Net income $ 754 $ 421 $ 178 $ 459 $ 99
Net income per
share, basic $1.06 $0.56 $0.23 $0.62 $0.13
Net income per
share, diluted $1.05 $0.56 $0.23 $0.61 $0.13
Cash dividends per
common share $ 0.1300 $0.0345 $ 0.0180 $ 0.0180 $ 0.0180
Total assets at
period-end $ 19,345 $18,596 $ 18,068 $ 15,463 $14,269
Long-term
obligations at
period-end $ 2,191 $ 2,883 $ 3,107 $ 2,875 $ 3,325
Stockholders’ equity
at period-end $ 7,336 $ 6,992 $ 6,877 $ 6,237 $ 5,454
Operating data
Revenue
passengers carried 108,075,976 109,346,509 103,973,759 88,191,322 86,310,229
Enplaned
passengers 133,155,030 133,978,100 127,551,012 106,227,521 101,338,228
Revenue passenger-
miles (RPMs)
(000s)1 104,348,216 102,874,979 97,582,530 78,046,967 74,456,710
Available seat-miles
(ASMs) (000s)2 130,344,072 128,137,110 120,578,736 98,437,092 98,001,550
Load factor3 80.1% 80.3% 80.9% 79.3% 76.0%
Average length of
passenger haul
(miles) 966 941 939 885 863
Average length of
each flight (miles) 703 693 679 648 639
Trips flown 1,312,785 1,361,558 1,317,977 1,114,451 1,125,111
Average passenger
fare $154.72 $147.17 $141.90 $130.27 $114.61
Passenger revenue
yield per RPM
(cents)4 16.02 15.64 15.12 14.72 13.29
Operating revenue
per ASM (cents)5 13.58 13.34 12.99 12.30 10.56
(Continued)
EXHIBIT 2 (Continued )
Year Ended December 31
2013 2012 2011 2010 2009
Passenger revenue
per ASM (cents)6 ¢12.83 ¢12.56 ¢12.24 ¢11.67 ¢10.09
Operating expenses
per ASM (cents)7 ¢12.60 ¢12.85 ¢12.41 ¢11.29 ¢10.29
Operating expenses
per ASM, excluding
fuel (cents) ¢8.18 ¢8.07 ¢7.73 ¢7.61 ¢7.18
Operating expenses
per ASM, excluding
fuel and profit
sharing (cents) ¢8.01 ¢7.98 ¢7.65 ¢7.45 ¢7.15
Fuel costs per
gallon, including
fuel tax $3.16 $3.30 $3.19 $2.51 $2.12
Fuel costs per

gallon, including fuel
tax, economic $3.12 $3.28 $3.19 $ 2.39 $1.97
Fuel consumed, in
gallons (millions) 1,818 1,847 1,764 1,437 1,428
Active full-time
equivalent
employees 44,831 45,861 45,392 34,901 34,726
Aircraft in service at
period-end8 680 694 698 548 537
1
A revenue passenger-mile is one paying passenger flown 1 mile.
2
An available seat-mile (ASM) is one seat (empty or full) flown 1 mile; also referred to as “capacity,” which is a measure of the space avail-
able to carry passengers in a given period.
3
Revenue passenger-miles divided by available seat-miles.
4
Calculated as passenger revenue divided by revenue passenger-miles. It represents the average cost paid by a paying passenger to fly
1 mile.
5
Calculated as operating revenue divided by available seat-miles. It is a measure of operating revenue production based on the total
available seat-miles flown during a particular period.
6
Calculated as passenger revenue divided by available seat-miles. It is a measure of passenger revenue production based on the total
available seat-miles flown during a particular period.
7
Calculated as operating expenses divided by available seat-miles. Also referred to as unit costs or cost per available seat-mile, this is
the average cost of flying an aircraft seat (empty or full) 1 mile.
8
Includes leased aircraft and excludes aircraft that were not available for service, in storage, held for sale, or held for return to the lessor.
Source: Company 10-K report, 2013.
with honors. He earned his law degree at New York When Herb Kelleher took on the role of South-
University, again graduating with honors and also serv- west’s CEO in 1981, he made a point of visiting with
ing as a member of the law review. After graduation, maintenance personnel, to check on how well the
he clerked for a New Jersey Supreme Court justice for planes were running, and talking with the flight atten-
two years and then joined a law firm in Newark. Upon dants. Kelleher did not do much managing from his
marrying a woman from Texas and becoming enam- office, preferring instead to be out among the troops as
ored with Texas, he moved to San Antonio, where he much as he could. His style was to listen and observe
became a successful lawyer and came to represent and to offer encouragement. Kelleher attended most
Rollin King’s small aviation company. graduation ceremonies of flight attendant classes, and
EXHIBIT 3 Select Operating and Financial Data for Major U.S. Airline Carriers,
1995, 2000, 2005, 2010–2013
1995 2000 2005 2010 2011 2012 2013
Passengers (millions) 559.0 666.2 738.3 720.5 730.8 736.6 758.9

Flights (thousands) 8,062.0 9,035.0 11,564.0 9,521.0 9,478.0 9,284 9,161
Revenue passenger-miles (billions) 603.4 692.8 778.6 798.0 814.4 823.2 840.4
Available seat-miles (billions) 807.1 987.9 1,002.7 972.6 992.7 994.5 1,011.2
Load factor (%) 67.0 72.4 77.7 82.0 82.0 82.8 83.1
Passenger revenues (millions) $69,470 $ 93,622 $ 93,500 $103,978 $114,299 $115,975 $120,640
Operating profit (loss) (millions) $ 5,852 $ 6,999 $ 427 $ 9,344 $ 7,035 $ 7,516 $ 12,548
Net profit (loss) excluding one-time
charges and gains (millions) $ 2,283 $ 2,486 ($5,782) $ 3,665 $ 1,392 $ 360 $ 12,771
Total employees 546,987 679,967 562,467 531,224 538,300 547,558 n.a.
Source: Air Transport Association, 2005 Economic Report, p. 7; and U.S. Department of Transportation, Bureau of Transportation Statis-
tics, “Airline Traffic Data” press releases, various years.
he often helped load bags on “Black Wednesday,” the when it came to the financial side of the business,
busy travel day before Thanksgiving. He knew the Kelleher insisted on fiscal conservatism, a strong
names of thousands of Southwest employees and was balance sheet, comparatively low levels of debt, and
held in the highest regard by the employees. When zealous attention to bottom-line profitability. While
he attended a Southwest employee function, he was believing strongly in being prepared for adversity,
swarmed like a celebrity. Kelleher had an aversion to Southwest personnel
Kelleher had an affinity for bold-print Hawaiian spending time drawing up all kinds of formal stra-
shirts, owned a tricked-out motorcycle, and made no tegic plans, saying, “Reality is chaotic; planning is
secret of his love for smoking and Wild Turkey whis- ordered and logical. The meticulous nit-picking that
key. He loved to make jokes and engage in pranks goes on in most strategic planning processes creates
and corporate antics, prompting some people to refer a mental straightjacket that becomes disabling in an
to him as the “clown prince” of the airline industry. industry where things change radically from one day
He once appeared at a company gathering dressed in to the next.” Kelleher wanted Southwest managers to
an Elvis costume, and he had arm-wrestled a South think ahead, have contingency plans, and be ready
Carolina company executive at a public event in to act when it seemed that the future held significant
Dallas for the right to use “Just Plane Smart” as an risks or when new conditions suddenly appeared and
advertising slogan.6 Kelleher was well known inside demanded prompt responses.
and outside the company for his combativeness, Kelleher was a strong believer in the principle
particularly when it came to beating back competi- that employees—not customers—came first:9
tors. On one occasion, he reportedly told a group of You have to treat your employees like your customers.
veteran employees, “If someone says they’re going When you treat them right, then they will treat your out-
to smack us in the face—knock them out, stomp side customers right. That has been a very powerful com-
them out, boot them in the ditch, cover them over, petitive weapon for us. You’ve got to take the time to listen
and move on to the next thing. That’s the Southwest to people’s ideas. If you just tell somebody no, that’s an
spirit at work.”7 On another occasion, he said, “I love act of power and, in my opinion, an abuse of power. You
battles. I think it’s part of the Irish in me. It’s like don’t want to constrain people in their thinking.
what Patton said, ‘War is hell and I love it so.’ That’s Another indication of the importance that Kelle-
how I feel. I’ve never gotten tired of fighting.”8 her placed on employees was the message he had
While Southwest was deliberately combative penned in 1990 that was prominently displayed in
and flamboyant in some aspects of its operations, the lobby of Southwest’s headquarters in Dallas:
The people of Southwest Airlines are “the creators” of flamboyant a personality as Kelleher. Parker was
what we have become—and of what we will be. seen as an honest, straight-arrow kind of person who
Our people transformed an idea into a legend. had a strong grasp of Southwest’s culture and mar-
That legend will continue to grow only so long as it is ket niche and who could be nice or tough, depending
nourished— by our people’s indomitable spirit, boundless on the situation. When his appointment as CEO was
energy, immense goodwill, and burning desire to excel.
announced, Parker said:10
Our thanks—and our love—to the people of South-
west Airlines for creating a marvelous family and a There is going to be no change of course insofar as
wondrous airline. Southwest is concerned. We have a very experienced
leadership team. We’ve all worked together for a long
In June 2001, Herb Kelleher stepped down as time. There will be evolutionary changes in Southwest,
CEO but continued on in his role as the chairman just as there have always been in our history. We’re
of Southwest’s board of directors and the head of going to stay true to our business model of being a
the board’s executive committee; as chairman, he low-cost, low-fare airline.
played a lead role in Southwest’s strategy, expansion
to new cities and aircraft scheduling, and govern- Parker retired unexpectedly, for personal rea-
ment and industry affairs. In May 2008, after more sons, in July 2004, stepping down as CEO and vice
than 40 years of leadership at Southwest, Kelleher chairman of the board and also resigning from the
retired as chairman (but he remained a full-time company’s board of directors. He was succeeded by
Southwest employee until July 2013 and carried the Gary C. Kelly.
title of chairman emeritus in 2014).
Colleen Barrett, Southwest’s
EXECUTIVE LEADERSHIP AT President, 2001–2008
Barrett began working with Kelleher as his legal
SOUTHWEST: 2001–2014 secretary in 1967 and had been with Southwest
In June 2001 Southwest Airlines, responding to anx- since 1978. As executive vice president–customers,
ious investor concerns about the company’s lead- Barrett had a high profile among Southwest employ-
ership succession plans, began an orderly transfer ees and spent most of her time on culture building,
of power and responsibilities from Herb Kelleher, morale building, and customer service; her goal was
age 70, to two of his most trusted protégés: James to ensure that employees felt good about what they
F. Parker, 54, Southwest’s general counsel, succeeded were doing and felt empowered to serve the cause
Kelleher as CEO; Colleen Barrett, 56, Southwest’s of Southwest Airlines.11 She and Kelleher were
executive vice president–customers and self-described regarded as Southwest’s guiding lights, and some
keeper of Southwest’s pep-rally corporate culture, analysts said she was essentially functioning as the
became president and chief operating officer. company’s chief operating officer prior to her for-
mal appointment as president. Much of the credit for
James Parker, Southwest’s the company’s strong record of customer service and
its strong-culture work climate belonged to Barrett.
CEO, 2001–2004 Barrett had been the driving force behind lining
James Parker’s association with Herb Kelleher went the hallways at Southwest’s headquarters with pho-
back 23 years to the time when they were colleagues tos of company events and trying to create a family
at Kelleher’s old law firm. Parker moved over to atmosphere at the company. Believing it was impor-
Southwest from the law firm in February 1986. tant to make employees feel cared about and impor-
Parker’s profile inside the company as Southwest’s tant, Barrett had put together a network of contacts
vice president and general counsel had been rela- across the company to help her stay in touch with
tively low, but he was Southwest’s chief labor nego- what was happening with employees and their fami-
tiator, and much of the credit for Southwest’s good lies. When network members learned about events
relations with employee unions belonged to Parker. that were worthy of acknowledgment, the word
Parker and Kelleher were said to think much alike, quickly got to Barrett—the information went into a
and Parker was regarded as having a good sense of database and an appropriate greeting card or gift was
humor, although he did not have as colorful and sent. Barrett had a remarkable ability to give gifts
that were individualized and connected her to the • Stay prepared for bad times with a strong balance
recipient.12 sheet, lots of cash, and a stout fuel hedge.
Barrett was the first woman appointed as presi-
To guide Southwest’s efforts to be a standout
dent and COO of a major U.S. airline. In October
performer on these four key success factors, Kelly
2001, Fortune included Colleen Barrett on its list of
had established five strategic objectives for the
the 50 most powerful women in American business
company:15
(she was ranked number 20). Barrett retired as presi-
dent in July 2008. • Be the best place to work.
• Be the safest, most efficient, and most reliable
Gary C. Kelly, Southwest’s airline in the world.
CEO, 2004–Present • Offer customers a convenient flight schedule with
Gary Kelly was appointed vice chairman of the board lots of flights to lots of places they want to go.
of directors and chief executive officer of Southwest • Offer customers the best overall travel experience.
effective July 15, 2004. Prior to that time, Kelly was • Do all of these things in a way that maintains
executive vice president and chief financial officer a low-cost structure and the ability to offer low
from 2001 to 2004, and vice president–finance and fares.
chief financial officer from 1989 to 2001. He joined
Southwest in 1986 as its controller. In 2008, effec- In 2008–2009, Kelly initiated a slight revision
tive with the retirement of Kelleher and Barrett, of Southwest’s mission statement and also spear-
Kelly assumed the titles of chairman of the board headed a vision statement that called for a steadfast
and president, in addition to serving as CEO. focus on a triple bottom line of “Performance, Peo-
When Kelly was named CEO in 2004, Herb ple, and Planet”—see Exhibit 4.
Kelleher said:13 In 2010, Kelly initiated one of the biggest stra-
tegic moves in the company’s history: the acquisi-
Gary Kelly is one of our brightest stars, well respected
tion of AirTran Airways, a low-fare, low-cost airline
throughout the industry and well known, over more
than a decade, to the media, analyst, and investor com- that served 70 airports in the United States, Mexico,
munities for his excellence. As part of our Board’s and the Caribbean (19 of the airports AirTran served
succession planning, we had already focused on Gary coincided with airports served by Southwest). In
as Jim Parker’s successor, and that process has simply 2011, Kelly initiated a five-year strategic plan that
been accelerated by Jim’s personal decision to retire. featured five strategic initiatives:
Under Gary’s leadership, Southwest has achieved the
strongest balance sheet in the American airline indus- • Integrating AirTran into Southwest.
try; the best fuel hedging position in our industry; and • Modernizing Southwest Airlines’ existing air-
tremendous progress in technology. craft fleet.
In his first two years as CEO, Kelly and other • Adding over 100 new Boeing 737-800 aircraft to
top-level Southwest executives sharpened and fine- the Southwest fleet.
tuned Southwest’s strategy in a number of areas, • Launching international service and a new reser-
continued to expand operations (both adding more vation system.
flights and initiating service to new airports), and • Growing membership in the company’s Rapid
worked to maintain the company’s low-cost advan- Rewards frequent-flyer program.
tage over its domestic rivals.
Kelly saw four factors as keys to Southwest’s In his Letter to the Shareholders in Southwest’s
recipe for success:14 2013 annual report, Kelly said:
• Hire great people, treat ’em like family. We are now in the fourth year of a bold five-year stra-
tegic plan that began in 2011. We believe our five Stra-
• Care for our Customers warmly and personally, tegic Initiatives are transformative with the potential
like they’re guests in our home. to drive more revenue, reduce unit costs, and make
• Keep fares and operating costs lower than any- Southwest more competitive. The world has changed
body else by being safe, efficient, and operation- dramatically since 2000. Our competitors took dra-
ally excellent. conian measures, including massive layoffs and pay
EXHIBIT 4 Southwest Airlines’ Mission, Vision, and Triple-Bottom-Line

Commitment to Performance, People, and Planet
THE MISSION OF SOUTHWEST AIRLINES The mission of Southwest Airlines is dedication to the highest quality of
Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.
OUR VISION Become the world’s most loved, most flown, and most profitable airline.
TO OUR EMPLOYEES We are committed to provide our Employees a stable work environment with equal opportunity
for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of
Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the
organization that they are expected to share externally with every Southwest Customer.
TO OUR COMMUNITIES Our goal is to be the hometown airline of every community we serve, and because those
communities sustain and nurture us with their support and loyalty, it is vital that we, as individuals and in groups,
embrace each community with the SOUTHWEST SPIRIT of involvement, service, and caring to make those
communities better places to live and work.
TO OUR PLANET We strive to be a good environmental steward across our system in all of our hometowns, and one
component of our stewardship is efficiency, which, by its very nature, translates to eliminating waste and conserving
resources. Using cost-effective and environmentally beneficial operating procedures (including facilities and equipment)
allows us to reduce the amount of materials we use and, when combined with our ability to reuse and recycle material,
preserves these environmental resources.
TO OUR STAKEHOLDERS Southwest’s vision for a sustainable future is one where there will be a balance in our
business model between Employees and Community, the Environment, and our Financial Viability. In order to protect
our world for future generations, while meeting our commitments to our Employees, Customers, and Stakeholders,
we will strive to lead our industry in innovative efficiency that conserves natural resources, maintains a creative and
innovative workforce, and gives back to the Communities in which we live and work.
Source: Southwest’s “One Report, 2009,” www.southwest.com (accessed August 20, 2010).
cuts, to adjust to today’s economic realities and have • Charge fares that were very price-competitive
been given new life through the use of federal bank- and, in some cases, appealingly lower than what
ruptcy laws. Thanks to the hard work and extraordi- rival airlines were charging.
nary efforts of our Southwest Warriors, Southwest has
adjusted through incredible Teamwork and unwavering • Create and sustain a low-cost operating structure.
resolve to execute our strategic plan. We have survived • Make it fun to fly on Southwest, and provide cus-
the onslaught of challenges to remain profitable for 41 tomers with a top-notch travel experience.
consecutive years, remain the nation’s largest airline in
terms of domestic originating passengers boarded, and Fare Structure Strategy
operate the largest Boeing fleet in the world. The trans-
formation hasn’t been easy, but it was necessary, and Southwest employed a relatively simple fare struc-
we made significant and successful progress in 2013. ture displayed in ways that made it easy for cus-
tomers to choose the fare they preferred. In 2014,
Southwest’s fares were bundled into four major cat-
SOUTHWEST AIRLINES’ egories: “Wanna Get Away,” “Anytime,” “Business
STRATEGY IN 2014 Select,” and fares for seniors (people 65 and older):
From day one, Southwest had pursued a low-cost, 1. Wanna Get Away fares were always the low-
low-price, no-frills strategy to make air travel afford- est fares and were subject to advance purchase
able to a wide segment of the population. While requirements. No fee was charged for changing
specific aspects of the strategy had evolved over the a previously purchased ticket to a different time
years, three strategic themes had characterized the or day of travel (rival airlines charged a change
company’s strategy throughout its existence and still fee of $100 to $175), but applicable fare dif-
had high profiles in 2014: ferences were applied. The purchase price was
nonrefundable, but the funds could be applied to announced that it would begin charging passengers
future travel on Southwest, provided the tickets fees of $20 to $50 for using the overhead bins to
were not canceled or changed within 10 minutes store carry-on luggage and other items and fees of
of a flight’s scheduled departure. $3 to $15 to preselect a seat; Frontier also charged
2. Anytime fares were refundable and changeable, $1.99 for bottled water and soft drinks on its flights.
and funds could be applied toward future travel Southwest, however, chose to forgo “à la carte” pric-
on Southwest. Anytime fares included a higher ing and stuck with an all-inclusive fare price. Dur-
frequent-flyer point multiplier under Southwest’s ing 2009 and periodically thereafter, Southwest ran
Rapid Rewards frequent-flyer program than did “Bags Fly Free” ad campaigns to publicize the cost
Wanna Get Away fares. savings of flying Southwest rather than paying the
3. Business Select fares were refundable and change- $20 to $50 fees that rival airlines charged for a first
able, and funds could be applied toward future or second checked bag. Southwest also ran ads pro-
travel on Southwest. Business Select fares included moting its policy of not charging a fee for changing
additional perks such as priority boarding, a higher a previously purchased ticket to a different flight.
frequent-flyer point multiplier than other South- When advance reservations were weak for par-
west fares (including twice as many points per ticular weeks or times of the day or on certain routes,
dollar spent as compared to Wanna Get Away Southwest made a regular practice of initiating spe-
fares), priority security and ticket counter access cial fare promotions to stimulate ticket sales on flights
in select airports, and one complimentary adult- that otherwise would have had numerous empty
beverage coupon for the day of travel (for cus- seats. The company’s use of special fare sales and
tomers of legal drinking age). The Business Bags Fly Free ads to combat slack air travel during
Select fare had been introduced in 2007 to help much of the Great Recession in 2008–2009 resulted
attract economy-minded business travelers. in company-record load factors (the percentage of
all available seats on all flights that were occupied
4. Senior fares were typically priced between the
by fare-paying passengers) for every month from
Wanna Get Away and Anytime fares. No fee was
July through December 2009.
charged for changing a previously purchased
Southwest was a shrewd practitioner of the con-
ticket to a different time or day of travel, but
cept of price elasticity, proving in one market after
applicable fare differences were applied. The pur-
another that the revenue gains from increased ticket
chase price was nonrefundable, but funds could
sales and the volume of passenger traffic would more
be applied to future travel on Southwest, provided
than compensate for the revenue erosion associated
the tickets were not canceled or changed within
with low fares. When Southwest entered the Florida
10 minutes of a flight’s scheduled departure.
market with an introductory $17 fare from Tampa to
Fares for seniors were not displayed on the list
Fort Lauderdale, the number of annual passengers
of fare options at the company’s website unless
flying the Tampa–Fort Lauderdale route jumped
customers checked a box indicating that one or
50 percent, to more than 330,000. In Manchester,
more passengers were 65 years of age or older.
New Hampshire, passenger counts went from 1.1 mil-
In 2008, rival airlines instituted a series of add- lion in 1997, the year prior to Southwest’s entry, to
on fees—including a fuel surcharge for each flight, 3.5 million in 2000, and average one-way fares
fees for checking bags, fees for processing frequent- dropped from just over $300 to $129. Southwest’s
flyer travel awards, fees for buying a ticket in person success in stimulating higher passenger traffic at air-
at the airport or calling a toll-free number to speak ports across the United States via low fares and fre-
with a ticket agent to make a reservation, fees for quent flights was coined the “Southwest Effect” by
changing a previously purchased ticket to a differ- personnel at the U.S. Department of Transportation.
ent flight, and fees for certain in-flight snacks and (See Exhibit 6 for a list of the cities and airports
beverages—to help defray skyrocketing costs for jet Southwest Airlines served in July 2014.)
fuel (which had climbed from about 15 percent of
operating expenses in 2000 to 40 percent of operat- AirTran’s Fare Structure AirTran had a fare
ing expenses in mid-2008) and try to bolster their structure that included Business Class fares and
operating performance. In 2014, Frontier Airlines competitively priced economy class fares. AirTran
Business Class fares were refundable and change- hub within a short span of time and then connecting
able and included such perks as priority boarding, to an outgoing flight to their destination—a spoke
oversized seats with additional leg room, bonus location or another hub. Most flights arrived at and
frequent-flyer credit, no first- or second-bag fees, departed from a hub during a two-hour window, cre-
and complimentary cocktails onboard. Business ating big peak-valley swings in airport personnel
Class upgrades could be purchased within 24 hours workloads and gate utilization—airport personnel
of travel for a fee ranging from $69 to $139 (depend- and gate areas were very busy when hub operations
ing on the length of the flight). All other AirTran were in full swing and then were underutilized in
fares were nonrefundable but could be changed the interval awaiting the next round of inbound and
prior to departure for a service fee of $150 per per- outbound flights. In contrast, Southwest’s point-
son. AirTran also imposed fees for checked baggage to-point routes permitted scheduling aircraft so as
($25 for the first checked bag and $35 for the sec- to minimize the time aircraft were at the gate, cur-
ond checked bag), advance seat assignments, prior- rently approximately 25 minutes, thereby reducing
ity boarding, ticket booking through the customer the number of aircraft and gate facilities that would
call center, ticket cancellation ($150 per ticket), and otherwise be required. Furthermore, with a rela-
assorted other services. tively even flow of incoming and outgoing flights
and gate traffic, Southwest could staff its terminal
Southwest’s Strategy to Create operations to handle a fairly steady workload across
a day, whereas hub-and-spoke operators had to staff
and Sustain Low-Cost Operations their operations to serve 3 to 4 daily peak periods.
Southwest management fully understood that earn- Exhibit 6 shows the cities and airports served by
ing attractive profits by charging low fares necessi- Southwest in mid-2014. Going into 2014, Southwest
tated the use of strategy elements that would enable had nonstop service between 524 airports. In 2013,
the company to become a low-cost provider of com- Southwest’s average passenger airfare was $154.72
mercial air service. There were three main compo- one way, and the average passenger trip length was
nents of Southwest’s strategic actions to achieve a approximately 966 miles.
low-cost operating structure: using a single aircraft
type for all flights, creating an operationally efficient Striving to Perform All Value Chain Activi-
point-to-point route structure, and striving to perform ties Cost-Effectively Southwest made a point
all value chain activities in a cost-efficient manner. of scrutinizing every aspect of its operations to find
Use of a Single Aircraft Type For many ways to trim costs. The company’s strategic actions
years, Southwest’s aircraft fleets had consisted only to reduce or at least contain costs were extensive and
of Boeing 737 aircraft. Operating only one type ongoing:
of aircraft produced many cost-saving benefits: • Sharply rising prices for jet fuel over the past
minimizing the size of spare-parts inventories, sim- 12 years that caused fuel expenses to rise from
plifying the training of maintenance and repair per- 16.5 percent of total operating expenses in 2003
sonnel, improving the proficiency and speed with to between 28 and 38 percent of total operating
which maintenance routines could be done, and sim- expenses since 2006 had prompted a number of
plifying the task of scheduling planes for particular projects to increase fuel efficiency, including:
flights. In 2013, Southwest operated the biggest fleet
of Boeing 737 aircraft in the world. Exhibit 5 pro- • Installing “blended winglets” on all of South-
vides information about Southwest’s aircraft fleet. west’s planes beginning in 2007 and then, in
2014, starting to upgrade its aircraft fleet with
Southwest’s Point-to-Point Route Structure newly designed split-scimitar winglets—see
Strategy Southwest’s point-to-point scheduling Exhibit 7. These winglets reduced lift drag,
of flights was more cost-efficient than the hub-and- allowed aircraft to climb more steeply and
spoke systems used by almost all rival airlines. Hub- reach higher flight levels quicker, improved
and-spoke systems involved passengers on many cruising performance, helped extend engine
different flights coming in from spoke locations life and reduce maintenance costs, and reduced
(and sometimes another hub) to a central airport or fuel burn.
EXHIBIT 5 Southwest’s Aircraft Fleet as of December 31, 2013

Average Age
Type of Aircraft Number Seats (years) Comments
Boeing 717-200 66 117 12 All of these were AirTran aircraft that were in the
process of being removed from the Southwest
fleet and leased or subleased to Delta Air Lines.
Boeing 737-300 122 137/143 20 Southwest was Boeing’s launch customer for this
model.
Boeing 737-500 15 122 22 Southwest was Boeing’s launch customer for this
model.
Boeing 737-700 425 137/143 9 Southwest was Boeing’s launch customer for this
model in 1997. As of April 2013, all were equipped
with satellite-delivered broadband Internet-
reception capability.
Boeing 737-800 52 175 1 As of April 2013, all were equipped with satellite-
delivered broadband Internet-reception capability.
Total 541
Other Fleet-Related Facts
Average age of aircraft fleet Approximately 11 years

Average aircraft trip length 708 miles, with an average duration of 1 hour and 59 minutes
Average aircraft utilization per day Nearly 6 flights and 10 hours and 43 minutes of flight time
Fleet size: 106
1990 224
1995 344
2000 537
2009
Firm orders for new aircraft: 33
2014 19
2015 31
2016 225
2017–2024:
Source: Information at www.southwest.com (accessed May 7, 2014).
• Using auto-throttle and vertical navigation at the company’s website (thus bypassing the
procedures to maintain optimum cruising need to pay commissions to travel agents for
speeds. handling the ticketing process and also reduc-
• Introducing new engine start procedures to ing staffing requirements at Southwest’s reser-
support using a single engine for runway vation centers). Selling a ticket on its website
taxiing. cost Southwest roughly $1, versus $3 to $4 for
• Reducing engine aircraft idle speed while on a ticket booked through its own internal reserva-
the ground. tion system and as much as $15 each for tickets
purchased through travel agents and professional
• Southwest was the first major airline to introduce business travel partners. Online ticket sales at
ticketless travel (eliminating the need to print and Southwest’s website grew swiftly, accounting for
process paper tickets); by 2007, ticketless travel 74 percent of Southwest’s revenues in 2009 and
accounted for more than 95 percent of all ticket 80 percent of all company bookings in 2013.
sales. • For most of its history, Southwest stressed flights
• Southwest was also the first airline to allow cus- into and out of airports in medium-sized cities
tomers to make reservations and purchase tickets and less congested airports in major metropolitan
EXHIBIT 6 Airports and Cities Served by Southwest Airlines, July 2014

Southwest’s Top-10 Airports, by Departures
Airport/City Daily Departures Gates Nonstop Cities Served
Chicago Midway 233 32 64

Las Vegas 210 19 54
Baltimore/Washington 206 28 57
Denver 167 19 56
Houston (Hobby) 161 19 45
Atlanta 165 31 44
Phoenix 162 24 46
Dallas (Love Field) 124 15 18
Orlando 120 20 43
Los Angeles 104 12 23
Other Airports Served by Southwest Airlines
Akron, OH Fort Myers/Naples Norfolk San Francisco

Albany Greenville/Spartanburg, SC Oakland San Jose
Albuquerque Harlingen/South Padre Island, TX Oklahoma City Seattle/Tacoma
Amarillo Grand Rapids, MI Omaha Spokane
Austin Hartford/Springfield Ontario, CA Tampa
Birmingham Indianapolis Orange County, CA Tucson
Boise Jacksonville Panama City, FL Tulsa
Boston Logan Kansas City Pensacola, FL Washington, DC (Dulles)
Buffalo Little Rock Philadelphia Washington, DC (Reagan
Burbank, CA Long Island Pittsburgh National)
Charleston Louisville Portland, OR West Palm Beach
Charlotte Lubbock Portland, ME Wichita, KS
Cleveland Manchester, NH Providence International
Columbus, OH Memphis Raleigh-Durham Aruba
Corpus Christi, TX Midland/Odessa, TX Reno/Tahoe Cabo San Lucas
Dayton, OH Milwaukee Richmond Cancun
Detroit Metro Minneapolis/St. Paul Rochester Mexico City
Des Moines Nashville Sacramento Montego Bay
El Paso Newark St. Louis Nassau
Flint, MI New Orleans Salt Lake City Punta Cana, DOM
Fort Lauderdale New York (LaGuardia) San Antonio San Juan
Source: Company 10-K report, 2013; and information at www.southwest.com (accessed April 29, 2014).
areas (Chicago Midway, Detroit Metro, Houston to land. It further allowed the company to avoid
Hobby, Dallas Love Field, Baltimore-Washington paying the higher landing fees and terminal gate
International, Burbank, Manchester, Oakland, San costs at such high-traffic airports as Atlanta’s
Jose, Providence, and Ft. Lauderdale–Hollywood). Hartsfield International, Chicago’s O’Hare, and
This strategy helped produce better-than-average Dallas–Fort Worth, where landing slots were con-
on-time performance and reduce the fuel costs trolled and rationed to those airlines willing to
associated with planes sitting in line on crowded pay the high fees. More recently, however, hav-
taxiways or circling airports waiting for clearance ing already initiated service to almost all of the
EXHIBIT 7 Southwest’s Fuel-Saving Blended Winglets and Split-Scimitar Winglets
Blended Winglets: first installations began in 2007; fuel Split-Scimitar Winglets: first installations began in 2014;
savings of about 3.5% per aircraft fuel savings of about 5% to 5.5% per aircraft
Source: Southwest Airlines.
medium-sized cities and less congested airports order. All passengers could check in online up
where there were good opportunities for sustained to 24 hours before departure time and print out
growth in passenger traffic and revenues, South- a boarding pass, thus bypassing counter check-in
west had begun initiating service to airports in (unless they wished to check baggage).
large metropolitan cities where air traffic conges- • Southwest flight attendants were responsible for
tion was a frequent problem—such as Los Ange- cleaning up trash left by deplaning passengers and
les (LAX), Boston’s Logan International, New otherwise getting the plane presentable for pas-
York LaGuardia, Denver, San Francisco, Philadel- sengers to board for the next flight. Rival carri-
phia, and Atlanta (when it acquired AirTran). ers had cleaning crews come on board to perform
• To economize on the amount of time it took ter- this function until they incurred heavy losses in
minal personnel to check passengers in and to 2001–2005 and were forced to institute stringent
simplify the whole task of making reservations, cost-cutting measures that included abandoning use
Southwest dispensed with the practice of assign- of cleaning crews and copying Southwest’s practice.
ing each passenger a reserved seat. Initially, pas- • Southwest did not have a first-class section in any
sengers were given color-coded plastic cards of its planes and had no fancy clubs for its fre-
marked with the letter A, B, or C when they quent flyers to relax in at terminals.
checked in at the boarding gate. Passengers then
boarded in groups, according to their card color • Southwest did not provide passengers with baggage
and letter, and sat in any seat that was vacant when transfer services to other carriers—passengers with
they got on the plane. In 2002, Southwest aban- checked baggage who were connecting to other
doned the use of plastic cards and began printing carriers to reach their destination were respon-
a big, bold A, B, or C on the boarding pass when sible for picking up their luggage at Southwest’s
the passenger checked in at the ticket counter; baggage claim and then getting it to the check-in
passengers then boarded in groups according to facilities of the connecting carrier. (Southwest
the letter on their boarding pass. In 2007–2008, booked tickets involving only its own flights; cus-
Southwest introduced an enhanced boarding tomers connecting to flights on other carriers had
method that automatically assigned each pas- to book such tickets through either travel agents or
senger a specific number within the passenger’s the connecting airline).
boarding group at the time of check-in; passen- • Starting in 2001, Southwest began converting
gers then boarded the aircraft in that numerical from cloth to leather seats; the team of Southwest
employees that investigated the economics of the management, and fixed-asset systems; the con-
conversion concluded that an all-leather interior version was designed to increase data accuracy
would be more durable and easier to maintain, and consistency and lower administrative support
more than justifying the higher initial costs. costs.
• Southwest was a first mover among major U.S. For many decades, Southwest’s operating costs
airlines in employing fuel hedging and derivative had been lower than those of rival U.S. airline
contracts to counteract rising prices for crude oil carriers—see Exhibit 8 for comparative costs per
and jet fuel. From 1998 through 2008, the com- revenue passenger-mile among the five major U.S.
pany’s fuel-hedging activities produced fuel cost airlines during the 1995–2013 period. Exhibit 9 shows
savings of about $4 billion over what the com- trends in Southwest’s operating costs per available
pany would have spent had it paid the industry’s seat-mile rather than per passenger-occupied seat.
average price for jet fuel. But unexpectedly large
declines in jet fuel prices in late 2008 and 2009 Making It Fun to Fly Southwest:
resulted in reported losses of $408 million on the The Strategy to Provide a
fuel-hedging contracts that the company had in
place during 2009. Since then, the company’s Top-Notch Travel Experience
fuel-hedging activities had continued to be inef- Southwest’s approach to delivering good customer
fective in reducing fuel expenses; the company service and building a loyal customer clientele was
recognized losses on its fuel-hedging activities predicated on presenting a happy face to passen-
of $324 million in 2010, $259 million in 2011, gers, displaying a fun-loving attitude, and doing
$157 million in 2012, and $118 million in 2013. things in a manner calculated to provide passengers
Southwest’s fuel-hedging strategy involved mod- with a positive flying experience. The company
ifying the amount of its future fuel requirements made a special effort to employ gate personnel who
that were hedged based on management’s judg- enjoyed interacting with customers, had good inter-
ments about the forward market prices of crude personal skills, and displayed cheery, outgoing per-
oil and jet fuel. As of January 2014, the company sonalities. A number of Southwest’s gate personnel
had fuel derivative contracts in place for about let their wit and sense of humor show by sometimes
20 percent of its expected fuel consumption in 2014, entertaining those in the gate area with trivia ques-
about 40 percent of its expected fuel consumption tions or contests such as “Who has the biggest hole
in 2015, and about 35 percent of its expected fuel in their sock?” Apart from greeting passengers
consumption in 2016. coming onto planes and assisting them in finding
• Southwest regularly upgraded and enhanced its vacant seats and stowing baggage, flight attendants
management information systems to speed data were encouraged to be engaging, converse and joke
flows, improve operating efficiency, lower costs, with passengers, and go about their tasks in ways
and upgrade its customer service capabilities. In that made passengers smile. On some flights, atten-
2001, Southwest implemented the use of new dants sang announcements to passengers on takeoff
software that significantly decreased the time and landing. On one flight, while passengers were
required to generate optimal crew schedules boarding, an attendant with bunny ears popped
and helped improve on-time performance. In out of an overhead bin exclaiming “Surprise!” The
2007–2008, Southwest invested in next-generation repertoires to amuse passengers varied from flight
technology and software to improve its ticketless crew to flight crew.
system and its back-office accounting, payroll, and During their tenure, both Herb Kelleher and
human resource information systems. During 2009, Colleen Barrett had made a point of sending con-
the company replaced or enhanced its point- gratulatory notes to employees when the company
of-sale, electronic ticketing and boarding, and received letters from customers complimenting par-
revenue accounting systems. During 2010, it ticular Southwest employees; complaint letters were
completed an initiative to convert to a new SAP seen as learning opportunities for employees and
enterprise resource planning application that reasons to consider making adjustments. Employees
would replace its general ledger, accounts pay- were provided the following policy guidance regard-
able, accounts receivable, payroll, benefits, cash ing how far to go in trying to please customers:
EXHIBIT 8 Comparative Operating Cost Statistics per Revenue Passenger-Mile, Major U.S. Airlines, 1995,
2000, 2005, 2010–2013
CASE 25
Costs Incurred per Revenue Passenger-Mile

Total Salaries and Fringe Benefits (in cents)
Total
All Fuel Landing General and Other Operating Operating
Pilots and Copilots Employees and Oil Maintenance Rentals Fees Advertising Administrative Expenses Expenses
American Airlines
1995 0.94¢ 5.59¢ 1 .53¢ 1.34¢ 0.59¢ 0.22¢ 0.19¢ 1.14¢ 3.65¢ 14.25¢
2000 1 .16 5.77 2.04 1.90 0.48 0.23 0.18 0.58 3.30 14.48
2005 0.90 4.65 3.67 1.42 0.41 0.32 0.10 0.95 3.66 15.18
2010 0.88 5.18 4.57 1.92 0.47 0.35 0.13 1.23 3.68 17 .53
2011 0.89 5.27 5.82 1.91 0.51 0.31 0.15 1.82 4.07 19.87
2012 0.86 5.17 6.10 1.87 0.43 0.30 0.12 1.91 3.70 19.61
2013 0.91 4.39 5.94 1.82 0.57 0.31 0.14 1.35 4.38 18.90
Delta Air Lines
1995 1 .27¢ 4.97¢ 1 .70¢ 1.16¢ 0.71¢ 0.30¢ 0.18¢ 0.43¢ 4.07¢ 13.53¢
2000 1 .27 5.08 1 .73 1.41 0.54 0.22 0.12 0.74 3.03 12.85
2005 0.93 4.31 3.68 1.10 0.38 0.22 0.16 0.84 6.01 16.69
2010 0.91 4.15 4.51 1.33 0.14 0.28 0.10 0.64 6.26 17 .41
2011 0.95 4.27 5.77 1.41 0.15 0.28 0.13 0.54 7 .09 19.65
2012 0.99 4.57 5.97 1.53 0.15 0.28 0.14 0.71 6.85 20.21
2013 1 .11 4.82 5.42 1.58 0.13 0.28 0.13 0.68 6.61 19.65
Southwest Airlines in 2014: Culture, Values, and Operating Practices
Southwest Airlines
1995 0.92¢ 3.94¢ 1 .56¢ 1.21¢ 0.79¢ 0.35¢ 0.41¢ 1 .09¢ 1 .56¢ 10.91¢
2000 0.86 4.22 1 .95 1.22 0.48 0.31 0.35 1 .42 0.96 10.91
2005 1 .18 4.70 2.44 1.17 0.31 0.34 0.29 0.73 1 .23 11 .21
2010 1 .37 4.97 4.63 1.47 0.28 0.46 0.26 0.83 1 .32 14.23
2011 1.37 4.99 5.76 1.47 0.23 0.45 0.26 0.98 1.35 15.50
2012 1.57 5.66 6.70 1.86 0.42 0.51 0.26 1.29 1.72 18.43
2013 1.59 5.87 6.38 1.85 0.46 0.52 0.23 1.21 1.68 18.19
C-357
(Continued )
EXHIBIT 8 (Continued )
C-358
Costs Incurred per Revenue Passenger-Mile

Total Salaries and Fringe Benefits (in cents)
Total
All Fuel Landing General and Other Operating Operating
Pilots and Copilots Employees and Oil Maintenance Rentals Fees Advertising Administrative Expenses Expenses
United Airlines
1995 0.86¢ 4.73¢ 1 .51¢ 1 .51¢ 0.90¢ 0.29¢ 0.17¢ 0.53¢ 2.92¢ 12 .58¢
PART 2
2000 1 .15 5.75 1 .98 1 .84 0.73 0.28 0.21 0.76 3.09 14 .65
2005 0.62 3.72 3.53 1 .60 0.35 0.30 0.16 0.60 5.09 15 .35
2010 0.67 4.34 4.46 1 .86 0.32 0.38 0.06 1 .31 5.24 17 .96
2011 0.69 4.38 5.60 2.14 0.32 0.36 0.08 1 .38 6.07 20.34
2012 0.74 4.71 5.97 1 .72 0.44 0.35 0.09 1 .57 5.84 20.69
2013 0.95 5.01 5.59 1 .70 0.41 0.35 0.10 1 .38 6.19 20.74
US Airways
1995 1 .55¢ 7 .53¢ 1 .59¢ 2.09¢ 1 .05¢ 0.29¢ 0.13¢ 0.73¢ 4.32¢ 17 .73¢
2000 1 .36 7 .59 2.44 2.30 0.97 0.28 0.19 1 .10 4.81 19.68
2005 0.78 3.74 3.89 1 .50 1 .06 0.31 0.06 0.66 7 .26 18.49
2010 0.74 4.03 4.05 1 .82 1 .17 0.27 0.02 1 .07 6.93 19.36
2011 0.72 3.96 5.57 1 .82 1 .09 0.27 0.03 1 .02 7 .47 21.24
2012 0.76 4.20 5.56 1 .78 1 .06 0.28 0.02 1 .30 7 .10 21.30
2013 0.75 4.29 5.24 1 .69 0.93 0.29 0.02 1 .93 6.68 21.06
Cases in Crafting and Executing Strategy
Note 1: Cost per revenue passenger-mile for each of the cost categories in this table is calculated by dividing the total costs for each cost category by the total number of revenue
passenger-miles flown, where a revenue passenger-mile is equal to one paying passenger flown 1 mile. Costs incurred per revenue passenger-mile thus represent the costs incurred
per ticketed passenger per mile flown.
Note 2: US Airways and America West started merging operations in September 2005, and joint reporting of their operating costs began in late 2007. Effective January 2010, data for
Delta Air Lines include the combined operating costs of Delta and Northwest Airlines; the merger of these two companies became official in October 2008. United Airlines acquired
Continental Airlines in 2010, and the two companies began joint reporting of operating expenses in 2012.
Source: U.S. Department of Transportation, Bureau of Transportation Statistics, “Air Carrier Statistics,” Form 298C, “Summary Data,” and Form 41, Schedules P-6, P-12, P-51, and
P-52, all for various years.
EXHIBIT 9 Southwest Airline’s Operating Costs per Available Seat-Mile,

1995–2013
Costs per Available Seat-Mile (in cents)
Expense Category 2013 2012 2011 2010 2005 2000 1995
Salaries, wages, bonuses, and benefits 3.86¢ 3.69¢ 3.62¢ 3.76 3.27¢ 2.81¢ 2.40¢
Fuel and oil 4.42 4.78 4.68 3.68 1.58 1.34 1.01
Maintenance materials and repairs .83 .88 .79 .76 .52 .63 .60
Aircraft rentals .28 .28 .26 .18 .19 .33 .47
Landing fees and other rentals .85 .81 .80 .82 .53 .44 .44
Depreciation .66 .66 .59 .64 .55 .47 .43
Acquisition and integration .07 .14 .11 — — — —
Other operating expenses 1.63 1.61 1.56 1.45 1.41 1.71 1.72
Total 12.60¢ 12.85¢ 12.41¢ 11.29¢ 8.05¢ 7.73¢ 7.07¢
Note: The entries in this exhibit differ from those for Southwest in Exhibit 8 because the cost figures in Exhibit 8 are based on cost per
revenue passenger-mile, whereas the cost figures in this exhibit are based on cost per available seat-mile. Costs per revenue passenger-
mile represent the costs per ticketed passenger per mile flown, whereas costs per available seat-mile are the costs per seat per mile
flown (regardless of whether the seat was occupied or not).
Source: Company 10-K reports and annual reports, various years.
No Employee will ever be punished for using good judg- In 2007, Southwest invested in an “extreme
ment and good old common sense when trying to accom- gate makeover” to improve the airport experience
modate a Customer—no matter what our rules are.16 of customers. The makeover included adding (1)
When you empower People to make a positive a business-focused area with padded seats, tables
difference everyday, you allow them to decide. Most
with power outlets, power stations with stools, and
guidelines are written to be broken as long as the
Employee is leaning toward the Customer. We follow
a large-screen TV with news programming and (2)
the Golden Rule and try to do the right thing and think a family-focused area with smaller tables and chairs,
about our Customer.17 power stations for charging electrical devices, and
kid-friendly TV programming. Later, Southwest
Southwest executives believed that conveying a added free wireless Internet service for passengers
friendly, fun-loving spirit to customers was the key waiting in its gate areas.
to competitive advantage. As one Southwest man- In 2013–2014, Southwest began offering in-flight
ager put it, “Our fares can be matched; our airplanes satellite-based Internet service on all of its 737-700
and routes can be copied. But we pride ourselves on and 737-800 aircraft, representing over 75 percent
our customer service.”18 of Southwest’s fleet. Southwest’s arrangement with
Southwest’s emphasis on point-to-point flights its Internet service provider enabled the company
enabled many passengers to fly nonstop to their des- to control the pricing of in-flight Internet service
tinations, thereby cutting total trip time and avoid- (which in 2014 was $8 a day per device, including
ing not only the added built-in travel time needed to stops and connections). The addition of in-flight
make connections but also the oft-encountered delays Internet service, coupled with the free wireless ser-
associated with connecting flights (late incoming vice available in all of Southwest’s gate areas, meant
flights, potential equipment failures requiring repairs that passengers traveling on a Southwest airplane
at the gate, and late departures). In recent years, equipped with satellite Internet service had gate-
about 72 percent of Southwest’s passengers flew to-gate connectivity for small portable electronic
nonstop to their destination—nonstop travel was a devices—in early 2014, Southwest was the only car-
major contributor to providing customers with a top- rier currently offering gate-to-gate connectivity on
notch travel experience. 75 percent of its total aircraft fleet.
In 2013, Southwest joined with DISH Network schedules. The optimization effort involved using
to give customers free access to 17 live channels a set of Southwest-developed tools for manag-
and 75 on-demand recorded episodes from various ing revenues and profitability to (1) discontinue
TV series at no additional charge. This promotion service to unprofitable destinations (service to
was later extended through the end of 2014. Shortly 15 AirTran destinations and 4 Southwest des-
thereafter, Southwest added a selection of movies tinations was discontinued in 2011–2013) and
on-demand (currently priced at $5 per movie) to redeploy the aircraft to other routes and markets,
its entertainment offerings and, in December 2013, (2) adjust the frequencies and arrival-departure
became the first airline to offer a messaging-only times of Southwest and AirTran flights to airports
option for $2 a day per device, including all stops served by both Southwest and AirTran (to avoid
and connections. Passengers did not have to pur- having too many unsold seats and better optimize
chase in-flight Internet service to access television profitability), (3) establish point-to-point flights
offerings, movies on-demand, or the messaging- from airports currently served only by AirTran
only service. to select destinations currently served only by
In 2013, Southwest introduced a completely Southwest, and (4) establish point-to-point flights
redesigned Southwest mobile website and app for from airports currently served only by Southwest
iPhone and Android that had more features and to destinations currently served only by AirTran.
functionality. The app enabled passengers to begin Southwest had established a Southwest presence
using mobile boarding passes. in all AirTran cities not currently served by South-
west in preparation for rebranding all AirTran
Strategic Plan Initiatives, 2011–2015 operations and activities as Southwest; already,
Integrating Southwest’s and AirTran’s Oper- AirTran operations in several airports had been
ations The process of integrating AirTran into rebranded as Southwest. Southwest management
Southwest’s operation began in 2013 and was expected expected that optimization and alignment of the
to be completed by year-end 2014. Headed into 2014, Southwest and AirTran flight schedules would
Southwest had completed a number of integration produce significant cost savings, enable more
milestones: efficient scheduling of airport employees, and
free up aircraft for redeployment either to new
• Connecting capabilities between AirTran and destinations that looked appealing or to existing
Southwest flights had been fully deployed, destinations where more flights were needed to
thereby enabling customers of both Southwest and serve the growing numbers of people choosing to
AirTran to book connecting itineraries between fly Southwest Airlines.
the two carriers and fly between any of the com-
bined 96 Southwest and AirTran destinations on a
• A total of 52 of AirTran’s Boeing 737-700 air-
craft had completed the process of being con-
single itinerary.
verted to the Southwest fleet. Conversion of
• Because AirTran utilized mainly a hub-and-spoke AirTran’s remaining 35 Boeing 737-700 aircraft
network system, with approximately half of its was scheduled to occur when AirTran’s flights
flights historically originating or terminating to seven international destinations were redesig-
at its hub at Hartsfield-Jackson Atlanta Interna- nated as Southwest flights.
tional Airport, Southwest had begun gradually
transitioning AirTran’s Atlanta hub into a point- • Approximately 65 percent of AirTran employ-
to-point operation to capture the efficiencies ees had been converted to Southwest employees.
related to the scheduling of aircraft, flight crews, The transfer of all remaining AirTran employees,
and ground staff. Converting AirTran’s flight net- including flight crews and dispatchers whose
work into a point-to-point operation was in the transitions were aligned with aircraft conversion,
final stages. was scheduled for 2014.
• In addition to converting AirTran’s flight sched- • Southwest had made considerable headway in inte-
ules into a point-to-point operation, Southwest grating Southwest’s and AirTran’s unionized work-
had made excellent progress in merging and opti- forces. AirTran’s flight attendants, represented by
mizing the combined Southwest-AirTran flight the Association of Flight Attendants–CWA (AFA),
had voted to ratify a new collective bargaining second type of plane in the fleet. Moreover, replac-
agreement with Southwest. The agreement with ing the Boeing 717 aircraft capacity with Boeing
AFA applied to AirTran flight attendants until 737 capacity provided incremental revenue oppor-
they transitioned to Southwest by the end of 2014 tunities because the latter had more seats per aircraft
and automatically became members of the Trans- yet cost approximately the same amount to fly on a
portation Workers of America union representing per-trip basis as the smaller Boeing 717 aircraft.
Southwest’s flight attendants.
Incorporating Larger Boeing Aircraft into
Southwest’s Fleet Modernization Initiative Southwest’s Fleet Starting in 2012, South-
Southwest had multiple efforts underway to modern- west began a long-term initiative to replace older
ize its aircraft fleet. One effort, referred to by South- Southwest aircraft with a new generation of Boeing
west as Evolve—The New Southwest Experience, aircraft that had greater seating capacity, a quieter
entailed retrofitting and refreshing the cabin interior interior, LED reading and ceiling lighting, improved
of its fleet of 425 Boeing 737-700 planes. The goal security features, reduced maintenance require-
of the Evolve program was to enhance customer ments, increased fuel efficiency, and the capabil-
comfort, personal space, and the overall travel expe- ity to fly longer distances without refueling. Of the
rience while improving fleet efficiency and being 680 active aircraft in Southwest’s fleet at year-end
environmentally responsible. The cabin refresh fea- 2013, the company had plans to remove 122 Boe-
tured recyclable carpet, a brighter color scheme, and ing 737-300 aircraft (with 143 seats and an average
more durable, ecofriendly, and comfortable seats age of 20 years), 15 Boeing 737-500 aircraft (with
that weighed less than the prior seats. By maximiz- 122 seats and an average age of 22 years), and 12
ing the space inside the plane, Evolve allowed for Boeing 717-200 aircraft (with 117 seats and an aver-
six additional seats on each retrofitted aircraft, along age age of 12 years) from its fleet over the next five
with more climate-friendly and cost-effective mate- years and replace them with new Boeing 737-700s
rials. Southwest retrofitted 78 of its 737-300 air- (143 seats), 737-800s (175 seats), and 737-MAX
craft through Evolve in 2013. In addition, the new aircraft (up to 189 seats). While Southwest had
737-800 aircraft entering the company’s fleet had added 54 new Boeing 737-700 and 737-800 planes
the Evolve interior. The 17 AirTran 737-700 aircraft to its fleet in 2012–2013, even bigger additions of
that were transferred to Southwest’s fleet at year-end new planes were scheduled for future delivery. As
2013 were refreshed with the new Evolve interior, of early 2014, Southwest had placed firm orders
and the remaining 35 AirTran 737-700 aircraft were for 52 Boeing 737-800 aircraft to be delivered in
scheduled to be refreshed with the Evolve interior 2014–2015, 56 Boeing 737-700 aircraft to be deliv-
when they became a part of the Southwest fleet in ered in 2016–2018 (with options to take delivery on
the second half of 2014. an additional 36 planes), and 200 737-MAX aircraft
Furthermore, Southwest was divesting AirTran’s to be delivered during 2017–2024 (with options to
fleet of Boeing 717-200 aircraft. It had negotiated take delivery on an additional 83 planes—Southwest
an agreement with Delta Air Lines, Inc., and Boe- was Boeing’s launch customer for the 737-MAX).
ing Capital Corp. to lease or sublease AirTran’s Plans called for some of the new aircraft to be leased
88 Boeing 717-200 aircraft to Delta. Deliveries to from third parties rather than be purchased—of the
Delta began in September 2013 and were scheduled company’s current fleet of 680 aircraft, 516 were
to continue at the rate of about three aircraft per owned and 164 were leased.
month. The seating capacity of the AirTran Boeing Southwest expected that the new Boeing 737-800
717-200 planes was being replaced by (1) extend- and 737-MAX aircraft would significantly enhance
ing the retirement dates for a portion of Southwest’s the company’s capabilities to (1) more economi-
737-300 and 737-500 aircraft, (2) acquiring used cally fly long-haul routes (the number of short-haul
Boeing 737 aircraft from other sources, and (3) the flights throughout the domestic airline industry had
forthcoming deliveries of new Boeing 737 aircraft. been declining since 2000), (2) improve schedul-
The company did not want to keep Boeing 717-200 ing flexibility and more economically serve high-
planes in its aircraft fleet because of the added main- demand, gate-restricted, slot-controlled airports by
tenance and repair costs associated with having a adding seats to such destinations without increasing
the number of flights, and (3) boost overall fuel class purchased. Rapid Rewards members could also
efficiency to reduce overall costs. Additionally, earn points through qualifying purchases with South-
the aircraft would enable Southwest to profitably west’s Rapid Rewards Partners (which included car
expand its operations to new, more distant destina- rental agencies, hotels, restaurants, and retail loca-
tions (including extended routes over water), such tions), and they could purchase points. Members
as Hawaii, Alaska, Canada, Mexico, and the Carib- who opted to obtain a Southwest cobranded Chase
bean. Southwest management expected that the new Visa credit card, which had an annual fee of $99,
Boeing 737-MAX planes would have the lowest earned 2 points for every dollar spent on purchases of
operating costs of any single-aisle commercial air- Southwest tickets and on purchases with Southwest’s
plane on the market. car rental and hotel partners, and they earned 1 point
on every dollar spent everywhere else. Holders of
Launching International Service and a New
Southwest’s cobranded Chase Visa credit card could
Reservation System In January 2014, South-
redeem credit card points for items other than travel
west launched an international reservation system
on Southwest, including international flights on other
separate from its domestic reservation system (but
airlines, cruises, hotel stays, rental cars, gift cards,
linked to and accessible from www.southwest.
event tickets, and other items. The most active mem-
com) and began selling tickets for its inaugural inter-
bers of Southwest’s Rapid Rewards program quali-
national daily nonstop service on Southwest aircraft
fied for priority check-in and security lane access
beginning July 1, 2014, to Jamaica (Montego Bay),
(where available), standby priority, and free in-flight
the Bahamas (Nassau), and Aruba (Oranjestad).
WiFi. In addition, members who flew 100 qualifying
During this first phase of Southwest’s international
flights or earned 110,000 qualifying points in a cal-
conversion plan, AirTran continued service between
endar year automatically received a Companion Pass,
Atlanta and Nassau and between Chicago Midway
which provided unlimited free round-trip travel for
and Montego Bay, as well as flights to and from
one year to any destination available via Southwest
Cancun, Mexico City, and Cabo San Lucas, Mex-
for a designated companion of the qualifying Rapid
ico, and Punta Cana, Dominican Republic. AirTran
Rewards member.
service to all these destinations was scheduled to be
Rapid Rewards members could redeem their
converted to Southwest in the second half of 2014.
points for any available seat, on any day, on any
Southwest worked with an outside vendor, Amadeus
flight, with no blackout dates. Points did not expire
IT Group, to create and support its international
as long as the Rapid Rewards member had points-
reservation service. In 2014, Southwest was in the
earning activity during the most recent 24 months.
planning stages of replacing its existing domestic
Headed into 2014, the current Rapid Rewards
reservation system with a comprehensive domestic
program had exceeded management’s expectations
and international system; in May 2014, Southwest
with respect to the number of frequent-flyer mem-
chose Amadeus IT Group to be the vendor for this
bers added, the amount spent per member on airfare,
multiyear project.
the number of flights taken by members, the num-
Growing Southwest’s Rapid Rewards ber of Southwest’s cobranded Chase Visa credit card
Frequent-Flyer Program Southwest’s current holders added, the number of points sold to business
Rapid Rewards frequent-flyer program, launched in partners, and the number of frequent-flyer points
March 2011, linked free-travel awards to the num- purchased by program members.
ber of points members earned purchasing tickets to Southwest allowed both its Rapid Rewards mem-
fly Southwest (the previous version of the Rapid bers and the members of AirTran’s A1 Rewards
Rewards program had tied free-travel awards to the frequent-flyer program to transfer their loyalty rewards
number of flight segments flown during a 24-month between the Southwest and AirTran frequent-flyer
period). The amount of points earned was based programs, thus giving them access to the benefits of the
on the fare and fare class purchased, with higher- combined programs.
fare products (like Business Select) earning more In 2013, members of the Southwest and AirTran
points than lower-fare products (like Wanna Get frequent-flyer programs redeemed approximately
Away). Likewise, the amount of points required to be 5.4 million flight awards, accounting for approxi-
redeemed for a flight was based on the fare and fare mately 9.5 percent of the revenue passenger-miles
flown. This was significantly higher than the 2012 On a number of occasions, when rival airlines
redemptions of approximately 4.5 million flight had cut back flights to cities that Southwest served,
awards (accounting for approximately 9.0 percent Southwest had quickly moved in with more flights
of the revenue passenger-miles flown) and the 2011 of its own, believing its lower fares would attract
redemptions of approximately 3.7 million flight more passengers. When Midway Airlines ceased
awards (accounting for approximately 8.6 percent operations in November 1990, Southwest moved in
of the revenue passenger-miles flown). Southwest’s overnight and quickly instituted flights to Chicago’s
Rapid Rewards members redeemed 2.4 million free- Midway Airport. Southwest was a first mover in
ticket awards during 2009 and 2.8 million free-ticket adding flights on routes where rivals cut their offer-
awards in both 2007 and 2008. ings following 9/11. When American Airlines closed
its hubs in Nashville and San Jose, Southwest imme-
diately increased the number of its flights into and
Southwest’s Growth Strategy out of both locations. When US Airways trimmed
Southwest’s strategy to grow its business consisted its flight schedule for Philadelphia and Pittsburgh,
of (1) adding more daily flights to the cities and air- Southwest promptly boosted its flights into and out
ports it currently served and (2) adding new cities of those airports. Southwest initiated service to Den-
and airports to its route schedule. ver when United, beset with financial difficulties,
It was normal for customer traffic to grow at cut back operations at its big Denver hub. In 2014,
the airports Southwest served. Hence, opportuni- it was clear that Southwest intended to pick up the
ties were always emerging for Southwest to cap- pace in adding service to more locations, particu-
ture additional revenues by adding more flights at larly larger metropolitan airports, places like Hawaii
the airports already being served. Sometimes these and Alaska, and international destinations.
opportunities entailed adding more flights to one or
more of the same destinations, and sometimes the Marketing, Advertising,
opportunities entailed adding flights to a broader
selection of Southwest destinations, depending on and Promotion Strategies
the mix of final destinations the customers departing Southwest was continually on the lookout for novel
from a particular airport were flying to. ways to tell its story, make its distinctive persona
To spur growth beyond that afforded by adding come alive, and strike a chord in the minds of air
more daily flights to cities and airports currently travelers. Many of its print ads and billboards were
being served, it had long been Southwest’s prac- deliberately unconventional and attention-getting to
tice to add one or more new cities and airports to create and reinforce the company’s maverick, fun-
its route schedule annually. In selecting new cities, loving, and combative image. Previous campaigns
Southwest looked for city pairs that could generate had promoted the company’s performance as “The
substantial amounts of both business and leisure Low-Fare Airline” and “The All-Time On-Time Air-
traffic. Management believed that having numerous line” and its Triple Crown awards. One of the com-
flights flying the same routes appealed to business pany’s billboard campaigns touted the frequency of
travelers looking for convenient flight times and the the company’s flights with such phrases as “Austin
ability to catch a later flight if they unexpectedly Auften,” “Phoenix Phrequently,” and “L.A. A.S.A.P.”
ran late. Each holiday season since 1985 Southwest had run
As a general rule, Southwest did not initiate a “Christmas card” ad on TV featuring children and
service to a city and/or airport unless it envisioned their families from the Ronald McDonald Houses
the potential for originating at least 8 flights a day and Southwest employees. Fresh advertising cam-
there and saw opportunities to add more flights paigns were launched periodically—Exhibit 10 shows
over time—in Denver, for example, Southwest had four representative ads.
boosted the number of daily departures from 13 in Southwest tended to advertise far more heavily
January 2006 (the month in which service to and than any other U.S. carrier. According to The Nielsen
from Denver was initiated) to 79 daily departures in Company, during the first six months of 2009,
2008, 129 daily departures in May 2010, and 167 Southwest boosted its ad spending by 20 percent to
daily departures in 2014. hammer home its “bags fly free” message. Passenger
EXHIBIT 10 Four Samples of Southwest’s Ads

traffic at Southwest subsequently rose, while pas- delivering superior service required employees who
senger volumes went in the opposite direction at not only were passionate about their jobs but also
Southwest’s largest competitors—all of which had knew the company was genuinely concerned for
recently introduced or increased fees for checked their well-being and committed to providing them
baggage. with job security. Southwest’s thesis was simple:
During 2010–2013, the company periodically Keep employees happy—then they will keep cus-
launched national and local advertising and pro- tomers happy.
motional campaigns to highlight what management In Southwest’s 2000 annual report, senior man-
believed were important points of differentiation agement explained why employees were the com-
between Southwest and rival airlines. These differ- pany’s greatest asset:
entiating features included: Our People are warm, caring and compassionate and
• Being the only major U.S. airline not to charge willing to do whatever it takes to bring the Freedom to
additional fees for first and second checked bags. Fly to their fellow Americans. They take pride in doing
Moreover, Southwest allowed each ticketed cus- well for themselves by doing good for others. They
have built a unique and powerful culture that demon-
tomer to check one stroller and one car seat free
strates that the only way to accomplish our mission to
of charge, in addition to the two free checked make air travel affordable for others, while ensuring
bags. ample profitability, job security, and plentiful Profit-
• Being the only major U.S. airline not to impose a sharing for ourselves, is to keep our costs low and Cus-
fee for customers to change their travel schedules. tomer Service quality high.
Nor did Southwest impose additional fees for items At Southwest, our People are our greatest assets,
such as seat selection, fuel surcharges, snacks, which is why we devote so much time and energy to
curbside check-in, and telephone reservations. hiring great People with winning attitudes. Because
we are well known as an excellent place to work
• Offering a wide range of in-flight entertainment with great career opportunities and a secure future,
options and conveniences for passengers (in- lots of People want to work for Southwest. . . . Once
flight Internet service, access to 17 live channels hired, we provide a nurturing and supportive work
and episodes of 75 different television series, environment that gives our Employees the freedom
movies on-demand, and messaging). to be creative, have fun, and make a positive differ-
ence. Although we offer competitive compensation
Southwest management believed that these dif- packages, it’s our Employees’ sense of ownership,
ferentiating features—along with the company’s pride in team accomplishments, and enhanced job
low fares, network size, numerous nonstop flights, satisfaction that keep our Culture and Southwest
friendly customer service, and Rapid Rewards Spirit alive and why we continue to produce winning
program—had been instrumental in helping grow seasons.
passenger traffic on Southwest flights, build mar-
ket share, and increase revenues. The company’s Since becoming the company’s CEO, Gary Kelly
advertising and promotional expenditures totaled had echoed the views of his predecessors, saying
$208 million in 2013, $223 million in 2012, and on numerous occasions: “Our People are our single
$237 million in 2011; these expenditures were greatest strength and our most enduring long term
included in “Other operating expenses” in Exhibit 9. competitive advantage.”19
The company changed the personnel depart-
ment’s name to the People Department in 1989.
SOUTHWEST’S PEOPLE Later, it was renamed the People and Leadership
MANAGEMENT PRACTICES Development Department.
AND CULTURE
Recruiting, Screening, and Hiring
Whereas the litany at many companies was that cus-
tomers come first, at Southwest the operative prin- Southwest hired employees for attitude and trained
ciple was that “employees come first and customers them for skills. Herb Kelleher explained:20
come second.” The high strategic priority placed We can train people to do things where skills are con-
on employees reflected management’s belief that cerned. But there is one capability we do not have and
that is to change a person’s attitude. So we prefer an Colleen Barrett elaborated on what the company
unskilled person with a good attitude . . . [to] a highly looked for in screening candidates for job openings:22
skilled person with a bad attitude.
We hire People to live the Southwest Way [see Exhibit
Management believed that delivering superior 11]. They must possess a Warrior Spirit, lead with a
service came from having employees who genu- Servant’s Heart, and have a Fun-LUVing attitude. We
inely believed that customers were important and hire People who fight to win, work hard, are dedicated,
that treating them warmly and courteously was the and have a passion for Customer Service. We won’t
right thing to do, not from training employees to act hire People if something about their behavior won’t be
like customers are important. The belief at South- a Cultural fit. We hire the best. When our new hires
west was that superior, hospitable service and a fun- walk through the door, our message to them is you are
loving spirit flowed from the heart and soul of starting the flight of your life.
employees who themselves were fun-loving and All job applications were processed through the
spirited, who liked their jobs and the company People and Leadership Development Department.
they worked for, and who were also confident and
empowered to do their jobs as they saw fit (rather Screening Candidates In hiring for jobs that
than being governed by strict rules and procedures). involved personal contact with passengers, the com-
Southwest recruited employees by means of pany looked for people-oriented applicants who were
newspaper ads, career fairs, and Internet job list- extroverted and had a good sense of humor. It tried
ings; a number of candidates applied because of to identify candidates with a knack for reading peo-
Southwest’s reputation as one of the best compa- ples’ emotions and responding in a genuinely caring,
nies to work for in America and because they were empathetic manner. Southwest wanted employees
impressed by their experiences as a customer on to deliver the kind of service that showed they truly
Southwest flights. Recruitment ads were designed enjoyed meeting people, being around passengers,
to capture the attention of people thought to possess and doing their jobs, as opposed to delivering the kind
Southwest’s “personality profile.” For instance, one of service that came across as being forced or taught.
ad showed Herb Kelleher impersonating Elvis Pres- Kelleher elaborated: “We are interested in people
ley and had the message:21 who externalize, who focus on other people, who are
Work In A Place Where Elvis Has Been Spotted. The
motivated to help other people. We are not interested
qualifications? It helps to be outgoing. Maybe even in navel gazers.”23 In addition to seeking individuals
a bit off center. And be prepared to stay for a while. with a “whistle while you work” attitude, Southwest
After all, we have the lowest employee turnover rate in was drawn to candidates whom it thought would be
the industry. If this sounds good to you, just phone our likely to exercise initiative, work harmoniously with
jobline or send your resume. Attention Elvis. co-employees, and be community-spirited.
EXHIBIT 11 Personal Traits, Attitudes, and Behaviors That Southwest Wanted

Employees to Possess and Display
Living the Southwest Way
Warrior Spirit Servant’s Heart Fun-LUVing Attitude

• Work hard • Follow the Golden Rule • Have FUN
• Desire to be the best • Adhere to the Basic Principles • Don’t take yourself too seriously
• Be courageous • Treat others with respect • Maintain perspective (balance)
• Display a sense of urgency • Put others first • Celebrate successes
• Persevere • Be egalitarian • Enjoy your work
• Innovate • Demonstrate proactive Customer Service • Be a passionate team player
• Embrace the SWA Family
Source: www.southwest.com (accessed August 18, 2010).

Southwest did not use personality tests to Training

screen job applicants, nor did it ask them what they
Apart from the FAA-mandated training for certain
would or should do in certain hypothetical situa-
employees, training activities at Southwest were
tions. Rather, the hiring staff at Southwest analyzed
designed and conducted by Southwest Airlines Uni-
each job category to determine the specific behav-
versity (formerly the University for people). The cur-
iors, knowledge, and motivations that jobholders
riculum included courses for new recruits, employees,
needed and then tried to find candidates with the
and managers. Learning was viewed as a never-ending
desired traits—a process called targeted selection.
process for all company personnel; the expectation was
A trait common to all job categories was teamwork;
that each employee should be an “intentional learner,”
a trait deemed critical for pilots and flight attendants
looking to grow and develop not just from occasional
was judgment. In exploring an applicant’s aptitude
classes taken at Southwest Airlines University but also
for teamwork, interviewers often asked applicants to
from his or her everyday on-the-job experiences.
tell them about a time in a prior job when they went
Southwest Airlines University conducted a variety
out of their way to help a co-worker or to explain
of courses offered to maintenance personnel and other
how they had handled conflict with a co-worker.
employees to meet the safety and security training
Another frequently asked question was, “What
requirements of the Federal Aviation Administration
was your most embarrassing moment?” The thesis
(FAA), the U.S. Department of Transportation, the
here was that having applicants talk about their past
Occupational Safety and Health Administration, and
behaviors provided good clues about their future
other government agencies. And there were courses
behaviors.
on written communications, public speaking, stress
To test for unselfishness, Southwest inter-
management, career development, performance
viewing teams typically gave a group of potential
appraisal, decision making, leadership, customer
employees ample time to prepare five-minute pre-
service, corporate culture, environmental steward-
sentations about themselves; during the presentations
ship and sustainability, and employee relations to help
in an informal, conversational setting, interviewers
employees advance their careers.
watched the audience to see who was absorbed in
Leadership development courses that focused
polishing their presentations and who was listen-
on developing people, building teams, thinking
ing attentively, enjoying the stories being told, and
strategically, and being a change leader were key-
applauding the efforts of the presenters. Those who
stone offerings. New supervisors attended a four-
were emotionally engaged in hearing the presenters
week course “Leadership Southwest Style” that
and giving encouragement were deemed more apt
emphasized coaching, empowering, and encourag-
to be team players than those who were focused on
ing, rather than supervising or enforcing rules and
looking good themselves. All applicants for flight
regulations. New managers attended a two-and-a-
attendant positions were put through such a presen-
half-day course on “Next-Level Leadership.” There
tation exercise before an interview panel consist-
were courses for employees wanting to explore
ing of customers, experienced flight attendants, and
whether a management career was for them and
members of the People and Leadership Develop-
courses for high-potential employees wanting to
ment Department. Flight attendant candidates who
pursue a long-term career at Southwest. From time
got through the group-presentation interviews then
to time supervisors and executives attended courses
had to complete a three-on-one interview conducted
on corporate culture, intended to help instill,
by a recruiter, a supervisor from the hiring section
ingrain, and nurture such cultural themes as team-
of the People and Leadership Development Depart-
work, trust, harmony, and diversity. All employees
ment, and a Southwest flight attendant; following
who came into contact with customers, including
this interview, the three-person panel tried to reach
pilots, received customer care training. Altogether,
a consensus on whether to recommend or drop the
Southwest employees spent over 1.4 million
candidate.
hours in training sessions of one kind or another
Southwest received 90,043 résumés and hired
in 2013 (see the table at the top of the next page).24
831 new employees in 2009. In 2007, prior to the
onset of the Great Recession, Southwest received The OnBoarding Program for Newly Hired
329,200 résumés and hired 4,200 new employees. Employees Southwest had a program called
the indoctrination of new employees into the com-

Amount of
Training
pany’s culture was done by the volunteer sponsor,
Job Category (hours) co-workers, and the new employee’s supervisor.
Southwest made active use of a one-year proba-
Maintenance and support personnel 145,100 tionary employment period to help ensure that new
employees fit in with its culture and adequately
Customer support and services personnel 57,800
embraced the company’s cultural values.
Flight attendants 109,450
Pilots 193,600
Promotion
Ground operations personnel 911,400
Approximately 80 to 90 percent of Southwest’s
supervisory positions were filled internally, reflect-
ing management’s belief that people who had “been
there and done that” would be more likely to appre-
OnBoarding “to welcome New Hires into the ciate and understand the demands that people under
Southwest Family” and provide information and them were experiencing and, also, more likely to
assistance from the time they were selected until enjoy the respect of their peers and higher-level
the end of their first year. All new hires attended a managers. Employees could either apply for super-
full-day orientation course that covered the com- visory positions or be recommended by their present
pany’s history, an overview of the airline indus- supervisor.
try and the competitive challenges that Southwest Employees being considered for managerial
faced, an introduction to Southwest’s culture and positions of large operations (“Up and Coming
management practices, the expectations of employ- Leaders”) received training in every department of
ees, and demonstrations on “Living the Southwest the company over a six-month period in which they
Way.” The culture introduction included a video continued to perform their current jobs. At the end
called Southwest Shuffle that featured hundreds of of the six-month period, candidates were provided
Southwest employees rapping about the fun they with 360-degree feedback from department heads,
had on their jobs (at many Southwest gatherings, peers, and subordinates; personnel in the People and
it was common for a group of employees to do the Leadership Development Department analyzed the
Southwest Shuffle, with the remaining attendees feedback in deciding on the specific assignment of
cheering and clapping). All new hires also received each candidate.25
safety training. Anytime during their first 30 days,
new employees were expected to access an inter-
active online tool—OnBoarding Online Orienta- Compensation and Benefits
tion—to learn more about the company. During Southwest’s pay scales and fringe benefits were
their first year of employment, new hires were quite attractive compared to those of other major
invited to attend a “LUV@First Bite Luncheon” in U.S. airlines (see Exhibit 12). Southwest’s average
the city where they worked; these luncheons were pay for pilots in 2013 was between 31 and 92 percent
held on the same day as Leadership’s Messages to higher than the average pay for pilots at American
the Field; at these luncheons, there were opportuni- Airlines, Delta Air Lines, United Airlines, and US
ties to network with other new hires and talk with Airways; the average pay for Southwest’s flight
senior leaders. attendants ranged from as little as 12 percent
An additional element of the Onboarding pro- higher to as much as 38 percent higher than the
gram involved assigning each new employee to an pay of their counterparts at those same rivals.
existing Southwest employee who had volunteered Its benefit package was the best of any domestic
to sponsor a new hire and be of assistance in accli- airline in 2013.
mating the new employee to his or her job and to In 2013, in addition to providing vacation time,
Living the Southwest Way; each volunteer spon- paid holidays, and sick leave, Southwest offered
sor received training from Southwest’s Onboarding full-time and part-time Southwest and AirTran
Team in what was expected of a sponsor. Much of employees a benefit package that included:
EXHIBIT 12 Employee Compensation and Benefits at Select U.S. Airlines, 2005,

2009, and 2013
Southwest Airlines American Airlines Delta Air Lines United Airlines US Airways
Average pilot wage/salary:

2005 $157,420 $137,734 $155,532 $114,789 $128,056
2009 176,225 137,482 137,948 125,465 110,595
2013 229,290 144,266 174,196 153,786 119,268
Average flight attendant wage/salary:
2005 $42,045 $46,191 $40,037 $35,450 $35,902
2009 46,839 50,933 39,161 40,559 41,080
2013 61,277 52,000 45,945 47,588 38,896
All-employee average wage/salary:
2005 $62,122 $57,889 $57,460 $49,863 $48,873
2009 75,624 62,961 56,030 58,239 55,534
2013 81,675 68,269 72,960 68,056 59,118
Average benefits per employee:
2005 $26,075 $24,460 $39,379 $20,980 $14,607
2009 23,820 30,516 28,279 22,749 13,547
2013 34,573 27,028 32,638 32,222 26,552
Source: Information at www.airlinefinancials.com (accessed May 22, 2013).
• A 401(k) retirement savings plan to the profit-sharing plan represented about 6 percent
• A profit-sharing plan of each eligible employee’s compensation. Employ-
• Medical and prescription coverage ees participating in stock purchases via payroll deduc-
tions bought 1.7 million shares in 2011, 2.2 million
• Mental health chemical dependency coverage shares in 2012, and 1.5 million shares in 2013 at
• Vision coverage prices equal to 90 percent of the market value at the
• Dental coverage end of each monthly purchase period.
• Adoption assistance
• Mental health assistance Employee Relations
• Life insurance About 83 percent of Southwest’s 45,000 employ-
• Accidental death and dismemberment insurance ees belonged to a union. An in-house union—the
• Long-term disability insurance Southwest Airline Pilots Association—represented
• Dependent life insurance the company’s pilots. The Teamsters Union repre-
sented Southwest’s stock clerks and flight simulator
• Dependent care flexible spending account
technicians; a local of the Transportation Workers
• Health care flexible spending account of America represented flight attendants; another
• Employee stock purchase plan local of the Transportation Workers of America rep-
• Wellness program resented baggage handlers, ground crews, and pro-
• Flight privileges visioning employees; the International Association
• Health care for committed partners of Machinists and Aerospace Workers represented
customer service and reservation employees; and
• Early retiree health care
the Aircraft Mechanics Fraternal Association repre-
Company contributions to employee 410(k) and sented the company’s mechanics.
profit-sharing plans totaled $1.74 billion during the Management encouraged union members and
2009–2013 period. In 2013, Southwest’s contribution negotiators to research their pressing issues and
to conduct employee surveys before each contract service, maintaining low costs, and nurturing the
negotiation. Southwest’s contracts with the unions Southwest culture. One component of this initia-
representing its employees were relatively free of tive involved giving a Kick Tail award to employees
restrictive work rules and narrow job classifications when they did something exemplary to make a posi-
that might impede worker productivity. All of the tive difference in a customer’s travel experience or
contracts allowed any qualified employee to per- in the life of a co-worker or otherwise stood out in
form any function—thus pilots, ticket agents, and exhibiting the values in Living the Southwest Way
gate personnel could help load and unload baggage (Exhibit 11).
when needed, and flight attendants could pick up Gary Kelly saw this aspect of Operation Kick
trash and make plane cabins more presentable for Tail as a way to foster the employee attitudes and
passengers boarding the next flight. commitment needed to provide “Positively Outra-
Except for one brief strike by machinists in the geous Customer Service”; he explained:
early 1980s and some unusually difficult negotia- One of Southwest’s rituals is finding and develop-
tions in 2000–2001, Southwest’s relationships with ing People who are “built to serve.” That allows us
the unions representing its employee groups were to provide a personal, warm level of service that is
harmonious and nonadversarial for the most part— unmatched in the airline industry.
even though there were sometimes spirited disagree-
ments over particular issues. Southwest management viewed the Operation
Kick Tail initiative as a means to better engage and
The No-Layoff Policy incentivize employees to strengthen their display of
the traits in Living the Southwest Way (and achieve
Southwest Airlines had never laid off or furloughed a competitive edge keyed to superior customer
any of its employees since the company began service).
operations in 1971. The company’s no-layoff policy
was seen as integral to how the company treated its Management Style
employees and to management’s efforts to sustain
and nurture the culture. According to Kelleher:26 At Southwest, management strived to do things in
a manner that would make Southwest employees
Nothing kills your company’s culture like layoffs. proud of the company they worked for and its work-
Nobody has ever been furloughed here, and that is force practices. Managers were expected to spend at
unprecedented in the airline industry. It’s been a least one-third of their time out of the office, walk-
huge strength of ours. It’s certainly helped negotiate
ing around the facilities under their supervision,
our union contracts. . . . We could have furloughed at
various times and been more profitable, but I always
observing firsthand what was going on, and listen-
thought that was shortsighted. You want to show your ing to employees and being responsive to their con-
people you value them and you’re not going to hurt cerns. A former director of people development at
them just to get a little more money in the short term. Southwest told of a conversation he had with one of
Not furloughing people breeds loyalty. It breeds a Southwest’s terminal managers:27
sense of security. It breeds a sense of trust. While I was out in the field visiting one of our stations,
Southwest had built up considerable good- one of our managers mentioned to me that he wanted
will with its employees and unions over the years to put up a suggestion box. I responded by saying that,
“Sure—why don’t you put up a suggestion box right here
by avoiding layoffs. Both senior management and
on this wall and then admit you are a failure as a man-
Southwest employees regarded the three recent buy- ager?” Our theory is, if you have to put up a box so peo-
out offers as a better approach to workforce reduc- ple can write down their ideas and toss them in, it means
tion than involuntary layoffs. you are not doing what you are supposed to be doing.
You are supposed to be setting your people up to be win-
Operation Kick Tail ners. To do that, you should be there listening to them
and available to them in person, not via a suggestion box.
In 2007, Southwest management launched an inter- For the most part, I think we have a very good sense of
nal initiative called Operation Kick Tail, a multi- this at Southwest. I think that most people employed here
year call to action for employees to focus even know that they can call any one of our vice presidents on
more attention on providing high-quality customer the telephone and get heard, almost immediately.
The suggestion box gives managers an out; it relin- Southwest’s Two Big Core
quishes their responsibility to be accessible to their
people, and that’s when we have gotten in trouble at Values—LUV and Fun
Southwest—when we can no longer be responsive to Two core values—LUV and fun—permeated the
our flight attendants or customer service agents, when work environment at Southwest. LUV was much
they can’t gain access to somebody who can give them more than the company’s ticker symbol and a recur-
resources and answers.
ring theme in Southwest’s advertising campaigns.
Company executives were very approachable, Over the years, LUV grew into Southwest’s code
insisting on being called by their first names. At new word for treating individuals—co-employees and
employee orientations, people were told, “We do customers—with dignity and respect and demon-
not call the company chairman and CEO Mr. Kelly, strating a caring, loving attitude. LUV and red hearts
we call him Gary.” Managers and executives had commonly appeared on banners and posters at com-
an open-door policy, actively listening to employee pany facilities, as reminders of the compassion that
concerns, opinions, and suggestions for reducing was expected toward customers and other employ-
costs and improving efficiency. ees. Practicing the Golden Rule, internally and
Employee-led initiatives were common. South- externally, was expected of all employees. Employ-
west’s pilots had been instrumental in developing ees who struggled to live up to these expectations
new protocols for takeoffs and landings that con- were subjected to considerable peer pressure and
served fuel. Another frontline employee had sug- usually were asked to seek employment elsewhere if
gested not putting the company logos on trash bags, they did not soon leave on their own volition.
saving an estimated $250,000 annually. Rather than Fun at Southwest was exactly what the word
buy 800 computers for a new reservations center implies, and it occurred throughout the company
in Albuquerque, company employees determined in the form of the generally entertaining behavior
that they could buy the parts and assemble the PCs of employees in performing their jobs, the ongoing
themselves for half the price of a new PC, saving pranks and jokes, and frequent company-sponsored
the company $1 million. It was Southwest clerks parties and celebrations (which typically included
who came up with the idea of doing away with paper the Southwest Shuffle). On holidays, employees
tickets and shifting to e-tickets. were encouraged to dress in costumes. There were
There were only four layers of management charity benefit games, chili cook-offs, Halloween
between a frontline supervisor and the CEO. parties, new Ronald McDonald House dedications,
Southwest’s employees enjoyed substantial author- and other special events of various kinds at one loca-
ity and decision-making power. According to tion or another almost every week. According to one
Kelleher:28 manager, “We’re kind of a big family here, and fam-
We’ve tried to create an environment where people
ily members have fun together.”
are able to, in effect, bypass even the fairly lean struc-
tures that we have so that they don’t have to convene Culture-Building Efforts
a meeting of the sages in order to get something done.
In many cases, they can just go ahead and do it on
Southwest executives believed that the company’s
their own. They can take individual responsibility for growth was primarily a function of the rate at which
it and know they will not be crucified if it doesn’t work it could hire and train people to fit into its culture and
out. Our leanness requires people to be comfortable in consistently display the traits and behaviors set forth
making their own decisions and undertaking their own in Living the Southwest Way. Kelly said, “Some
efforts. things at Southwest won’t change. We will continue
to expect our people to live what we describe as the
From time to time, there were candid meetings
‘Southwest Way,’ which is to have a Warrior Spirit,
of frontline employees and managers at which oper-
Servant’s Heart, and Fun-Loving Attitude. Those
ating problems and issues between or among work-
three things have defined our culture for 36 years.”30
ers and departments were acknowledged, openly
discussed, and resolved.29 Informal problem avoid- The Corporate Culture Committee South-
ance and rapid problem resolution were seen as west formed its Corporate Culture Committee in
managerial virtues. 1990 to promote “Positively Outrageous Service” and
devise tributes, contests, and celebrations intended Efforts to Nurture and Sustain the South-
to nurture and perpetuate the Southwest Spirit and west Culture Apart from the efforts of the
Living the Southwest Way. The committee was com- Corporate Culture Committee, the Local Culture
posed of 100 employees who had demonstrated their Committees, and the cultural ambassadors, South-
commitment to Southwest’s mission and values and west management sought to reinforce the company’s
their enthusiasm in exhibiting the Southwest Spirit core values and culture via a series of employee rec-
and Living the Southwest Way. Members came from ognition programs to single out and praise employ-
a cross-section of departments and locations and ees for their outstanding contributions to customer
functioned as cultural ambassadors, missionaries, service, operational excellence, cost efficiency, and
and storytellers during their two-year term. display of the Southwest Spirit. In addition to Kick
The Corporate Culture Committee had four Tail awards, there were “Heroes of the Heart”
all-day meetings annually; ad hoc subcommittees awards, Spirit magazine Star of the Month awards,
that were formed throughout the year met more President’s awards, and LUV Reports whereby one
frequently. Over the years, the committee had spon- or more employees could recognize other employ-
sored and supported hundreds of ways to promote ees for an outstanding performance or contribution.
and ingrain the traits and behaviors embedded in Other culture-supportive activities included the
Living the Southwest Way—examples included CoHearts mentoring program; the Day in the Field
promoting the use of red hearts and LUV to program, in which employees spent time working in
embody the spirit of Southwest employees caring another area of the company’s operations; the Help-
about each other and Southwest’s customers ing Hands program, in which volunteers from around
and showing up at a facility to serve pizza or ice the system traveled to work two weekend shifts at
cream to employees or to remodel and decorate an other Southwest facilities that were temporarily
employee break room. Kelleher indicated, “We’re shorthanded or experiencing heavy workloads; and
not big on Committees at Southwest, but of the periodic Culture Exchange meetings to celebrate the
committees we do have, the Culture Committee is Southwest Spirit and company milestones. Almost
the most important.”31 every event at Southwest was videotaped, which
In addition, there was a Culture Services Team provided footage for creating multipurpose videos,
in Southwest’s executive office dedicated solely such as Keepin’ the Spirit Alive, that could be shown
to ensuring that the culture of Southwest Airlines at company events all over the system and used in
remained alive and well; the team’s duties included training courses. The concepts of LUV and fun were
coordinating the yearly Messages to the Field, plan- spotlighted in all of the company’s training manuals
ning Spirit Parties at various locations, writing com- and videos.
mendations and congratulatory notes to employees Southwest’s monthly employee newsletter often
exhibiting outstanding performance, organizing the spotlighted the experiences and deeds of particular
company’s Annual Awards Banquet, and support- employees, reprinted letters of praise from custom-
ing the Corporate Culture Committee. Each major ers, and reported company celebrations of milestones.
department and geographic operating unit had a Local A quarterly news video, As the Plane Turns, was sent
Culture Committee charged with organizing culture- to all facilities to keep employees up to date on com-
building activities and nurturing the Southwest pany happenings, provide clips of special events,
Spirit within its unit. More recently, the company and share messages from customers, employees,
created a new position in each of its major operating and executives. The company had published a book
departments and largest geographic locations called for employees that described “outrageous” acts of
culture ambassador; the primary function of culture service.
ambassadors was to nurture the Southwest Spirit In 2012, Southwest launched the Southwest Air-
by helping ensure that the Local Culture Commit- lines Gratitude (SWAG) initiative, which included a
tee had the resources needed to foster the culture at software tool that enabled each employee to set up a
its location, planning and coordinating departmental profile that listed all the recognitions and awards she
celebrations and employee appreciation events, and or he received. This tool also allowed the employee
acting as a liaison between the local office and the to send commendations to other employees, recog-
corporate office on culture-related matters. nizing their hardworking efforts and/or exemplary
performance. Employees who won Kick Tail, Heroes of on-time arrivals and departures. Believing that
of the Heart, Star of the Month, or President’s air travelers were more likely to fly Southwest if its
awards were credited with SWAG points that could flights were reliable and on time, Southwest’s man-
be redeemed in the company’s SWAG Shop, which agers constantly monitored arrivals and departures,
contained thousands of items and enabled employ- making inquiries when many flights ran behind and
ees to reward themselves in ways they found most searching for ways to improve on-time performance.
meaningful. One initiative to help minimize weather and opera-
tional delays involved the development of a state-of-
Employee Productivity the-art flight dispatch system.
Management was convinced the company’s strategy, Southwest’s current CEO, Gary Kelly, had
culture, esprit de corps, and people management followed Kelleher’s lead in pushing for operating
practices fostered high labor productivity and con- excellence. One of Kelly’s strategic objectives for
tributed to Southwest having low labor costs in com- Southwest was “to be the safest, most efficient, and
parison to the labor costs at its principal domestic most reliable airline in the world.” Southwest man-
rivals (Exhibit 8). When a Southwest flight pulled up agers and employees in all positions and ranks were
to the gate, ground crews, gate personnel, and flight proactive in offering suggestions for improving
attendants hustled to perform all the tasks required to Southwest’s practices and procedures; suggestions
turn the plane around quickly—employees took pride with merit were quickly implemented. Southwest
in doing their part to achieve good on-time perfor- was considered to have one of the most competent
mance. Southwest’s turnaround times were in the and thorough aircraft maintenance programs in the
25-to-35-minute range, versus an industry average commercial airline industry and, going into 2008,
of around 45 minutes. In 2013, just as had been the was widely regarded as the best operator among
case for many years, Southwest’s labor productiv- U.S. airlines. Exhibit 13 presents data comparing
ity compared quite favorably with its chief domestic Southwest against its four domestic rivals on four
competitors: measures of operating performance.
The First Significant Blemish on South-
Productivity Measure west’s Safety Record While no Southwest
plane had ever crashed and there had never been a
Passengers Employees
Enplaned per per Plane,
passenger fatality, there was an incident in 2005 in
Employee, 2013 2013 which a Southwest plane landing in a snowstorm
with a strong tailwind at Chicago’s Midway airport
Southwest Airlines 2,412 66
was unable to stop before overrunning a shorter-than-
American Airlines 1,461 96 usual runway and rolled onto a highway, crashing
Delta Air Lines 1,553 107 into a car, killing one of the occupants, and injuring
United Airlines 1,038 127 22 of the passengers on the plane. A National Trans-
US Airways 1,775 98 portation Safety Board investigation concluded that
“the pilot’s failure to use available reverse thrust in
Source: Information at www.airlinesfinancials.com (accessed a timely manner to safely slow or stop the airplane
May 22, 2014).
after landing” was the probable cause.
Belated Aircraft Inspections Further Tar-
System Operations nish Southwest’s Reputation In early 2008,
Under Herb Kelleher, instituting practices, proce- various media reported that Southwest Airlines
dures, and support systems that promoted operating had, over a period of several months in 2006 and 2007,
excellence had become a tradition and a source of knowingly failed to conduct required inspections for
company pride. Much time and effort over the years early detection of fuselage-fatigue cracking on 46
had gone into finding the most effective ways to of its older Boeing 737-300 jets. The company had
do aircraft maintenance, to operate safely, to make voluntarily notified the Federal Aviation Administra-
baggage handling more efficient and baggage trans- tion about the lapse in checks for fuselage cracks,
fers more accurate, and to improve the percentage but it continued to fly the planes until the work was
EXHIBIT 13 Comparative Statistics on On-Time Flights, Mishandled Baggage,

Boarding Denials due to Oversold Flights, and Passenger Complaints
for Major U.S. Airlines, 2000, 2005, 2010–2013
Percentage of Scheduled Flights Arriving within 15 Minutes of the Scheduled Time (during the previous
12 months ending in May of each year)
Airline 2000 2005 2010 2011 2012 2013
American Airlines 75.8% 78.0% 79.6% 77.8% 76.9% 77.6%

Delta Air Lines 78.3 76.4 77.4 82.3 86.5 84.5
Southwest Airlines 78.7 79.9 79.5 81.3 83.1 76.7
United Airlines 71.6 79.8 85.2 80.2 77.4 79.3
US Airways 72.7 76.0 83.0 79.8 85.9 81.5
Mishandled Baggage Reports per 1,000 Passengers (in May of each year)
Airline 2000 2005 2010 2011 2012 2013
American Airlines 5.44 4.58 4.36 3.23 2.92 3.02

Delta Air Lines 3.64 6.21 4.90 2.28 2.22 2.15
United Airlines 6.71 4.00 4.13 4.25 3.87 3.47
US Airways 4.57 9.73 3.49 2.42 2.14 2.52
Involuntary Denied Boardings per 10,000 Passengers due to Oversold Flights (January–March of each year)
Airline 2000 2005 2010 2011 2012 2013

Delta Air Lines 0.44 1.06 0.29 0.30 0.79 0.52
United Airlines 1.61 0.42 1.00 0.94 1.52 1.37
US Airways 0.80 1.01 0.91 0.87 0.79 0.55
Complaints per 100,000 Passengers Boarded (in May of each year)
Airline 2000 2005 2010 2011 2012 2013

Delta Air Lines 1.60 0.91 1.21 0.90 0.43 0.53
United Airlines 5.07 0.87 1.47 2.14 1.93 1.89
US Airways 1.63 0.99 1.15 1.56 0.91 1.27
Source: Office of Aviation Enforcement and Proceedings, “Air Travel Consumer Report,” various years.
done—about eight days. The belated inspections all potentially affected aircraft in March 2007. The
revealed tiny cracks in the bodies of six planes, FAA approved our actions and considered the mat-
with the largest measuring 4 inches; none impaired ter closed as of April 2007.” Nonetheless, on March
flight safety. According to CEO Gary Kelly, “South- 12, 2008, shortly after the reports in the media sur-
west Airlines discovered the missed inspection area, faced about Southwest not meeting inspection dead-
disclosed it to the FAA, and promptly re-inspected lines, Southwest canceled 4 percent of its flights and
grounded 44 of its Boeing 737-300s until it verified inspections for early signs of fuselage fatigue at
that the aircraft had undergone required inspections. five other airlines. An air travel snafu ensued, with
Gary Kelly then initiated an internal review of the over a thousand flights subsequently being canceled
company’s maintenance practices; the investiga- due to FAA-mandated grounding of the affected
tion raised “concerns” about the company’s aircraft aircraft while the overdue safety inspections were
maintenance procedures, prompting Southwest to performed. Further public scrutiny, including a con-
put three employees on leave. The FAA subsequently gressional investigation, turned up documents indi-
fined Southwest $10.2 million for its transgressions. cating that, in some cases, planes flew for 30 months
In an effort to help restore customer confidence, after the inspection deadlines had passed. Moreover,
Kelly publicly apologized for the company’s wrong- high-level FAA officials were apparently aware of
doing, promised that it would not occur again, and the failure of Southwest and other airlines to per-
reasserted the company’s commitment to safety; he form the inspections for fuselage skin cracking at the
said: scheduled times and chose not to strictly enforce the
From our inception, Southwest Airlines has main- inspection deadlines—according to some commen-
tained a rigorous Culture of Safety—and has main- tators, because of allegedly cozy relationships with
tained that same dedication for more than 37 years. personnel at Southwest and the other affected air-
It is and always has been our number one priority to lines. Disgruntled FAA safety supervisors in charge
ensure safety. of monitoring the inspections conducted by airline
We’ve got a 37-year history of very safe operations, carriers testified before Congress that senior FAA
one of the safest operations in the world, and we’re officials frequently ignored their reports that certain
safer today than we’ve ever been. routine safety inspections were not being conducted
In the days following the public revelation of in accordance with prescribed FAA procedures.
Southwest’s maintenance lapse and the tarnish- Shortly thereafter, the FAA issued more stringent
ing of its reputation, an industrywide audit by the procedures to ensure that aircraft safety inspections
FAA revealed similar failures to conduct timely were properly conducted.
ENDNOTES
1 15 23
Kevin Freiberg and Jackie Freiberg, NUTS! Speech to Business Today International Quick, “Crafting an Organizational Struc-
Southwest Airlines’ Crazy Recipe for Business Conference, November 20, 2007, www. ture,” p. 52.
24
and Personal Success (New York: Broadway southwest.com (accessed September 8, 2008). Southwest’s “2013 One Report,” p. 42,
16
Books, 1998), p.15. As cited in Freiberg and Freiberg, www.southwest.com (accessed May 16, 2014).
2 25
Ibid., pp. 16–18. NUTS! p. 288. Sunoo, “How Fun Flies at Southwest Air-
3 17
Katrina Brooker, “The Chairman of the Board Speech by Colleen Barrett on January 22, lines,” p. 72.
26
Looks Back,” Fortune, May 28, 2001, p. 66. 2007, www.southwest.com (accessed Septem- Brooker, “The Chairman of the Board Looks
4
Freiberg and Freiberg, NUTS! p. 31. ber 5, 2008). Back,” p. 72.
5 18 27
Ibid., pp. 26–27. Brenda Paik Sunoo, “How Fun Flies at Freiberg and Freiberg, NUTS! p. 273.
6 28
Ibid., pp. 246–247. Southwest Airlines,” Personnel Journal 74, Ibid., p. 76.
7 29
As quoted in Dallas Morning News, March no. 6 (June 1995), p. 70. Hallowell, “Southwest Airlines: A Case Study
19
20, 2001. Statement in the Careers section at www. Linking Employee Needs Satisfaction and
8
Quoted in Brooker, “The Chairman of the southwest.com (accessed May 16, 2014). Organizational Capabilities to Competitive
Board Looks Back,” p. 64. Kelly’s statement has been continuously Advantage,” Human Resource Management
9
Ibid., p. 72. posted on www.southwest.com since 2009. 35, no. 4 (Winter 1996), p. 524.
10 20 30
As quoted in The Seattle Times, March 20, As quoted in James Campbell Quick, “Craft- Speech to Business Today International
2001, p. C3. ing an Organizational Structure: Herb’s Hand Conference, November 20, 2007, www.
11
Speech at Texas Christian University, at Southwest Airlines,” Organizational Dynam- southwest.com (accessed September 8, 2008).
31
September 13, 2007, www.southwest.com ics 21, no. 2 (Autumn 1992), p. 51. Freiberg and Freiberg, NUTS! p. 165.
21
(accessed September 8, 2008). Southwest’s ad entitled “Work in a Place
12
Freiberg and Freiberg, NUTS! p. 163. Where Elvis Has Been Spotted”; Sunoo, “How
13
Company press release, July 15, 2004. Fun Flies at Southwest Airlines,” pp. 64–65.
14 22
Speech to Greater Boston Chamber of Speech to the Paso Del Norte Group in
Commerce, April 23, 2008, www.southwest El Paso, Texas, January 22, 2007, www.
.com (accessed September 5, 2008). southwest.com (accessed September 5, 2008).

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CASE 25

Southwest Airlines in 2014: Culture,

Arthur A. Thompson John E. Gamble

EXHIBIT 1 Total Number of Domestic and International Passengers Traveling on

Carrier 2000 2005 2010 2011 2012 2013

AirTran (International) — — — 937 1,301 1,534

Southwest’s Struggle to (Later, when the company went public, it chose

amendment was expanded in 1997, when Alabama, Sustained Growth Transforms

EXHIBIT 2 Summary of Southwest Airlines’ Financial and Operating Performance,

2013 2012 2011 2010 2009

2013 2012 2011 2010 2009

Fuel costs per

Passengers (millions) 559.0 666.2 738.3 720.5 730.8 736.6 758.9

EXHIBIT 4 Southwest Airlines’ Mission, Vision, and Triple-Bottom-Line

EXHIBIT 5 Southwest’s Aircraft Fleet as of December 31, 2013

Other Fleet-Related Facts

Average age of aircraft fleet Approximately 11 years

Source: Information at www.southwest.com (accessed May 7, 2014).

EXHIBIT 6 Airports and Cities Served by Southwest Airlines, July 2014

Airport/City Daily Departures Gates Nonstop Cities Served

Chicago Midway 233 32 64

Other Airports Served by Southwest Airlines

Akron, OH Fort Myers/Naples Norfolk San Francisco

EXHIBIT 7 Southwest’s Fuel-Saving Blended Winglets and Split-Scimitar Winglets

Costs Incurred per Revenue Passenger-Mile

Costs Incurred per Revenue Passenger-Mile

EXHIBIT 9 Southwest Airline’s Operating Costs per Available Seat-Mile,

Expense Category 2013 2012 2011 2010 2005 2000 1995

Source: Company 10-K reports and annual reports, various years.

EXHIBIT 10 Four Samples of Southwest’s Ads

EXHIBIT 11 Personal Traits, Attitudes, and Behaviors That Southwest Wanted

Warrior Spirit Servant’s Heart Fun-LUVing Attitude

Source: www.southwest.com (accessed August 18, 2010).

Southwest did not use personality tests to Training

the indoctrination of new employees into the com-

EXHIBIT 12 Employee Compensation and Benefits at Select U.S. Airlines, 2005,

Average pilot wage/salary:

Source: Information at www.airlinefinancials.com (accessed May 22, 2013).

EXHIBIT 13 Comparative Statistics on On-Time Flights, Mishandled Baggage,

Airline 2000 2005 2010 2011 2012 2013

American Airlines 75.8% 78.0% 79.6% 77.8% 76.9% 77.6%

Airline 2000 2005 2010 2011 2012 2013

American Airlines 5.44 4.58 4.36 3.23 2.92 3.02

Airline 2000 2005 2010 2011 2012 2013

American Airlines 0.59 0.72 0.75 0.78 0.75 0.36

Complaints per 100,000 Passengers Boarded (in May of each year)

Airline 2000 2005 2010 2011 2012 2013

American Airlines 2.77 1.01 1.08 0.87 1.86 1.99

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