Southwest Airlines: Brilliant Management or Just Lucky?

© Copyright 2006 Kos Semonski. All rights reserved.

 

Kos Semonski

MGMT 300, Section 6900

Professor Michael Kulansky

August 2, 2000


Southwest Airlines: Brilliant Management or Just Lucky?

Southwest Airlines was and is a leader in the industry.  From its formation on a paper napkin [1] to the multi million dollar company that it grew up to be, Southwest Airlines is a trend setter.  When we look at the case “Southwest Airlines: Expanding Beyond the Southwest”  in “Leadership, Management and diversity”, we see the progress of an unconventional airline from 1971 through 1990.  Herbert Kelleher did what people said could not be done, and he did it without the usual rank and file procedures and business plans.  Brian Tracy summed up this attitude of Herb’s in his taped seminar “Thinking Big” with the words,  “ If you are not getting the results that you want for your company, then simply change something, anything, but don’t just wait for things to get better” [2] Herb’s ability to “think outside of the box” allowed him to catch the trends and harness a new business model.

 

When we contrast Southwest’s initial progress with the last ten years, we can see that not only did Southwest Airlines continue on their path of growth, but they exceeded many of the industry expectations. Furthermore, the most impressive fact that I found when researching the Southwest Airlines company was that for the last ten years, there has been only two personnel changes in the executive officer team. [3] ( Exhibit 1) This loyalty and longevity of the management team has certainly contributed to the success of the company.


Exhibit 1

1990 Officers

2000 Officers

Herbert Kelleher – CEO

Herbert Kelleher – CEO

Colleen Barrett – Executive VP Customers

Colleen Barrett – Executive VP Customers

Gary Barron – Executive VP Chief Operations Officer

James Wimberly – VP Chief Operations Officer

John Denison – Executive VP Corporate Services

John Denison – Executive VP Corporate Services

Gary Kelly – VP Finance

Gary Kelly – VP Finance

James Parker – VP General Council

James Parker – VP General Council

Ron Ricks – VP Governmental Affairs

Ron Ricks – VP Governmental Affairs

Donald Valentine – VP Marketing

Joyce Rogge – VP Marketing

James Wimberly – VP Ground Operations

David Ridley – VP Ground Operations

 

Another great indicator of the success of the management team and the business plan is reflected in the stock market.  Below is a chart of the last five years of stock market performance for Southwest Airlines.  From the chart we can see steady growth, and three separate stock splits.  The splits don’t really mean that much by themselves, but when we see continued increase in the price of the stock following the split, this indicates that the investors are in favor of the performance of the company.

 

(Historical data provided by Iverson Financial Systems, Inc.)

 

Herb Kelleher, CEO of Southwest Airlines, has a management style that empowers people to “make it happen.”  Herb’s freestyle management is a breath of fresh air to many people and should be a goal of many other companies.  Southwest Airline’s goals were created almost thirty years ago and were they quite simple: Make a profit, and offer low cost transportation to an otherwise over charged customer base.  Southwest wanted to offer to the general public low cost no frills air transportation.  They did, and they continue to do so.  To quote Mr. Kelleher…

 

"We started back in 1971 with three planes serving three Texas cities. In the short-haul markets, most people will drive those distances instead of fly. A lot of people figured us for road kill at the time. But today we've got over 300 airplanes in 55 cities.

 

 We like mavericks - people who have a sense of humor. We've always done it differently. You know, we don't assign seats. Used to be we only had about four people on the whole plane, so the idea of assigned seats just made people laugh. Now the reason is you can turn the airplanes quicker at the gate. And if you can turn an airplane quicker, you can have it fly more routes each day. That generates more revenue, so you can offer lower fares."

 

 Herb Kelleher, CEO, Southwest Airlines [4]

 

Based on the case study of Southwest Airlines, it would appear that their biggest hurdle will be competing with the major airlines.  It is quite a balancing act to calculate what markets to penetrate, and still maintain a leadership position in existing markets.  Looking back, we can see that Southwest started by offering service to three cities: Houston, San Antonio, and Dallas.  Now, Southwest boasts service in 58 airports in 57 cities. [5]  Furthermore, from it’s fledgling start to it’s current position of the fourth largest U.S. Airline (based on Domestic Customers carried) [5], Southwest is an example of a new management style that all businesses can learn from.

 

The issues that face Southwest are a question of how to keep the prices down offering no frills flying and still compete with the full service airlines.  Southwest has to insure that they maintain diligence with the original business plan.  Southwest’s ability to maintain their plan shows how people can compete without getting caught up in trying to be everything to everyone.  Southwest maintained their original charter of  getting passengers to their destinations when they want to get there, on time, and at the lowest possible fair.  Furthermore, they wanted to insure that people had a darn good time doing it! [6]

 


The question as to weather Southwest should remain a regional carrier in the southwestern U.S. can be answered with the simple response of no.  This is not to say that Southwest should attempt to compete with the other full service carriers, but rather, if the market results show that the business plan works in one region of the country, then it should work in other regions.  Maintaining their charter of low cost, no frills, fun filled flying will (and has) appeal to other regions of the country.  Therefore, expansion is a must to maintain the growth of the company that the stock holders desire.

 

Careful planning is paramount in order to investigate any anomalies of markets.  For instance, while the Texas commuter may find southern drawls and slang from the pilots refreshing, the Northeastern commuter may see this as an indication of low education.  Insuring that a marketing study is completed in the proposed “new” regions will assist the company with the subtle adjustments that are necessary to make Southwest Airlines a “franchise” in the minds of short hop commuters wherever they may reside.  After all, a national company can service people in different regions, but we must remember that the marketing strategy will differ from community to community.  Making these discoveries and adjustments will certainly enhance the first impression of customers, and will ultimately insure repeat business for Southwest Airlines.

 


The markets that Southwest should consider can be defined in the following fashion.

 

1.     High density population

2.     Short flight time to other high density or highly desired destinations

3.     High frequency of commuter traffic between targeted cities

4.     Higher cost associated with “other” modes of transportation and / or air carriers to the target cities

5.     Available space at target airports

6.     Available workforce to maintain flight corridors and equipment

 

Other considerations for internal capabilities would include:

 

1.     Available inventory of aircraft to saturate the markets to grab and maintain market share

2.     Available capital to launch a successful market push and insure the time necessary to turn a profit

3.     “Buy In” from the officer team

4.     “Buy In” from the employees

5.     “Buy In” from the general stock holder

 

The obvious advantages of expanding into other markets are the growth potential and the ability to grow profitability.  The draw backs could be diluting the ability of the company to maintain a leadership position in existing markets, not meeting the expectations of the new markets, and ultimately spreading the company too thin during less than favorable economic times.  Southwest’s past performance shows that their management style and business plan has insulated them from previous economic downturns, but careful consideration and business plan adjustments will protect the company from future trouble. 

 

The survival of the company is not necessarily at risk with or without new markets, as long as, existing markets maintain their population base and necessity to commute; however, to foster growth, new markets may be necessary to satisfy the stock holders and the Wall Street analysts.  The current markets, in most cases, should continue to grow if the above criteria were met. (i.e. high population density, high frequency of commuter traffic, etc. ), but the rate of growth in these markets may not outpace the expected attrition of current customers thus causing growth stagnation in a mature marketplace.

 

According to a study done by Dr. Walter Scott in conjunction with Ameritech Advertising services, eighty one out of one hundred customers are lost in ten years.  Almost half of these are lost during the first three years!  The majority of these customers are lost for the following reasons:

      1.   Moved away

      2.   Poor service

      3.   Poor quality

      4.   Indifferent treatment

      5.   Grievances not settled to customer’s satisfaction

      6.   Sold by another company

With this daunting statistic facing Southwest Airlines, they must insure that while the expansion is occurring in other markets, that they don’t loose track of current markets.  For it is a business formula constant that it costs much less money to maintain a customer than it does to create a new one.

 

When we consider expansion into new markets that already have similar services that you want to offer, we must evaluate the resources that will be necessary to grab market share from our would be competitors, and we must consider the maintenance costs of those customers.  For Southwest to expand into other markets, they have to understand that the competition (other full service carriers) will attempt to thwart their efforts by price matching.  If the competitors do not modify their business plans to account for their higher overall costs of business in the full service arena, then their attempt to compete with Southwest’s no frills approach will not be successful.  However, Southwest can never loose sight of the fact that often times a competing business will operate at a loss in order to discourage and / or remove competition.  The recent litigation against Microsoft illustrates this phenomenon of how a company can loose short term capital in order to make a long term profit.

 

The old adage of “Don’t fix it if it ain’t broke” really rings true with Southwest Airlines.  For the last twenty eight years, Southwest Airlines has made a profit doing what it does best: Offering low cost flights to commuters. [5] While their business model hasn’t changed much since their beginning, you can rest assured that Southwest has evolved with the changing times and growing markets.  In my opinion, if Southwest Airlines uncovers data that show that their current model does not work for a particular market, they should consider long and hard the benefits to the company before trying to penetrate that market.  Keeping the plan simple is the key to success, and Southwestern Airlines can boast more consecutive quarterly profits than any other U.S. based airline.

 

My recommendation to Southwest Airlines would be a simple strategy of maintaining current market share while constantly planning and searching for new markets.  With their current net income ($474.4 million) [5] Southwest Airlines has the financial fortitude to study and research any new and existing markets to make informed decisions.  Using our previously mentioned criteria for market definition would allow generation of a list of possible markets to consider.  After generating the “short list” of potential markets, determinations of asset requirements would be the next stage.

 

Coupling the above strategies with actual market surveys and studies, would yield a list of “perfect” opportunity markets that Southwest Airlines should penetrate.  The opportunities abound for Southwest Airlines.  With the leadership of Herb, and the loyalty of the crew, Southwest Airlines will be here for a long time.   Even though another airline coined the phrase “Fly the friendly skies”, I believe that Herbert Kelleher has created a friendlier company  and ultimately a friendlier industry for both his customers and his employees.

 

 What more can I say about Herb?  Well, the nay sayers state “Replacing Herb will be an impossibility, and when he leaves or retires, Southwest may face its most serious problem.  Maintaining Southwest’s type of operation was based on Kelleher’s personal relations and ability to relate to people.  I’m not sure anyone else could even come close to doing it.” [1]  The fact of the matter is that Herb is here now, and the company is thriving.  To quote Mark Twain, “ The reports of my death are highly exaggerated”, Herb’s management style is one of openness, and because of his charisma and passion for his company and industry, Herb will groom the necessary successors to take the company forward in the years to come.  As for our original question of  “brilliant management or just lucky?”  I leave you to decide for yourself, but I can assure you that over the course of thirty years, Lady Luck is not that nice.


Bibliography

 

 

1.              Brockner, N.H., and Heffner, Alan G., “Southwest Airlines: Expanding Beyond the Southwest.”, Leadership, Management and Diversity., Ed. Lesley Denton. New York, McGraw-Hill. 1994. 497-507

 

2.              Tracy, Brian. Thinking Big. Niles, IL. Audio Cassette. Nightingale – Conant Corporation. 1996

 

3.              Southwest Airlines Investor Relations : Directors and Officers. 01 Aug 2000. Southwest Airlines. http:// www.southwestairlines.com/ about_swa/financials/directors.html

 

4.              Kelleher, Herbert, A Brief History of Southwest Airlines. 01 Aug 2000. Southwest Airlines. http:// www.southwestairlines about_swa/

 

5.              Southwest Airlines Facts Sheet – July 2000. 01 Aug 2000. Southwest Airlines. http:// www.southwestairlines.com/ about_swa/ press/factsheet.html

 

6.              We Weren’t Just Airborne Yesterday. 01 Aug 2000. Southwest Airlines. http:// www.southwestairlines.com/ about_swa/ airborne.html