Business

Southwest Airways Operations – A Strategic Perspective

Background:

Southwest Airways is the biggest airline measured by variety of passengers carried every year inside america. It’s also referred to as a ‘low cost airline’ in contrast with its giant rivals within the trade. Rollin King and Herb Kelleher based Southwest Airways on June 18, 1971. Its first flights have been from Love Area in Dallas to Houston and San Antonio, brief hops with no-frills service and a easy fare construction. The airline started with one easy technique: “In the event you get your passengers to their locations after they wish to get there, on time, on the lowest attainable fares, and make darn certain they’ve a very good time doing it, folks will fly your airline.” This method has been the important thing to Southwest’s success. Presently, Southwest serves about 60 cities (in 31 states) with 71 million complete passengers carried (in 2004) and with a complete working income of $6.5 billion. Southwest is traded publicly underneath the image “LUV” on NYSE.

Info:

* The primary main airline to fly a single kind of plane (Boeing 737s)

* The primary main airline to supply ticketless journey system vast together with a frequent flier program based mostly on variety of journeys and never variety of miles flown.

* The primary airline to supply a profit-sharing program to its Workers (instituted in 1973).

* The primary main airline to develop a Website online and provide on-line reserving. In 2001, about 40 % ($2.1 billion) of its passenger income was generated via on-line bookings at [http://www.southwest.com]. Southwest’s value per reserving by way of the Web is about $1, in contrast to a price per reserving via journey brokers of $6 to $8.

Key aggressive benefits:

* Low Operational prices / Excessive Operational Effectivity

* Award profitable customer support

* Human Useful resource practices / Work tradition

Operations Evaluation – Aggressive Dimensions:

Southwest clearly has a definite benefit in comparison with different airways within the trade by executing an efficient and environment friendly operations technique that varieties an necessary pillar of its general company technique. Given beneath are some aggressive dimensions that will probably be studied on this paper.

1. Operational Prices and Effectivity

2. Buyer Service

3. Worker/Labor Relations

4. Know-how

1. Operational Prices and Effectivity

In any case, the airline trade general is in shambles. However, how does Southwest Airways keep worthwhile? Southwest Airways has the bottom prices and strongest steadiness sheet in its trade, in keeping with its chairman Kelleher. The 2 greatest working prices for any airline are – labor prices (approx 40%) adopted by gasoline prices (approx 18%). Another ways in which Southwest is ready to maintain their operational prices low is – flying point-to-point routes, selecting secondary (smaller) airports, carrying constant plane, sustaining excessive plane utilization, encouraging e-ticketing and so on.

Labor Prices

The labor prices for Southwest usually accounts for about 37% of its working prices. Maybe essentially the most crucial aspect of the profitable low-fare airline enterprise mannequin is reaching considerably greater labor productiveness. In accordance with a current HBS Case Research, southwest airways is the “most closely unionized” US airline (about 81% of its staff belong to an union) and its wage charges are thought-about to be at or above common in comparison with the US airline trade. The low-fare provider labor benefit is in way more versatile work guidelines that enable cross-utilization of just about all staff (besides the place disallowed by licensing and security requirements). Such cross-utilization and a long-standing tradition of cooperation amongst labor teams translate into decrease unit labor prices. At Southwest in 4th quarter 2000, complete labor expense per obtainable seat mile (ASM) was greater than 25% beneath that of United and American, and 58% lower than US Airways.

Carriers like Southwest have an amazing value benefit over community airways just because their workforce generates extra output per worker. In a research in 2001, the productiveness of Southwest staff was over 45% greater than at American and United, regardless of the considerably longer flight lengths and bigger common plane dimension of those community carriers. Subsequently by its relentless pursuit for lowest labor prices, Southwest is ready to positively impression its backside line revenues.

Gas Prices

Gas prices is the second-largest expense for airways after labor and accounts for about 18 % of the provider’s working prices. Airways that wish to forestall large swings in working bills and backside line profitability select to hedge gasoline costs. If airways can management the price of gasoline, they will extra precisely estimate budgets and forecast earnings. With rising competitors and air journey turning into a commodity enterprise, being aggressive on value was key to any airline’s survival and success. It turned laborious to go greater gasoline prices on to passengers by elevating ticket costs because of the extremely aggressive nature of the trade.

Southwest has been capable of efficiently implement its gasoline hedging technique to save lots of on gasoline bills in a giant method and has the biggest hedging place amongst different carriers. Within the second quarter of 2005, Southwest’s unit prices fell by 3.5% regardless of a 25% improve in jet gasoline prices. Throughout Fiscal 12 months 2003, Southwest had a lot decrease gasoline expense (0.012 per ASM) in comparison with the opposite airways except for JetBlue as illustrated in exhibit 1 beneath. In 2005, 85 per cent of the airline’s gasoline wants has been hedged at $26 per barrel. World oil costs in August 2005 reached $68 per barrel. Within the second quarter of 2005 alone, Southwest achieved gasoline financial savings of $196 million. The state of the trade additionally means that airways which might be hedged have a aggressive benefit over the non-hedging airways. Southwest introduced in 2003 that it will add performance-enhancing Blended Winglets to its present and future fleet of Boeing 737-700’s. The visually distinctive Winglets will enhance efficiency by extending the airplane’s vary, saving gasoline, reducing engine upkeep prices, and decreasing takeoff noise.

Level-to-Level Service

Southwest operates its flight point-to-point service to maximise its operational effectivity and keep cost-effective. Most of its flights are brief hauls averaging about 590 miles. It makes use of the technique to maintain its flights within the air extra usually and due to this fact obtain higher capability utilization.

Secondary Airports

Southwest flies to secondary/smaller airports in an effort to cut back journey delays and due to this fact present glorious service to its clients. It has led the trade in on-time efficiency. Southwest has additionally been capable of trim down its airport operations prices comparatively higher than its rival airways.

Constant plane

On the coronary heart of Southwest’s success is its single plane technique: Its fleet consists completely of Boeing 737 jets. Having frequent fleet considerably simplifies scheduling, operations and flight upkeep. The coaching prices for pilots, floor crew and mechanics are decrease, as a result of there’s solely a single plane to study. Buying, provisioning, and different operations are additionally vastly simplified, thereby reducing prices. Constant plane additionally allows Southwest to make the most of its pilot crew extra effectively.

E-Ticketing

The concept of ticketless journey was a serious benefit to Southwest as a result of it might decrease its distribution prices. Southwest turned digital or ticketless again within the mid-1990s, and immediately they’re about 90-95% ticketless. Clients who use bank cards are eligible for on-line transactions, and immediately Southwest.com bookings account for about 65% of complete income. The CEO Gary Kelly thinks that this concept would develop additional and that he would not be shocked if e-ticketing accounted for 75% of Southwest’s revenues by finish of 2005. Prior to now, when there was a 10% journey company fee paid, it used to value about $Eight a reserving. However at the moment, Southwest is paying between 50 cents and $1 per reserving for digital transactions that translate to very large value financial savings.

2. Worker and Labor Relations

Southwest has been extremely regarded for its modern administration fashion. It maintains a relentless concentrate on high-performance relationships and its people-management practices have been the important thing to its unparalleled success within the airline trade.

Mission Assertion

To Our Workers
“We’re dedicated to supply our Workers a steady work setting with equal alternative for studying and private progress. Creativity and innovation are inspired for enhancing the effectiveness of Southwest Airways. Above all, Workers will probably be offered the identical concern, respect, and caring angle inside the group that they’re anticipated to share externally with each Southwest Buyer.”

The Southwest mission assertion reveals that the corporate has a robust dedication to its staff. The corporate affords the identical respect to its staff that’s offered to its clients. The Southwest mission assertion is exclusive in that it acknowledges the significance of its staff inside the broader enterprise technique, which emphasizes excellent customer support and operational effectivity. The staff reciprocate the respect, loyalty and belief that Southwest demonstrates. Southwest staff are recognized for his or her loyalty, dedication, angle and innovation. The staff are the distinguishing issue between Southwest and the remainder of the airline trade.

Hiring

Southwest hiring coverage is exclusive not solely inside the airline trade, but additionally extra broadly, and revolves round discovering folks with the fitting angle that can thrive within the Southwest tradition. In depth procedures are employed to rent for optimistic angle and dedication. Those that don’t posses these qualities are weeded out. Colleen Barrett, a non-operational officer at Southwest, states that

“Hiring is crucial, since you can’t institutionalize habits. As a substitute, you could establish these individuals who already follow the behaviors you might be in search of. Then you may enable Workers to be themselves and make choices about Customer support based mostly on frequent sense and their pure inclinations.” 1

Recruiting and interviewing at Southwest is a two-step course of. Step one is a bunch interview, carried out by staff, the place communication abilities of potential candidates are evaluated. The following steps on this course of are one on one interview, the place the candidates’ attitudes and orientation towards serving others are evaluated. These hiring standards apply to all job capabilities since all Workers at Southwest play a customer support function. A crucial a part of Southwest operational technique is that each job at Southwest is a customer support place, whether or not it straight applies to the shopper or whether or not it’s inner.

The desk beneath reveals that despite the fact that Southwest is essentially the most closely unionized airline, at roughly 80%, that contract negotiations between the unions and Southwest are a lot shorter in length than of the opposite main carriers. This reveals the standard of relationship that Southwest has with its staff and with the unions that signify them.

Tradition

Southwest was created as a special type of firm and from its beginnings a singular tradition was nurtured. In 1990 Colleen Barrett shaped the Southwest Tradition Committee. That is distinctive inside the trade and amongst all giant firms. The committee additionally has a mission assertion:

“This group’s aim is to assist create the Southwest spirit and tradition the place wanted; to counterpoint it and make it higher the place it already exists; and to liven it up in locations the place it is likely to be “floundering”. Briefly, this group’s aim is to do “no matter it takes” to create, improve, and enrich the particular Southwest spirit and tradition that has made this such an exquisite Firm/Household.”

It’s this distinctive method to firm values that has created a tradition that differentiates itself from others. Southwest’s tradition is the rationale why it’s profitable.

3. Buyer Service

The Mission of Southwest Airways
The mission of Southwest Airways is dedication to the best high quality of Buyer Service delivered with a way of heat, friendliness, particular person satisfaction, and Firm Spirit.

Method

Herb Kelleher, founding father of Southwest, has been quoted as saying that “We’re within the Customer support enterprise; we simply occur to supply airline transportation”.2 Award profitable customer support is a distinguishing attribute of Southwest and it’s referred to internally as “Positively Outrageous Service”. It signifies that from the highest to backside everybody does no matter she or he can to fulfill the shopper. This contains Herb Kelleher, who has been recognized for serving to out baggage handlers on Thanksgiving. It’s via emphasizing the shopper and worker that Southwest is ready to differentiate itself from others within the airline trade. On a extra technical stage, every worker or group inside Southwest has his or her personal buyer. Which means each worker ‘serves’ in a technique or one other regardless of not being straight concerned with the passenger. The mechanic’s buyer is the pilot and the caterer’s is the flight attendant.

Outcomes

It may be mentioned that the “Positively Outrageous Service” that’s distinctive to Southwest “will not be the results of a division, or a program, or a mandate from administration. It isn’t secondary to the product; it’s the product.” This method creates the situations the place Workers usually tend to deal with clients in ways in which distinguish the corporate from others. There are quite a few accounts of passengers who’ve obtained distinctive remedy from Southwest staff.

The query that must be answered is how Southwest’s customer support is totally different and why? Is it frequent for patrons of different airways to rave about their particular service? The reply is that it isn’t. Whereas Southwest doesn’t have a monopoly on people who find themselves variety and who’re prepared to go above and past to fulfill a buyer, such habits is nurtured at Southwest to a a lot higher extent.

It will probably then be concluded that the customer support that’s inherent to Southwest is part of its tradition. This tradition is supported via worker encouragement to do the additional to fulfill the shopper. This method conjures up individuals who would ordinarily solely every now and then exit of their method to assist somebody, to change into constant performers that supply distinctive service on a regular basis. Southwest staff are what differentiate its customer support from the opposite airways.

4. Know-how

Southwest makes use of expertise in some ways to meet its enterprise targets and preserve its environment friendly operations. In accordance with its CEO, expertise equals productiveness. Launched in 1996, ticketless journey was first launched by Southwest. On Could 1st 2000, Southwest Airways introduces “SWABIZ,” a portal that assists firm journey managers in reserving and monitoring journeys made via its site [http://www.southwest.com]. There are a lot of new expertise initiatives being undertaken at the moment and a few are within the pipeline.

Bar codes in Boarding Passes

Southwest Airways has invested $12 million throughout the previous three years to standardize company and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude pocket book computer systems in keeping with its firm executives. Southwest needed to interchange its well-known, brightly coloured plastic boarding passes with an digital system with bar-code paper boarding passes. So it put in about 350 contact display screen ticket readers powered by Dell OptiPlex desktops. The bar code offers Southwest extra data to routinely reconcile the variety of boarding passes with the variety of passengers that truly board the airplane.

Though the expertise will assist Southwest Airways stay environment friendly by consolidating passenger data for the corporate’s 3,000 each day flights, there have been issues it might lengthen the time to get vacationers on board. Nevertheless it was discovered that scanning every bar code on the boarding passes did not improve or shorten boarding schedules, but it surely did take minutes from administrative processes, corresponding to wanting up buyer data. The brand new paper bar code system is giving Southwest ticket brokers the power to match a buyer report inside having to scroll via and log into a number of software program screens. The method is way more automated. As soon as the bar code on the boarding go is scanned on the terminal gate it checks off the particular person from the passenger record in actual time.

The previous course of was guide that concerned discovering the knowledge, scrolling via a number of software program screens from reservations to check-in to boarding. The bar code {hardware} to scan the boarding passes has been deployed. The corporate is within the technique of changing customer support back-office gear at airports together with at its headquarters in Dallas.

Software program Upgrades

Software program functions, corresponding to these utilized by clerks to verify in passengers, are being changed. Southwest Airways’ internally written “Airport Utility Suite” is anticipated to rollout subsequent 12 months as the corporate transitions from inexperienced screens to Window-based person interface. Just like Wal-Mart Shops Inc., Southwest Airways believes in growing in-house the software program that runs its operations. The corporate makes use of little or no off-the-shelf software program. There are between 75 and 100 initiatives within the works every year supported by roughly 900 IT staff.

RFID

Radio frequency identification expertise, a positive different to bar-coding for baggage identification, can also be on Southwest’s radar. It plans to check RFID expertise someday in 2006. Though, Southwest is enjoying just a little catch-up with different airways corresponding to Air Tran, Alaska and Champion Airways, in lots of circumstances they’re ready leapfrog to extra subtle functions simply having waited longer.

Challenges:

Southwest has emerged very profitable, regardless of essentially the most troubled instances within the airline market. Nevertheless, it faces new challenges within the face of accelerating competitors from different low fare airways corresponding to JetBlue, ATA airways, America West.

Reserved Seating

As a result of growing safety tips since September 2001, Southwest would wish to arrange for assigned (reserved) seating to trace its in-flight passengers. This transformation will contain giant expertise investments and will impression its gate operations negatively for the reason that present method of unassigned seating has helped in fast gate turnarounds.

Passenger Demand

The keep-it-simple philosophy has served Southwest nicely. However as its personal enterprise grows and grows extra complicated, with plans to buy dozens of latest plane and an anticipated upsurge in passenger visitors to about 80 million boarding’s a 12 months, the simplicity technique that has been mirrored within the airline’s IT philosophy is evolving. The CIO Tom Nealon says that “It is time to adapt our enterprise processes for effectivity. As our airline scales for us to supply the identical type of high-touch customer support, we now have to automate a whole lot of issues we have been capable of do with out expertise beforehand. The problem is doing that with out conceding the shopper contact.” Southwest can also be aggressively pursuing buyer relationship administration (CRM) strategies and has functions to get perception into buyer’s desires and dislikes. In accordance with an interview with its CEO Gary Keller, Southwest has its concentrate on enhancing in two areas – buyer’s airport expertise and in-flight expertise.

In-Flight Leisure

In an general effort to enhance buyer’s in-flight expertise, in-flight leisure is one thing that Southwest is at the moment evaluating and which JetBlue has been very profitable at already due to its introduction in its long-haul flights. Compared, Southwest has 415 airplanes to contemplate and that represents an funding resolution at a complete new dimension. Moreover, Southwest has to contemplate how issues could match into their setting. At this level, 60% of its service continues to be very brief haul. Southwest must be aware of the truth that a sure method that has been profitable for its competitor will not be essentially work to its benefit.

Abstract:

Southwest has lengthy been thought to be a benchmark in its trade for operational excellence. Southwest Airways is a wonderful instance of an organization that’s dedicated to its core competencies – environment friendly operations to drive its low value construction, excellent supply of customer support and modern HR administration practices. We hope this paper offered a very good perception into Southwest operations, as a part of its general technique, to realize success and achieve aggressive benefit.

References:

1. [http://www.southwest.com] (Southwest airways official site)

2. “Southwest retains it easy” – Air Transport World, April 2005, Pg 36

3. “Across the World on $48 (or So): How Excessive Can Low cost Airways Fly?“ Technique Administration – Information@ Wharton E-newsletter Oct 5, 2005

4. TechWeb – [http://www.techweb.com/wire/ebiz/173601227]

5. “Southwest’s Technique for Success: Consolidate!” – Oracle Journal (Sept/Oct 2004 version) http://www.oracle.com/expertise/oramag/oracle/04-sep/o54swest.html

6. “Southwest Airways: Excessive Tech, Low Prices” – Eweek.com, April 2005

7. “Jet Gas Hedging Methods: Choices Obtainable for Airways and a Survey of Business Practices” – Kellogg College of Administration Analysis Paper, Spring 2004

8. Profitable Conduct: What the Smartest, Most Profitable Firms Do In another way, Terry R. Bacon and David G. Pugh, 2003

9. Time Journal, Oct 28th 2002 challenge, Vol. 160 Concern 18, p. 45

10. “Wings Of Change”,Data Week, March 28, 2005,

11. Labor Contract Negotiations within the Airline Business, Month-to-month Labor Evaluate, July 2003, web page 24

Supply by Mukund Srinivasan

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