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Southwest Airways Operations – A Strategic Perspective

Southwest Airways Operations – A Strategic Perspective

Background:

Southwest Airways is the most important airline measured by variety of passengers carried every year inside the USA. Additionally it is referred to as a ‘low cost airline’ in contrast with its massive rivals within the trade. Rollin King and Herb Kelleher based Southwest Airways on June 18, 1971. Its first flights have been from Love Discipline 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: “When you get your passengers to their locations after they wish to get there, on time, on the lowest potential fares, and make darn certain they’ve a superb time doing it, individuals will fly your airline.” This strategy has been the important thing to Southwest’s success. Presently, Southwest serves about 60 cities (in 31 states) with 71 million whole passengers carried (in 2004) and with a complete working income of $6.5 billion. Southwest is traded publicly underneath the image “LUV” on NYSE.

Information:

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

* The primary main airline to supply ticketless journey system broad together with a frequent flier program primarily based 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 Web page and supply 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 price per reserving through the Web is about $1, in contrast to a price per reserving via journey brokers of $6 to $eight.

Key aggressive benefits:

* Low Operational prices / Excessive Operational Effectivity

* Award successful 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 kinds an necessary pillar of its total company technique. Given beneath are some aggressive dimensions that will likely be studied on this paper.

1. Operational Prices and Effectivity

2. Buyer Service

three. Worker/Labor Relations

four. Know-how

1. Operational Prices and Effectivity

In any case, the airline trade total is in shambles. However, how does Southwest Airways keep worthwhile? Southwest Airways has the bottom prices and strongest stability sheet in its trade, in accordance with its chairman Kelleher. The 2 greatest working prices for any airline are – labor prices (approx 40%) adopted by gas 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 sometimes accounts for about 37% of its working prices. Maybe essentially the most crucial factor of the profitable low-fare airline enterprise mannequin is reaching considerably greater labor productiveness. In line with a current HBS Case Research, southwest airways is the “most closely unionized” US airline (about 81% of its workers 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 rather more versatile work guidelines that enable cross-utilization of nearly all workers (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, whole labor expense per accessible 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 price benefit over community airways just because their workforce generates extra output per worker. In a examine in 2001, the productiveness of Southwest workers 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 affect its backside line revenues.

Gasoline Prices

Gasoline 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 stop big swings in working bills and backside line profitability select to hedge gas costs. If airways can management the price of gas, they’ll extra precisely estimate budgets and forecast earnings. With rising competitors and air journey changing into a commodity enterprise, being aggressive on worth was key to any airline’s survival and success. It grew to become exhausting to move greater gas prices on to passengers by elevating ticket costs because of the extremely aggressive nature of the trade.

Southwest has been in a position to efficiently implement its gas hedging technique to avoid wasting on gas bills in an enormous means and has the most important hedging place amongst different carriers. Within the second quarter of 2005, Southwest’s unit prices fell by three.5% regardless of a 25% enhance in jet gas prices. Throughout Fiscal yr 2003, Southwest had a lot decrease gas expense (zero.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 gas 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 gas financial savings of $196 million. The state of the trade additionally means that airways which can 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 gas, 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 subsequently obtain higher capability utilization.

Secondary Airports

Southwest flies to secondary/smaller airports in an effort to scale back journey delays and subsequently present glorious service to its clients. It has led the trade in on-time efficiency. Southwest has additionally been in a position to 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 permits Southwest to make the most of its pilot crew extra effectively.

E-Ticketing

The thought of ticketless journey was a significant benefit to Southwest as a result of it may decrease its distribution prices. Southwest grew to become digital or ticketless again within the mid-1990s, and at the moment they’re about 90-95% ticketless. Prospects who use bank cards are eligible for on-line transactions, and at the moment Southwest.com bookings account for about 65% of whole income. The CEO Gary Kelly thinks that this concept would develop additional and that he would not be stunned 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 price 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 price financial savings.

2. Worker and Labor Relations

Southwest has been extremely regarded for its revolutionary administration fashion. It maintains a relentless give attention to 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 offer our Workers a secure work surroundings with equal alternative for studying and private progress. Creativity and innovation are inspired for bettering the effectiveness of Southwest Airways. Above all, Workers will likely be supplied the identical concern, respect, and caring angle throughout the group that they’re anticipated to share externally with each Southwest Buyer.”

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

Hiring

Southwest hiring coverage is exclusive not solely throughout the airline trade, but additionally extra broadly, and revolves round discovering individuals with the fitting angle that may 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 conduct. As an alternative, you will need to establish these individuals who already apply the behaviors you might be searching for. Then you may enable Workers to be themselves and make choices about Customer support primarily based 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, performed by workers, the place communication abilities of potential candidates are evaluated. The subsequent 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 position. A crucial a part of Southwest operational technique is that each job at Southwest is a customer support place, whether or not it immediately applies to the client or whether or not it’s inner.

The desk beneath exhibits that regardless 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 period than of the opposite main carriers. This exhibits the standard of relationship that Southwest has with its workers and with the unions that symbolize them.

Tradition

Southwest was created as a unique form of firm and from its beginnings a singular tradition was nurtured. In 1990 Colleen Barrett shaped the Southwest Tradition Committee. That is distinctive throughout the trade and amongst all massive 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 complement 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”. In brief, 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 strategy to firm values that has created a tradition that differentiates itself from others. Southwest’s tradition is the explanation why it’s profitable.

three. Buyer Service

The Mission of Southwest Airways

The mission of Southwest Airways is dedication to the very best high quality of Buyer Service delivered with a way of heat, friendliness, particular person delight, 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 offer airline transportation”.2 Award successful customer support is a distinguishing attribute of Southwest and it’s referred to internally as “Positively Outrageous Service”. It implies that from the highest to backside everybody does no matter she or he can to fulfill the client. This consists of Herb Kelleher, who has been recognized for serving to out baggage handlers on Thanksgiving. It’s via emphasizing the client and worker that Southwest is ready to differentiate itself from others within the airline trade. On a extra technical degree, every worker or group inside Southwest has his or her personal buyer. Because of this each worker ‘serves’ in a technique or one other regardless of not being immediately 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 strategy creates the circumstances 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 workers.

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

It could 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 client. This strategy conjures up individuals who would ordinarily solely now and again exit of their means to assist somebody, to grow to be constant performers that provide distinctive service on a regular basis. Southwest workers are what differentiate its customer support from the opposite airways.

four. Know-how

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

Bar codes in Boarding Passes

Southwest Airways has invested $12 million through the previous three years to standardize company and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude pocket book computer systems in accordance with its firm executives. Southwest wished 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 mechanically reconcile the variety of boarding passes with the variety of passengers that really board the aircraft.

Though the know-how will assist Southwest Airways stay environment friendly by consolidating passenger data for the corporate’s three,000 every day flights, there have been considerations it may lengthen the time to get vacationers on board. Nonetheless it was discovered that scanning every bar code on the boarding passes did not enhance or shorten boarding schedules, but it surely did take minutes from administrative processes, resembling wanting up buyer information. The brand new paper bar code system is giving Southwest ticket brokers the flexibility to match a buyer document inside having to scroll via and log into a number of software program screens. The method is rather more automated. As soon as the bar code on the boarding move is scanned on the terminal gate it checks off the particular person from the passenger checklist 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 to scan the boarding passes has been deployed. The corporate is within the strategy of changing customer support back-office gear at airports together with at its headquarters in Dallas.

Software program Upgrades

Software program functions, resembling these utilized by clerks to examine in passengers, are being changed. Southwest Airways’ internally written “Airport Software Suite” is anticipated to rollout subsequent yr as the corporate transitions from inexperienced screens to Window-based person interface. Just like Wal-Mart Shops Inc., Southwest Airways believes in creating 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 workers.

RFID

Radio frequency identification know-how, a positive different to bar-coding for baggage identification, can also be on Southwest’s radar. It plans to check RFID know-how someday in 2006. Despite the fact that, Southwest is taking part in a little bit catch-up with different airways resembling Air Tran, Alaska and Champion Airways, in lots of instances they’re ready leapfrog to extra subtle functions simply having waited longer.

Challenges:

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

Reserved Seating

Because 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 massive know-how investments and should affect its gate operations negatively because the present means 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 advanced, with plans to buy dozens of latest plane and an anticipated upsurge in passenger visitors to about 80 million boarding’s a yr, 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 offer the identical form of high-touch customer support, we now have to automate a number of issues we have been in a position to do with out know-how beforehand. The problem is doing that with out conceding the client 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 line with an interview with its CEO Gary Keller, Southwest has its give attention to bettering in two areas – buyer’s airport expertise and in-flight expertise.

In-Flight Leisure

In an total 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 think about and that represents an funding resolution at an entire new dimension. Moreover, Southwest has to think about how issues could match into their surroundings. At this level, 60% of its service continues to be very brief haul. Southwest must be conscious of the truth that a sure strategy that has been profitable for its competitor will not be essentially work to its benefit.

Abstract:

Southwest has lengthy been considered a benchmark in its trade for operational excellence. Southwest Airways is a high quality instance of an organization that’s dedicated to its core competencies – environment friendly operations to drive its low price construction, excellent supply of customer support and revolutionary HR administration practices. We hope this paper supplied a superb perception into Southwest operations, as a part of its total technique, to attain success and acquire aggressive benefit.

References:

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

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

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

four. 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/know-how/oramag/oracle/04-sep/o54swest.html

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

7. “Jet Gasoline Hedging Methods: Choices Out there for Airways and a Survey of Business Practices” – Kellogg Faculty of Administration Analysis Paper, Spring 2004

eight. Successful Habits: What the Smartest, Most Profitable Corporations Do In a different way, Terry R. Bacon and David G. Pugh, 2003

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

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

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

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