S G Cowen Case

Southwest Airlines Case Study

Prepared by Byron Lilly, Instructor, Business Department, De Anza College

The Instructor is grateful to Ryan Stanley of the Foundation for Enterprise Development, and Thomas A. Kochan of the Institute for Work and Employment Research, MIT Sloan School of Management, whose articles were used extensively in the preparation of this case study. See the references at end of this case study for a full citation.

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Company Profile

Southwest Airlines is the fifth largest airline company in America, operating more than 2,100 flights per day and carrying over 44 million passengers a year to 50 different cities all over the United States. Southwest boasts the best on-time record, best baggage handling, and fewest customer complaints in the airline industry and won the industry's Triple Crown award for Best Airline five times in a row from 1992-96. It was founded on a belief that the short-haul passenger Ð'- and especially the business frequent flyer passenger Ð'- was not been adequately served by existing airlines. Southwest's initial flights were all meal-less and did not offer any baggage handling. This allowed Southwest to greatly reduce what is called "turnaround time": the time required for a plane to land and take off again. This in turn allowed Southwest to offer lower fares and more frequent flights, which was exactly what the business traveler wanted. Southwest Airline's initial strategy thus illustrates the old dictum: "The key to marketing is to find a(n underserved) need and fill it."

Southwest is the only airline that has made money every year since 1973, and its stock price has reflected its success. An investment of $1000 in Southwest stock in 1973 would be worth over $1.8 million today.

Company Growth and Strategy

Southwest Airlines was formed in 1971 to serve inter-city routes in three Texas cities. By 1998, it had grown to approximately 24,000 employees serving 25 states with approximately 2,500 flights per day. Southwest operates as a low-cost, no-frills but high customer service airline flying point-to-point, rather than establishing the hub-and-spoke system common to its larger competitors. As mentioned above, a key to its success has been the achievement of low turnaround timeÐ'--the time required for a plane to land and take off againÐ'--which requires a high level of teamwork, coordination, and flexibility among different employees and occupational groups. To accomplish this advantage, the company works hard at maintaining a culture that emphasizes flexibility, family orientation, and fun.

Employee Ownership Culture

To support their belief that people take better care of things they own, and that this special care is ultimately passed on to the customer, Southwest created a profit sharing program and a broad-based stock option plan which allows employees to participate in the financial benefits of an ownership culture.

Ownership extends beyond just the financial benefits of profit sharing and stock option plans and is manifested in the priority they place on employee initiative and responsibility. Southwest is built on the principle that employees are expected to take on an entrepreneurial role in being proactive owners who are cognizant of corporate values and confident enough with their empowerment to participate in decision-making and continuous improvement. This entrepreneurial spirit provides employees with the freedom and responsibility to take effective action and the financial participation through ownership which allows them