MBA Case Study

1 CASE STUDY Of A Project Submitted in Partial Fulfillment of the Requirements for GBA 535 Organizational Management At CalPoly Pomona University Submitted by: Mark Rivera Erin Cornwell Leo Abenes 2 Table of Contents PAGE 3 4 6 6 6 9 12 12 12 14 15 17 19 21 23 24 Section I: Research Project - Southwest Airlines Methodology Findings/Research Introduction Company Profile Company History Attributes of a Great Company ATTRIBUTE NUMBER 1: INNOVATIVE OPERATIONS Innovativeness Defined Low Cost Innovations Terminal Innovations Customer Service Innovations Airport Location Innovations Travel Booking Innovations Single Aircraft Innovations Marketing Innovations ATTRIBUTE NUMBER 2: QUALITY OF CORPORATE MANAGEMENT Management and Leadership Defined Leadership at Southwest Airlines Employee Ownership Culture Southwest Employee‟s Unions Management Team Organizational Structure Personnel Recruitment Affirmative Action Hiring Program Conclusions Experiential Exercise Individual Submissions and Group Average Team Summary APPENDIX Table 1. Southwest by the Numbers Table 2. Five-Year Average Comparative Data Table 3 How does Southwest Soar Above its Rivals Reference List 25 25 26 27 29 30 32 36 39 40 43 43 47 49 49 50 51 53 3 SECTION 1 RESEARCH PROJECT A Project Submitted in Partial Fulfillment of the Requirements for GBA 535 Organizational Management At CalPoly Pomona University March, 2003 4 Methodology We chose Southwest Airlines for our project because it is, in our opinion, the best managed airline in the United States with a long term record of profitable performance. Even today, when the entire airline industry is in turmoil, this company continues to demonstrate its ability to eke out a profit without sacrificing values that made it such an admirable company: dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit. Our decision to focus on Southwest Airlines was validated when we went to the Fortune Magazine website and found that this company was rated within the top ten of just about every attribute category that defines excellence. We were given the task to identify TWO attributes that contributed to the success of our chosen company. It was difficult to decide which two attributes to focus on because this company is excellent in so many attributes. After a spirited debate, our group decided on: innovative operations and quality of corporate management. We believe that these two attributes are Southwest‟s principal pillars of strength. We began our research on Southwest Airlines by conducting an extensive literature search using the excellent on-line capabilities of the CalPoly Pomona University Library. Our search included all possible sources of information, including books, magazines, newspapers, peer-reviewed journals, business school case studies, and the Internet. We were not disappointed; we found more material than we expected. We were amazed at the capability of the CPP library as we were able to obtain all the publications that we sought, even full copies of newspaper articles from minor cities in 5 the United States were available on-line. As a successful company operating in a very challenging and competitive business, Southwest Airlines has become a darling of the media and a subject of much scrutiny and analysis by business scholars. At our first meeting, we laid out a project plan utilizing a critical path scheduling program and assigned specific timelines, milestones and responsibilities to each of us. We also developed a website for the project (http://www.geocities.com/lbabenes/) to facilitate our own interactions. Drafts and revisions were posted so we can keep track of changes. We met weekly to check on our progress and collaborated closely on “wordsmithing” our final paper. We made certain that all of our references were checked for accuracy and relevance. After eight grueling meetings, we finalized the draft and our power point presentation. 6 Findings/Research I. Introduction Company Profile Southwest Airlines may only rank 317 on the Fortune 500 List but the company ranks highly on most publications‟ Most Admired Companies lists (Diba and Munoz, 2001, p. 14; Colvin, 2001, p. 60; Robinson, 1997, p. 68). Within its own industry group, the company scored first place in such key attributes as: innovation, employee talent, use of corporate assets, social responsibility, quality of management, financial soundness, and long-term investment value according to Fortune Magazine (Fortune 500 List, 2003, p. 1). In the airline industry, Southwest Airlines is considered a true maverick. By shaking up the rules of flying and improving upon inefficient industry norms, Southwest has quickly grown by leaps and bounds. From the very start, Southwest Airlines‟ goals were to make a profit, achieve job security for every employee, and make flying affordable for more people (Freiberg and Freiberg, 1997, p. 48). Southwest has not strayed from these goals. It does not buy huge aircrafts, fly international routes or try to go head to head with the major carriers. It has become the most successful airline company in the U.S., if not the world. Southwest Airlines started flying in 1971, and Kelleher, who became CEO in 1978, helped pioneer the no-frills, low-fare approach that has been copied by smaller carriers (Koenig, 2001, p. C-2). "Dignify" might not be the first word one would think of to describe how Southwest treats passengers: no first class; no food other than peanuts, 7 potato chips, or cookies; no assigned seats; no transfers of luggage to other airlines (Teitelbaum, 1992, p. 115). Yet, Southwest Airlines has become the nation‟s fourth largest carrier in terms of customer boardings. It has 35,000 employees and it serves 59 airports in 58 cities in 30 states. It operates nearly 2,800 flights a day. Southwest carried over 44 million passengers and served 91.7 million bags of peanuts in 2001 (We weren‟t just airborne yesterday, 2003, p.1). Southwest is big on peanuts: in 1999, Southwest bought about $10 million worth of peanuts. While the average cost per passenger of serving meals in the industry is about $5, Southwest‟s average cost per passenger is only 20 cents (Rose, 1999, p. 61) Southwest Airlines boasts the best on-time record, best baggage handling, and fewest customer complaints in the airline industry. For these achievements, it won the industry's Triple Crown award for Best Airline five times in a row (Moskowitz and Levering, 2001, p. 148). The Great Place to Work Institute, cites statistics published annually by the U.S. Department of Transportation (DOT) that Southwest has ranked number one in customer satisfaction for eleven consecutive years—1991 through 2001 (2002 results are not yet available). Southwest is the only airline that has made money every year since 1973 (McCarthy, 2001, p. B-6). There is no doubt that the terror of 9/11 reduced the number airline customers. Those that are still flying are more cost conscious. Post 9/11, the full service airlines struggled due to the reluctance of passengers to pay „full‟ fares while low cost airlines were taking advantage and expanding. Southwest Airlines, the largest low cost carrier in the US, had expanded its share of the US market to 11 percent in 2002 in terms of passengers carried (Peltz, 2002 p. C-1; Southwest Airlines, 2001, p. 3). 8 Despite the reduced business brought about by the tragedy of September 11, Southwest has managed to eke out a profit while its competitors drowned in red ink (Donnelly, 2002, p. 45). In this tough environment, Southwest managed to pare down its costs: according to Morgan Stanley, it costs Southwest just $9,861 to operate a 1,100mile trip, the lowest among 12 major airlines (Lim, et al, 2003, p. 42). On the week of October 23, 2002, barely a year and one month since the tragedy, Southwest reported $74.9 million in earnings for the third quarter and stands as the only profitable U.S. airline among the top eight (Southwest posts modest profit, 2002, p. 54). Meanwhile, AMR, parent of American Airlines, and the world's largest airline, reported a thirdquarter loss of $924 million. Other airlines are in deeper predicament: U.S. Airways is reorganizing under bankruptcy protection, and industry experts expect it will soon be joined by United Airlines. Delta has announced that "to survive for the long term" it will lay off an additional 7,000 to 8,000 employees, meaning it will have lost nearly a quarter of its work force since Sept. 11 (Donnelly, 2002, p. 45). Amidst all these troubles, Southwest Airlines, on January 16, 2003, declared its 106th Consecutive Quarterly Dividend of $.0045 (Southwest Airlines declares 106th dividend, 2003, p. 1). Southwest Airlines‟ stellar performance has not escaped the eyes of the investment community. When Money Magazine asked Ned Davis Research to compile a list of the 30 best-performing stocks since the magazine‟s debut in 1972, it was expecting that that the No. 1 performer would reflect the brawn-to-brains transformation of the U.S. economy - probably a technology stock; or maybe a big name pharmaceutical company. Money Magazine never expected that it would be an airline-Southwest Airlines, to be precise (Birger, 2002, p. 88). Since August 1972, Southwest 9 has produced annualized returns of 25.99%, which means that $10,000 invested in Southwest 30 years ago, would be worth a little over $10.2 million in August 2002.1 Company History Southwest was founded by Texas businessman Rollin King and lawyer Herb Kelleher. The fateful day came in 1966 when a banker client named Rollin King, recently returned from a trip to California, walked into Kelleher's office and declared that Texas could benefit from a short-haul commuter airline similar to Pacific Southwest Airlines, then a major player in the California market (Labich and Hadjian, 1994, p. 44). The two men proceeded to map out the basic plan, a low-cost intrastate airline carrier that would link Houston and San Antonio from a Dallas base. The two main intra-Texas carriers of the time, Braniff and Texas International, were less than thrilled by the prospect of a new competitor and were able to tie up Kelleher's dream in litigation. It took almost five years of legal battle with Braniff, Texas International and Continental over its right to fly before the airline actually took flight. Kelleher brought in a handful of airline veterans, and Southwest finally got aloft in 1971, operating out of ramshackle old Love Field, near downtown Dallas, using three Boeing 737 aircraft. The airline broke into the black within two years and has remained profitable every year since -- a record unmatched in the U.S. airline industry. 1 We do not wish to over hype this stock. Because of the study‟s start and end dates August 1972 through July 2002, - the list excludes top stocks that were not publicly traded in 1972, such as Dell (which went public in 1988), Home Depot (1981) and Microsoft (1986). The database includes only those companies that have traded on a major exchange throughout the 30-year period and have, at some point, been included in the S&P 500. 10 From this humble beginning its fleet has grown to 366 Boeing 737 jets and has become the United States' only major short-haul, low-fare, high-frequency, point-to-point carrier. Currently, each Southwest aircraft flies an average of 715 miles, 8 flights a day (see Appendix, Table 1). Southwest has the lowest operating-cost structure in the domestic airline industry and consistently offers the lowest and simplest fares with an average one-way airfare of $85 and a passenger load factor - industry jargon for the percentage of seats filled - of 68.1 percent (Southwest posts modest profit, 2002, p. 54). Southwest survived the airline deregulation wars of the 1980s and 1990s, which claimed such once proud airlines as Eastern and Braniff and destroyed even once mighty Pan Am. In 1998, Southwest defied odds again by adding longer-haul routes. On Thanksgiving Day, 1999, it flew its first nonstop transcontinental flight between Baltimore and Oakland, Calif. It was to be a one-time experiment, but the $99 one-way tickets filled the plane, and almost half of the passengers had never flown before (Zellner, 1999, p. 58). What some have referred to as the revolution has come to the East Coast. Its influence now span the nation, enabling travelers in a growing number of areas to make relatively short and direct flights for less than half what they paid before its imitators began service (Spencer, 1994, p. 10). Herb Kelleher loves to tell the story that when Southwest first expanded outside Texas; he got a letter from a congressman who wrote: “Herbie, you're going to destroy Southwest Airlines, flying outside Texas.” Kelleher wrote back: “Congressman, Man, not God, ordained the boundaries of the State of Texas.'' Southwest experienced an extraordinary traffic growth during its first decade of operation, growing 20-30% annually from 1972 to 1992 (Teitelbaum, 1992, p.115). 11 This Fortune 500 Company is headquartered in Dallas, Texas. Southwest Airlines is listed in the New York Stock Exchange, under the trading symbol LUV, which in the early days was partly a marketing ploy, since all of the flights went into or out of Dallas Love Field (named not after the divine passion but after a pilot, Lieutenant Moss Lee Love). The company's advertising tag line for years was "The airline that love built," a slogan that would give most airline CEO‟s hives. But Kelleher has never been shy about identifying the source of his company's success: "A company is stronger if it is bound by love rather than by fear (Colvin, 2001, p. 60).” LUV serves as the theme of its employee and customer relationships (Southwest Airlines, 2001, p. 4). 12 II. Attributes of a Great Company Our case study centers on identifying the principal company attributes that enabled Southwest Airlines to become one of the most admired companies in the world. This project required research on two attributes, so we decided to focus on innovative operations and quality of corporate management. It is our belief that these are the main attributes that made Southwest Airlines a great airline when compared to United, American, Delta and Continental that operate under the same environment. ATTRIBUTE NUMBER 1: INNOVATIVE OPERATIONS Southwest’s innovative operations lead to unsurpassed efficiencies Just what is Innovation? Innovation occurs when a business introduces new products or services to the marketplace, or adopts new ways of making products or services. Anything new or novel about the way an organization operates or the goods and services it produces is the result of innovation (Jones and George, 2003, p. 276). The concept may refer to technical advances in how products are made or shifts in attitudes about how products and services are developed, sold and marketed. Innovation implies creativity and dynamism. It means enterprises are looking for better ways of producing and marketing products and services. When a company is more innovative, it is more open to new ideas and technology. This increased flexibility can lead to improved productivity and competitiveness and will result in a higher return on investment. Company policies must encourage innovation as a way of running its business. 13 Innovation is also the invention of new technologies, products and production processes, through the successful exploitation of ideas. An innovative business is one which lives and breathes 'outside the box'. It is not just good ideas; it is a combination of good ideas, motivated staff and an instinctive understanding of what a customer wants. More businesses are recognizing that competitive advantage comes from knowledge and new ideas. That means companies need to develop and protect intellectual property as a mechanism for growth within their business. Innovation occurs when a new or changed product is introduced to the market, or when a new or changed process is used in commercial production. The innovation process is the combination of activities - such as design, research, market investigation, process development, organizational restructuring, employee development and so on which are necessary to develop and support an innovative product or production process. Innovation is the thought, ability and courage to do something that no one else has done. Southwest‟s innovative way of doing things is best summed up by Herb Kelleher himself: “We never tried to be like other airlines. From the very beginning we told our people, „Question it. Challenge it. Remember, decades of conventional wisdom have sometimes led the airline industry into huge losses (Freiberg and Freiberg, 1997, p 130).” When such innovations lead to efficiencies, company profits follow. Southwest Airlines has continuously done this within the airline industry. Business analysts have pointed many unique, sometimes off-the-wall practices of SWA that differentiate it from other airlines and made SWA the success that it is today. “Southwest has always been 14 known as a maverick and an innovator in the U.S. airline industry (Freiberg and Freiberg, 1997, p. 28).” Low Cost Innovations At the time Southwest started, the airline industry was highly regulated; however, because Southwest ran on intrastate routes only, it did not fall under CAB (Civil Aeronautics Board). The fares charged by other airlines were uniformly expensive and had to be approved by CAB. Southwest Airlines, on the other hand, was able to offer low fares, since it did not operate under CAB (Freiberg and Freiberg, 1997, p.29). These low fares enabled more people to fly. Southwest became known as the low fare, no frills airline. Even after airline deregulation when every airline could and did offer low fares, Southwest‟s reputation persisted. Southwest's strategy is based on one simple notion: if you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and made sure they have a good time doing it, people will fly your airline. By boasting the lowest costs among the major airlines, Southwest can profitably offer low fares where others cannot (McCartney, 2002, p. A-5). When SWA enters a new market with fares that undercut prevailing rates by 50% or more, traffic explodes, and Southwest nabs many customers who might have driven before (Zellner, 2001, p. 45). Before opening the route, somewhere around 8,000 people used to fly between Louisville and Chicago weekly; since Southwest entered the market, about 26,000 do. Similarly explosive growth took place after Kelleher introduced a $49 fare on a St. Louis-Kansas City route that TWA had been flying for $250. 15 Terminal Innovations: Anti-Hub and Spoke- the Short-Haul, Point-to-Point strategy Southwest manages to make money even when air travel is slow because it has a very low cost structure (Southwest posts modest profit, 2002, p. 54). In contrast, the major airlines incur high costs for several reasons. Unlike Southwest, they all have developed and operate expensive "hub and spoke" systems. Hubs allow airlines to fly passengers from numerous feeder cities (the spokes of the system) to large collection points (the hubs of the system) where the passengers can be dispersed efficiently. This works for serving thinly traveled long-haul routes, say between Providence and Chattanooga. But for trips of 500 miles or less, it can prove time-consuming and inconvenient for travelers, particularly when flying on heavily traveled routes. More importantly, hub and spoke systems require huge investment and expense: arriving and departing travelers must converge on hubs in concentrated periods, to be sorted and sent on their way. This requires large ground crews to handle the crunch and results in longer down-time for the aircraft, which must sit long enough to collect passengers from the various arriving flights. When an aircraft sits on the ground, airlines lose money. A hub and spoke layout is akin to a spider web, spun one strand at a time, flexible enough to disperse assets and dissipate stress but very expensive to operate. In contrast, Southwest, a "short-haul, point-to-point" carrier, has no recognizable hub or spoke. It flies short distances nonstop, the average flight being 55 minutes. Flights do not make connections with other airlines, and do not transfer baggage. It does not need a hub and spoke layout in its terminals. 16 Without a hub and spoke to operate, the turn-around times for Southwest planes at the gate average 20 minutes, compared with 45 minutes to an hour-plus for the other major airlines. This means Southwest can fly more paying passengers per plane, per day than hub-based carriers (Spencer, 1994, p. 10). Southwest Airlines would average 10.5 trips per gate, when others can only manage 5. With very little idle time, crews are kept busy, maximizing employee efficiency. To fully appreciate this kind of efficiency, consider this fact: short turnaround times enable Southwest to use 35 less aircraft than if it had the industry standard turnaround time. This incredible turnaround time can be as short as 15 minutes, as observed by Forbes (Chakravarty, 1991, p. 48): ANATOMY OF A 15-MINUTE TURNAROUND 7:55 8:03:30 8:04 8:04:30 8:06:30 8:07 8:08 8:10 8:15 8:15:30 8:18 Ground crew chats around gate position Ground crew alerted, move to their vehicles Plane begins to pull into gate; crew move toward plane Plane stops; jetway telescopes out; baggage door opens Baggage unloaded; refueling and other servicing under way Passengers off plane Boarding call; baggage loading, refueling complete Boarding complete; most of ground crew leave Jetway retracts Pushback from gate Pushback tractor disengages; plane leaves for runway Of course this time efficiency is greatly aided by the cooperation provided by its passengers. Southwest passengers learn to do without assigned seating and onboard food except for peanuts or crackers. Since no meals are served, areas used for storage and heating meals are not needed, allowing more seats on the plane (Freiberg and Freiberg, 1997, p. 57). Still another way to save time: seats are not assigned. When a 17 passenger shows up at the boarding gate, passes are given out on a first come, first serve basis. This reduces the time a customer would spend reserving a seat and allow the reservation agent to attend to more people (Freiberg and Freiberg, 1997, p. 81). Passengers sometimes complain that they must recheck their baggage if they are proceeding to a further destination on another airline; but the payoff from this relatively minor inconvenience is that Southwest ground crews can usually turn around an aircraft at the gate in 15 or 20 minutes, compared to nearly an hour on average at other carriers. This is yet another way that Southwest planes can make 10.5 flights a day, more than twice the industry average. Customer Service Innovations Southwest Airlines‟ dedication to quality of its Customer Service is embodied it its Mission Statement: 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 (Southwest Airlines, 2001, p. 1). At Southwest Airlines, the Mission Statement has always governed the way to conduct business. It highlights their desire to serve customers and gives them direction when they have to make service-related decisions. It is another way of the Company saying, "we always try to do the right thing!" Foremost, Southwest‟s Mission Statement conveys its wish to never inconvenience their valued customers. Employees are told that the Airline is in the Customer Service business—they just happen to provide airline transportation. It is a privilege of Southwest to serve its customer‟s air travel needs. 18 Southwest‟s customer service commitment in conjunction with Southwest‟s Mission Statement is not merely words on a paper. Southwest Airlines has continually delivered quality Customer Service while maintaining their “no frills” value that has made the company successful. As Jeff Cannon in his article titled Southwest Airlines: Service for Smiles and Profits noted, “Southwest Airlines flouts all the rules of airline customer service. No in-flight movies. No miniature pseudo-gourmet dinners. No firstclass upgrades. Heck, no reserved seating. And customers can't get enough. That's in part because of the economy airline's low fares, which require it to run leaner than its full-priced competitors. But it's also because the Dallas, Texas, airline follows another rule usually ignored by everyone else: be nice and smile a lot (Southwest Airlines: Service for Smiles and Profits, 2002, p. 1).” Southwest‟s philosophy of “Service for Smiles and Profits” encourages employees to treat customer service as the most important aspect of their job. It appears that when employees strive for this high level of service, the rest takes care of itself and success is inevitable. At Southwest Airlines, there is a constant search to better service the needs and desires of its customers. To minimize delays caused by heightened airport security, the airline sought to improve its customer service by integrating its Rapid Rewards frequent flyer, loyalty-based program, with its reservation system to avoid delays in reservation transactions. This integration has allowed customers to get tickets instantly while taking advantage of a simple card swipe card reader so as to avoid agents that ask for information such as addresses and name spellings. Southwest spent two months implementing their new Oracle9/Real Application Clusters (Oracle9/RAC) system from 19 start to finish. This is the system that allows the Rapid Rewards customers the convenience of making reservations with a swipe of a card (Southwest Airlines Improves Passenger Check-In Time, 2002, p.1). Despite its technological savvy, Southwest knows when being technologically conservative provide a better value for its customers. For example, it has rejected email response systems and interactive telephone menus as being too impersonal. Southwest would rather put a human on the other end of the line for customer interactions (Cannon, 2002, p. 1). Southwest Airlines has a way of making every single customer feel special. Southwest Airlines approach to frequent flyer rewards is “Non-traditional.” Southwest rewards are based on number of trips taken. Other airlines reward people based on miles flown. Southwest does not even provide special lines or priority boarding for frequent fliers. Their philosophy is that every customer is equally as important as the other. The customer service philosophy that Southwest focuses on is to keep customers coming back. Customer service combined with value is the recipe for Southwest that other airlines seemed to have overlooked. Airport Location Innovations Southwest saves time and keeps service frequent (and on time) by avoiding heavily congested airports. For example, in its recent expansion, Southwest chose Baltimore-Washington International over more heavily congested Dulles International or Reagan National. It prefers flying into smaller, less modern airports instead of state-ofthe-art facilities as long as these airports are closer to downtown areas. This has 20 tremendous appeal to the business traveler. For instance, it flies to Manchester, N.H., instead of Boston, MA. It will not attempt to enter any of the big three airports around New York City because, as Kelleher himself professed, of wariness of the Big Apple's three C's--cold, cost and congestion (Pedersen, 1999, p. 47). Furthermore, the "slot controls," used by the Federal Aviation Administration to cap arrivals and departures in busy airports are a sure-fire way to induce delay as demand to fly picks up. "It doesn't help to turn an airplane at the gate if you have to sit on the taxiway for an hour waiting to take off," explains Southwest's chairman, Herbert Kelleher (Spencer, 1994, p. 10). This strategy worked well in some cities; however, sometimes no alternative airport is available (i.e. Los Angeles, San Diego, Las Vegas). Still, whenever an alternative is available Southwest always chose the one that would most efficiently use its fleet and would least inconvenience its passengers. Figure 1 shows the route structure that has helped Southwest experience the most rapid aircraft turnaround time in the industry. Rapid turnaround time is essential for short-haul flights because airplanes are in the air for a smaller percentage of time than on longer routes. Faster turnaround time also allows Southwest to fly more daily segments with each plane, which increases its profitability. 21 Figure 1: Route Structure of SWA Travel Booking Innovations Forty-six percent of Southwest‟s passenger revenue is generated by online bookings via www.iflyswa.com, www.southwest.com and www.southwestairlines.com. In 2002, the cost per booking via the Internet was about $1, compared to the cost per booking of $6-$8 through a travel agent. Terra Lycos, one of the largest global Internet network search engines, reported that Southwest received 50 percent more searches than any other airline. Southwest's Internet ticketing saves it $50 million a year, or 1% of revenue (Fisher, 2002, p. 82). Even before the advent of Internet booking, Southwest Airlines‟ distribution system was unique. While most airlines relied on independent travel agents to write up to 90% of their tickets, Southwest had steadfastly refused to link up with the computer reservation systems the agents use. Agents who wished to book a 22 Southwest flight had to pick up the phone like anyone else, so much so that many tried to persuade customers to pick another carrier or make the call themselves. The result is that nearly half of all Southwest tickets are sold directly to passengers, saving the airline $30 million annually (Labich and Hadjian, 1994, p. 44). Southwest was the first airline to use the automated ticket vending machine (ATVM). Customers use ATVM‟s much like ATM‟s to purchase tickets simply by choosing the destination city and swiping a credit card. This enables customers to purchase tickets without ever talking to a customer service agent. This reduced the wait to talk to an agent and allowed the agent to tend to the needs of others in need. These machines were made by Southwest‟s own Technical Services Department, led by Mike Golden, using off-the-shelf parts and putting them together (Freiberg and Freiberg, 1997, p. 139). In January 1995, Southwest became the first airline to provide ticketless travel, after it was tossed out of three computer reservation systems (United, Continental and Delta‟s as these airlines felt threatened by Southwest‟s competitiveness). This innovation, born out of necessity, now allows customers to completely bypass the computer reservation systems of major airlines by obtaining a confirmation number and showing up for the flight (Freiberg and Freiberg, 1997, p. 136). Customers loved the idea and the paperwork was reduced tremendously therefore saving money. This innovation is now pervasive in the industry, due to its cost savings. Currently, if a customer wants a printed ticket, there is a surcharge of $20. 23 Single Aircraft Innovation The Boeing 737 is Southwest‟s only aircraft in its fleet. Starting with just three Boeing 737‟s, its fleet has grown to three hundred sixty-six Boeing 737 jets in 2002. This keeps training costs down as all employees are trained for just one aircraft. This also gives Southwest incredible flexibility for substituting airplanes and using parts. The flight schedule is interrupted minimally for “lack of spare parts.” To further obviate the spare parts problem, Southwest partnered with i2 solutions (Southwest Airlines Broadens Customer Service Initiatives with i2, 2002, p. 1). i2 technologies Inc. is a leading provider of value chain management solutions to provide Service and Parts Management (SPM). This solution system allows Southwest to maintain the availability of critical parts while reducing stock. The advance planning capability of i2 allows for the reduction of spare part inventories and enables the airline to optimize service plans. The focus of this solution is to identify frequently used replacement parts while maintaining minimum levels of critical parts thus eliminating overstocking and minimizing “out of stock” parts. Having mechanics trained in servicing only one kind of aircraft, Southwest‟s 737 mechanics have become the best in the world in terms of knowledge and efficiency. Operating like a NASCAR pit crew Southwest‟s mechanics change airplane tires three times faster than their counterparts at other carriers. So creative are these mechanics that they do not use the standard $500 tool to remove the magnetic device that detects metal chips in engine oil, as other airline mechanics do; they simply and quickly use 24 their hand to pop it out (Donnelly, 2002, p. 45). "Those tools are a waste," explains a Southwest mechanic. Marketing Innovations Southwest has been an innovator in the marketing department as well. At Southwest, advertising and marketing are used both to create and reinforce the company‟s nutty image (Freiberg and Freiberg, 1997, p. 248). Southwest attempts to do three things in their advertising: intrigue, entertain and persuade. One story goes that Southwest‟s CEO Herb Kelleher and Stevens Aviation CEO Kurt Herwald arm-wrestled to settle an advertising slogan dispute. The dispute was over Stevens Aviation slogan “Plane Smart” and Southwest Airlines slogan “Just Plane Smart”. The two decided that instead of going to court, spending countless dollars on lawyers and court costs, to settle it quickly in an arm wrestling contest with prize money for the winner‟s charity. The face off took place in front of the media and their employees. In the end Kelleher was defeated, but Herwald decided to let Southwest keep its slogan anyway. Everyone won, both companies received great publicity, the media had a field day, and charities were given the prize monies (Freiberg and Freiberg, 1997, p. 249). Southwest Airlines is big on symbols and symbolisms. When Sea World and Southwest Airlines partnered for a promotion, Southwest painted one of its Boeing 737 like a killer whale. The airplane was appropriately named Shamu One. Southwest has added other uniquely painted airplanes to its fleet: Shamu Two and Shamu Three. Lone Star One, Arizona One, California One, Nevada One and New Mexico One were Statethemed planes, painted to resemble the State‟s flag. In 1996, Southwest christened one 25 of its planes the Silver One to commemorate, the company‟s 25th anniversary. When it won the airline industry‟s most coveted Triple Crown Award for the fifth time in a row, Southwest dedicated one of its planes to its employees, named the plane Triple Crown One and painted 24,000 names of the employee on it. This simple gesture incalculably increased personnel morale, akin to a mass rite of enhancement described by Jones and George (Jones and George, 2003, p. 350). ATTRIBUTE NUMBER 2: COMPANY MANAGEMENT Leadership is the key to successful management Management is defined by Jones and George as the art and science of planning, organizing, leading and controlling human and other resources to achieve organization goals effectively and efficiently (Jones and George, 2003, p. 5). The principal aim of management is to maximize the output of a company through administrative implementation. Management usually consists of people who are experienced in their field, and who have worked their way up the company. A manager knows how each layer of the system works and may also possess a good technical knowledge. However, groups are often more loyal to a leader than a manager. This loyalty is created by the leader taking responsibility in areas such as taking the blame when things go wrong, celebrating group achievements, even minor ones, and giving credit where it is due. A leader is someone who people naturally follow through their own choice, whereas a manager must be obeyed. A manager may only have obtained his position of authority through time and loyalty given to the company, not as a result of his leadership qualities. A leader may have no organizational skills, but his vision unites people behind 26 him. Managing and leading are two different ways of organizing people. The manager uses a formal, rational method while the leader uses passion and stirs emotions. Leadership at Southwest Airlines In the management analysis of Southwest Airlines, one area that stands out is the leadership role played by its founder, Herb Kelleher. Kelleher is not just a manager, he is an extraordinary leader. It is said that managers think incrementally, while leaders think radically. "Managers do things right, while leaders do the right thing (Pascale, 1990, p. 65).“ This means that managers do things by the book and follow company policy, while leaders follow their own intuition, which may in turn be of more benefit to the company. A leader is more emotional than a manager. "Leaders stand out by being different. They question assumption and are suspicious of tradition. They seek out the truth and make decisions based on fact, not prejudice. They have a preference for innovation (Fenton, 1990, p. 113). Southwest Airlines‟ unique approach to management starts at the top of the organizational chart. When Herb Kelleher was President, Chairman and CEO, there was no doubt about who was in charge at Southwest. Herb Kelleher's management style has been described as a combination of thriftiness and Robin Williams-style humor and wackiness (Rose, 1999, p 61). He was a highly visible leader whose 16-hour workdays and unflagging energy set an example for other employees. Southwest workers who perform outstanding feats for customers have been known to justify their behavior by saying it was "what Herb would have done." So powerful is the bond between the company and many of its workers that observers, only half-jokingly, have likened Southwest to some sort of religious cult. 27 Kelleher proclaims he is not the least offended by such comparisons, contending that his operation has always retained “a patina of spirituality.” Says he: “I feel that you have to be with your employees through all their difficulties, that you have to be interested in them personally. They may be disappointed in their country. Even their family might not be working out the way they wish it would. But I want them to know that Southwest will always be there for them (Labich and Hadjian, 1994 p. 44).” Part of Southwest‟s culture is built around humor, fostered mainly by Kelleher. Southwest has been specializing in humor for a long time. Over the past decade, as the U.S. airline has experienced 8% annual growth and has come to employ 35,000 people, generating laughs has become an official corporate goal, even a part of recruitment (Suskind, 2003, p. A1). "Have you ever used humor to solve a workplace problem?" is a question asked in job interviews. The airline's growing army of flight attendants -- now numbering 7,000 -- includes a few actors, stand-up comics and hundreds of skilled amateurs. All of this corporate levity worked beautifully through the devil-may-care 1990s, as Southwest mined and enriched deposits of humor. Employee Ownership Culture To support SWA management‟s belief that people take better care of things they own, and that this special care is ultimately passed on to the customer, Southwest initiated the first profit-sharing plan in the U.S. airline industry in 1974. It has offered profit sharing to its employees every year since then (Hall, 1996, p. H-1). Southwest‟s profit sharing program and a broad-based stock option plan allows employees to participate in the financial benefits of an ownership culture. The profit sharing plan is at the heart of Southwest's benefits program. Nearly all of the employees are rewarded 28 with a percentage of the company's profits divided up and allocated by relative salary. The company invests 15% of its pretax operating income in the profit sharing plan. While people are free to choose to increase the amount, 25% of an employee's profit sharing goes to the purchase of Southwest's stock. The company is the only airline to offer stock ownership in the company without asking for wage concessions. In 2000, Southwest offered its employees a record-setting $138Mm in profit sharing (Laing, 2001, p. 25). This tax-deferred compensation represented an additional 14.1 percent of each employee's annual salary. Employees now own more than 13% of the company's stock through investments from an Employee Profit Sharing Plan. The shares held by employees are spread broadly among most of the company's roughly 33,000 workers. The pilots and flight attendants working for Southwest have separate stock option plans which account for additional employee held shares. In addition, Southwest also has a 401(k) program which allows employees to invest their contributions in company stock. Participation among employees investing 401(k) contributions in Southwest is lower than the profit sharing plan, yet employees who do contribute to the 401(k) invest an average of nearly 30% of their contributions in the company stock (Southwest Airlines, 2001, p. 28). Southwest Airlines‟ management also puts a priority on employee initiative and responsibility (McCartney, 1995, p. A-12). 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 championed by Vice-President Colleen Barrett provides employees with the freedom 29 and responsibility to take effective action and the financial participation through ownership which allows them to benefit from the company's overall performance. Southwest's unique employee involvement has really empowered employees to take on responsibility for maintaining the high performance standards of the company with few complications (Jones and George, 2003, p. 312). Southwest has the most productive workforce in the industry with 2,400 customers served per employee annually; once again, double its competitors‟ average productivity. Southwest has the lowest turnover rate among airlines, with less then 4.5% of employees leaving per year. There is also a no furlough policy at Southwest, which has never lain off a permanent employee (McNulty, 2001, p. 14). In fact, immediately after Sept. 11, 2001, management assured its workers and unions that no one would be laid off (Donnelly, 2002, p. 45). Southwest's internal ownership culture is what sets this airline apart from other companies in the industry. Every employee is given the general guidelines of their responsibilities and role in the company, then expected and encouraged to go outside those guidelines fearlessly (McNulty, 2001, p. 14). As a result, this is an airline that takes the boredom out of flying and makes it fun again. Communication of this image is important to the success of the company, so Southwest takes every chance it gets to be funny and out of the ordinary. It seems the employees of Southwest love the benefits of watching their actions create personal financial rewards through stock ownership. Southwest Employee’s Unions Southwest pilots are the only pilots of a major U.S. airline who do not belong to a national union. National union rules limited the number of hours pilots could fly; but Southwest pilots were unionized independently, allowing them to fly far more hours than 30 pilots at other airlines. Southwest's 4,100 pilots signed a ten-year contract in 1994 that was 35% lower than comparable contracts of pilots of the major airlines. This was an extraordinary deal that froze wage increases for 10 years in exchange for an increased proportional allocation of stock options (Cimini and Muhl, 1995, p. 64). As a result, a veteran Southwest pilot makes $142 an hour, or $135,000 a year compared to about $185,000 at United; but profit sharing and stock options for the most tenured pilots can add another $80,000, making the pilots better compensated (Fisher, 2002, p. 82). The flight attendants' union also signed a similar agreement that was equally unprecedented in the industry. The terms of stock option compensation can not be disclosed, but Southwest says their flight attendants realized the full yield of their "would be" wage increases for a ten-year period with stock option value in just four years into the plan. Other workers at Southwest are nationally unionized, but their contracts are flexible enough to allow them to jump in and help out, regardless of the task at hand. This allows Southwest to employ a ground crew of four plus two people at the gate to take care of takeoffs and landing. By comparison, United Airlines requires a ground crew of 12 plus three gate agents (Lim, et. al, 2003, p. 42). Unlike workers at most other carriers, Southwest employees are willing to pitch in wherever needed, to walk -- or fly -the extra mile. Pilots might man the boarding gate if things are running slow; ticket agents might find themselves hauling luggage. Management Team The year 2001 marked a changing of the guard at Southwest Airlines. James F. Parker and Colleen C. Barrett, both Southwest veterans, assumed two of the duties of 31 Herb Kelleher, as CEO and President of the company, respectively. However, Herb Kelleher retained the title of Chairman and Founder. Kelleher still manages strategy and government relations. Although it might be too early to tell, these new guards have shown hopeful signs that this highly revered company will continue in its winning ways. Perhaps the best gauge of their abilities is the fact that they managed to turn a profit and protect jobs, while the rest of the industry lost an estimated $9 billion in 2002 and laid off thousands of workers. Certainly, the industry's woes have clipped Southwest‟s wings a bit. The company will grow only about 5% in 2002, less than its 8% target. But with rivals rapidly downsizing--in and out of bankruptcy court--and desperately trying to emulate Southwest Airlines‟ cost structure, Kelleher's successors are proving themselves worthy pilots of the low-fare leader (Making the best of a bad situation, 2003, p.70). As James Parker said in a Fortune interview (Replacing a legend, 2002, p. 58), “My biggest challenge is to maintain the direction and focus of the company.” As organizations, airlines do not lend themselves to Theory Y style of management. Airlines tend to be rigorous in the organization and planning of their activities. The nature of the airline industry demands effectiveness: schedules must be adhered to exactly, and procedures insuring maintenance of airplanes and training of staff need to be carefully followed. Southwest Airlines organizes its employees according to their function, or the role they play within the organization. Each job is carefully analyzed and categorized to insure that the airline operates efficiently and consistently (Greco, 2001, p. 28). 32 This does not mean that things at Southwest are totally inflexible. The Airline also needs to operate efficiently in order to be successful. To consistently achieve this, Southwest emphasizes an easy-going, relaxed corporate style that provides employees with extensive operational independence (Huey and Sookdeo, 1994, p. 54), a “loosetight” system of management. Organizational Structure Southwest Airline's management structure is designed to carefully direct the activities of employees while still maintaining the spirit of "fun" that is the cornerstone of the airlines‟ customer service success (Lancaster, 1999, p. B-1). The fundamental concept of management at Southwest is the notion of a "loose-tight" design. Within the context of tight rules of conduct, employees are encouraged to take a wide degree of leeway. For example, the company encourages employees to make their own customer service decisions. Employees are encouraged to try new things, knowing that they will not be punished for innovation as long as they do not violate safety standards, endanger crew or passengers, or keep a plane from taking off or landing on time. 33 NOTE: In this paper, we decided to analyze Southwest’s management structure while Kelleher was at the helm. We reason that the changing of the guard was too recent an occurrence to account for Southwest’s success. It is more logical to analyze the company’s performance before the change in management. Southwest is organized in a typical hierarchical structure, with employees reporting through a line of supervisors to Kelleher himself. While most people will not interact with the CEO on a daily basis, technology enhancements allow all employees to keep abreast of Kelleher's activities. 34 As shown in Southwest's organizational chart, only the Executive Vice Presidents, or top managers, actually report directly to the CEO. These individuals are responsible for making strategic decisions about the future of the organization. They make higher-level, general decisions about the directions Southwest will take in the future and the kinds of policies and procedures that should govern employees' conduct. Looking at the span of control of one of the Executive Vice Presidents can help us understand more about what various levels of managers do at Southwest Airlines. Colleen Barrett was Executive Vice President in charge of the Customer Department. Like most top managers, Colleen Barrett's role was to direct and manage the "big picture" of life at Southwest Airlines. For example, in the early 1990s Barrett set up a Company Culture Committee comprised of people from all over the organization. The committee meets four times a year, and is charged with preserving and enhancing Southwest's company culture. Under Barrett's leadership, these individuals come up with programs designed to foster teamwork and cross-functional cooperation. Rather than focusing only on a specific area of the organization, Barrett's role is to make sure that all of Southwest's people talk to one another on a regular basis. The policies she implements contribute to the airline's success because she looks beyond a particular functional area to see how each component of the organization can and should work together for the overall good of the company. Treating the customer right is a lot easier when employees are treating one another that way. Each operating division at Southwest has identified its internal customer and focused on his needs. Mechanics who service planes target the pilots who fly them, and marketers do the same with 35 reservation agents. Barrett figures that if they can provide the service to one another that they do to the passengers, Southwest is bound to soar (Teitelbaum, 1992, p. 115). Like most top managers, Barrett has a primarily decision-making role. This means that she is likely to initiate and oversee new projects, take action to guide the company through times of crisis, and make decisions about allocating resources to various parts of the organization. Reporting to Colleen Barrett are middle managers, the Vice Presidents in charge of Advertising/Promotions, Governmental Affairs, Marketing and Sales, Human Resources (People), and Special Marketing. These individuals translate Ms. Barrett's goals and strategies into actual programs to be implemented within their functional area. For example Libby Sartain is the Vice President in charge of "People" for Southwest. To insure that all Southwest employees are motivated to see one another as "teammates," Ms. Sartain oversees Southwest's profit sharing program (Wong, 2002, p. 33). In 1999, Southwest transferred 13.7% of its annual budget for salaries to the profit sharing account. Libby Sartain's role at Southwest is to insure that human resource policies and procedures, including fringe benefit programs such as profit sharing, help support the teamwork orientation goals of the airline. Like most middle managers, Sartain translates the goals of top management into specific programs and policies within her functional area. As Southwest's organizational chart indicates, Ms. Sartain has other middle managers reporting to her. These individuals have more specialized areas of expertise. While Ms. Sartain views the entirety of human resource policies at Southwest 36 as her domain, other middle managers are responsible more specifically for Benefits/Compensation, Learning & Development, and Employment. Each of these individuals has a large number of line supervisors reporting to them. These individuals direct the activities of non-managerial personnel. A People Department "Team Leader" is responsible for the delegation and scheduling of work among non-managerial personnel. As one job description indicates, these individuals must "maximize utilization of individual talents and abilities in order to accomplish department objectives (Lancaster, 1999, p. B-1)." Line supervisors focus on interpersonal relationships. They know the job that needs to be done, and their emphasis is on assigning and directing the talents and capabilities of their personnel to best utilize their abilities and get work done effectively and efficiently. Non-managerial personnel in the human resources area perform largely clerical duties. A job description for Administrative Support personnel in the Southwest Airlines People Department indicates that typical duties include alpha and numeric filing, phone operations, and use of a personal computer and other standard office equipment. These individuals have limited range in the tasks they perform, and are usually assigned to perform only one portion of a project. Southwest Airline's commitment to provide socially responsible service is an excellent way to review how managerial and non-managerial duties function together in an organization. In an effort to be socially responsive, Southwest has actively tried to be a minority-friendly service provider and employer. Personnel Recruitment Workers.com polled 1200 job applicants in 2000 and found that over 19 percent of them would work for SWA if given the opportunity (Wong, 2002, p. 33). Southwest 37 Airline‟s Human Resources Department has consistently, year after year, received such honors as a place on Fortune's and Working Woman's "Best Places to Work" lists. What is it about Southwest Airlines that make it such a great place to work? What makes employees not just like but love this company? First and foremost is Herb Kelleher, the past CEO and current Chairman who is perched at the pinnacle of just about every 100 Best CEO list. He spends his business life making sure his employees believe in him and in the operation he has muscled into the top tier of a savagely competitive industry. He smokes, he arm-wrestles, he drinks large quantities of Wild Turkey, he raps in music videos--and it is only slight hyperbole to say nearly all his employees worship the ground he walks on (Lieber, 1998, p. 72). Kelleher never had leadership training per se. As he likes to say (Huey and Sookdeo, 1994, p. 54), “Trying to teach leadership may be a lot like trying to teach sex. If you really need lessons, well... “ Herb Kelleher is deeply committed to a philosophy that puts employees welfare first (Lancaster, 1999, p. B-1). "If they're happy, satisfied, dedicated, and energetic, they'll take real good care of the customers. When the customers are happy, they come back. And that makes the shareholders happy," Kelleher articulates. Southwest‟s walls are filled with photographs of its employees. More than 1,000 married couples worked for the airline. The average age of a Southwest employee is 34 years. Southwest employees are among the highest paid in the industry and the company enjoys the lowest employee turnover relative to the airline industry. Southwest‟s culture of hard work, high-energy, fun, local autonomy, and creativity is reinforced through training at its 38 University of People, encouragement of in-flight contests, and recognition of personal initiative (Lancaster, 1999, p. B-1). In 1998, Southwest reviewed 194,821 resumes and hired 6,406 new employees (Lieber, 1998, p. 72). The company's hiring process is very interesting: peers screened candidates and conducted interviews; pilots hired pilots, and gate agents hired gate agents. To better understand what the company sought in candidates, Southwest interviewed its top employees in each job function (e.g., pilots, gate agents, baggage handlers, ground crew) and identified their common strengths, then used these profiles to identify top candidates during the interview process. Southwest hired for attitude as much as aptitude. Lieber quotes CEO Kelleher, "We want people who do things well, with laughter and grace." Southwest Airlines' behavior-based, conversational style of interviewing puts people at ease claims HR director Libby Sartain, whose official title, Vice President of People, is intended to do the same. "People feel like they are talking to a friend, and sometimes they tell us the most unbelievable things." Sartain recalls one candidate who, when asked how he dealt with prior difficulties with his co-workers, admitted to stabbing one with a screwdriver. But more than a screening tool for “wackos”, Southwest's interview process brings out indicators of how successfully a candidate will fit into the company's storied, customer-focused culture (Stein, 2000, p 132.). After ten years' analyzing the behavior of Southwest's own employees, Sartain and her staff have calibrated their questions to test for the specific needs and requirements of each job, as well as for shared attributes like common sense, judgment, and decision-making skills. The time and money spent on the hiring process has resulted in a turnover rate of only 39 9% (6% for upper management), by far the lowest in the industry. It has also enabled Southwest to maintain a strong, unified culture in the face of enormous growth and to groom management talent within it. Less than five "outsiders" hold senior management positions at the airline, and many began their careers in entry-level positions. EVP Colleen Barrett, for example, started out in 1971 as CEO Herb Kelleher's legal secretary (Stein, 2000, p 132). Affirmative Action Hiring Program Initially, CEO Herb Kelleher and other top managers made the strategic decision to insure that Southwest Airlines was perceived as friendly to minority populations. Since Southwest is headquartered in Texas, which has a particularly large HispanicAmerican population, Kelleher was primarily concerned with Southwest's image with Hispanics. In the People Management Department, recruiting managers made an effort to enhance work force diversity by actively promoting an affirmative action hiring program that targeted talented Hispanic individuals. Supervisors monitored the number of Hispanic recruits that each recruiter interviewed, and encouraged them to carefully review their qualifications for potential "fit" with jobs at Southwest. Similarly, in the Marketing Department managers directed the development of campaigns aimed at Hispanic travelers. In the Customer Service department, managers sought out bilingual employees and strategically scheduled those who could speak Spanish to insure that non-English speaking customers would always have someone they could communicate with when they arrived to check in for a flight. 40 III. CONCLUSIONS Our research validates the widely held view that Southwest Airlines is the best managed airline company in the United States. We believe that this is largely due to their innovative operations and quality of corporate management. Southwest never did play by the old rules. By introducing numerous key innovations—such as flying only 737s, eliminating seat assignments, introducing nofrills flights and delivering high employee productivity combined with a unique corporate management style — Southwest Airlines has earned the recognition as one of the best airlines in the world. The following Awards and Recognitions that we have compiled tell the whole story: Southwest Airlines' Recognitions  Southwest is one of the most admired companies in America, according to the March 4, 2002 issue of FORTUNE. Southwest ranked second among companies across all industry groups, and first in the airline industry in the magazine's 2002 America's Most Admired Companies list. Southwest Airlines has been named a charter member of the International Airline Passengers Association's Honor Roll of Airlines among the World's Safest Airlines. Southwest also has been recognized as one of the world's safest airlines by Conde Nast Traveler.   On May 20, 2002 The Wall Street Journal reported Southwest Airlines ranked first among airlines for the highest customer service satisfaction according to a survey by the American Customer Satisfaction Index for the first quarter of 2002. FORTUNE has consistently recognized Southwest Airlines in its annual survey of corporate reputations. Among airlines, Southwest came out on top as the most admired airline in the world for 1997, 1998, 1999, and 2000. Among all industries, FORTUNE has listed Southwest as one of the most admired companies in the world, year after year.  41  Since 1997, FORTUNE has ranked Southwest Airlines in the top five of the Best Companies to Work For in America. Southwest ranked first in 1997 and 1998, second in 1999, and fourth in 2000. Southwest chose not to participate in 2001. Southwest Airlines' Rapid Rewards program won top honors as Program of the Year in Inside Flyer magazine's 2002 annual Freddie Awards. The awards for best Customer Service, best bonus promotion, and best award redemptions were also given to Southwest's program. Southwest Airlines has been named in the Forbes Platinum 400: America's Best Big Companies. Forbes named Southwest in its January 2002 issue. Forbes also listed Southwest in its 2002 Forbes 500 annual directory, which ranks the top 500 American Companies according to financial performance. The Economist Intelligence Unit honored Southwest Airlines at its "2002 Global Corporate Achievement Awards." The airline was recognized for its excellent financial strategy and its ability to adapt to change successfully in the face of strategic and operational challenges. The ranking is based on revenue growth, net earnings, market capitalization, earnings per share, and return on shareholders' equity. In April 2002, the National Airline Quality Rating (AQR) ranked Southwest Airlines number four among the top eleven airlines for performance in 2001. The AQR system uses weighted averages and monthly performance data in the areas of on time performance, baggage handling, involuntary denied boardings, and a combination of 11 Customer complaint categories, all according to DOT statistics. The rating is conducted jointly by researchers at the University of Nebraska at Omaha Aviation Institute and the W. Frank Barton School of Business at Wichita State University. Business Ethics lists Southwest Airlines in its "100 Best Corporate Citizens", a list that ranks public companies based on their corporate service to various stakeholder groups. The "100 Best Corporate Citizens" list is found in the March/April 2002 issue of Business Ethics. The November 2002 issue of Global Finance magazine named Southwest Airlines the "Best Company" in North America for its airline sector. The ranking is based on both objective and subjective criteria including: revenue and profitability growth; market capitalization growth, social responsibility, percentage of revenues, technology or product breakthroughs; crisis control, and aggressiveness in market building. On January 16, 2002, the Wall Street Journal reported that Southwest Airlines made the RQ Gold 2001 list. The RQ Gold is a consumer study conducted by Harris Interactive which lists the most visible companies in America with the best reputation. Southwest was ranked number 24 out of 60.        42  Southwest Airlines was listed by HISPANIC magazine in the 2000, 2001, and 2002 Hispanic Corporate 100 for leadership in providing opportunities for Hispanics and for supporting recruitment, scholarships, and minority vendor programs. Southwest Airlines was recognized for its top-notch service and low fares by Business Travel Magazine. The magazine's 2002 "Annual Best in Business Travel Reader Survey" named Southwest as "Best Low Cost Carrier." The survey is conducted by independent research firm, Mediamark Research Inc., and is voted on by the magazine's business travel readers. Southwest Airlines was named the Best Low Cost Airline in the 2001 and 2002 Official Airline Guide (OAG) Airline of the Year awards. OAG is an independent provider of travel information, products and services. Southwest.com. Southwest was the first airline to establish a home page on the Internet. Southwest reported that approximately 50 percent, or over $650 million, of its passenger revenue for third quarter 2002 was generated by online bookings via southwest.com. Southwest's cost per booking via the Internet is about $1, and the cost per booking via a travel agent is between $6 and $8. The cost per booking to Southwest via the airline's reservations agents lies somewhere in between. Initially, five Employees comprised Southwest's web site development team, and the site took about nine months to create. Now there are more than 60 fulltime Employees on the airline's interactive marketing team, with about half of them working on the software development team. More than 3.6 million people subscribe to Southwest's weekly Click 'N Save emails. CIO Magazine named Southwest Airlines in the CIO Web Business 50 Awards in the December 1, 2001 issue. Judges found southwest.com exemplary of the highest level of business value, design effectiveness, and innovative technology use achievable on the Web today. On May 30, 2002, the Jupiter Media Metrix named Southwest the airline that best utilizes the Internet and provides brand synergy between its main line and online presence. The results were part of a new index, the Jupiter Airline CORE (Composite Rating of Online Effectiveness) Index.       43 Section II Management in Practice: Experiential Exercise Name: Leo Abenes Disagree Strongly 1. Group meetings were held regularly and everyone attended. We talked about and shared the same goals for group work and grade. We spent most of our meeting time talking business, but discussions were open-ended and active. We talked through any conflicts and disagreements until they were resolved. Group members listened carefully to one another. We really trusted each other, speaking personally about what we really felt. Leadership roles were rotated and shared, with people taking initiative at appropriate time for the good of the group. Each member found a way to contribute to the final work product. I was satisfied being a member of the group. We freely gave each other credit for jobs well done. Group members gave and received feedback to help the group do even better. We held each other accountable; each member was accountable to the group. Group members really liked and respected each other. Agree Strongly 5 2. 5 3. 5 4. 5 5. 5 6. 5 7. 5 8. 5 9. 5 10. 5 11. 5 12. 5 13. 5 Total Score 65 44 Name: Mark Rivera Disagree Strongly 1. Group meetings were held regularly and everyone attended. We talked about and shared the same goals for group work and grade. We spent most of our meeting time talking business, but discussions were open-ended and active. We talked through any conflicts and disagreements until they were resolved. Group members listened carefully to one another. We really trusted each other, speaking personally about what we really felt. Leadership roles were rotated and shared, with people taking initiative at appropriate time for the good of the group. Each member found a way to contribute to the final work product. I was satisfied being a member of the group. We freely gave each other credit for jobs well done. Group members gave and received feedback to help the group do even better. We held each other accountable; each member was accountable to the group. Group members really liked and respected each other. 4 Agree Strongly 5 2. 5 3. 4. 5 5. 5 6. 5 7. 5 8. 5 9. 5 10. 5 11. 5 12. 5 13. 5 Total Score 64 45 Name: Erin Cornwell Disagree Strongly 1. Group meetings were held regularly and everyone attended. We talked about and shared the same goals for group work and grade. We spent most of our meeting time talking business, but discussions were open-ended and active. We talked through any conflicts and disagreements until they were resolved. Group members listened carefully to one another. We really trusted each other, speaking personally about what we really felt. Leadership roles were rotated and shared, with people taking initiative at appropriate time for the good of the group. Each member found a way to contribute to the final work product. I was satisfied being a member of the group. We freely gave each other credit for jobs well done. Group members gave and received feedback to help the group do even better. We held each other accountable; each member was accountable to the group. Group members really liked and respected each other. 4 Agree Strongly 5 2. 5 3. 4. 5 5. 5 6. 5 7. 5 8. 5 9. 5 10. 5 11. 5 12. 5 13. 5 Total Score 64 46 Name: Group Average Disagree Strongly 1. Group meetings were held regularly and everyone attended. We talked about and shared the same goals for group work and grade. We spent most of our meeting time talking business, but discussions were open-ended and active. We talked through any conflicts and disagreements until they were resolved. Group members listened carefully to one another. We really trusted each other, speaking personally about what we really felt. Leadership roles were rotated and shared, with people taking initiative at appropriate time for the good of the group. Each member found a way to contribute to the final work product. I was satisfied being a member of the group. We freely gave each other credit for jobs well done. Group members gave and received feedback to help the group do even better. We held each other accountable; each member was accountable to the group. Group members really liked and respected each other. 4.33 Agree Strongly 5 2. 5 3. 4. 5 5. 5 6. 5 7. 5 8. 5 9. 5 10. 5 11. 5 12. 5 13. 5 Total Score 64.33 47 Team Summary GBA 535—Organizational Management, Principles and Behavior Winter Quarter 2003 Team Number: Team Leader: Team Members: 1 Mark Rivera 1. Leo Abenes 2. Erin Cornwell Goal: Our goal was to study the business model employed by Southwest Airlines that allowed it to become the most successful airline in the United States. Specifically, our group examined the contributions of Innovativeness and Quality of Management in Southwest‟s strategy to become THE best airline in the world. We sought to understand the ways Southwest builds its competitive advantage through innovative practices and their commitment to quality management and its control systems to execute the Airline‟s business strategy. Our research analyzed and reported the successes of Southwest airlines in a business climate where all other competitors were failing. Working Strategy We used a structured plan with the controls of the CPM schedule to delineate responsibilities and milestones. Our group conducted independent research and met on a weekly basis. During each meeting, we consolidated and discussed our results. We collaborated in writing the entire project using Microsoft Office tools. 48 Results and Discussion Our research yielded enough material to write an entire book on Southwest Airlines. Initially, we thought since there were three of us in the group, we would study three attributes. In the process of writing the paper we found that we could consolidate the three attributes into two. We wanted to limit our paper to the required 15 to 20 pages, we thought we succeeded until we found out that that was double-spaced. Since we were just about finished when we realized this, we decided to risk a deduction (minor, we hope) and submit a complete paper. 49 IV. APPENDIX Table 1. Southwest by the Numbers (from 2001 Southwest Airlines Annual Report) Revenue, 2001 Net Income, 2001 Passengers carried, 2001 Average length of passenger haul Trips flown, 2001 Average passenger fare Number of Employees at period-end Size of fleet at period-end $5.38 billion $511.1 million 64,446,773 715 miles 940,426 $82.84 33,149 366 50 Table 2. Five-Year Average Comparative Financial Data on Southwest Airlines and its major competitors: United, American, Delta, and Continental* Return on Equity % Sales Growth % 2000 Data Sales Cost of Goods sold as % of sales 16.3 27.9 12.9 19.5 38.1 14.5 5.4 3.0 6.5 11.2 5.6 19.3 18.1 6.7 9.9 76 91 87 83 89 Gross Margin as % of sales Operating Income as % of sales Net Income as % of sales Return on Equity % 23.7 9.0 12.8 17.5 11.0 23.7 9.0 12.8 17.5 11.0 10.7 0.3 4.3 4.9 3.5 18 12 12 17 30 *Note: we chose the period of 1995 to 2000 because the airline industry since 9/11/2001 has been operating under a most difficult environment and would not be representative of normal operating conditions for the airlines 51 Table 3 How does Southwest soar above its money-losing rivals? Source: Time, 10/28/2002, Vol. 160 Issue 18, p. 45 1. Southwest spends less money to go the same distance... Cost per Seat Mile Southwest America West Delta Northwest Continental Alaska American United US Airways 7.5 8.0 10.0 10.2 10.4 10.5 11.2 11.4 14.2 2. It spends more time on the air. . . Aircraft Hours per Day Southwest 10.9 Alaska 10.0 Continental 9.6 US Airways 9.5 United 9.1 American 9.0 America West 8.9 Delta 8.9 Northwest 8.5 52 3. It has the highest internet customer satisfaction rating Source: Jupiter Media Metrix, 2003 p. 1 ). The Jupiter Airline CORE (Composite Rating of Online Effectiveness) Rank 1 2 3 4 5 6 7 8 9 10 Carrier Southwest sites AA.com JetBlue sites Delta.com United sites USAirwsays.com AirTran.com NWA.com Alaska Air sites Continental Overall Index 100 78 76 73 70 57 48 48 46 28 53 V. Reference List Birger, J. (2002, Fall). Top 30 stocks. Money, 88. Cannon, J. (2002). Southwest Airlines: Service for smiles and profits. Retrieved 18 January 2003 from http://www.crmguru.com/features/.htm. Chakravarty, S. N. (1991, September 16). Hit „em hardest with the mostest. 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