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4. Assess the US Airline industry in early 1990s
Airlines' profitability is closely tied to economic growth and trade. During the first half of
the 1990s, the industry suffered not only from world recession but travel was further
depressed by the Gulf War. In 1991 the number of international passengers dropped for
the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft
in the boom years of the late 1980s, leading to significant excess capacity in the market.
IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990
to 1994.
Since then, airlines have had to recognize the need for radical change to ensure their
survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity
growth and to increase load factors. At a time of renewed economic growth, such actions
have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in
1996, less than 2% of total revenues. This is below the level IATA believes is necessary
for airlines to reduce their debt, build reserves and sustain investment levels. In
addition, many airlines remain unprofitable.
To meet the requirements of their increasingly discerning customers, some airlines are
having to invest heavily in the quality of service that they offer, both on the ground and
in the air. Ticketless travel, new interactive entertainment systems, and more
comfortable seating are just some of the product enhancements being introduced to
attract and retain customers.
The United States is the largest single market in the world, accounting for 33 per cent of
scheduled RPMs (41 per cent of total scheduled passengers) in 1996. The most
significant change in the history of the industry came in 1976 when the Civil Aeronautics
Board (CAB) asked Congress to dismantle the economic regulatory system and allow the
airlines to operate under market forces. This changed the face of commercial aviation in
the United States. Congress passed the Airline Deregulation Act in 1978, easing the
entry of new companies into the business and giving them freedom to set their own
fares and fly whatever domestic routes they chose.
Deregulation of the industry was followed quickly by new entrants, lower fares and the
opening of new routes and services to scores of cities. The growth in air traffic brought
on by deregulation's first two years ended in 1981 when the country's professional air
traffic controllers went on strike. Traffic surged again after 1981, adding 20 million new
passengers a year in the post strike period, reaching a record 466 million passengers in
1990.
In 1989 events began which severely damaged the economic foundations of the industry.
The Gulf crisis and economic recession caused the airlines to lose billions of dollars. The
industry experienced the first drop in passenger numbers in a decade, and by the end of
the three-year period 1989-1992 had lost about US$10 billion - more than had been
made since its inception. Great airline names like Pan American and Eastern

disappeared, while others, such as TWA and Continental Airlines, sought shelter from
bankruptcy by going into Chapter 11.
Today the domestic industry in the US is a low cost, low fare environment. Most of the
major airlines have undergone cost restructuring, with United Airlines obtaining
employee concessions in exchange for equity ownership. Some airlines sought the
protection of Chapter 11 bankruptcy to restructure and reduce costs and then emerged
as strong low-cost competitors. The majority have entered into cross-border alliances to
improve profitability through synergy benefits.
In 1993 President Clinton appointed the National Commission to ensure a strong
competitive industry. Its recommendations seek to establish aviation as an efficient,
technologically superior industry with financial strength and access to global markets.
The early 1990s were different years for the airline industry. In the period 1990-9,
airlines lost as much profits as they had made since the industry was deregulated in
1978.
The main reasons:
1. US Economic recession which resulted in reduction of air-traffic
2. Gulf War in 1990s reduced the load factors
3. Price of jet fuel all time hig
4. Perceived terrorist threat resulted into decline in demand
All this lead to destructive competition and the industry waved red flag to this when it
forced an unprecedented industry collapse.

5. How is southwest positioned within the industry? What is the Competitive

strategy?
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 Positioning
only low-fare
short-haul
high-frequency
point-to-point carrier
fun to fly
At a glance, the company's source of competitive advantage is its low price tickets. Most
of its customers are people who are willing to forego in-flight meals, direct routes and
fancy seats if that would mean for a cheaper ticket. Not to imply that Southwest doesn't

provide direct flights, but that is offered at a higher price. Southwest Airlines was in
better shape than its for a simple reason: their low-cost model.
There were three keystones to Southwest Airlines competitive advantage. The first lied
in its employees and how they were managed. Secondly, the firm sought to identify
major threats and opportunities in their competitors, and assess how Southwest could
improve and capitalize on markets where their competition failed.
And the final
significant success factor was the companys cost structure.
CEO, Herb Kelleher, was a prime example of how Southwest fostered a healthy internal
environment. He interacted with customers and employees, promoted company parties
and understood that the firm was only as strong as its employees.
Employee
satisfaction was crucial.
Therefore, the human resources department (the People
Department) encouraged employees to give feedback and to ask questions. Its people
were so important, that the firm is very selective in the recruiting process.
Since
teamwork
is
critical,
the
wrong
people
could
spoil
the
pot.
Southwest remained aware of their ever-changing strengths, weaknesses, opportunities,
and threats. They seized opportunities to expand when other airlines closed their airline
services to some cities that they deemed unprofitable. They concentrated on flying to
airports that were underutilized and close to metropolitan areas. Eliminating central
hubs created efficiency, in which flights had point-to-point routes without connection
flights, because delays were often associated with connection flights.
Therefore, a
Southwest aircraft spent more hours in the air than its competitors, on average.
Cost efficiency was a two-front strategy for the firm; it not only reduced the firms
spending, but it also allowed them to pass the cost reduction onto the customers
through providing lower fares. Southwest found that a swift turnaround of an aircraft
created cost advantage.

6. How would you describe the structure and culture off Southwest Airline?
Structure:
Centered on team-building
Cross-training encouraged
Broad latitude offered
10% of stock held by employees
Southwest Airlines is an upside-down pyramid. The upper management is at the bottom
and supports the front line employees, who are the experts. This is Herb Kelleher's
unorthodox leadership style, in which management decisions are made by everyone in
the organization, not just the head executives. The company is described to not have
much emphasis on structure; instead employees are encouraged to think freely without
constraints such as titles.
Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S.
airline industry in 1974 and offered it ever since.
Culture:
The culture of this company is what helps make it a wonderful place to work for. The
leaders of this company have tried their best to develop a place where everyone loves to

STRAGYCHEDULIN

come to work and wants to work. Managers who do not follow this theory are stuck with
employees who just come to get as little done and still get paid.

It's a company that not only nurtures nuttiness but also makes its pleasure a
requirement for employment. And it's a company unique culture, which includes a order
that people have fun at work which are part of Southwest, which set itself on low fares
and low frills, serving peanuts instead of meals. Employees also are constantly reminded
that they are No. 1 in the company's eyes. The reminders include cards, notes, gifts,
celebrations - and profit sharing to motivate them that there are our children
In fact they believe: Yes, Southwest its a good home
Attributes:

Casual dress code

Field visits
Strong guidelines to everyone
Celebrations quite common
Recognition an important element

South West Airlines built numbers on its culture where as most competitors let the
culture to shape up by their focus on numbers

7. How do Southwests Human Resource Management practices support,

reinforce, and maintain the culture of the company?
Southwests philosophy - Service for Smiles and Profits
CEO Kelleher, "We want people who do things well, with laughter and grace."

Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S.
airline industry in 1974 and offered it ever since. Southwest encourages employees to
treat customer service as the most important aspect of their job.
It encourages employees to be innovative, to communicate, understand, and care, to be
individuals mavericks even. Southwest is not afraid to use the p words: people,
personal, personalities. Even the place in which employees are hired shares this spirit in

its name. Southwest doesnt have a Human Resource Departmentit has a People and
Leadership Development Department!
Southwest is turning around long-held corporate beliefs by acting on the conviction that
a business is not an entity its people.
Herb Kelleher, chairman and one of Southwest Airlines founders, states emphatically
competitors have tried and failed to copy us because they cannot copy our people.
The airline believes the best way to succeed is to treat employees with respect and give
them the latitude and encouragement they need to do their jobs better than anyone
thought possible.
So how does an airline support individuality, innovation, and fun without creating chaos
and anarchy? In large part, success is due to employee education, much of which takes
place in Southwest Airlines festive learning center: the University for People.
Hiring
Identify attitudes rather than skills
Rigorous interviewing
Peer hiring
Compensation
Varied with position
At par with industry norm
Pension through a profit-sharing plan
Culture
Casual dress code
Field visits
Strong guidelines to everyone
Have Fun Together
Treat employees as family
Hire people who form the fit
Involve employees
8. How do Southwests Structure, processes, culture and Human Resources
Management practices relate to the companys strategy and its competitive
Environment?
While Southwest Airlines offers no frills, Southwest Airlines do meet customer
expectations when it comes to service. They base their model on the motto, which states
that "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," Southwest has very good relations with all their employees.
Employees are either of independent unions or have flexible contracts which allow
employees to work longer hours.
At a glance, the company's source of competitive advantage is its low price tickets. Most
of its customers are people who are willing to forego in-flight meals, direct routes and
fancy seats if that would mean for a cheaper ticket. Not to imply that Southwest doesn't
provide direct flights, but that is offered at a higher price. Southwest Airlines was in
better shape than its competitors for a simple reason: their low-cost model.
The reason for Southwest Airline's success is due to their low-cost model. The Southwest

Airlines consists solely of Boeing 737s and offers only coach seats (there is no business
or first class). Southwest Airlines also do not offer in-flight meals, only peanuts and
other snacks. Southwest is simple and direct at the goal of their service; "a primarily
short-haul airline that flies directly from city to city, with just one type of plane--the
Boeing 737 - and the lowest costs". Services, such as in-flight meals and luxury seats,
which have become standard to competitors, have been seen as unnecessary for an
airline that provides a short-haul trip from city to city at the lowest cost. To have opted
for a first class, business class, or any form of luxury class seat would have been excess
baggage; most people would prefer to do without it if it meant for cheaper ticket price.
One major opportunity for Southwest would be to push the use of their website,
www.southwest.com to employ the ticketless passenger strategy. Ticketless travel cuts
the cost in half in comparison to use of a travel agency, and with the rising price of oil,
Southwest will need to find new ways to keep costs down and in turn prices down.
First, the company is defined as excellent according to the criteria established by
Peters and Waterman. Second, management-employee relations, organizational training
and strong leadership are identified as the sources of employee motivation. Third, loss of
strong leadership and organizational structure are discussed as possible future problems
influencing motivation and service. Southwest Airlines concept of service is the true
source of motivation and excellence.
Apart, Southwest were the first airline with a frequent flyer program to give credit for the
number of trips taken and not the number of miles flown.
Processes and Operations
1. Did all of its ticketing (not making seats available through
computerized
systems)
2. Did not operate in the hub-and spoke route system
3. Flew into uncongested airports of small cities, less congested airports of large
cities
4. Did not transfer baggage directly to other airlines Only drinks and snacks often
peanuts served on board
1. Travel agents had to contact the airlines directly to book seats
2. SWA passengers flew non-stop origin to destination. Did not promote connecting
services
3. Savings in reduced taxi time, fewer gate holds and less in-air waiting time
4. It doesnt coordinate its services with other airlines
84% unionized labor force but its labor relations were excellent
Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day.
Average age of SWA was 7 years(lowest in the industry)
Differentiation in terms of turnaround time , 2 out of 3 planes were turnedaround in 15 mins.
Usually do not share the ground handling crew until unavoidable
Other airlines flew variety of jet aircrafts, as many as 5 distinct ones including
McDonnell Douglas, Airbus and Boeing
737s had average life of 20 years
US industry average was 55 mins.
Cost Control
Airlines dont have revenue problems, they have cost problems

Cost Cutting
Pilots contributing new ideas to save fuels
Fuel costs
Buying fuel from vendors who offer best prices : Carry inventory if possible
Gate costs & landing Fees
Average : $2.50 pp,
Small airports: $2.00 pp, Large airports: $6 - $8 pp
No. of Departures
Maximize productivity of people and machinery .Atleast 20 departures per day
Low cost service
Offering great service at low cost : SWA cost per passenger was 7.3 cents in 1993.