Final Soutnwest Airline Presentation

Southwest Airlines: Culture, Values, and Operating Practices

Company Background Southwest Airlines, Inc. (NYSE: LUV) major domestic airline that provides :… primarily short haul high-frequency point-to-point low-fare service The third-largest airline in the world by number of passengers carried and the largest in the United States by number of passengers carried domestically.

Founded

1971

Fleet size

472

Destination 63 Headquarter Dallas, Texas s

Company Background

Core Values 2 core values- LUV and FUN. LUV- compassion, caring, loving attitude. FUN- company sponsored parties & celebrations. Culture committee to promote “ positively outrageous service”. Nurturing SW culture: Co hearts mentoring program. South West spirit. “LUV lines” and “as the plane

Company Background

History

Company Background

1967 Company is incorporated as Air Southwest Co. 1971 Airline launches first route, connecting Dallas, Houston, and San Antonio 1973 SWA posts first profit and begins RUSH cargo service 1975 Southwest goes public on the American Stock Exchange 1976 Company is renamed Southwest Airlines Co. 1977 Shares migrate to the New York Stock Exchange 1978 Herb Kelleher becomes Southwest's outspoken new chairman

1981 Kelleher is named company president and CEO 1982 SWA begins flights to West Coast 1990 Revenues exceed $1 billion, making SWA a major airline 1994 Morris Air and Arizona One are acquired

&

Herb Kelleher

Herb Kelleher leadership team

Became Southwest’s CEO in 1981 Listen, observe and offer encouragement People referred to him as “Clown prince” Combative and flamboyant Fiscal conservatism Optimistic and confident Socialistic view Growth mindset

& Herb Kelleher Chairman of Board of Directors & Head of Executive Committee Former General Counsel and Vice President Chief Labor Negotiator Former member of Executive Planning Committee Rich Experience Similar personality to Kelleher

James F. Parker (1986) Chief Executing Officer

Herb Kelleher Leadership team

Former Executive Vice President of Customers, Keeper of Corporate Culture High profile Colleen amongst the Barrett employees (1984) Network of contact across Chief Operating company Officer Fortune-ranked Non financial 20 in the list of motivation most powerful women in American Business

Southwest Airlines Strategy

♥ The beginning Strategy Triangular route (Dallas, Houston, and San Antonio)

Innovati on

Southwest Airlines Strategy

Low Cost Innovations Terminal Innovations Point-to-Point strategy Airport Location Innovations Travel Booking Innovations Single Aircraft Innovation Customer service Innovations Leadership at Southwest Airlines Employee Ownership Culture Southwest Employee’s Unions

Southwest Airlines Strategy

Southwest Airlines Strategy

Porter’s Five Forces Threat of New Entrants : Medium ♥ Inter competitors ♥ Large Capital Requirement – Continental Lite, United Shuttle, Delta Express, US Airways MetroJet

Buyer Power: Medium ♥ Destination Dependent ♥ Price Sensitive ♥ College Students

Internal Rivalry: High - Price is primary differentiator - Exit Barriers are high - Difficult to dispose of planes - Loss making companies take longer to close down Threat of Substitutes: Low ♥ ♥ ♥

Train Bus Webcam

Supplier Power: Medium ♥ ♥ ♥ ♥ ♥

Ticketing System Company Boeing 737 Fuel Company Snacks Company Beverage Company

Advertisement strategy “Just Plane Smart” “The Somebody Else Up There Who Loves You” “THE Low Fare Airline” “Symbol of Freedom” “Wanna get away?” “[ding] You are now free to move about the country”

Southwest Airlines Strategy

Advertiseme nt strategy Some southwest planes feature special themes, rather than the normal livery Shamu One/Two/Three California One Arizona One Lone Star One Triple Crown One Sliver One

Southwest Airlines Strategy

Financial

Financial analysis Year

1998

1999

2000

2001

2002

Operating ratio

0.83

0.83

0.82

0.88

0.92

Working capital

-$276498

-$329461

-$466867

281034

798132

Current ratio

0.674

0.657

0.6404

1.125

1.55

Long-term obligations

$623309

$871717

$760992

$1327158

$1552781

Stockholders’ equity

$2397918

$2835788

$3451320

$4014053

$4421617

Passenger revenue per mile

12.76 cents

12.51 cents

12.95 cents

12.09 cents

11.77 cents

Operating revenue per seat mile

8.76 cents

8.96 cents

9.43 cents

8.51 cents

8.02 cents

Operating expenses per 7.32 cents seat mile

7.48 cents

7.73 cents

7.54 cents

7.41 cents

Operating profit per seat 1.44 cents mile

1.48 cents

1.7 cents

0.97 cents

0.61 cents

How Southwest

Comparison with other Airlines

is best

Compa ny

Revenue Net Passenge Freight Fuel cost Customer per Income r Revenue per Available Available Revenue gallon seat mile seat mile

American Airlines

$0.107

$504M $20.7B

$8.25B

$2.12

$0.114

Continental Airlines

$0.112

$459M $13B

$453M

$2.18

$0.108

Delta Airlines $0.112

$1.61B $16.9B

$482M

$2.24

$0.119

Jet Blue Airways

$0.0826

$18M

$0

$2.09

$0.0838

Southwest Airlines Company

$0.099

$645M $9.46B

$130M

$1.7

$0.091

$2.64B

People Management practices and Cultures

Operative principle- “employees comes first and customers comes second” Thesis- keep employees happy they will keep customers happy Changed personal department to people department

People Management practices and Cultures

Recruiting, Screening andemployees Hiring Hired for attitude and trained them for skills Screening: looked for people oriented applicants focus on other people.

Traits for selection: Team work for all job categories Judgment for pilots and flight attendants Unselfishness for flight attendant

In 2002 company reviewed 243,657 resumes hired 5,043 new employees.

Training

People Management practices and Cultures

Training activities designed and conducted by southwest’s university Curriculum includes courses for new recruits, employees, and leadership training Orientation courses conducted two to five times a week for new recruits Good coaching and good listening on the part of supervisees

Management Style

People Management practices and Cultures

Managers are expected to spend 1/3rd of the time out of the office. No suggestion box. Informal office ambience. Executives approachable. Called by first names. Employee empowerment. Suggestions for reducing costs. Empowerment for innovation. Saved $250,000 by not putting logos on trash bags. Replacing paper tickets with e-tickets. Lean organization structure. Candid meetings.

PROMOTION & COMPENSATION • • • • • • • •

People Management practices and Cultures

Supervisory position filled internally “Leading with integrity” classes for new appointee Six months training for managers of large operation 360 degree feedback 10 % above industry average Benefit packages relatively good Profit sharing plan employee bought shares of the company

EMPLOYEE RELATION & NO-LAYOFF POLICY

People Management practices and Cultures

 Highly unionized U.S. Airlines  Employee – harmonious and non adversarial  No restrictive work rules and no narrow job classification  No layoff policy Employee productivity & awards  High labor productivity  Good on time performance by employee  Number one in consumer satisfaction  Most admired airline in world  Top awards from business week & pc magazine

Aftermath of September 9/11

♥ Immediate Responses ♥ Heightened Security and Regulation ♥ Competitive disadvantage

♥ Industry Bailout and Taxation Financing assistance Two types of tax increase costs

♥ New Competitive Position ♥ Labor Relations

Airline Industry

Aftermath of September 9/11

Southwest Airlines

The number of flights were cut by around 20 percent

No flights were cut

Employees laid off

no employees were laid off Temporary freeze on hiring until Jan 2002

The delivery of new Negotiated a revised aircraft on order deferred delivery schedule for the or cancelled 132 Boeing 737 jets on order Speculation on how much Fare sales in January,

KEY SUCCESS FACTORS • Low Fares • More destinations • Operational Efficiency • Turn Around Time • Hub / Secondary Locations

STRATEGIC COMPETENCIES • Cost & Service culture • Team of talented people • Operating Efficiency

• Aircraft Utilization • Single Model Usage • On time Performance • Service Standards (Basic) • Safety

• Technology for cost reduction • Mgt of human capital • Excellent Union Relations

Southwest Airlines provides reliable service and passenger care at the lowest fares to the short haul, frequent-flying, point-to-point, non-interlining traveler.

Just Plane Smart THE Low Fare Airline A SYMBOL OF FREEDOM

Southwest Airlines