solution
Airlines have faced tough challenges in recent years as rising fuel costs are taking a toll. Discount carriers such as Jet Blue, Air Tran, Spirit, and Southwest, whose strategy is based on low fares, have increased fares, in some cases making them higher than the major airlines’ fares for some routes. As Chief Executive Officer (CEO) of Southwest Airlines, Gary Kelly has no easy job. When he took over as Southwest’s CEO in 2004, he had huge shoes to fill. Founder and former CEO Herb Kelleher revolutionized the airline industry through his vision of bringing cheaper travel to the masses and by developing a culture where employees thrived. With its strong culture of “employees first, customer focus, and cost containment,” Southwest has continued to prosper under Kelly. The airline began flying in 1971, turned a profit in 1973, and has remained profitable ever since, a feat no other airline has matched. Southwest now flies more passengers in the United States than any other airline. The Southwest strategy can be expressed simply: Dominate the markets it chooses, keep costs down, fly only one plane–the Boeing 737–to keep parts and maintenance costs low, treat customers like kings, and treat employees even better. Southwest has always had a strong service orientation and traditionally ranks first in customer service rankings. Employees rank the company as a very positive place to work. The first airline to start a profit-sharing plan for employees, Southwest focuses on building excellent relations with its workforce, which is more than 80 percent unionized. People at competing airlines have taken pay cuts to work at Southwest. Kelly lives the culture daily. A flight to his ranch in Austin from headquarters at Love Field, Dallas, with his wife, Carol, is a good example. Kelly greets many employees by name. He sits in the back of the plane and enjoys mingling with passengers, telling them, “I’m just a guy who works in the office.” The former high school star quarterback was an accountant before he became Southwest’s chief financial officer, a position he held for 15 years. As CEO, Kelly has earned the confidence of his workforce. Keeping with Southwest’s strategy of being the lowest-cost producer in the industry, Kelly shrewdly locked in fuel-hedging contracts which enabled the airline to pay less than competitors for its fuel. The fuel contracts gave Southwest a competitive advantage for several years, but as they expire, Southwest has faced the rise in fuel costs that hit other 3 airlines years ago. Rising fuel costs coincided with rising labor costs since 9/11. Experiencing lower profits, Southwest decided to make major changes and measure their effects through greater emphasize on performance management and more formal reporting throughout the company. Executives worked with CEO Kelly to develop a corporate balanced scorecard of business objectives: financial management, customer experience, operational excellence, and the company’s foundation of its people and culture. Gary Kelly never said Southwest employees—33,000 of them serving 63 U.S. cities— would not have to work hard and make sacrifices. Employees, whose job security and prosperity are tied to the company’s prosperity, have been asked to increase productivity. From 2003 to 2006, the airline reduced the number of employees per aircraft from 86 to 68 and maintained the labor force at 33,000 while growing its business by 30 percent. Gate agents, for example, have been asked to work multiple flights at once. With slower growth expected in the next few years, Southwest is adopting cost-cutting measures. It offered buyouts of $25,000 in cash plus health and dental benefits to 8,700 flight attendants, baggage handlers, and others except for pilots and mechanics. The airline is installing avionics technology and software on all its planes that will cut fuel burn as well as emissions, and noise, and developing customized procedures for pilots to use it. Southwest is slowing expansion, adding 19 planes to its fleet in 2008 instead of 34, and trying to boost revenue by shifting planes to more lucrative routes and attracting more business travelers with changes in the frequent flyer program, a new marketing campaign, and possibly seat assignments. Kelly aims to add more than $1 billion in revenue over the next few years, a significant jump from its 2006 revenue of $9.1 billion. In spite of the slowdown, Kelly is looking at potential acquisitions and alliances with multiple carriers and says Southwest has capital available to make that happen. Heading to Austin with his wife, Gary Kelly looks like just another airline passenger, and it is this everyman quality combined with business acumen and tolerance for risk that may help him navigate Southwest through economic turbulence.
Discussion
Questions
1. What skills does Gary Kelly possess that make him a successful manager? What have been some important factors in Southwest’s organizational performance?
2. What challenges lie ahead for Gary Kelly and Southwest in maintaining and building the company’s competitive advantage?
Discussion
Questions
1. What skills does Gary Kelly possess that make him a successful manager? What have been some important factors in Southwest’s organizational performance?
2. What challenges lie ahead for Gary Kelly and Southwest in maintaining and building the company’s competitive advantage?
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