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CASE 13 Southwest Airlines: How Herb Kelleher Led the Way The the U.S. airline industry experienced problems in the early 1990s. From 1989 through 1993, the largest airlines, including American, United, Delta, and USAir, lost billions of dollars. Only Southwest Alrlines remained profitable throughout that period. Herb Kelleher, who co-founded Southwest In 1971 and was its CEO until 2001, pointed out that "we didn't make much for a while there. It was like being the tallest guy in a tribe of dwaris Nevertheless, Southwest Airlines has grown to the point of having operating revenues of US$7.6 billion. This is particularly noteworthy because Southwest flies to only 62 cities in 32 states, and its average flight length is only 864 kilometres. How did a little airline get to be so big? Its success is due to its core values, developed by Kelleher and carried out daily by the company's 32,000 employees. These core values are humour, altruism, and 7"- the company's stock ticker symbol.2 SOUTHWEST AIRLINES' UNIQUE CHARACTER AND SUCCESS Besides its short-haul focus, some of the things that make Southwest Airlines so unique in the industry are the fact that the airline does not assign seats or sell tickets through the reserva- tion systems used by travel agents. Many passengers buy tickets at the gate. The only foods served are peanuts, pret zels, and similar snacks, but pas- sengers don't seem to mind. In fact, serving Customers (always written with a capital Cat Southwest) is the focus of the company's employees. When Colleen Barrett, currently South- west's president, was the execu- tive vice-president for Customers, she said, "We will never jump on employees for leaning too far toward the cus- tomer, but we come down on them hard for not using com- mon sense." Southwest's core values produce employees who are grily mothrated and who care about the customers and Also about one another One way in which South- Westcames out this philosophy is by treating employees and their ideas with respect. While executive vice-president, Calleen Barrett formed a cul- ture committee" made up of employees from different func cional areas and levels of the company. The committee meets quarterly to come up with ideas for maintaining Southwest's cor porate spirit and Image. Also, all managers, officers and directors are expected to get out in the field." to meet and get to know the other employees and the jobs they do. Employees are en couraged to use their creativity and sense of humour to make their jobs and the customers' ex- periences more enjoyable. Gate agents, for example, are given a book of games to play with wait- ing passengers when a flight is delayed. Flight agents might do an imitation of Elvis or Mr. Rogers while making announce ments. Others have jumped out of the overhead luggage bins to surprise boarding passengers > Kelleher, currently chair man of the executive commit In which she tumed an unflat- tering picture of her boss into Screensaver for her departments To encourge employees to treat one another as well as they treat their customers, de- partments examine linkages within Southwest to see what their internal customers need. The provisioning depart- ment, for example, whose re- sponsibility is to provide the snacks and drinks for each flight, selects a flight attendant as customer of the month." The provisioning department's own "board of directors makes the selection decision. Other departments have sent pizza and ice cream to their chosen internal customers. Employees write letters commending the work of other employees or de- partments, and these letters are valued as much as those from external customers. When problems do occur between de partments, the employees themselves work out solutions in supervised meetings Employees exhibit the same attitude of altruism and "lux, Southwest's term for its relation ship with its customers, toward external groups as well. A signif- icant number of Southwest em ployees volunteer their time at Ronald McDonald Houses throughout Southwest's service territory When the company purchased a small regional air- line, employees personally sent cards and company T-shirts to their new colleagues to welcome them to the Southwest family, They demonstrate similar caring toward the company itself. As gasoline prices rose during the period of the Gulf War in the early 1990s many of the em ployees created the "Fuel from the Heart program, donating foel to the company by deduct ing the cost of one or more u lons from their peycheques Acting in the company best interests is also directly in the interest of the employees Southwest has a profit-sharing plan for all epible employees and, unlike many of its competi- tors, Southwest consistently has profits to share. Employees can also purchase Southwest stock at 90 percent of market valuat least 13 percent of Southwest's employees have taken advantage of this Approximately 81 percent of employees are unionized and the company has a history of good labour relations? Southwest Airlines is a low- cost operator. According to Har- vard University professor John Kotter, setting the standard for low costs in the airline industry does not mean Southwest is cheap. "Cheap is trying to get your prices down by nibbling costs off everything ... firms like Southwest Airlines are thinking efficient, which is very different... They recognize that you don't necessarily have to take a few pennies off of every thing. Sometimes you might even spend more. By buying one type of planethe Boeing 737-Southwest Saves on both pilot training and maintenance costs: the cheap paradigm would favour used planes. As a result of its cost saving ap proach, Southwest has the youngest fleet of airplanes in the industry Southwest currently oper- ates a fleet of 453 Boeing 737 jets. By using each plane an av- erage of 12 hours per day. Southwest is able to make more trips with fewer planes than any other airline. Since May ter, knows that not everyone would be happy as a Southwest employee: "What we are looking for first and foremost is a sense of humour. Then we are looking for people who have to excel to satisfy themselves and who work well in a collegial environ ment. He feels that the com- pany can teach specific skills but that a compatible attitude is most important. When asked to prove that she had a sense of humour, Mary Ann Adams. hired in 1997 as a finance execu- tive, recounted a practical joke 1988, Southwest Airlines has won the monthly Triple Crown" distinction of airline service Best On-Time Record, Best Baggage Handling and Fewest Customer Complaints more than 30 times. From 1992 through 1996, Southwest won the annual Triple Crown each American history through ful of attention to efficiency and value in its expendit. the same time, the company has managed to maintaimu levels of employee satisfaction by focusing on its Internal tomers above all else when turn, are positively motivated to show that same degree of concern for external conten But as fuel prices continue to climb and airlines consolidate for security, can Southwest hang on as that rare breedman independent, domestic airline All signs indicate clear skies ahead. management and leadership style, could be maintained. Re- cent events, however, seem to demonstrate that Kelleher's successors, longtime Southwest employees Gary Kelly (currently vice-chairman of the board and CEO) and Colleen Barrett (cur rently the company president), were well prepared to handle the challenges of malntaining Southwest culture and level of success. As Barrett wrote in the company's Spirit magazine, "Air travel changed forever two years ago, but our steadfast de. termination remains unbroken to provide the high-spirited Customer Service, low fares, and frequent non-stop flights year, 10 SOUTHWESTS ONGOING CHALLENGES Despite its impressive record of success, Southwest lines has pressing concerns to address. Management worries about the effects on employee morale of the limited opportunities for promotion. The company has created "job families with each having various grade levels so that employees can work their way up within their job category However, within five or six years employees will begin to achieve the maximum compensation level for their job category Another issue is that of maintaining the culture of caring and fun while at the same ex panding rapidly into new mar- kets. Southwest's success has been built with the enthusiasm and hard work of its employees as Kelleher said, "The people who work here don't think of Southwest as a business. They think of it as a crusade. "Il Culti- vating that crusading atmos. phere is a continuing priority for the company As Herb Kelleher prepared to relinquish his role as South- west's CEO, a major concern for Investors was whether the com- pany's success, so much of it at tributable to Kelleher's unique that Americans want and need."12 Not even terrorist at- tacks can derail the company that Herb Kelleher led to suc cess. Southwest Airlines contin- ues to be recognized by Fortune magazine as America's most ad mired airline as well as one of the most admired companies in the United States. In 2003. Air Transport World magazine se lected Southwest as the "Airline for the Year" for its 30 consecu- tive years of profitability, while at the same time providing af- fordable fares for millions of passengers. Other recognitions of Southwest culture and suc- cess continue to pile up REVIEW QUESTIONS 1. What role has leadership played in the success of Southwest Airlines? 2. What is the key to South- west's continued success under leaders other than Herb Kelleher? 3. In what ways has Herb Kelleher exemplified Peter Drucker's notion of old- fashioned" leadership? SOMETIMES THE VOYAGE IS BETTER THAN THE DESTINATION From its roots as a regional car- rier in Texas, Southwest Airlines grew to become one of the most profitable and arguably the most beloved-airlines in YOU DO THE RESEARCH 1. Which of the leadership theories in Chapter 13 seem to provide the most useful explanation of Herb Kelle- her's success in leading Southwest Airlines 2. How does Southwest Air- lines develop its leadership pool" so that there is no shortage of future leaders in the organization