Case study of southwest airlines with solution

Confirming Pages CASE 25 Southwest Airlines in 2016: Culture, Values, and Operating Practices Arthur A. Thompson John E. Gamble The University of Alabama Texas A&M University–Corpus Christi I n 2016, Southwest Airlines was the world’s ­second-largest airline in terms of total passengers boarded (144.6 million in 2015), trailing only Delta Air Lines, which boarded just over 180 million passengers in 2015 (counting those on flights operated by Delta’s regional and international joint venture partners). However, based on the most recent data available from the U.S. Department of Transportation, the number of originating domestic passengers boarding Southwest flights exceeded those of Delta and its other two biggest rivals—American Airlines and United Airlines (see Exhibit 1). Southwest also had the enviable distinction of being the only major air carrier in the world that had been profitable for 43 consecutive years (1973–2015). In 2015, Southwest was named to Fortune’s list of the World’s Most Admired Companies for the 22nd consecutive year, coming in at number seven. From humble beginnings in 1971 as a scrappy underdog with quirky practices that once flew mainly to “secondary” airports (rather than hightraffic airports like Chicago O’Hare, Los Angeles International, Dallas–Fort Worth International, and Hartsfield–Jackson International Airport in Atlanta), Southwest had climbed up through the industry ranks to become a major competitive force in the domestic segment of the U.S. airline industry. It had weathered industry downturns, dramatic increases in the price of jet fuel, cataclysmic falloffs in airline traffic due to terrorist attacks and economy-wide recessions, and fare wars and other attempts by rivals to undercut its business, all the while adding more and more flights to more and more airports. The number of passengers flying Southwest had increased from 72.6 million in 2000 to 144.6 million in 2015. At tho32789_case25_C311-C345.indd 311 year-end 2015, Southwest had a fleet of 704 Boeing 737 aircraft serving 97 destinations in 40 states, the District of Columbia, Puerto Rico, Mexico, Costa Rica, Belize, Jamaica, the Bahamas, Aruba, and the Dominican Republic. Southwest planned to begin flights to Cuba in 2016, if approved by the U.S. Department of Transportation. In 2015, Southwest earned record after-tax profits of $2.2 billion on revenues of $19.8 billion, easily surpassing the 2014 record after-tax profits of $1.2 billion on revenues of $18.6 billion. In May 2016, Southwest’s board of directors authorized a $2.0 billion share repurchase program (on top of a recently completed $1.5 billion share repurchase program announced in May 2015) and increased the quarterly dividend to $0.10 per share starting June 2016, up from $0.075 per share (starting in June 2015) and $0.06 per share in 2014. The June 2016 dividend payment marked the 159th consecutive quarter Southwest had paid a dividend to shareholders. COMPANY BACKGROUND In late 1966, Rollin King, a San Antonio entrepreneur who owned a small commuter air service, marched into Herb Kelleher’s law office with a plan to start a low-cost/low-fare airline that would shuttle passengers between San Antonio, Dallas, and Houston.1 Over the years, King had heard many Texas business executives complain about the length of time that it took to drive between the three cities and the Copyright © 2016 by Arthur A. Thompson and John E. Gamble. All rights reserved. 11/29/16 06:43 PM Confirming Pages C-312 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 1 Total Number of Domestic and International Passengers Traveling on Selected U.S. Airlines, 2000, 2005, 2010, 2013–2015 (in thousands) Total Number of Enplaned Passengers (including both passengers paying for tickets and passengers traveling on frequent flyer awards) Carrier 2010 2013 2014 2015 77,297 20,710 98,007 65,774 20,424 86,198 65,070 19,962 85,032 66,384 24,444 87,828 93,280 25,010 118,290 97,965 7,596 105,561 77,581 8,359 85,940 90,141 19,390 109,531 98,590 18,925 117,515 106,220 21,798 128,018 114,904 22,828 137,732 Southwest Airlines (see Note 3) Domestic International   Total 72,568 — 72,568 88,436 — 88,436 106,270 — 106,270 115,323 — 115,323 126,695 500 127,195 142,408 2,167 144,575 United Airlines (see Note 4) Domestic International   Total 72,450 10,625 83,075 55,173 10,356 65,529 43,323 9,727 53,050 65,221 22,209 87,430 64,668 25,203 89,871 69,179 25,713 94,892 American Airlines (see Note 1) Domestic International   Total Delta Air Lines (see Note 2) Domestic International   Total 2000 2005 68,319 17,951 86,270 Note 1: American Airlines and US Airways merged in December 2013, but continued to operate under their separate names through 2014. Previously, US Airways had merged with America West in September 2005. Note 2: Delta Air Lines and Northwest Airlines merged in October 2008; however, combined reporting did not begin until 2010. Note 3: Southwest Airlines acquired AirTran in late 2010; starting in 2013 and continuing into 2014, AirTran flights were rebranded as Southwest Airlines flights. Southwest’s first international flights began when some of AirTran’s international flights were rebranded as Southwest flights in 2013. Note 4: United Airlines acquired Continental Airlines in 2010, and the two companies began joint reporting of passenger traffic in 2012. Prior to 2012, traffic count data are only for United flights. Source: U.S. Department of Transportation, Bureau of Transportation Statistics, Air Carrier Statistics, Form T-100. expense of flying the airlines currently serving these cities. His business concept for the airline was simple: Attract passengers by flying convenient schedules,