Southwest airlines case study

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.