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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 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. 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 2000 2005 2010 2013 2014 2015 68,319 17,951 86,270 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 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,
get passengers to their destination on time, make sure
they have a good experience, and charge fares competitive with travel by automobile. Kelleher, skeptical
that King’s business idea was viable, dug into the possibilities during the next few weeks and concluded a
new airline was feasible; he agreed to handle the necessary legal work and also to invest $10,000 of his
own funds in the venture. In 1967, Kelleher filed papers to incorporate the
new airline and submitted an application to the Texas
Aeronautics Commission for the new company to
begin serving Dallas, Houston, and San Antonio.2
But rival airlines in Texas pulled every string they
could to block the new airline from commencing
operations, precipitating a contentious four-year
parade of legal and regulatory proceedings. Kelleher led the fight on the company’s behalf, eventually
prevailing in June 1971 after winning two appeals to
the Texas Supreme Court and a favorable ruling from Case 25 Southwest Airlines in 2016: Culture, Values, and Operating Practices U.S. Supreme Court. Kelleher recalled, “The constant proceedings had gradually come to enrage me.
There was no merit to our competitors’ legal assertions. They were simply trying to use their superior
economic power to squeeze us dry so we would collapse before we ever got into business. I was bound
and determined to show that Southwest Airlines was
going to survive and was going into operation.”3
In January 1971, Lamar Muse was brought in
as the CEO to get operations underway. Muse was
an aggressive and self-confident airline veteran who
knew the business well and who had the entrepreneurial skills to tackle the challenges of building the
airline from scratch and then competing head-on
with the major carriers. Through private investors
and an initial public offering of stock in June 1971,
Muse raised $7 million in new capital to purchase
planes and equipment and provide cash for startup.
Boeing agreed to supply three new 737s from its
inventory, discounting its price from $5 million to $4
million and financing 90 percent of the $12 million
deal. Muse was able to recruit a talented senior staff
that included a number of veteran executives from
other carriers. He particularly sought out people
who were innovative, wouldn’t shirk from doing
things differently or unconventionally, and were
motivated by the challenge of building an airline
from scratch. Muse wanted his executive team to be
willing to think like mavericks and not be lulled into
instituting practices at Southwest that imitated what
was done at other airlines. Southwest’s Struggle to
Gain a Market Foothold
In June 1971, Southwest initiated its first flights with
a schedule that soon included 6 roundtrips between
Dallas and San Antonio and 12 roundtrips between
Houston and Dallas. But the introductory $20 oneway fares to fly the Golden Triangle, well below the
$27 and $28 fares charged by rivals, attracted disappointingly small numbers of passengers. To try to
gain market visibility and drum up more passengers,
Southwest undertook some creative actions to supplement its ad campaigns publicizing its low fares: ∙ Southwest decided to have its flight attendants dress in colorful hot pants and white kneehigh boots with high heels. Recruiting ads for
Southwest’s first group of attendants headlined C-313 “Attention, Raquel Welch: You can have a job
if you measure up.” Two thousand applicants
responded and those selected for interviews were
asked to come dressed in hot pants to show off
their legs—the company wanted to hire longlegged beauties with sparkling personalities. Over
30 of Southwest’s first graduating class of 40
flight attendants consisted of young ladies who
were cheerleaders and majorettes in high school
and thus had experience performing skimpily
dressed in front of people. ∙ A second attention-getting action was to give passengers free alcoholic beverages during daytime
flights. Most passengers on these flights were
business travelers. Management’s thinking was
that many passengers did not drink during the
daytime and that with most flights being less than
an hour’s duration it would be cheaper to simply
give the drinks away rather than collect the money ∙ Taking a cue from being based at Dallas Love
Field, Southwest began using the tagline “Now
There’s Somebody Else Up There Who Loves
You.” The routes between Houston, Dallas, and
San Antonio became known as the Love Triangle.
Southwest’s planes were referred to as Love Birds,
drinks became Love Potions, peanuts were called
Love Bites, drink coupons were Love Stamps, and
tickets were printed on Love Machines. The “love”
campaign set the tone for Southwest’s approach to
its customers and company efforts to make flying
Southwest Airlines an enjoyable, fun, and differentiating experience. (Later, when the company went
public, it chose LUV as its stock-trading symbol.) ∙ In order to add more flights without buying more
planes, the head of Southwest’s ground operations came up with a plan for ground crews to offload passengers and baggage, refuel the plane,
clean the cabin and restock the galley, on-load
passengers and baggage, do the necessary preflight checks and paperwork, and push away from
the gate in 10 minutes. The 10-minute turnaround
became one of Southwest’s signatures during
the 1970s and 1980s. (In later years, as passenger volume grew and many flights were filled to
capacity, the turnaround time gradually expanded
to 25 minutes—because it took more time to
unload and load 125 passengers, as compared to
a half-full plane with just 60 to 65 passengers.
Even so, the 25-minute average turnaround times C-314 PART 2 Cases in Crafting and Executing Strategy at Southwest during the 2000–2009 period were
shorter than the 30–50 minute turnarounds typical at other major airlines.) ∙ In late November 1971, Lamar Muse came up
with the idea of offering a $10 fare to passengers
on the Friday night Houston–Dallas flight. With
no advertising, the 112-seat flight sold out. This
led Muse to realize that Southwest was serving
two quite distinct types of travelers in the Golden
Triangle market: (1) business travelers who were
more time sensitive than price sensitive and
wanted weekday flights at times suitable for conducting business, and (2) price-sensitive leisure
travelers who wanted lower fares and had more
flexibility about when to fly.4 He came up with
a two-tier on-peak and off-peak pricing structure
in which all seats on weekday flights departing
before 7 PM were priced at $26 and all seats on
other flights were priced at $13. Passenger traffic increased significantly—and systemwide onpeak and off-peak pricing soon became standard
across the whole airline industry. ∙ In 1972, the company decided to move its flights
in Houston from the newly opened Houston Intercontinental Airport (where it was losing money
and where it took 45 minutes to get to downtown)
to the abandoned Houston Hobby Airport located
much closer to downtown Houston. Despite being
the only carrier to fly into Houston Hobby, the
results were spectacular—business travelers who
flew to Houston frequently from Dallas and San
Antonio found the Houston Hobby location far
more convenient and passenger traffic doubled
almost immediately. ∙ In early 1973, in an attempt to fill empty seats on
its San Antonio–Dallas flights, Southwest cut its
regular $26 fare to $13 for all seats, all days, and
all times. When Braniff International, at that time
one of Southwest’s major rivals, announced $13
fares of its own, Southwest retaliated with a twopage ad run in the Dallas newspapers headlining
“Nobody is going to shoot Southwest Airlines out
of the sky for a lousy $13,” and containing copy
saying Braniff was trying to run Southwest out
of business. The ad announced that Southwest
would not only match Braniff’s $13 fare but that it
would also give passengers the choice of buying a
regular-priced ticket for $26 and receiving a complimentary fifth of Chivas Regal scotch, Crown Royal Canadian whiskey, or Smirnoff vodka (or,
for nondrinkers, a leather ice bucket). Over 75 percent of Southwest’s Dallas–Houston passengers
opted for the $26 fare, although the percentage
dropped as the two-month promotion wore on and
corporate controllers began insisting that company employees use the $13 fare. The local and
national media picked up the story of Southwest’s
offer, proclaiming the battle as a David versus
Goliath struggle in which the upstart Southwest
did not stand much of a chance against the much
larger and well-established Braniff; grassroots
sentiment in Texas swung to Southwest’s side.
All these moves paid off. The resulting gains
in passenger traffic allowed Southwest to report its
first-ever annual profit in 1973. More Legal and Regulatory Hurdles
During the rest of the 1970s, Southwest found itself
embroiled in another round of legal and regulatory battles. One battle involved Southwest’s refusal
to move its flights from Dallas Love Field, located
10 minutes from downtown, to the newly opened
Dallas–Fort Worth Regional Airport, which was 30
minutes from downtown Dallas. Local officials were
furious because they were counting on fees from
Southwest’s flights in and out of DFW to help service
the debt on the bonds issued to finance the construction of DFW. Southwest’s position was that it was not
required to move because it had not agreed to do so
or been ordered to do so by the Texas Aeronautics
Commission—moreover, the company’s headquarters
were located at Love Field. The courts eventually ruled
Southwest’s operations could remain at Love Field.
A second battle ensued when rival airlines protested Southwest’s application to begin serving several smaller cities in Texas; their protest was based on
arguments that these markets were already well served
and that Southwest’s entry would result in costly overcapacity. Southwest countered that its low fares would
allow more people to fly and grow the market. Again,
Southwest prevailed and its views about low fares
expanding the market proved accurate. In the year
before Southwest initiated service, 123,000 passengers
flew from Harlingen Airport in the Rio Grande Valley
to Houston, Dallas, or San Antonio; in the 11 months
following Southwest’s initial flights, 325,000 passengers flew to the same three cities. Case 25 Southwest Airlines in 2016: Culture, Values, and Operating Practices Believing that Braniff and Texas International
were deliberately engaging in tactics to harass
Southwest’s operations, Southwest convinced the
U.S. government to investigate what it considered
predatory tactics by its chief rivals. In February
1975, Braniff and Texas International were indicted
by a federal grand jury for conspiring to put Southwest out of business—a violation of the Sherman
Antitrust Act. The two airlines pleaded “no contest”
to the charges, signed cease-and-desist agreements,
and were fined a modest $100,000 each.
When Congress passed the Airline Deregulation
Act in 1978, Southwest applied to the Civil Aeronautics Board (now the Federal Aviation Administration) to fly between Houston and New Orleans. The
application was vehemently opposed by local government officials and airlines operating out of DFW
because of the potential for passenger traffic to be
siphoned away from DFW. The opponents solicited
the aid of Fort Worth congressman Jim Wright, then
the majority leader of the U.S. House of Representatives, who took the matter to the floor of the House
of Representatives; a rash of lobbying and maneuvering ensued. What emerged came to be known as the
Wright Amendment of 1979: no airline may provide
nonstop or through-plane service from Dallas Love
Field to any city in any state except for locations in
Texas, Louisiana, Arkansas, Oklahoma, and New
Mexico. Southwest was prohibited from advertising, publishing schedules or fares, or checking baggage for travel from Dallas Love Field to any city
it served outside the five-state “Wright Zone.” The
Wright Amendment continued in effect until 1997
when Alabama, Mississippi, and Kansas were added
to the five-state Wright Zone; in 2005, Missouri was
added to the zone. In 2006, after a heated battle in
Congress, legislation was passed and signed into law
that repealed the Wright Amendment beginning in
October 2014. With the repeal of the Wright Amendment, Southwest Airlines increased flight activity
from Dallas Love Field by 50 percent to add 20 new
nonstop destinations with 180 daily departures to a
total of 50 nonstop destinations. The Emergence of a Combative
Can-Do Culture at Southwest
The legal, regulatory, and competitive battles that
Southwest fought in these early years produced a
strong esprit de corps among Southwest personnel C-315 and a drive to survive and prosper despite the odds.
With newspaper and TV stories reporting Southwest’s difficulties regularly, employees were fully
aware that the airline’s existence was constantly on
the line. Had the company been forced to move from
Love Field, it would most likely have gone under,
an outcome that employees, Southwest’s rivals, and
local government officials understood well. According to Southwest’s former president, Colleen Barrett, the obstacles thrown in Southwest’s path by
competitors and local officials were instrumental in
building Herb Kelleher’s passion for Southwest Airlines and ingraining a combative, can-do spirit into
the corporate culture:5
They would put twelve to fifteen lawyers on a case and
on our side there was Herb. They almost wore him to
the ground. But the more arrogant they were, the more
determined Herb got that this airline was going to go
into the air—and stay there.
The warrior mentality, the very fight to survive, is
truly what created our culture. When Lamar Muse resigned in 1978, Southwest’s board wanted Herb Kelleher to take over as
chair and CEO. But Kelleher enjoyed practicing
law and, while he agreed to become board chair, he
insisted that someone else be CEO. Southwest’s board
appointed Howard Putnam, a group vice president of
marketing services at United Airlines, as Southwest’s
president and CEO in July 1978. Putnam asked
Kelleher to become more involved in Southwest’s
day-to-day operations, and over the next three years
Kelleher got to know many of the company’s personnel and observe them in action. Putnam announced
his resignation in fall 1981 to become president and
COO at Braniff International. This time, Southwest’s
board succeeded in persuading Kelleher to take on
the additional duties of CEO and president. Sustained Growth Transforms
Southwest into the Domestic
Market Share Leader, 1981–2015
When Herb Kelleher took over in 1981, Southwest
was flying 27 planes to 14 destination cities and
had $270 million in revenues and 2,100 employees.
Over the next 20 years, Southwest Airlines prospered under Kelleher’s leadership. When Kelleher
stepped down as CEO in mid-2001, the company
had 350 planes flying to 58 U.S. airports, annual C-316 PART 2 Cases in Crafting and Executing Strategy revenues of $5.6 billion, over 30,000 employees, and
64 million fare-paying passengers annually.
Under the two CEOs who succeeded Kelleher,
Southwest continued its march to becoming the market share leader in domestic air travel, growing to
2015 revenues of $19.8 billion and 49,600 employees, flying 704 planes to 97 airports in 40 states and 7
destinations outside the United States, and transporting some 118 million-plus fare-paying passengers
and some 144 million-plus passengers (including
those traveling on frequent flyer awards) in 2015. In
the process, the company won more industry Triple
Crown awards for best on-time record, best baggage
handling, and fewest customer complaints than any
other U.S. airline. While Southwest fell short of its
on-time performance and baggage handling goals in
some years, it still led the domestic airline industry
in customer satisfaction and received other awards
and recognitions, including Best Domestic Airline
for Customer Service by Executive Travel magazine’s Leading Edge Awards, Brand of the Year in
the Value Airline Category by the Harris Poll, and
the top ranking by InsideFlyer magazine for Best
Customer Service and Best Loyalty Credit Card.
Exhibit 2 provides a five-year summary of Southwest’s financial and operating performance. Exhibit 3
provides selected financial and operating data for
major U.S. air carriers during 1995–2015. HERB KELLEHER: THE CEO
WHO TRANSFORMED
SOUTHWEST INTO A
MAJOR AIRLINE
Herb Kelleher majored in philosophy at Wesleyan
University in Middletown, Connecticut, graduating with honors. He earned his law degree at New
York University, again graduating with honors and
also serving as a member of the law review. After
graduation, he clerked for a New Jersey Supreme
Court justice for two years and then joined a law firm
in Newark. Upon marrying a woman from Texas
and becoming enamored with Texas, he moved to
San Antonio where he became a successful lawyer
and came to represent Rollin King’s small aviation
company.
When Herb Kelleher took on the role of Southwest’s CEO in 1981, he made a point of visiting with maintenance personnel to check on how well
the planes were running and talking with the flight
attendants. Kelleher did not do much managing from
his office, preferring instead to be out among the
troops as much as he could. His style was to listen
and observe and to offer encouragement. Kelleher
attended most graduation ceremonies of flight attendant classes, and he often appeared to help load bags
on “Black Wednesday,” the busy travel day before
Thanksgiving. He knew the names of thousands of
Southwest employees and was held in the highest
regard by Southwest employees. When he attended a
Southwest employee function, he was swarmed like
a celebrity.
Kelleher had an affinity for bold-print Hawaiian
shirts, owned a tricked-out motorcycle, and made
no secret of his love for smoking and Wild Turkey
whiskey. He loved to make jokes and engage in
pranks and corporate antics, prompting some people
to refer to him as the “clown prince” of the airline
industry. He once appeared at a company gathering
dressed in an Elvis costume and had arm-wrestled a
South Carolina company executive at a public event
in Dallas for rights to use “Just Plane Smart” as an
advertising slogan.6 Kelleher was well known inside
and outside the company for his combativeness,
particularly when it came to beating back competitors. On one occasion, he reportedly told a group of
veteran employees, “If someone says they’re going
to smack us in the face—knock them out, stomp
them out, boot them in the ditch, cover them over,
and move on to the next thing. That’s the Southwest
spirit at work.”7 On another occasion, he said, “I love
battles. I think it’s part of the Irish in me. It’s like
what Patton said, ‘War is hell and I love it so.’ That’s
how I feel. I’ve never gotten tired of fighting.”8
While Southwest was deliberately combative
and flamboyant in some aspects of its operations,
when it came to the financial side of the business
Kelleher insisted on fiscal conservatism, a strong
balance sheet, comparatively low levels of debt, and
zealous attention to bottom-line profitability. While
believing strongly in being prepared for adversity,
Kelleher had an aversion to Southwest personnel
spending time drawing up all...
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