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CASE 25 Southwest Airlines in 2014: Culture, Values, and Operating Practices Arthur A. Thompson John E. Gamble The University of Alabama Texas A&M University-Corpus Christi n 2014, Southwest Airlines was the market share leader in domestic air travel in the United States; it transported more passengers from U.S. airports to U.S. destinations than any other airline, and it offered more regularly scheduled domestic flights than any other airline. Southwest also had the enviable distinction of being the only major air carrier in the United States that was consistently profitable, having reported a profit every year since 1973. From humble beginnings as a scrappy underdog with quirky practices that flew mainly to \"secondary\" airports (rather than high-traffic airports like Chicago O'Hare, Dallas-Fort Worth, and New York's Kennedy airport), 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 economywide 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. Since 2000, the number of passengers flying Southwest had increased from 72.6 million to 115.4 million, whereas domestic passenger traffic had remained flat or declined at American Airlines, Delta Air Lines, United Airlines, and US Airwayssee Exhibit 1. Houston.1 Over the years, King had heard many Texas businessmen complain about the length of time that it took to drive between the three cities and the 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. Herb 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 the 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 I 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 Copyright 2014 by Arthur A. Thompson and John E. Gamble. All rights reserved. CASE 25 EXHIBIT 1 Southwest Airlines in 2014: Culture, Values, and Operating Practices C-341 Total Number of Domestic and International Passengers Traveling on Select U.S. Airlines, 2000, 2005, 2010-2013 (in thousands) Total Number of Enplaned Passengers1 Carrier American Airlines Domestic International Total Delta Air Lines2 Domestic International Total Southwest Airlines (domestic only, has no international flights)3 AirTran (Domestic)3 AirTran (International) Southwest Airlines total United Airlines4 Domestic International Total US Airways5 Domestic International Total 2000 2005 2010 2011 2012 2013 68,319 17,951 86,270 77,297 20,710 98,007 65,774 20,424 86,198 65,253 20,887 86,140 65,027 21,430 86,457 65,070 19,962 85,032 97,965 7,596 105,561 77,581 8,359 85,940 90,141 19,390 109,531 92,864 19,344 112,208 95,641 19,568 115,209 98,590 18,925 117,515 72,568 88,436 106,270 110,624 23,781 112,277 20,453 115,377 16,146 937 135,342 1,301 134,031 1,534 133,057 72,450 10,625 83,075 55,173 10,356 65,529 43,323 9,727 53,050 39,551 10,091 49,642 67,629 23,998 91,627 65,221 22,209 87,430 56,667 3,105 59,772 37,040 4,829 41,869 45,180 6,670 51,850 46,208 6,749 52,957 47,481 6,794 54,275 50,037 6,480 56,517 1 Includes both passengers who paid for tickets and passengers who were traveling on frequent-flyer awards. Delta Air Lines and Northwest Airlines merged in October 2008; however, combined reporting did not begin until 2010. 3 Southwest Airlines acquired AirTran in late 2010; by year-end 2014, all AirTran flights were scheduled to be rebranded as Southwest Airlines flights. 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 for only United flights. 5 US Airways and America West merged in September 2005, but joint reporting of traffic counts did not begin until 2007; hence, data for 2000 and 2005 do not include America West, whereas the data for 2010-2013 do include the traffic counts of the combined companies. US Airways and American Airlines merged in December 2013 but continued to operate under their separate names through 2014. 2 Source: U.S. Department of Transportation, Bureau of Transportation Statistics, \"Air Carrier Statistics,\" Form T-100. In January 1971, Lamar Muse was brought in as the CEO to get operations under way. 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. C-342 PART 2 Cases in Crafting and Executing Strategy Southwest's Struggle to Gain a Market Foothold In June 1971, Southwest initiated its first flights with a schedule that soon included 6 round-trips between Dallas and San Antonio and 12 round-trips 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 hostesses dress in colorful hot pants and white knee-high boots with high heels. Recruiting ads for Southwest's first group of hostesses headlined \"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 legsthe company wanted to hire long-legged 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 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 its 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.) To add more flights without buying more planes, the head of Southwest's ground operations came up with a plan for ground crews to off-load 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 30 minutes because it took more time to unload and load 135 passengers compared to a half-full plane with just 60 to 65 passengers. Even so, the average turnaround times at Southwest during the 2000-2013 period were shorter than the 35- to 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 p.m. were priced at $26 and all seats on other flights were priced at $13. Passenger traffic increased significantlyand 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 Southwest was losing money and where passengers faced a 45-minute trip to the city's downtown area) 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 CASE 25 Southwest Airlines in 2014: Culture, Values, and Operating Practices 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 stating that Braniff was trying to run Southwest out of business. The ad announced that Southwest would not only match Braniff's $13 fare but 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 enabled Southwest to report its firstever 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, out to the newly opened Dallas-Fort Worth (DFW) 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 the airport. 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 Commissionmoreover, the C-343 company's headquarters were located at Love Field. The courts eventually ruled that 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 thus would 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. 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 businessa 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; 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 C-344 PART 2 Cases in Crafting and Executing Strategy amendment was expanded in 1997, when Alabama, Mississippi, and Kansas were added to the five-state zone; in 2005, Missouri was added to the Wright Zone. In 2006, after a heated battle in Congress, legislation was passed and signed into law that repealed the Wright amendment beginning in 2014. The Emergence of a Combative, Can-Do Culture at Southwest The legal, regulatory, and competitive battles that Southwest fought in its early years produced a strong esprit de corps among Southwest personnel 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 the company'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 airand 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 chairman and CEO. But Kelleher enjoyed practicing law, so while he agreed to become chairman of the board, 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, 1981-2013 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 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 2013 revenues of $17.7 billion and 44,800 employees, flying 680 planes to 96 airports in 41 states and 7 destinations outside the United States, and transporting more than 108 million fare-paying passengers and over 133 million total passengers (including those traveling on frequent-flyer awards) in 2013. In the process, the company won more industry Triple Crown awardsfor 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 baggagehandling goals in 2013, it still led the domestic airline industry in customer satisfaction and received other awards and recognitions, including Best Domestic Airline for Customer Service, one of Executive Travel Magazine's Leading Edge awards; Brand of the Year in the Value Airline Category, from the Harris Poll; and Best Customer Service and Best Loyalty Credit Card, from InsideFlyer Magazine. Exhibit 2 provides a five-year summary of Southwest's financial and operating performance. Exhibit 3 on page C-347 provides select operating and financial data for major U.S. air carriers during the 1995-2013 period. HERB KELLEHER: THE CEO WHO TRANSFORMED SOUTHWEST INTO A MAJOR AIRLINE Herb Kelleher majored in philosophy at Wesleyan University in Middletown, Connecticut, graduating CASE 25 EXHIBIT 2 Southwest Airlines in 2014: Culture, Values, and Operating Practices C-345 Summary of Southwest Airlines' Financial and Operating Performance, 2009-2013 (in millions, except per share and operating data) Year Ended December 31 2013 Financial data Operating revenues Operating expenses Operating income Other expenses (income), net Income before taxes Provision for income taxes Net income Net income per share, basic Net income per share, diluted Cash dividends per common share Total assets at period-end Long-term obligations at period-end Stockholders' equity at period-end Operating data Revenue passengers carried Enplaned passengers Revenue passengermiles (RPMs) (000s)1 Available seat-miles (ASMs) (000s)2 Load factor3 Average length of passenger haul (miles) Average length of each flight (miles) Trips flown Average passenger fare Passenger revenue yield per RPM (cents)4 Operating revenue per ASM (cents)5 2012 2011 2010 2009 $ 17,699 16,421 1,278 $ 17,088 16,465 623 $ 15,658 14,965 693 $ 12,104 11,116 988 $ 10,350 10,088 262 370 323 243 745 98 164 69 1,209 $ 455 754 (62) 685 $ 264 421 $ 145 178 $ 286 459 $ 65 99 $1.06 $0.56 $0.23 $0.62 $0.13 $1.05 $0.56 $0.23 $0.61 $0.13 $ 0.1300 $0.0345 $ 0.0180 $ 0.0180 $ 0.0180 $ 19,345 $18,596 $ 18,068 $ 15,463 $14,269 $ 2,191 $ 2,883 $ 3,107 $ 2,875 $ 3,325 $ 7,336 $ 6,992 $ 6,877 $ 6,237 $ 5,454 108,075,976 109,346,509 103,973,759 88,191,322 86,310,229 133,155,030 133,978,100 127,551,012 106,227,521 101,338,228 104,348,216 102,874,979 97,582,530 78,046,967 74,456,710 130,344,072 80.1% 128,137,110 80.3% 98,437,092 79.3% 98,001,550 76.0% 120,578,736 80.9% 966 941 939 885 863 703 1,312,785 693 1,361,558 679 1,317,977 648 1,114,451 639 1,125,111 $154.72 $147.17 $141.90 $130.27 $114.61 16.02 15.64 15.12 14.72 13.29 13.58 13.34 12.99 12.30 10.56 (Continued) PART 2 C-346 EXHIBIT 2 Cases in Crafting and Executing Strategy (Continued ) Year Ended December 31 2013 Passenger revenue per ASM (cents)6 Operating expenses per ASM (cents)7 Operating expenses per ASM, excluding fuel (cents) Operating expenses per ASM, excluding fuel and profit sharing (cents) Fuel costs per gallon, including fuel tax Fuel costs per gallon, including fuel tax, economic Fuel consumed, in gallons (millions) Active full-time equivalent employees Aircraft in service at period-end8 2012 2011 2010 2009 12.83 12.56 12.24 11.67 10.09 12.60 12.85 12.41 11.29 10.29 8.18 8.07 7.73 7.61 7.18 8.01 7.98 7.65 7.45 7.15 $3.16 $3.30 $3.19 $2.51 $2.12 $3.12 $3.28 $3.19 $ 2.39 $1.97 1,818 1,847 1,764 1,437 1,428 44,831 45,861 45,392 34,901 34,726 680 694 698 548 537 1 A revenue passenger-mile is one paying passenger flown 1 mile. An available seat-mile (ASM) is one seat (empty or full) flown 1 mile; also referred to as \"capacity,\" which is a measure of the space available to carry passengers in a given period. 3 Revenue passenger-miles divided by available seat-miles. 4 Calculated as passenger revenue divided by revenue passenger-miles. It represents the average cost paid by a paying passenger to fly 1 mile. 5 Calculated as operating revenue divided by available seat-miles. It is a measure of operating revenue production based on the total available seat-miles flown during a particular period. 6 Calculated as passenger revenue divided by available seat-miles. It is a measure of passenger revenue production based on the total available seat-miles flown during a particular period. 7 Calculated as operating expenses divided by available seat-miles. Also referred to as unit costs or cost per available seat-mile, this is the average cost of flying an aircraft seat (empty or full) 1 mile. 8 Includes leased aircraft and excludes aircraft that were not available for service, in storage, held for sale, or held for return to the lessor. Source: Company 10-K report, 2013. 2 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 CASE 25 EXHIBIT 3 Southwest Airlines in 2014: Culture, Values, and Operating Practices C-347 Select Operating and Financial Data for Major U.S. Airline Carriers, 1995, 2000, 2005, 2010-2013 1995 Passengers (millions) Flights (thousands) Revenue passenger-miles (billions) Available seat-miles (billions) Load factor (%) Passenger revenues (millions) Operating profit (loss) (millions) Net profit (loss) excluding one-time charges and gains (millions) Total employees 2000 2005 2010 2011 2012 2013 559.0 8,062.0 603.4 807.1 67.0 $69,470 $ 5,852 666.2 9,035.0 692.8 987.9 72.4 $ 93,622 $ 6,999 738.3 11,564.0 778.6 1,002.7 77.7 $ 93,500 $ 427 720.5 9,521.0 798.0 972.6 82.0 $103,978 $ 9,344 730.8 9,478.0 814.4 992.7 82.0 $114,299 $ 7,035 736.6 9,284 823.2 994.5 82.8 $115,975 $ 7,516 758.9 9,161 840.4 1,011.2 83.1 $120,640 $ 12,548 $ 2,283 546,987 $ 2,486 679,967 ($5,782) 562,467 $ 3,665 531,224 $ 1,392 538,300 $ 360 547,558 $ 12,771 n.a. Source: Air Transport Association, 2005 Economic Report, p. 7; and U.S. Department of Transportation, Bureau of Transportation Statistics, \"Airline Traffic Data\" press releases, various years. he often helped 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 the 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 he had arm-wrestled a South Carolina company executive at a public event in Dallas for the right 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 faceknock 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 kinds of formal strategic plans, saying, \"Reality is chaotic; planning is ordered and logical. The meticulous nit-picking that goes on in most strategic planning processes creates a mental straightjacket that becomes disabling in an industry where things change radically from one day to the next.\" Kelleher wanted Southwest managers to think ahead, have contingency plans, and be ready to act when it seemed that the future held significant risks or when new conditions suddenly appeared and demanded prompt responses. Kelleher was a strong believer in the principle that employeesnot customerscame first:9 You have to treat your employees like your customers. When you treat them right, then they will treat your outside customers right. That has been a very powerful competitive weapon for us. You've got to take the time to listen to people's ideas. If you just tell somebody no, that's an act of power and, in my opinion, an abuse of power. You don't want to constrain people in their thinking. Another indication of the importance that Kelleher placed on employees was the message he had penned in 1990 that was prominently displayed in the lobby of Southwest's headquarters in Dallas: C-348 PART 2 Cases in Crafting and Executing Strategy The people of Southwest Airlines are \"the creators\" of what we have becomeand of what we will be. Our people transformed an idea into a legend. That legend will continue to grow only so long as it is nourished by our people's indomitable spirit, boundless energy, immense goodwill, and burning desire to excel. Our thanksand our loveto the people of Southwest Airlines for creating a marvelous family and a wondrous airline. In June 2001, Herb Kelleher stepped down as CEO but continued on in his role as the chairman of Southwest's board of directors and the head of the board's executive committee; as chairman, he played a lead role in Southwest's strategy, expansion to new cities and aircraft scheduling, and government and industry affairs. In May 2008, after more than 40 years of leadership at Southwest, Kelleher retired as chairman (but he remained a full-time Southwest employee until July 2013 and carried the title of chairman emeritus in 2014). EXECUTIVE LEADERSHIP AT SOUTHWEST: 2001-2014 In June 2001 Southwest Airlines, responding to anxious investor concerns about the company's leadership succession plans, began an orderly transfer of power and responsibilities from Herb Kelleher, age 70, to two of his most trusted protgs: James F. Parker, 54, Southwest's general counsel, succeeded Kelleher as CEO; Colleen Barrett, 56, Southwest's executive vice president-customers and self-described keeper of Southwest's pep-rally corporate culture, became president and chief operating officer. James Parker, Southwest's CEO, 2001-2004 James Parker's association with Herb Kelleher went back 23 years to the time when they were colleagues at Kelleher's old law firm. Parker moved over to Southwest from the law firm in February 1986. Parker's profile inside the company as Southwest's vice president and general counsel had been relatively low, but he was Southwest's chief labor negotiator, and much of the credit for Southwest's good relations with employee unions belonged to Parker. Parker and Kelleher were said to think much alike, and Parker was regarded as having a good sense of humor, although he did not have as colorful and flamboyant a personality as Kelleher. Parker was seen as an honest, straight-arrow kind of person who had a strong grasp of Southwest's culture and market niche and who could be nice or tough, depending on the situation. When his appointment as CEO was announced, Parker said:10 There is going to be no change of course insofar as Southwest is concerned. We have a very experienced leadership team. We've all worked together for a long time. There will be evolutionary changes in Southwest, just as there have always been in our history. We're going to stay true to our business model of being a low-cost, low-fare airline. Parker retired unexpectedly, for personal reasons, in July 2004, stepping down as CEO and vice chairman of the board and also resigning from the company's board of directors. He was succeeded by Gary C. Kelly. Colleen Barrett, Southwest's President, 2001-2008 Barrett began working with Kelleher as his legal secretary in 1967 and had been with Southwest since 1978. As executive vice president-customers, Barrett had a high profile among Southwest employees and spent most of her time on culture building, morale building, and customer service; her goal was to ensure that employees felt good about what they were doing and felt empowered to serve the cause of Southwest Airlines.11 She and Kelleher were regarded as Southwest's guiding lights, and some analysts said she was essentially functioning as the company's chief operating officer prior to her formal appointment as president. Much of the credit for the company's strong record of customer service and its strong-culture work climate belonged to Barrett. Barrett had been the driving force behind lining the hallways at Southwest's headquarters with photos of company events and trying to create a family atmosphere at the company. Believing it was important to make employees feel cared about and important, Barrett had put together a network of contacts across the company to help her stay in touch with what was happening with employees and their families. When network members learned about events that were worthy of acknowledgment, the word quickly got to Barrettthe information went into a database and an appropriate greeting card or gift was sent. Barrett had a remarkable ability to give gifts CASE 25 Southwest Airlines in 2014: Culture, Values, and Operating Practices that were individualized and connected her to the recipient.12 Barrett was the first woman appointed as president and COO of a major U.S. airline. In October 2001, Fortune included Colleen Barrett on its list of the 50 most powerful women in American business (she was ranked number 20). Barrett retired as president in July 2008. Gary C. Kelly, Southwest's CEO, 2004-Present Gary Kelly was appointed vice chairman of the board of directors and chief executive officer of Southwest effective July 15, 2004. Prior to that time, Kelly was executive vice president and chief financial officer from 2001 to 2004, and vice president-finance and chief financial officer from 1989 to 2001. He joined Southwest in 1986 as its controller. In 2008, effective with the retirement of Kelleher and Barrett, Kelly assumed the titles of chairman of the board and president, in addition to serving as CEO. When Kelly was named CEO in 2004, Herb Kelleher said:13 Gary Kelly is one of our brightest stars, well respected throughout the industry and well known, over more than a decade, to the media, analyst, and investor communities for his excellence. As part of our Board's succession planning, we had already focused on Gary as Jim Parker's successor, and that process has simply been accelerated by Jim's personal decision to retire. Under Gary's leadership, Southwest has achieved the strongest balance sheet in the American airline industry; the best fuel hedging position in our industry; and tremendous progress in technology. In his first two years as CEO, Kelly and other top-level Southwest executives sharpened and finetuned Southwest's strategy in a number of areas, continued to expand operations (both adding more flights and initiating service to new airports), and worked to maintain the company's low-cost advantage over its domestic rivals. Kelly saw four factors as keys to Southwest's recipe for success:14 Hire great people, treat 'em like family. Care for our Customers warmly and personally, like they're guests in our home. Keep fares and operating costs lower than anybody else by being safe, efficient, and operationally excellent. C-349 Stay prepared for bad times with a strong balance sheet, lots of cash, and a stout fuel hedge. To guide Southwest's efforts to be a standout performer on these four key success factors, Kelly had established five strategic objectives for the company:15 Be the best place to work. Be the safest, most efficient, and most reliable airline in the world. Offer customers a convenient flight schedule with lots of flights to lots of places they want to go. Offer customers the best overall travel experience. Do all of these things in a way that maintains a low-cost structure and the ability to offer low fares. In 2008-2009, Kelly initiated a slight revision of Southwest's mission statement and also spearheaded a vision statement that called for a steadfast focus on a triple bottom line of \"Performance, People, and Planet\"see Exhibit 4. In 2010, Kelly initiated one of the biggest strategic moves in the company's history: the acquisition of AirTran Airways, a low-fare, low-cost airline that served 70 airports in the United States, Mexico, and the Caribbean (19 of the airports AirTran served coincided with airports served by Southwest). In 2011, Kelly initiated a five-year strategic plan that featured five strategic initiatives: Integrating AirTran into Southwest. Modernizing Southwest Airlines' existing aircraft fleet. Adding over 100 new Boeing 737-800 aircraft to the Southwest fleet. Launching international service and a new reservation system. Growing membership in the company's Rapid Rewards frequent-flyer program. In his Letter to the Shareholders in Southwest's 2013 annual report, Kelly said: We are now in the fourth year of a bold five-year strategic plan that began in 2011. We believe our five Strategic Initiatives are transformative with the potential to drive more revenue, reduce unit costs, and make Southwest more competitive. The world has changed dramatically since 2000. Our competitors took draconian measures, including massive layoffs and pay C-350 EXHIBIT 4 PART 2 Cases in Crafting and Executing Strategy Southwest Airlines' Mission, Vision, and Triple-Bottom-Line Commitment to Performance, People, and Planet THE MISSION OF SOUTHWEST AIRLINES The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. OUR VISION Become the world's most loved, most flown, and most profitable airline. TO OUR EMPLOYEES We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer. TO OUR COMMUNITIES Our goal is to be the hometown airline of every community we serve, and because those communities sustain and nurture us with their support and loyalty, it is vital that we, as individuals and in groups, embrace each community with the SOUTHWEST SPIRIT of involvement, service, and caring to make those communities better places to live and work. TO OUR PLANET We strive to be a good environmental steward across our system in all of our hometowns, and one component of our stewardship is efficiency, which, by its very nature, translates to eliminating waste and conserving resources. Using cost-effective and environmentally beneficial operating procedures (including facilities and equipment) allows us to reduce the amount of materials we use and, when combined with our ability to reuse and recycle material, preserves these environmental resources. TO OUR STAKEHOLDERS Southwest's vision for a sustainable future is one where there will be a balance in our business model between Employees and Community, the Environment, and our Financial Viability. In order to protect our world for future generations, while meeting our commitments to our Employees, Customers, and Stakeholders, we will strive to lead our industry in innovative efficiency that conserves natural resources, maintains a creative and innovative workforce, and gives back to the Communities in which we live and work. Source: Southwest's \"One Report, 2009,\" www.southwest.com (accessed August 20, 2010). cuts, to adjust to today's economic realities and have been given new life through the use of federal bankruptcy laws. Thanks to the hard work and extraordinary efforts of our Southwest Warriors, Southwest has adjusted through incredible Teamwork and unwavering resolve to execute our strategic plan. We have survived the onslaught of challenges to remain profitable for 41 consecutive years, remain the nation's largest airline in terms of domestic originating passengers boarded, and operate the largest Boeing fleet in the world. The transformation hasn't been easy, but it was necessary, and we made significant and successful progress in 2013. Charge fares that were very price-competitive and, in some cases, appealingly lower than what rival airlines were charging. Create and sustain a low-cost operating structure. Make it fun to fly on Southwest, and provide customers with a top-notch travel experience. Fare Structure Strategy SOUTHWEST AIRLINES' STRATEGY IN 2014 Southwest employed a relatively simple fare structure displayed in ways that made it easy for customers to choose the fare they preferred. In 2014, Southwest's fares were bundled into four major categories: \"Wanna Get Away,\" \"Anytime,\" \"Business Select,\" and fares for seniors (people 65 and older): From day one, Southwest had pursued a low-cost, low-price, no-frills strategy to make air travel affordable to a wide segment of the population. While specific aspects of the strategy had evolved over the years, three strategic themes had characterized the company's strategy throughout its existence and still had high profiles in 2014: 1. Wanna Get Away fares were always the lowest fares and were subject to advance purchase requirements. No fee was charged for changing a previously purchased ticket to a different time or day of travel (rival airlines charged a change fee of $100 to $175), but applicable fare differences were applied. The purchase price was CASE 25 Southwest Airlines in 2014: Culture, Values, and Operating Practices nonrefundable, but the funds could be applied to future travel on Southwest, provided the tickets were not canceled or changed within 10 minutes of a flight's scheduled departure. 2. Anytime fares were refundable and changeable, and funds could be applied toward future travel on Southwest. Anytime fares included a higher frequent-flyer point multiplier under Southwest's Rapid Rewards frequent-flyer program than did Wanna Get Away fares. 3. Business Select fares were refundable and changeable, and funds could be applied toward future travel on Southwest. Business Select fares included additional perks such as priority boarding, a higher frequent-flyer point multiplier than other Southwest fares (including twice as many points per dollar spent as compared to Wanna Get Away fares), priority security and ticket counter access in select airports, and one complimentary adultbeverage coupon for the day of travel (for customers of legal drinking age). The Business Select fare had been introduced in 2007 to help attract economy-minded business travelers. 4. Senior fares were typically priced between the Wanna Get Away and Anytime fares. No fee was charged for changing a previously purchased ticket to a different time or day of travel, but applicable fare differences were applied. The purchase price was nonrefundable, but funds could be applied to future travel on Southwest, provided the tickets were not canceled or changed within 10 minutes of a flight's scheduled departure. Fares for seniors were not displayed on the list of fare options at the company's website unless customers checked a box indicating that one or more passengers were 65 years of age or older. In 2008, rival airlines instituted a series of addon feesincluding a fuel surcharge for each flight, fees for checking bags, fees for processing frequentflyer travel awards, fees for buying a ticket in person at the airport or calling a toll-free number to speak with a ticket agent to make a reservation, fees for changing a previously purchased ticket to a different flight, and fees for certain in-flight snacks and beveragesto help defray skyrocketing costs for jet fuel (which had climbed from about 15 percent of operating expenses in 2000 to 40 percent of operating expenses in mid-2008) and try to bolster their operating performance. In 2014, Frontier Airlines C-351 announced that it would begin charging passengers fees of $20 to $50 for using the overhead bins to store carry-on luggage and other items and fees of $3 to $15 to preselect a seat; Frontier also charged $1.99 for bottled water and soft drinks on its flights. Southwest, however, chose to forgo \" la carte\" pricing and stuck with an all-inclusive fare price. During 2009 and periodically thereafter, Southwest ran \"Bags Fly Free\" ad campaigns to publicize the cost savings of flying Southwest rather than paying the $20 to $50 fees that rival airlines charged for a first or second checked bag. Southwest also ran ads promoting its policy of not charging a fee for changing a previously purchased ticket to a different flight. When advance reservations were weak for particular weeks or times of the day or on certain routes, Southwest made a regular practice of initiating special fare promotions to stimulate ticket sales on flights that otherwise would have had numerous empty seats. The company's use of special fare sales and Bags Fly Free ads to combat slack air travel during much of the Great Recession in 2008-2009 resulted in company-record load factors (the percentage of all available seats on all flights that were occupied by fare-paying passengers) for every month from July through December 2009. Southwest was a shrewd practitioner of the concept of price elasticity, proving in one market after another that the revenue gains from increased ticket sales and the volume of passenger traffic would more than compensate for the revenue erosion associated with low fares. When Southwest entered the Florida market with an introductory $17 fare from Tampa to Fort Lauderdale, the number of annual passengers flying the Tampa-Fort Lauderdale route jumped 50 percent, to more than 330,000. In Manchester, New Hampshire, passenger counts went from 1.1 million in 1997, the year prior to Southwest's entry, to 3.5 million in 2000, and average one-way fares dropped from just over $300 to $129. Southwest's success in stimulating higher passenger traffic at airports across the United States via low fares and frequent flights was coined the \"Southwest Effect\" by personnel at the U.S. Department of Transportation. (See Exhibit 6 for a list of the cities and airports Southwest Airlines served in July 2014.) AirTran's Fare Structure AirTran had a fare structure that included Business Class fares and competitively priced economy class fares. AirTran C-352 PART 2 Cases in Crafting and Executing Strategy Business Class fares were refundable and changeable and included such perks as priority boarding, oversized seats with additional leg room, bonus frequent-flyer credit, no first- or second-bag fees, and complimentary cocktails onboard. Business Class upgrades could be purchased within 24 hours of travel for a fee ranging from $69 to $139 (depending on the length of the flight). All other AirTran fares were nonrefundable but could be changed prior to departure for a service fee of $150 per person. AirTran also imposed fees for checked baggage ($25 for the first checked bag and $35 for the second checked bag), advance seat assignments, priority boarding, ticket booking through the customer call center, ticket cancellation ($150 per ticket), and assorted other services. Southwest's Strategy to Create and Sustain Low-Cost Operations Southwest management fully understood that earning attractive profits by charging low fares necessitated the use of strategy elements that would enable the company to become a low-cost provider of commercial air service. There were three main components of Southwest's strategic actions to achieve a low-cost operating structure: using a single aircraft type for all flights, creating an operationally efficient point-to-point route structure, and striving to perform all value chain activities in a cost-efficient manner. Use of a Single Aircraft Type For many years, Southwest's aircraft fleets had consisted only of Boeing 737 aircraft. Operating only one type of aircraft produced many cost-saving benefits: minimizing the size of spare-parts inventories, simplifying the training of maintenance and repair personnel, improving the proficiency and speed with which maintenance routines could be done, and simplifying the task of scheduling planes for particular flights. In 2013, Southwest operated the biggest fleet of Boeing 737 aircraft in the world. Exhibit 5 provides information about Southwest's aircraft fleet. Southwest's Point-to-Point Route Structure Strategy Southwest's point-to-point scheduling of flights was more cost-efficient than the hub-andspoke systems used by almost all rival airlines. Huband-spoke systems involved passengers on many different flights coming in from spoke locations (and sometimes another hub) to a central airport or hub within a short span of time and then connecting to an outgoing flight to their destinationa spoke location or another hub. Most flights arrived at and departed from a hub during a two-hour window, creating big peak-valley swings in airport personnel workloads and gate utilizationairport personnel and gate areas were very busy when hub operations were in full swing and then were underutilized in the interval awaiting the next round of inbound and outbound flights. In contrast, Southwest's pointto-point routes permitted scheduling aircraft so as to minimize the time aircraft were at the gate, currently approximately 25 minutes, thereby reducing the number of aircraft and gate facilities that would otherwise be required. Furthermore, with a relatively even flow of incoming and outgoing flights and gate traffic, Southwest could staff its terminal operations to handle a fairly steady workload across a day, whereas hub-and-spoke operators had to staff their operations to serve 3 to 4 daily peak periods. Exhibit 6 shows the cities and airports served by Southwest in mid-2014. Going into 2014, Southwest had nonstop service between 524 airports. In 2013, Southwest's average passenger airfare was $154.72 one way, and the average passenger trip length was approximately 966 miles. Striving to Perform All Value Chain Activities Cost-Effectively Southwest made a point of scrutinizing every aspect of its operations to find ways to trim costs. The company's strategic actions to reduce or at least contain costs were extensive and ongoing: Sharply rising prices for jet fuel over the past 12 years that caused fuel expenses to rise from 16.5 percent of total operating expenses in 2003 to between 28 and 38 percent of total operating expenses since 2006 had prompted a number of projects to increase fuel efficiency, including: Installing \"blended winglets\" on all of Southwest's planes beginning in 2007 and then, in 2014, starting to upgrade its aircraft fleet with newly designed split-scimitar wingletssee Exhibit 7. These winglets reduced lift drag, allowed aircraft to climb more steeply and reach higher flight levels quicker, improved cruising performance, helped extend engine life and reduce maintenance costs, and reduced fuel burn. CASE 25 EXHIBIT 5 Southwest Airlines in 2014: Culture, Values, and Operating Practices Southwest's Aircraft Fleet as of December 31, 2013 Type of Aircraft Number Seats Average Age (years) Boeing 717-200 66 117 12 Boeing 737-300 122 137/143 20 Boeing 737-500 15 122 22 Boeing 737-700 425 137/143 9 Boeing 737-800 52 175 1 Total C-353 Comments All of these were AirTran aircraft that were in the process of being removed from the Southwest fleet and leased or subleased to Delta Air Lines. Southwest was Boeing's launch customer for this model. Southwest was Boeing's launch customer for this model. Southwest was Boeing's launch customer for this model in 1997. As of April 2013, all were equipped with satellite-delivered broadband Internetreception capability. As of April 2013, all were equipped with satellitedelivered broadband Internet-reception capability. 541 Other Fleet-Related Facts Average age of aircraft fleet Average aircraft trip length Average aircraft utilization per day Fleet size: 1990 1995 2000 2009 Firm orders for new aircraft: 2014 2015 2016 2017-2024: Approximately 11 years 708 miles, with an average duration of 1 hour and 59 minutes Nearly 6 flights and 10 hours and 43 minutes of flight time 106 224 344 537 33 19 31 225 Source: Information at www.southwest.com (accessed May 7, 2014). Using auto-throttle and vertical navigation procedures to maintain optimum cruising speeds. Introducing new engine start procedures to support using a single engine for runway taxiing. Reducing engine aircraft idle speed while on the ground. Southwest was the first major airline to introduce ticketless travel (eliminating the need to print and process paper tickets); by 2007, ticketless travel accounted for more than 95 percent of all ticket sales. Southwest was also the first airline to allow customers to make reservations and purchase tickets at the company's website (thus bypassing the need to pay commissions to travel agents for handling the ticketing process and also reducing staffing requirements at Southwest's reservation centers). Selling a ticket on its website cost Southwest roughly $1, versus $3 to $4 for a ticket booked through its own internal reservation system and as much as $15 each for tickets purchased through travel agents and professional business travel partners. Online ticket sales at Southwest's website grew swiftly, accounting for 74 percent of Southwest's revenues in 2009 and 80 percent of all company bookings in 2013. For most of its history, Southwest stressed flights into and out of airports in medium-sized cities and less congested airports in major metropolitan PART 2 C-354 EXHIBIT 6 Cases in Crafting and Executing Strategy Airports and Cities Served by Southwest Airlines, July 2014 Southwest's Top-10 Airports, by Departures Airport/City Chicago Midway Las Vegas Baltimore/Washington Denver Houston (Hobby) Atlanta Phoenix Dallas (Love Field) Orlando Los Angeles Daily Departures Gates Nonstop Cities Served 233 210 206 167 161 165 162 124 120 104 32 19 28 19 19 31 24 15 20 12 64 54 57 56 45 44 46 18 43 23 Other Airports Served by Southwest Airlines Akron, OH Albany Albuquerque Amarillo Austin Birmingham Boise Boston Logan Buffalo Burbank, CA Charleston Charlotte Cleveland Columbus, OH Corpus Christi, TX Dayton, OH Detroit Metro Des Moines El Paso Flint, MI Fort Lauderdale Fort Myers/Naples Greenville/Spartanburg, SC Harlingen/South Padre Island, TX Grand Rapids, MI Hartford/Springfield Indianapolis Jacksonville Kansas City Little Rock Long Island Louisville Lubbock Manchester, NH Memphis Midland/Odessa, TX Milwaukee Minneapolis/St. Paul Nashville Newark New Orleans New York (LaGuardia) Norfolk Oakland Oklahoma City Omaha Ontario, CA Orange County, CA Panama City, FL Pensacola, FL Philadelphia Pittsburgh Portland, OR Portland, ME Providence Raleigh-Durham Reno/Tahoe Richmond Rochester Sacramento St. Louis Salt Lake City San Antonio San Francisco San Jose Seattle/Tacoma Spokane Tampa Tucson Tulsa Washington, DC (Dulles) Washington, DC (Reagan National) West Palm Beach Wichita, KS International Aruba Cabo San Lucas Cancun Mexico City Montego Bay Nassau Punta Cana, DOM San Juan Source: Company 10-K report, 2013; and information at www.southwest.com (accessed April 29, 2014). areas (Chicago Midway, Detroit Metro, Houston Hobby, Dallas Love Field, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, and Ft. Lauderdale-Hollywood). This strategy helped produce better-than-average on-time performance and reduce the fuel costs associated with planes sitting in line on crowded taxiways or circling airports waiting for clearance to land. It further allowed the company to avoid paying the higher landing fees and terminal gate costs at such high-traffic airports as Atlanta's Hartsfield International, Chicago's O'Hare, and Dallas-Fort Worth, where landing slots were controlled and rationed to those airlines willing to pay the high fees. More recently, however, having already initiated service to almost all of the CASE 25 EXHIBIT 7 Southwest Airlines in 2014: Culture, Values, and Operating Practices C-355 Southwest's Fuel-Saving Blended Winglets and Split-Scimitar Winglets Blended Winglets: first installations began in 2007; fuel savings of about 3.5% per aircraft Split-Scimitar Winglets: first installations began in 2014; fuel savings of about 5% to 5.5% per aircraft Source: Southwest Airlines. medium-sized cities and less congested airports where there were good opportunities for sustained growth in passenger traffic and revenues, Southwest had begun initiating service to airports in large metropolitan cities where air traffic congestion was a frequent problemsuch as Los Angeles (LAX), Boston's Logan International, New York LaGuardia, Denver, San Francisco, Philadelphia, and Atlanta (when it acquired AirTran). To economize on the amount of time it took terminal personnel to check passengers in and to simplify the whole task of making reservations, Southwest dispensed with the practice of assigning each passenger a reserved seat. Initially, passengers were given color-coded plastic cards marked with the letter A, B, or C when they checked in at the boarding gate. Passengers then boarded in groups, according to their card color and letter, and sat in any seat that was vacant when they got on the plane. In 2002, Southwest abandoned the use of plastic cards and began printing a big, bold A, B, or C on the boarding pass when the passenger checked in at the ticket counter; passengers then boarded in groups according to the letter on their boarding pass. In 2007-2008, Southwest introduced an enhanced boarding method that automatically assigned each passenger a specific number within the passenger's boarding group at the time of check-in; passengers then boarded the aircraft in that numerical order. All passengers could check in online up to 24 hours before departure time and print out a boarding pass, thus bypassing counter check-in (unless they wished to check baggage). Southwest flight attendants were responsible for cleaning up trash left by deplaning passengers and otherwise getting the plane presentable for passengers to board for the next flight. Rival carriers had cleaning crews come on board to perform this function until they incurred heavy losses in 2001-2005 and were forced to institute stringent cost-cutting measures that included abandoning use of cleaning crews and copying Southwest's practice. Southwest did not have a first-class section in any of its planes and had no fancy clubs for its frequent flyers to relax in at terminals. Southwest did not provide passengers with baggage transfer services to other carrierspassengers with checked baggage who were connecting to other carriers to reach their destination were responsible for picking up their luggage at Southwest's baggage claim and then getting it to the check-in facilities of the connecting carrier. (Southwest booked tickets involving only its own flights; customers connecting to flights on other carriers had to book such tickets through either travel agents or the connecting airline). Starting in 2001, Southwest began converting from cloth to leather seats; the team of Southwest C-356 PART 2 Cases in Crafting and Executing Strategy employees that investigated the economics of the conversion concluded that an all-leather interior would be more durable and easier to maintain, more than justifying the higher initial costs. Southwest was a first mover among major U.S. airlines in employing fuel hedging and derivative contracts to counteract rising prices for crude oil and jet fuel. From 1998 through 2008, the company's fuel-hedging activities produced fuel cost savings of about $4 billion over what the company would have spent had it paid the industry's average price for jet fuel. But unexpectedly large declines in jet fuel prices in late 2008 and 2009 resulted in reported losses of $408 million on the fuel-hedging contracts that the company had in place during 2009. Since then, the company's fuel-hedging activities had continued to be ineffective in reducing fuel expenses; the company recognized losses on its fuel-hedging activities of $324 million in 2010, $259 million in 2011, $157 million in 2012, and $118 million in 2013. Southwest's fuel-hedging strategy involved modifying the amount of its future fuel requirements that were hedged based on management's judgments about the forward market prices of crude oil and jet fuel. As of January 2014, the company had fuel derivative contracts in place for about 20 percent of its expected fuel consumption in 2014, about 40 percent of its expected fuel consumption in 2015, and about 35 percent of its expected fuel consumption in 2016. Southwest regularly upgraded and enhanced its management information systems to speed data flows, improve operating efficiency, lower costs, and upgrade its customer service capabilities. In 2001, Southwest implemented the use of new software that significantly decreased the time required to generate optimal crew schedules and helped improve on-time performance. In 2007-2008, Southwest invested in next-generation technology and software to improve its ticketless system and its back-office accounting, payroll, and human resource information systems. During 2009, the company replaced or enhanced its pointof-sale, electronic ticketing and boarding, and revenue accounting systems. During 2010, it completed an initiative to convert to a new SAP enterprise resource planning application that would replace its general ledger, accounts payable, accounts receivable, payroll, benefits, cash management, and fixed-asset systems; the conversion was designed to increase data accuracy and consistency and lower administrative support costs. For many decades, Southwest's operating costs had been lower than those of rival U.S. airline carrierssee Exhibit 8 for comparative costs per revenue passenger-mile among the five major U.S. airlines during the 1995-2013 period. Exhibit 9 shows trends in Southwest's operating costs per available seat-mile rather than per passenger-occupied seat. Making It Fun to Fly Southwest: The Strategy to Provide a Top-Notch Travel Experience Southwest's approach to delivering good customer service and building a loyal customer clientele was predicated on presenting a happy face to passengers, displaying a fun-loving attitude, and doing things in a manner calculated to provide passengers with a positive flying experience. The company made a special effort to employ gate personnel who enjoyed interacting with customers, had good interpersonal skills, and displayed cheery, outgoing personalities. A number of Southwest's gate personnel let their wit and sense of humor show by sometimes entertaining those in the gate area with trivia questions or contests such as \"Who has the biggest hole in their sock?\" Apart from greeting passengers coming onto planes and assisting them in finding vacant seats and stowing baggage, flight attendants were encouraged to be engaging, converse and joke with passengers, and go about their tasks in ways that made passengers smile. On some flights, attendants sang announcements to passengers on takeoff and landing. On one flight, while passengers were boarding, an attendant with bunny ears popped out of an overhead bin exclaiming \"Surprise!\" The repertoires to amuse passengers varied from flight crew to flight crew. During their tenure, both Herb Kelleher and Colleen Barrett had made a point of sending congratulatory notes to employees when the company received letters from customer