Southwest Airlines Southwest Airlines has long been one of the stand- out performers in the US. airline industry. It is famous for its low fares, which are often some 30% lower than those of its major rivals. These are bale anced by an even lower cost structure, enabling it to record superior protability even in had years such as 2002, when the industry faced slumping demand in the wake of the September 11 terrorr ist attacks. Indeed, from 2001 to 2005, quite possie bly the worst four years in the history of the airline industry, while every other maior airline lost money, Southwest made money every year and earned an ROIC of 5.8%. Even in 2008, an awful year for most airlines, Southwest made a prot and earned an ROTC of 4%. Southwest operates somewhat differently from many of its competitors. While operators like Ameri- can Airlines and United Airlines route passengers through hubs, Southwest Airlines flies point-to point, often through smaller airports. By competing in a way that other airlines do not, Southwest has found that it can capture enough demand to keep its planes full. Moreover, because it avoids many hubs, Southwest has experienced fewer delays. In the rst eight months of 2008, Southwest planes arrived on schedule 80% of the time, compared to 76% at United and 74% at Continental. Southwest flies only one type of plane, the Boeing 737. This reduces training costs, maintenance costs, and inventory costs while increasing efciency in crew and ight scheduling. The operation is nearly ticketless, with no seat assignments, which reduces cost and back-ofce accounting functions. There are no meals or movies in ight, and the airline will not transfer baggage to other airlines, reducing the need for baggage handlers. Southwest also has high employee productivity. One-way airlines measure employee productivity is by the ratio of employees to passengers carried. According to gures from company 10-K statements, in 2008 Southwest had an employee-to-passenger ratio of 1 to 2,400, the best in the industry. By com- parison, the ratio at United Airlines was 1 to 1,175 and, at Continental, it was 1 to 1,125. Southwest devotes enormous attention to the peo ple it hires. On average, the company hires only 3% of those interviewed in a year. When hiring, it empha sizes teamwork and a positive attitude. Southwest rationalizes that skills can be taught, but a positive attitude and a willingness to pitch in cannot. South- west also creates incentives for its employees to work hard. All employees are covered by a prot-sharing plan, and at least 25% of an employee's share of the prot-sharing plan has to be invested in Southwest Airlines stock. This gives rise to a simple formula: the harder employees work, the more protable Southwest becomes, and the richer the employees get. The results are clear. At other airlines, one would neversee a pilot helping to check passengers onto the plane. At Southwest, pilots and ight attendants have been known to help clean the aircraft and check in passengers at the gate. They do this to turn around an aircraft as quickly as possible and get it into the air again because an aircraft does not make money while it is on the ground. This flexible and motivated workforce leads to higher productivity and reduces the company's need for more employees. Because Southwest flies pointto-point rather than through congested airport hubs, there is no need for dozens of gates and thousands of employ ees to handle banks of ights that come in and then disperse within a twohour window, leaving the hub empty until the next ights a few hours later. The result: Southwest can operate with far fewer employ- ees than airlines that fly through hubs.M Case Discussion Questions 1. How would you characterize the business model of Southwest Airlines? How does this differ from the business model used at many other airlines. such as United and American Airlines? 2. Identify the resources, capabilities, and distinc- tive competencies of Southwest Airlines. 3. How do Southwest's resources, capabilities, and distinctive competencies translate into superior financial performance? 4. How secure is Southwest's competitive advan tage? What are the barriers to imitation here