Southwest

CASE: HR-1A DATE: 1995 (REV’D. 04/05/06)

SOUTHWEST AIRLINES (A)
“The workforce is dedicated to the company. They’re Moonies basically. That’s the way they 1 operate.” —Edward J. Starkman, Airline Analyst, PaineWebber

Ann Rhoades, vice president of people for Southwest Airlines, was packing her briefcase at the end of a 17-hour day. Tomorrow was an off-site meeting with the top nineexecutives of Southwest Airlines. The agenda for the meeting was to review Southwest’s competitive position in light of recent actions by United and Continental, both of whom had entered Southwest’s low fare market. That day’s New York Times (September 16, 1994) had an article that characterized the situation as a major showdown in airline industry: This is a battle royal that has implications for theindustry, said Kevin C. Murphy, an airline stock analyst at Morgan Stanley. The battle will, after all, be as much a test of strategy as a contest between two airlines. United and other big carriers like USAir and Continental have decided that they can lower their costs by creating a so-called airline-within-an-airline that offers low fares, few flights, and frequent service. The new operations areunabashedly modeled after Southwest, the pioneer of this strategy and keeper of the healthiest balance sheet in the industry.2 The reasons for this competition were easy to understand. Over 45 percent of United’s revenues came from passengers who flew through its California hubs. As a market, the California corridor was the most heavily traveled in the United States, which had 80 percent moretraffic than the Boston-New York-Washington corridor. Yet United’s share in this market had fallen from 38 percent in 1991 to 30 percent in 1993. During the same period, Southwest’s share had increased from 26 percent to 45 percent. Other airlines, like Continental, had also been hurt by Southwest’s competition. Southwest’s success
1 2

Peter Elsworth, “Southwest Air’s New Push West.” New YorkTimes, June 16, 1991. Adam Bryant, “United’s Bid to Rule Western Skies,” New York Times, September 16, 1994.

This case was prepared by Professors Charles O'Reilly and Jeffrey Pfeffer as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 1995 by the Board of Trustees of the Leland Stanford Junior University. Allrights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form orby any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of the Stanford Graduate School of Business.

Southwest Airlines (A) HR-1A

p. 2

spawned a number of imitators, including new airlines like Kiwi and Reno Air as well as major airlines like United and Continental. Concerned with this new competition, the market had driven down Southwest’sstock price and analysts were raising questions about how sustainable Southwest’s advantage really was. Rhoades, a former marketing executive with an MBA from the University of New Mexico and a background in banking, had joined Southwest in 1989 to help transform the People Department (Human Resources in most organizations). Southwest had always believed that an important part of its competitiveadvantage rested with its people and how they were managed. Ann’s job was to help leverage this advantage. At tomorrow’s meeting she would be asked to review Southwest’s current position in light of the new competition. She had prepared a brief overview of what she saw as the major threats and opportunities of the competition and an assessment of Southwest’s strengths and weaknesses in light of...