Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
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Southwest Airlines An analysis of the factors of motivation,
culture, leadership and structure Ryan Abbott ORG580 Dr. Becky
Takeda-Tinker In partial fulfillment of the Master of Management
Degree Colorado State University-Global Campus December 2009
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
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Table of ContentsChapter I-Introduction Introduction and
Background
..................................................................................................................
5
Leadership and Management Theories
............................................................................
8 Key Factors
......................................................................................................................
9Research Sources
......................................................................................................................
10 Chapter II- Literature Review Organizational Design and
Structure
......................................................................................................
11 Early
Theorists...........................................................................................................................
11 Modern Theorists
......................................................................................................................
12 The Systems Approach
..............................................................................................................
13
Power and
Leadership...............................................................................................................
14 Power
............................................................................................................................
14 Fiedler s Contingency Model
.........................................................................................
15 Path-Goal Theory
..........................................................................................................
16 Organizational Culture
..............................................................................................................
16 Culture Theory
..............................................................................................................
16 Types of Culture
............................................................................................................
18 Human Relations Management
.................................................................................................
20 Motivation
....................................................................................................................
20 Job satisfaction
..............................................................................................................
21Chapter III- Methods Introduction
..........................................................................................................................................
22
Theoretical Framework
.............................................................................................................
22 Outcomes
.................................................................................................................................
24Chapter IV- Application and Analysis Introduction
..........................................................................................................................................
26
Industry Analysis
.......................................................................................................................
27 Power and
Leadership...............................................................................................................
31
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Organizational culture
...........................................................................................................................
34
Human Relations Management
.................................................................................................
36Chapter V- Summary and Recommendations
Summary
..................................................................................................................................
39Appendices Southwest Airlines Mission Statement
...................................................................................................
41
Corporate Structure
..................................................................................................................
41 Capital Asset Pricing Model (CAPM)
..........................................................................................
45Weighted Average Cost of Capital (WACC)
.............................................................................................
46
Ratio Summary-Table 1
.............................................................................................................
48 Working Capital Management
..................................................................................................
49Income Statement
.................................................................................................................................
50
Balance Sheet
..........................................................................................................................
52 Cash
Flow..................................................................................................................................
54Income Statement-10 Year
Summary.....................................................................................................
56
Balance Sheet-10 Year
Summary...............................................................................................
57References
References.............................................................................................................................................
58
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Abstract
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Southwest Airlines is the current low-cost leader in the air
travel industry, taking care to keep costs down in every aspect of
day-to-day operations, which allows them to pass the savings on to
customers, resulting in higher returns for investors. This report
details the factors that are plausible to the success of Southwest
Airlines, examining their strategic structure, analyzing their
leadership and culture, and discussing the companys human relations
aspect that motivates and satisfies a vast workforce across the
United States. These key points are all considered important
indicators of an organizations health through this analysis.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
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CHAPTER 1 Introduction and Background Early endeavors from the
Romans to the Egyptians where groups of people were organized and
led to accomplish a planned task exhibited some of the earliest
principles of management theory. From Frederick Taylor and the
scientific management principles he espoused to the 14 Principles
set forth by Henri Fayol and the theoretical constructs of
organizational behavior and the systems approach, management has
evolved and adapted with the times to varying degrees of success
(Robbins & Coulter, 2007). The simplest term of managing as
defined by Robbins & Coulter (2007), is to coordinate and
oversee the work activities of others to complete a task
efficiently and effectively and has changed little since the Romans
and Egyptians. However, the ideas of management have varied but the
simple definition remains constant. What then constitutes a good
management theory? How these groups are managed, successfully or
not, is often up to the manager or leader of the group. Some argue
that leaders are born and not made while others take an opposing
view. In any light leadership can make or break a company. The top
leadership in any organization should set the course the
organization shall take and embody that organizations culture. What
they do and what they say are important and should be seen as
important by those within the organization. Through their actions
and words leaders can shape the culture within the organization and
perpetuate its success or failure (Spector, 2007). A leader,
according to Robbins and Coulter (2007), is someone who can
influence others and who has managerial authority. (p.488)
Leadership is what leaders do. More specifically, its the process
of influencing a group to achieve goals (Ibid). To be an effective
change agent a leader needs to focus on driving the
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mission and vision of the organization that must be embodied in
the culture of the organization through management control efforts
and a transformational style of leader. Through a strong and
visionary leader an organization can lay out its vision, mission,
and execute a plan that embodies the whole of the corporation that
will allow it to accomplish great endeavors. Strategic planning is
a process that involves describing the organizations destination,
assessing barriers that stand in the way of that destination, and
selecting approaches for moving forward. The main goal of strategic
planning is to allocate resources in a way that provides
organizations with a competitive advantage. Overall, a strategic
plan serves as a blueprint that defines how the organization will
allocate its resources in pursuit of its goals (Aguinis, 2009,
p.51). This blue print is driven in large part by the leadership
and the overall mission of the organization. A mission statement
can be used to guide the organization and define its overall
culture; however, it is the CEO and other senior corporate officers
that must set the tone at the top. The mission statement represents
the goals the company will strive to achieve and the commitments it
has made to its various constituents-employees, shareholders,
customers, and others (Epstein, 2009, p. 71). From the top
leadership the mission and vision are borne that drives the
companys plan and its culture. According to Aguinis (2006), a
mission statement summarizes the organizations most important
reason for its existence and provides insight into the purpose and
scope of the organization as a whole. Every organization has a
mission, a purpose, a reason for being. Often the mission is why
the organization was first created-to meet a need identified many
years ago. Sometimes, the same problems that the organization
initially tried to address continue to haunt generation after
generation. In that case, the organizations purpose does not
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change-although how it does business has probably evolved. Other
times, even 10 or 20 years can change the landscape so markedly
that the original mission must be updated, altered, or changed
dramatically in order to address those new realities (Radtke, 1998,
p.1). Through effective leadership an organization can have a
strong culture. Organizational culture is defined as A pattern of
shared basic assumptions that the group learned as it solved its
problems of external adaptation and internal integration that has
worked well enough to be considered valid and therefore, to be
taught to new members as the correct way to perceive, think, and
feel in relation to those problems (Schein, 1992). This culture is
borne of the vision and mission and can serve as a motivating
factor for the organization. Through a strong culture that is
espoused through the visionary leader, employees feel a sense of
security and satisfaction. This safe cultural harbor exists to
motivate the employees to accomplish great tasks as a family or
clan.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Leadership and
Management Theories
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Like any solid structure an organization needs to be built upon
a solid foundation. Just as the Romans and Egyptians great building
projects, every organization since that time has exhibited certain
characteristics of management from planning, organizing, leading
and controlling. From the early theories of classical and
scientific management, Fayols 14 principles and Webers theories, to
the more modern and progressive thinkings of McGregors Theory X and
Y (1960) to the systems approach, management theories and
principles abound and create the organizations that have driven
global expansion. How an organization is designed, its structure,
and corporate governance are all considerable assets to the
organizations overall effectiveness and strength. An organization
can have a strong foundation based upon any management theory and
still not be effective if the leadership is not effective. Power
and leadership in organizations are carried out in a variety of
manners. Leaders have been overseeing the execution of work since
the Romans and Egyptians. The manner in which they lead and utilize
their power in a transformational manner or through use of coercive
efforts illicit a response in the followers that ultimately
determines the effectiveness of the organization. This
effectiveness is in large part due to the culture that the leader
creates and the followers are willing to accept (Vecchio, 2009).
Culture, however, is not a new concept, it has been present since
before the Romans, yet our understanding of how it is applied and
exhibited within an organization is new as modern management
theories are concerned. From Fiedlers (1974) early ideas on the
topic to the groundbreaking works of Schein, organizational culture
and its constructs are a new paradigm in viewing how organizations
are effective. However, the fundamental concept of how leaders
approach an organization and lead and control the followers and how
the culture can contribute
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to employee morale, loyalty and motivation, have a lasting
impression on the success or failure of the organization. It is
human nature to have needs that must be satisfied; hunger, love,
safety, acceptance, etc. (Maslow, 1954). These needs are also
manifested in how we are motivated and the satisfaction generated
from being productive and working (Herzberg, 1966). Yet, to be a
truly motivated and satisfied worker and member of an organization,
leaders have to foster a spirit of inclusiveness and bestow rewards
upon their employees, either in an intrinsic or extrinsic fashion.
Through a strong culture employees are afforded a satisfying need
to be part of the larger family or clan aspect of the organization,
and many employees have found incentive in varying degrees and
forms to contribute to the organization to further its continued
success, as well as the employees. This study will analyze
Southwest Airlines and the forces that have contributed to its
successes, financially and otherwise, from the overall leadership
of the organization through management theories and organizational
design constructs that have allowed the airline to create a culture
that has motivated followers and created continued success. Key
Factors The key factors for this study assume that the basic
theories of management hold true in the organization selected, that
is: do the organizational constructs based upon the founders
philosophies contribute to the overall success of the organization?
It is assumed that the culture created through the leadership
within the organization has contributed to employee motivation that
has forced the organization down the path that the leaders had
intended. If this is then the case is it the leader, the followers,
or other mitigating factors that have created the success?
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Research Sources
Many of the underlying premises for this study are found in the
basic textbooks of
10
graduate school coursework on management, organizational
behavior, and leadership theories. Though not exhaustive or
complete, the works of many theorists that have been examined for
this analysis come from the textbooks and many were developed
through a more thorough effort to conduct research from the primary
sources. This analysis has focused on the seminal works of the
likes of Maslow, Herzberg, Fiedler, Schein, Kotter, Vecchio, and
Bass who have all contributed to theories in organizational
management, behavior, leadership, and social psychology. The
selected airline and its industry are the noted figures of this
analysis and industry specific research will be conducted to the
effectiveness of the corporation selected.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES CHAPTER 2
Literature Review Organizational Design and Structure
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The historical context of organizational design and management
has been around since organized endeavors have planned, organized
and directed activities such as the building of the pyramids of
Egypt, the Roman aqueducts, and the Great Wall of China. Through
the ages different approaches to management were developed and
refined from scientific/classical management and general
administrative or human relations theory to the theories of systems
approach and the contingency model (Robbins & Coulter, 2007).
As America became more industrialized and advanced the management
theories evolved to reflect growing trends in society and business.
The newer theories by McGregor and Drucker, Theory X/Y and
management by objectives respectively, grew from the early
classical thinkings of Frederick Taylor and his 4 principles of
management and Henri Fayols five functions of managers (Robbins
& Coulter, 2007). Early Theorists Early theorists in the
classical school of management theory introduced concepts that are
still heavily utilized in organizations to this day. Henri Fayol
introduced the five critical elements that all managers in
organizations must do: plan, organize, command, coordinate and
control, many of these ideas are basic tenets that managers rely
upon in the strategic planning process in todays modern
organizations. Fayols five functions coupled with his 14
principles, that included division of work; the scalar chain;
equity; and esprit de corps (Robbins & Coulter, 2007), laid
much of the groundwork for the ensuing theorists to base their
principles of management theory upon. Through Fayols theories the
practical application of a managers
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work could be categorized into functions for employees and the
organization (Stanley, 2004). Fayols principles and theories during
the day were widely heralded as a new paradigm in management theory
and adapted and adopted in many fields. Building upon Fayols
theories, Max Weber established the idealization of bureaucracy
within an organization. This concept espoused that organizational
form should be considered through the division of labor, hierarchy,
rules and regulations, and impersonal relationships (Robbins &
Coulter). Webers theory grew out of the thought of controlling the
organization much like the 14 principles of Fayol. This control was
an idealized version of the organization and the constructs of
bureaucracy to emphasize rationality, predictability,
impersonality, technical competence, and authoritarianism (Robbins
& Coulter, 2007, p.33). Webers theory grew out of the
authoritarian and impersonal Gilded Age of the late 19th century
that saw the expansion of industrialization and wealth in the
United States his theory became the model structural design for
many of todays large organizations (Ibid). It was through Fayol and
Webers theories that a new paradigm in the management field was
growing in a post industrialized nation would continue to be
heavily utilized, adapted, and adopted over the next century.
Modern Theorists The underpinnings of modern theory date back to
the theories of the classical or scientific management school of
thought and the teachings of Fayol and Weber. However, the modern
theories of McGregor and the systems approach grew out of a
transitional period in post war America during the 1960s. McGregor
(1960) initially posited in his Theory X that the average human
being has an inherent dislike of work and will avoid it if he can
(p.33). This theorys roots lie in the early works of Fayol and
Weber and their espousal of a strict authoritarian control
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of the division of labor within organizations. However, as
McGregor (1960) stated to some, the preceding analysis will appear
unduly harsh. Have we not made major modifications in the human
resources of industry during the past quarter century? (p.45). With
this paradigm shift, McGregor began to examine the human dimension
and its influences on the overall affect on management and the
organization. As McGregor (1960) stated, there is no question that
important progress has been made in the past two or three decades.
During this period the human side of enterprise has become a major
preoccupation of management (p.45). It was through this new
preoccupation that McGregor posed his new theory, labeled theory y,
which was vastly different than that of theory x and assumes that
people will exercise self-direction and self-control in the
achievement of organizational objectives to the degree that they
are committed to those objectives (p.56). Through his theories
McGregor instituted a paradigm shift that still held the classical
underpinnings that organizations were based upon authority and the
division of labor, however a new dimension to organizational
effectiveness based upon human relations entered the equation. The
Systems Approach Building upon the natural evolution of
organizational theories, the systems approach grew from the
theories in both the natural and physical sciences (Mullins, 1999).
This new approach to organizational behavior examines the
organization as a system, according to Gibson, et al. (2009) that
consists of a grouping of elements that individually establish
relationships with each other and that interact with their
environment both as individuals and as a collective (p.19). Through
the systems approach, expanding upon the concepts of Fayol and
other earlier theorists, the organization is viewed as a whole
operating machine that consists of inputs and creates outputs
through the process of transformation (Robbins & Coulter,
2007). In this new
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approach all facets of the organization are integral to its
successes. What this means is that the managers coordinate work
activities in the various units of the organization, they ensure
that all these interdependent units are working together so that
the organizations goals can be achieved (Robbins & Coulter,
2007, p. 38). In short the manager has to have the power to
exercise his influence across the whole of the organization and
establish goals and lead the organization towards those goals.
Power and Leadership Power Organizational design and structure are
fundamental components to the success of an organization; however,
power and leadership at the top can be critical to the success of
the organization. Authority and power demand respect and can be
garnered in numerous different ways, from legitimate, coercive and
referent, power is the cornerstone of how leaders shape the
structure and culture of the organization. The power exerted by a
leader can be a driving force in the culture and motivation of
employees One of the early theorists on authority in organizations,
Max Weber, posited that organizations were one of three distinctive
authority types; traditional, charismatic, and bureaucratic, and
that superiors within the organization base their power over
subordinates upon these constructs (Mullins, 1999). In the
traditional sense authority is legitimized by custom and a long
standing belief in the natural right to rule (Ibid, p. 96). Others
feel that through formal rules and procedures that the bureaucratic
authority is established. Yet, others feel that, as Weber alluded
to, authority is based upon the belief in the personal qualities of
the leader (Ibid, p.96). From early theories on authority, such as
Webers, the thinking on power and leadership has been a growing
field within management theory that has garnered much
attention.
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Power is exhibited differently by different people throughout an
organization. However, the style and tone should be set at the top
and filter down through the organization. This style and tone can
have different consequences based upon the power exhibited by top
leaders in the organization. If a leader is to lead in the
legitimate sense then they would automatically have power based
upon their position within the organization. Subordinates are a
critical component to legitimate power in the fact that if they do
not see the power or authority as legitimate then they are more apt
to not follow the figure (Gilley, 2006). If power is not
legitimatized then other approaches must be taken through coercive
actions. Coercive power, as Gilley (2006) states is the ability to
punish others and some subordinates may comply because of fear.
This power structure may seem contradictory to common leadership
practice; however, it is effective in compliance and corrective
action issues and managers often utilize this style when large
numbers of employees comprise the organization (Gibson, et al.
2009). However, it may be that many of the individuals in a large
organization are influenced by a leader due to their personality or
behaviors that may be more common or referent to those within the
organization (Gibson, et al. 2009). As Gilley (2006) articulates
referent power is based upon a personality or style of behavior
marked by charisma and personal magnetism that easily attracts
admiration and appeal (p.23). It is through this type of power and
leadership style that the exceptional leader can establish trust
and loyalty in his followers and throughout the organization.
Fiedlers Contingency Model It was through the early work of Fred
Fiedler that the ideas of leadership were poised to take shape
through the leaders style and situational factors. As Robbins &
Coulter (2007) argue, Being an effective leader requires not only
an understanding of traits and behaviors, but an
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understanding of the situation in which the leader is attempting
to lead, as well (p.493). It was Fiedler who argued for two styles
of leadership in task-oriented leadership and relationship oriented
leadership. Through these two models the personality was the
cornerstone to which model was employed by the leader and the fact
that leader cannot employ both models. Individuals in leadership
positions will be more comfortable, sincere, and effective
practicing the leadership behavior that supports their own
underlying personality (Robbins & Coulter, 2007, p.321). It was
through Fiedlers work that the idea of leader-member relations,
task structure, and position power were first posed. Through these
thinkings, much like the idea of the power of authority a leader
exhibits in an organization as proposed by Weber, these models
contend that a leader leads with confidence, trust, respect and
important structures of subordinates jobs through the amount of
power they exhibit through their position (Gibson, et al., 2009).
The power structure from the early thinkings of Weber had
progressed to be more inclusive in Fiedlers contingency model as to
the personality that the leader exhibits and how that is carried
out through the goals he sets within the organization. Path Goal
Theory As Gibson et al. (2009) argued, like other leadership
approaches such as Fiedlers contingency model the path-goal
leadership model assumes how leaders are effective in different
situations based upon their effect on their followers. As Robert
House developed the early model of path-goal he espoused that
leaders are effective because of their positive effect on followers
motivation, ability to perform, and satisfaction (Gibson, et al.
2009, p.325). The effectiveness of the leader through the path-goal
theory has been broken into four distinctive behaviors: directive
which proposes that subordinates know what is expected of them;
supportive
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in the fact that the leader treats subordinates as equals;
participative leaders offer suggestions and ideas to subordinates
to reach a conclusion; and achievement-oriented leaders who set
goals and have expectations of subordinates (Gibson, et al. 2009).
The path-goal method takes a charismatic and transformational
leader that can set goals and motivate their followers to achieve
those goals and those of the organization (Robbins & Coulter,
2009). The transformational leader stimulates and inspires
followers to achieve outcomes through establishing goals and
objectives (Robbins & Coulter, 2009). This type of leadership
style is built largely upon the transactional leader style however
it does not espouse legitimate authority over the followers to
accomplish goal. Transformational leadership according to Gibson et
al. (2009) espouses an internal reward factor in the followers
through the leader expressing a vision, the transformational leader
persuades followers to work hard to achieve the goals envisioned
(p.354). It is through the path-goal model that the
transformational leader motivates his employees to become followers
as they gain an intrinsic value which creates a strong culture
within the organization allowing it to grow and accomplish great
things. Organizational Culture Culture Theory Theories surrounding
culture have been prevalent in various disciplines such as
anthropology, psychology and sociology (Bass, 2006). However, as
Hofstede argues, culture is a construct, that means it is not
directly accessible to observation but inferable from verbal
statements and other behaviors and useful in predicting still other
observable and measurable verbal and nonverbal behavior (Vecchio,
2007, p.484). Yet, this latent phenomenon has a potent impact on an
organization through the shared values, thoughts, perceptions, and
behaviors of individuals and the organization (Schein, 1999) as a
whole that the leaders and followers either
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accept or reject as the overriding force of the organization. As
Schein (1999) highlighted, culture exists at several levels, and
that we must understand and manage the deeper levels (p.15). It is
through this examination that you can then understand the
multifaceted concept of culture; deep, broad and stable. As Gibson
et al. (2009) argue strong cultures emerge in an organization when
the employees share and accept the values and behaviors that are
portrayed throughout the organization and have a greater impact
upon employee satisfaction and motivation. Types of Culture As
Fiedler (1974) asserted, the emphasis placed upon the individual as
the basis for the examination of organizational climate has been on
interpersonal aspects of the situation (p.57), he also states that
some writers have identified its components as the degrees of
managerial support, concern for new employees, and conflict within
or between departments of the organization. Others have defined
organizational climate as including organizational constraints and
red tape, the degree to which the employee has independence to make
decisions, the nature and frequency of rewards, challenge and risk,
and warmth of support (ibid). This breaks down the generalization
of organizational cultures into various types. Types of culture
based upon Fiedlers analysis and the theory posited by Schein show
that the individual is a large component of the general property of
organizational culture. The various types of culture; bureaucratic,
clan, entrepreneurial, and market, all are based upon the
individuals perception of the shared values and norms within the
organization and how they are neatly classified into those
categories. In the bureaucratic cultures as Gibson et al. (2009)
argued, the individual prefers rigidity and hierarchy and can
easily identify with the formal rules and procedures that are
prevalent in organizations such as the military. For
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individuals who prefer less formal authority and align
themselves with the rituals, traditions and sociability of the
organization may prefer the close knit familial unit of the clan
culture according to Gibson. Yet, others, as Fiedler argued, may
like independence and autonomy and prefer the entrepreneurial
culture that allows them to set goals and take risks (Gibson, et
al. 2009). However, others prefer the market culture and its
reliance on the bottom line and profitability and has little effort
from individuals given towards teamwork (Ibid, 2009). Regardless of
the type of culture that is prevalent within an organization the
tone must be set from the top. According to Smith & Vecchio
(2007), the founder of a company, or small group of founding
members who start a firm, can play a particularly important role in
the development of an organizations culture (p.494). It is the
philosophy of the founders and the norms, beliefs, stories, and
rituals that they establish at the onset that become the lifeblood
of the organization and its culture. Myths and stories, as Gibson
(2009) stated are the tales about the organization that are passed
down over time and communicate a story of the organizations
underlying values (p.39). Myths coupled with the rituals, or
recurring events or activities that reflect important aspects of
the underlying culture (Gibson 2009, p.39) can create a strong
culture based upon the founders role in affirming the myths and
rituals within the organization. As Gibson (2009) states older
strong culture organizations have established stories, use symbols,
conduct rituals, and even use their own language. In a strong
culture organization, the core values are widely shared, respected,
and protected (p.39). Through the founders vision and the
establishment of rituals and traditions the culture is poised to be
well received by the employees who will be more motivated and find
satisfaction in their jobs within this strong organizational
culture.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Human Relations
Management
20
Human relations and performance management are critical
components to the success of any organization. According to Aguinis
(2009) performance management is an ongoing process that involves
several components that are closely related and that human capital
is the greatest asset to any organization. How this capital is
managed and motivated and they find satisfaction in their job is
part and parcel to the continued success of the organization.
Motivation Motivation of an individual is a challenging task as
each individual has different needs and feels motivated based upon
different internal factors (Robbins & Coulter, 2007). From the
earl theories of Maslow (1954) and his hierarchy of needs that
espouse that an individual needs to have certain basic requirements
(food, shelter, etc.) met in order to be motivated to the more
modern theories of goal-setting that posit that an individual needs
to have specific goals proposed to them and their performance is
based upon the rewards associated with the assigned task which
allows them to be motivated (Robbins & Coulter, 2007).
Motivation can be achieved through assigning tasks to an individual
that are rewording and allows them to receive satisfaction from
their job. As previously outlined, groundbreaking work as to the
organizational design as posited in McGregors (1960) theory y is
also a construct in how employees are motivated. Theory y assumes
that people will exercise self-direction and self-control in the
achievement of organizational objectives to the degree that they
are committed to those objectives (McGregor, 1960, p.56). If, as
McGregor argues with his Theory Y the amount of control given to
the employees is abundant then the motivational factor is even
greater which allows the employee to do their job with great
satisfaction.
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21
Job Satisfaction Job satisfaction is a critical component of
employee motivation. Through satisfaction with their job an
employee is motivated to continue to strive to accomplish tasks
that were set out for them. As Gibson, et al. (2009) contend, job
satisfaction involves many factors of how an individual perceives
their work environment; from a supervisors style, working
conditions, and benefits. Yet, there are five crucial
characteristics according to Gibson, et al. (2009) that encompass
the generalization of job satisfaction that include; pay, job,
promotion opportunities, supervisor, and co-workers (p.106). These
key factors may be a determinant of an employees ability to be
motivated and be productive and do a satisfactory job. This
satisfaction in turn can then create customer satisfaction which
makes the organization viable and increases the bottom line.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES CHAPTER 3
Methods Introduction
22
This study will analyze Southwest Airlines and the forces that
have contributed to its successes, financially and otherwise, from
the overall leadership of the organization through management
theories and organizational design constructs that have allowed the
airline to create a culture that has motivated followers and
created continued success. Through the theoretical constructs of
organizational design, culture, leadership, and human motivation
this analysis will examine how organizations can function and
thrive. Theoretical Framework This analysis is based upon the
construct that the theories examined are all interconnected in some
fashion; whereby form follows function in a sense from the
thinkings of modern theories that were based upon classical thought
in the development of organizations. If there is a breakdown in any
of the manners of theoretical areas within the organization, that
of the leader/follower, structure, culture, and system, then an
overall failing of the organization may result. Through the
organizations strategy and its mission, goals, and objectives
propelled by top leadership, as set forth through the founders
principles, has established the overall philosophy and governance
of the organization that determines its future performance.
Southwest Airlines, from its inception, has run like a well oiled
machine to ensure that all pistons-leadership, system, culture,
etc.-are working in concert. Through the founders principles,
Southwest has adhered to and maintained their core philosophy and
strategy that has driven the company and created their continued
success
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
23
All humans, according to Maslow, have basic needs that must be
met for an individual to feel satisfied. This ideal is one
construct of the larger human relations management theory and
movement. It has often been said that human capital is the greatest
asset to any organization (Aguinis, 2007). This need of
satisfaction for the greatest asset in the organization is typified
in the motivation and incentives of an employees job. It is through
this motivation and satisfaction that employees feel as they are a
valuable and integral part of the organization. This then creates
employee loyalty to the organization and a sense of belonging to a
group of like individuals. The culture that has thrived, and
continues to so, at Southwest is legendary and an almost cult-like
religion. From this familial clan unit and the fostering of the
group cohesiveness from the employees at Southwest are afforded
great satisfaction and motivation from and through their peers and
leaders. This group of individuals within the organization that
feels valued creates a sense of strong culture within the
organization (Schein, 1999). This strong sense of culture that
stems from the motivation and satisfaction of the individuals and
is often reflective of the organizations leadership allows the
leaders to exert their power and control over the followers.
Leadership and power are reflective of the overall strengths,
traits, and behaviors of an individual (Robbins & Coulter,
2007) and how they apply these traits and utilize their power to
exert influence in either a negative or positive manner. Much
thought has been given to leadership and how leaders lead over the
ages and the impact they have on their followers. Through an effort
to extol power over someone in a coercive manner through punishment
to the charismatic transformational leader that enables the
followers to feel value (Vecchio, 2009) the context of the
organizations design and culture can be shaped by the traits and
behaviors the leader exhibits. It is through this analysis of the
leadership style within the organization that the key factor may be
determined that the leaders set the tone of the organization and
allows the
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
24
followers to create a strong culture and in essence a strong
organization. The accolades for both Southwest Airlines and its
founder and former CEO, Herb Kelleher, are many. Through Kellehers
charismatic, flamboyant, and zany personality that exudes
confidence and is brimming with fun, no other leader could have
created organized, lead and sustained in as legendary a fashion as
Kelleher. Many theories abound regarding organizational design and
management; from the classical thinkings of Fayol and Weber to the
more modern theories that have a human dimension to them as
McGregor alludes to in his theories, the design and function of an
organization can be the catalyst for the organizations successes or
its failures and its ability meet the bottom line and create value.
It is through the strategy and implementation of the overall
mission, goals and objectives of the organization through the
chosen system and management philosophy that the organization in
essence can determine its own fate as to its future continued
success. This analysis will examine the mission and structure of
Southwest Airlines and its simple strategy for organizational
management and how they have contributed to the overall success of
the organization. The simple strategy that was instituted in the
beginning has been a cornerstone for the continued successes at
Southwest and in the airline industry that has befuddled many that
have tried to imitate it to little avail. Outcomes Through an
examination of the theoretical constructs as described this
analysis will attempt examine the leadership style and their
foundations and the constructs and the implementation in the
organization and how these theories affect the culture through the
motivational aspects of the employees which in turn generates
profits in a value added environment. Through analyzing Southwest
Airlines and their innovative culture and the industry
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
25
norms in which they operate a conclusion should be evident as to
the financial outcomes of the organizations.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES CHAPTER 4
Application and Analysis Introduction Southwest Airlines is a
low-cost domestic airline headquartered in Dallas, Texas,
26
servicing primarily leisure travelers on short-haul routes.
Southwest currently operates 520 of the 737 type aircraft serving
411 nonstop city pairs (Datamonitor, n.d.). While the airlines
primary customer base is the leisure traveler, they also provide
airline service to business travelers, as well as, limited freight
transportation. The story of Southwest Airlines began in 1967 as a
diagram on a cocktail napkin, however it would be years before the
airline would take flight in 1971. Southwest Airlines began as the
brainchild of Rollin King, a San Antonio entrepreneur, and Herb
Kelleher, a prominent San Antonio lawyer who saw a need to create a
regional airline that served the Dallas, Houston, and San Antonio
triangle (Freiberg, 1996). Through the visionary style and
leadership of cofounder and former CEO Herb Kelleher, Southwest
Airlines has had a remarkable flight path in terms of corporate and
financial success. The simple corporate structure and legendary
culture of Southwest was borne out of Kellehers visionary
leadership and his willingness to go the extra mile and do the
right thing that has set the mission for Southwest. The airline has
countless stakeholders that depend on and affect the success and
viability of the organization. The airline is customer and employee
oriented; therefore these two groups unarguably have the greatest
stake in the airline. Customers depend on this airline to provide
discounted, competitive travel options and have come to expect
above par customer service. As a result, a large part of the
airlines success is a consequence of their commitment to providing
the highest level of customer service with pride and caring
(Rhoades, 2006, p. 542). This
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
27
unrelenting commitment to customer service has enabled the
airline to build and maintain a loyal customer base, ensuring
future success. Southwests successful flight path was driven by
discipline that is instilled in the mission, vision, values, and
culture that embodies Southwest Airlines that has lead to a company
that has been profitable for more than 35 years while maintaining a
core philosophy and strategy that has endured through economic
downturns carried out through brand loyalty to ensure the customers
low fare no frills air transportation with a fun loving spirit and
zany attitude. Industry analysis Few inventions have changed how
people live and experience the world as much as the invention of
the airplane. Since the first flight by the Wright brothers at
Kitty Hawk in 1903 to the creation of interstate routes and
international travel with jumbo jets, the airline industry has seen
enormous growth and staggering competition. The airline industry
exists in an intensely competitive market. Not only from within but
without as well, through auto and bus travel competition. According
to Investopedia, The airline industry can be separated into four
categories: International - 130+ seat planes that have the ability
to take passengers just about anywhere in the world. Companies in
this category typically have annual revenue of $1 billion or more.
National - Usually these airlines seat 100-150 people and have
revenues between $100 million and $1 billion. Regional - Companies
with revenues less than $100 million that focus on shorthaul
flights. Cargo - These are airlines generally transport goods.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Southwest
airlines originally began as small regional airline in the Texas
Triangle
28
between Houston, Dallas, and San Antonio and grew to national
prominence with deregulation in 1978 that allowed them to fly
interstate routes. Through focusing on a regional/national
definition of airline travel and keeping costs low and offering
little product differentiation (to both customer and supplier)
Southwest has changed how the industry operates. Gone are the days
of the larger corporation dictating price and service. Southwest
has done well to set them apart from the competition in the
industry and has consistently ranked among the tops in the industry
several years running in on-time records, fewest customer
complaints and misplaced bags (Freiberg, 1996). This success has
been achieved through Southwests adherence to their core principles
and believing in themselves and their customers. From their humble
beginnings, scratched out on a cocktail napkin, to becoming the
most successful and profitable airline within the industry,
Southwest Airlines has found a recipe for success that many others
cannot imitate, the key to success at Southwest has been due to
unrelenting discipline. Southwest Airlines recipe for success is
really no secret at all. Throughout its existence, Southwest has
consistently adhered to a clearly defined purpose and a
well-thought-out strategy for accomplishing it. As simple as it
sounds, Southwest Airlines exists to make a profit, achieve job
security for every employee, and make flying affordable for more
people (Freiberg, 1996, p.49). Much of the success was borne from
the simple vision and strategic plan set forth by the founders. The
founders believed the key to corporate success lie in discipline
and simplicity; flying one type of aircraft, a horizontal
structure, flying short routes. This simplicity coupled with the
values that drive the corporation have been the recipe for success
at Southwest for more than 35 years.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
29
From the beginning, Kelleher, then a board member and the
airline's chief counsel, was Southwest's "master strategist"11 and
led development of its point-to-point, intra-Texas, discounted
fares for business travelers. Southwest considered the automobile
its primary competition, and priced its flights to present a
faster, more convenient alternative to driving. Its 1971 premier
flight from Dallas to Houston cost $20 per ticket. The cheap fares
were revolutionary. Other airlines charged three times as much. To
make money on such low fares, the upstart airline was very strict
on minimizing costs. From the beginning, that meant no frills. As
time went on, those cost savings expanded to include a fast
turnaround - 10 to 20 minutes in and out of the gate. Since then,
Southwest's business model hasn't changed. Its planes have never
served a meal and the 20-minute-turnaround is a Southwest hallmark.
As a result, Southwest's costs are 22% below the industry average.
Its operating margins (16.5%) are triple the industry average
(ANBHF). The competitive advantage that Southwest Airlines has
within the industry is in part due to the vision set forth by the
founders and largely through the horizontal and functional
corporate structure that has been created and maintained at
Southwest. Kelleher's strategy, broadly stated, was low cost, low
fare, and strong-but-manageable growth to yield high profits.
Specifically, Southwest appealed to customers with affordable,
enjoyable, reliable service and made that service profitable
through tight cost controls and high capacity utilization. At the
heart of it all -the key to the successful implementation of cost
controls, great service and 20- minute turnarounds -- were
Southwest's employees (ANBHF). Southwest Airlines has provided an
excellent opportunity cost to investors over its 30 plus year
history. In examining the Principle of Risk-Return Trade-Off
according to Emery, Finnerty, and
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
30
Stowe (2007), Southwest Airlines has proven to be a lucrative
investment vehicle compared to others in the industry. It has fared
better than the 5- and 10-year T-Bill rates that were 1.09% and
2.96% respectively, in comparison with The Standard and Poor Index
(S&P 500), which yielded 5.27% for the 10-year period of 1998
to 2007; 6.72% for the 10-year period of 1997 through 2006; and
7.07% for the 10-year period of 1996 through 2005. (See Appendix-
Capital Asset Pricing Model Analysis). Much of the advantage at
Southwest has been placed upon the simple philosophy of one
aircraft, low fares, no frills. Another strategy was the manner in
which the corporation was governed and the span of control that was
exhibited form Herb Kelleher at the top down to the front line
workers. After the supervisory level, Southwest has a single layer
of middle management (directors) before the Vice President level.
Unlike the major airlines there is no geographic breakdown of
management responsibility. The Vice Presidents hold responsibility
for specific functions such as: Special Marketing, Schedule
Planning, Properties, Fuel, Treasury, Purchasing, Maintenance,
Customer Relations, Reservations, Marketing, Ground Operations,
Legal, Labor Relations, and Planning. Each Vice President reports
to one of eight Senior Vice Presidents. In turn, each SVP reports
to one of two Executive Vice Presidents, one for Customer
Operations and the other for Aircraft Operations. The two Executive
Vice Presidents, along with Southwests president (whose duties are
mostly related to investor issues and public discourse) report to
Gary Kelly, CEO. (Leavenworth) Much of the success at Southwest has
been from the value they have placed upon their employees. Yes,
they are in business to make a profit, however, how those profits
are made,
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
31
according to the Southwest Spirit, are through valuing the human
side of the enterprise and placing a greater emphasis on the
employees and how the organizational structure operates around them
and their continued successes. Human capital at Southwest has been
the driving force behind the overall success of the organization.
As McGregor (1960) argues in his Theory Y, people will exercise
self-direction and self-control in the achievement of
organizational objectives to the degree they are committed to those
objectives (p.56). This has been the embodiment of the core values
of Southwest since Herb Kelleher first scribbled his idea on a
cocktail napkin; allow the people great latitude and the company
will prosper. Power and Leadership The success of any organization
at times depends upon the top leadership within the organization.
There is a sense that a truly great leader can set the tone and
empower those around him to carry out the mission and vision he has
sought for the organization. Herb Kelleher, cofounder and former
CEO, of Southwest Airlines has been argued to be one of the
greatest organizational leaders in the past century through his
continued successes at Southwest. Kelleher has accomplished this
through his articulation of power through his personality and
charismatic behavior. This behavior and personality have allowed
Kelleher to persuade and motivate his followers to accomplish the
goals and vision of the organization. Some may attribute Southwests
success to its dynamic CEO and founder Herb Kelleher, who has been
honored as the most admired CEO in the USA by his employees. Herb
would attribute it to other factors, such as the people who work
for Southwest Airlines. Both seem to admire each other, as
evidenced perhaps by Southwest Airlines turnover rate, which is the
lowest in the U.S. airline industry (Avolio & Bass, 2002,
p.13).
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
32
Authority and power demand respect and according to Weber can be
exerted over those in organizations in various ways, from
legitimate to coercive and referent, power is the cornerstone of
how leaders shape the structure and culture of the organization.
The power exerted by a leader can be a driving force in the culture
and motivation of employees and much of the power that a leader has
over his followers is driven by the leaders charismatic style.
Southwests culture also emphasizes small supervisory spans of
control compared to the major airlines. For example, Southwest
president Colleen Barrett claims that the major airlines have 30 to
40 front-line workers to each supervisor whereas Southwest has only
8 to 9. A Southwest supervisor is on the job to help the 8 or 9
front-line employees do their jobs better, not police the duration
of someones lunch hour. The supervisors at the major airlines
perform largely administrative functions. Like most airlines,
Southwests horizontally coordinated ground employees must work
under tight time schedules and high stress. Contrary to its
competitors, Southwest has not created a flat organization based on
individual performance managed under low supervision like those of
its competitors. These flat individual structures tend to lend
themselves toward excessive finger pointing and ill will among
employees. Rather Southwest has created a horizontal organization
based on cross-functional teams to diffuse blame, with adequate
staffing to provide coaching, feedback, and learning (Leavenworth).
Much of the success that Kelleher has created at Southwest he has
attributed to the employees within the organization. Although there
are many similarities among successful and effective leaders, there
are also wide differences in attitudes, beliefs, and behavior.
Successful leaders get their followers to follow them; effective
leaders motivate and enable their followers
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
33
to reach shared goals. Such leaders create a sense of alignment
and direction that is shared by colleagues and followers (Avolio
& Bass, 2002, p.11). Kelleher has always had a shared vision,
purpose, and values for the organization he cofounded. If you study
the people who participate in dynamic leadership relationships, you
will find that the majority of them never set out to be great
leaders. Rather, they set out to pursue a purpose, a cause, or a
calling that was worthy of giving it everything they had (Freiberg,
1996, p.308). Kelleher has shown through his more than 35 plus
years of leading Southwest by example that his vision and
leadership style have resonated throughout the whole of the
organization to make Southwest what it is today. At Southwest
Airlines, leadership is practiced through collaborative
relationships. The people of Southwest Airlines work in
relationships where the roles of leader and collaborator are
interchangeable. Essentially, leadership is something leaders and
their collaborators do together. The relationship between leaders
and collaborators at Southwest Airlines is based upon commitment,
not compliance. Leadership isnt some sophisticated technique for
getting people to do what you want them to. Leadership is getting
people to want to do what you want them to do. (Freiberg,1996,
p.299). This, in essence has been the key success of Kellehers
leadership at Southwest, to allow the employees to be part of the
solution and lead the company through collaborative efforts. It has
always been Kellehers belief that he is not the lone ranger, or
sole leader, of Southwest Airlines. He has empowered the more than
35,000 people within the organization to become collaborators in
leading the success of Southwest Airlines. This has been
accomplished through Kelleher sharing a vision, mission, and higher
purpose with those collaborators and allowing them to forge ahead
to make Southwest Airlines the success it has become. Through
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
34
Kellehers dynamic leadership he has empowered the employees and
created a culture that allows the leaders to ask the employees to
accomplish great things even at a cost. Organizational Culture The
leadership at Southwest has set the tone at the top that has
allowed a robust culture to thrive within the organization. As
Smith & Vecchio (2007) have argued the founder of a company, or
a small group of founding members who start a firm, can play a
particularly important role in the development of an organizations
culture (p.494). This thinking is highly evident at Southwest
Airlines through the visionary leadership that co-founder Herb
Kelleher created. The culture at Southwest Airlines has become
legend within the corporate world and many have tried to copy it
and its successes to little avail. The idea of corporate culture is
too important to the effective functioning of todays organizations
to be dismissed as a fleeting craze. Culture is the glue that holds
our organizations together. It encompasses beliefs, expectations,
norms, rituals, communication patterns, symbols, heroes, and reward
structures (Freiberg, 1996, pp.144-5). The culture at Southwest has
been embodied in the Southwest Spirit that is the driving force
behind the companys success. The strength of the company rests on
the strong and robust culture that embodies the Southwest Spirit.
Much of the culture can again be traced back to the founders
principles and the values that Herb Kelleher envisioned to be the
integral part of the organization. In all organizations, formal and
informal values, philosophies, and norms interact and overlap to
create the fabric we call culture. Southwest is no exception.
Southwests values, philosophies, and norms are so tightly meshed
that they have created a thick culture (Freiberg, 1996, p.146). To
this end Southwest has gone to great lengths to ensure the culture
remains strong and viable.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
35
Much of the vision and values has been set forth in the mission
statement at Southwest Airlines. This mission statement drives the
culture as a founding document that ensures the employees are an
integral part of the organization and its successes and are highly
valued. As Hofstede observed, culture is an intangible thing that
can only be inferred through verbal statements on a piece of paper.
It is through these verbal statements, the mission at Southwest
Airlines, that the culture is created and it is through the
non-verbal cues that the culture at Southwest thrives. Much of the
success of Southwest is directly attributed to the culture, the
culture that founder Herb Kelleher inadvertently created through
his vision and values. However, one man alone cannot create an
overt culture that drives the organization. The clan culture that
has been instilled at Southwest grew in part out of Kellehers
vision but also due to the nature of the mission and the service
the employees were providing to customers. This culture, as Fiedler
and Schein argued, grew through interpersonal aspects of
individuals and an eschewing of bureaucracy and red tape. According
to Southwests corporate philosophy, bureaucracy exhausts the
entrepreneurial spirit, slows the organization down, and constrains
its competitive position. That is, bureaucracy creates a mindset of
dependency, which makes people do what they are told but no more.
Rather than encouraging employees to assume ownership and
responsibility, bureaucracy teaches them to transfer responsibility
(Freiberg, 1996, p.76). To ensure that the culture at Southwest
Airlines remains strong and robust the organization created the
Culture Committee in 1991 to convey an understanding of the
history, spirit, and culture of Southwest to new hires and fellow
employees (Haasen & Shea, 2003, p.98). It was through the
Culture Committee that the spirit of Southwest has been embodied
and the norms, rituals, vision and value have empowered the culture
climate to foster ownership and responsibility in the organization
that promotes job satisfaction and motivation.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Human Relations
Management
36
A vital aspect of Southwests success has been due in part to the
stakeholders; its 31,000 employees working throughout the country
(Hardage, 2006). The airlines mission to provide unprecedented
customer service could not be accomplished without equally
committed employees. While Southwest is similar to other airlines
in that it is highly unionized, they have overcome this potential
obstacle through a commitment to providing flexible contracting and
a trusting relationship between the various unions and Southwest
management (Rhoades, 2006). Of the many benefits offered to
Southwest employees, profit sharing is perhaps the most significant
benefit available to employees. The practice of profit sharing
benefits ensures employees have a vested financial interest in the
airlines success. As Aguinis (2009) human capital is one of the
most important assets that an organization has. Through motivation
and job satisfaction this capital can be a considerable asset in
the overall success of the organization in financial and other
terms. Southwest has taken great caution in managing the greatest
asset the organization has. Though they are in business to creaete
a profit and increase the bottom line, Southwest has considerable
return on investment when it comes to the emphasis placed upon the
employees within the organization. As Herb Kelleher argued in a Ney
York times article, Weve never had layoffs, we could have made more
money if we furloughed people. But we dont do that. And we honor
them constantly. Our people know that if they are sick, we will
take care of them. If there are occasions or grief or joy, we will
be there with them. They know that we value them as people, not
just cogs in a machine (Nocera). Kelleher recognized that good
employee relations would affect the bottom line. He knew that
having employees who wanted to do a good job would drive revenue
and lower costs (Nocera).
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
37
While airline customer satisfaction continues to decline on most
major domestic airlines, Southwests commitment to increasing not
only customer satisfaction, but the satisfaction and well-being of
their employees, is perhaps the most compelling reason to research
this company. The nations current financial crisis makes it all the
more important to understand the foundation that has contributed to
the airlines success. Southwest has proven that an airline can not
only be successful, but can also cater to one of their most
important stakeholders, their customers. With many airlines
instituting baggage fees, reducing the amenities available to
customers, as well as the number of service areas available,
Southwest has continued to flourish. It is important to grasp an
understanding of the strategies employed by Southwest, the
corporate culture contributing to their success, as well as, the
airlines operations and the impact of each on the financial
viability and success of the airline.Most major airlines, for
example American Airlines, focus intensely on individual
accountability. Negative focus (stimulus) accompanies the delays in
the form of a manager who seeks to find out who caused the delay
and why it occurred. The bigger the stakes, the more people
involved. If a mistake causes planes to miss their intended
connection in another city, then a minor mistake adds up to
millions of lost dollars. If this scenario occurred inside of
American Airlines, it was said that former CEO Robert Crandall
wanted to see the corpse of the employee who make the mistake.
Therefore, while the customer was alleged to be the center of
focus, it was really the negative repercussions to the employee.
Southwests culture emphasizes teamwork over individual effort.
Southwest uses a procedure called team delay which is a less
precise reporting of the cause of delays with the goal of diffusing
blame and encouraging learning. The team delay is used to point out
problems between two or three different employee groups in working
together. For example, if customers were still in the jetway at
departure time, then the delay was declared a station
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
38
delay. If customers were on-board at departure time, then it was
a flight crew delay. During a team debriefing, all members of the
crew would meet to determine the cause of the delay and learn how
not to have it happen again. Southwest headquarters emphasizes the
theme of learning from mistakes. (Leavenworth). Southwest Airlines
believes that the employees are a major priority and the driving
force behind the success of the airline. It is through the emphasis
that has been placed upon the employee from the founder principles
that Herb Kelleher set out to foster in the organization that have
created the strong and robust organizational culture that has
motivated the employees to accomplish great deeds in often uncanny
ways.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES CHAPTER 5
Summary
39
Every organization has many constructs to carry out how they
function and do business. Yet, the underlying principles of the
organization involved in this study are to increase the bottom
line. How the organization is successful in accomplishing this task
and remaining a viable corporate entity is carried out through
various theoretical constructs that have permeated organizational
management and leadership for millennia. The thoughts of the early
theorists of how to define, compartmentalize and lead organizations
are still inherent in the way organizations are operated in this
day age. The dramatic shift over the course of centuries has gone
from a predetermined focus on the organization to the more human
side of the enterprise and that of the capital asset of employees
and their motivation and satisfaction as the driving force of the
organization. How the organization in this analysis operates is
fundamental to how the employees are treated within the
organization and lead by the top leadership. Southwest Airlines
conducts business in a highly competitive industry where new
entrants are gaining market share every year. However, the
strategies that have lead to Southwest Airlines success have been
fundamental to them retaining the majority of the market share and
continuing to be a viable organization. This has been driven not by
the bottom line but from an extraordinary charismatic leadership
style that has placed a great emphasis on how the bottom line is
achieved through the asset of human capital. The success of the
organization has been driven in large part due to the success that
the founder, Herb Kelleher, has instilled and ensured through his
vision and leadership. From the founders principles and Kellehers
simple strategy Southwest has had a remarkable flight path that has
enable it to be a driving economic force through turbulent times
and remain the organization that Kelleher set out to create.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
40
For Southwest to remain a viable organization and retain their
market share they need to ensure that they adhere to the mission
and vision that Kelleher set forth for the organization more than
35 years ago when he scribbled his idea on a cocktail napkin.
Southwests vision through Kellehers charismatic and zany leadership
style that he set forth for the organization is the momentum that
has sustained the organization through deregulation in 1978 to the
post 9/11 world that saw many airlines cutting services and staff.
Southwest must maintain the momentum that Kelleher had created to
remain the success story that it has been for 35 years.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
41
Appendix Southwest Airlines Mission Statement 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. 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
(southwest.com).
Corporate StructureDirectorsDavid W. Biegler Chairman of the
Board Estrella Energy L.P. Retired Vice Chairman of TXU Corp.
Dallas, Texas Audit, Compensation (Chair) and Safety and Compliance
Oversight Committees C. Webb Crockett Attorney Fennemore Craig,
Attorneys at Law Phoenix, Arizona Executive and Nominating and
Corporate Governance (Chair) Committees Gary C. Kelly Chairman of
the Board, President and Chief Executive Officer Southwest Airlines
Co. Dallas, Texas Executive Committee
Nancy B. Loeffler Longtime advocate of volunteerism San Antonio,
Texas Compensation Committee
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
42
William H. Cunningham, PhD James L. Bayless Chair for Free
Enterprise University of Texas at Austin Red McCombs School of
Business Former Chancellor of The University of Texas System
Austin, Texas Presiding Director Audit, Compensation, Safety and
Compliance Oversight and Executive Committees John G. Denison
Former Chairman of the Board Global Aero Logistics Inc. Plano,
Texas Audit Safety and Compliance Oversight (Chair) Committees
Travis C. Johnson Attorney at Law El Paso, Texas Audit, Executive
(Chair), and Nominating and Corporate Governance Committees
John T. Montford Senior Vice President State Legislative Affairs
Western Region AT&T Services, Inc. San Antonio, Texas Audit
(Chair), Compensation and Nominating and Corporate Governance
Committees
Daniel D. Villanueva Partner RC Fontis Pasadena, California
Compensation and Safety and Compliance Oversight Committees
Honorary DesignationsHerbert D. Kelleher Chairman Emeritus
Southwest Airlines Co. Dallas, Texas Colleen C. Barrett President
Emeritus Southwest Airlines Co. Dallas, Texas
OfficersGary C. Kelly* Chairman of the Board, President and
Chief Executive Officer Robert E. Jordan* Executive Vice President
Strategy and Planning Kevin M. Krone Vice President Marketing,
Sales and Distributio
Teresa Laraba Vice President Ground Operations
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
43
Ron Ricks* Executive Vice President Corporate Services and
Corporate Secretary Michael G. Van De Ven* Executive Vice President
and Chief Operating Officer
Chuck Magill Vice President Flight Operations
Jan Marshall Vice President Technology and Chief Information
Officer
Ginger C. Hardage* Senior Vice President Culture and
Communications Daryl Krause* Senior Vice President Customer
Services Jeff Lamb* Senior Vice President Administration and Chief
People Officer Dave Ridley* Senior Vice President of Marketing and
Revenue Management Greg Wells* Senior Vice President Operations
Pete McGlade Vice President Schedule Planning Bob Montgomery
Vice President Properties Rob Myrben Vice President Fuel
Management
Lori Rainwater Vice President Internal Audit
Tammy Romo Vice President Financial Planning
Laura H. Wright* James A. Ruppel Senior Vice President Finance
and Chief Financial Officer Vice President Customer Relations and
Rapid Rewards Gregory N. Crum Vice President Director Operations
Darren Dayley Vice President Technology, Customer Experience
Portfolio Matt Hafner Vice President Ground Operations Mike Hafner
Vice President Inflight Services Scott Halfmann Vice President
Safety and Security Joe Harris Linda B. Rutherford Vice President
Communications and Strategic Outreach Mike Ryan Vice President
Labor Relations
Jim Sokol Vice President Maintenance and Engineering Scott E.
Topping Vice President Treasurer Ellen Torbert Vice President
Customer Support and Services Chris Wahlenmaier
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
44
Vice President Labor and Employee Relations Laurie Hulin Vice
President Technology, Aircraft Operations & Enterprise
Management Portfolios Madeleine Johnson Vice President General
Counsel Leah Koontz Vice President Controller
Vice President Ground Operations Kathleen Wayton Vice President
Strategy and Change Leadership
Kay Weatherford Vice President Revenue Management and Pricing
Bob Young Vice President Technology and Chief Technology
Officer
*Member of Executive Planning Committee
(southwest.com)
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
45
Capital Asset Pricing Model (CAPM) For any shareholder to invest
in a company there is always some degree of risk. However, there is
a risk return trade off according to the principle. If an investor
can invest the same amount of money and earn an amount that is
equal to what the current T-Bill rate is through the United States
Treasury then they are safer, and smarter, to invest in this
risk-free manner. If the investor believes they can earn at a
greater percent than the T-Bill rate and also greater than the
index in the market they are investing in, then they would be wise
to invest in the company. The Capital Asset Pricing Model (CAPM)
allows an investor to wisely decide on their investment portfolio
and the amount of risk they are going to take. The equation for
calculating the expected return an investor must receive to
undertake the investment is: , whereby rj is the required return,
rf is the riskless return (or the amount of the T-Bill comparison),
rm is the risk premium (or the market index average return over a
period of time), beta can be found on many investing websites
online such as www.msnmoneycentral.com or www.m.Morningstar.com.
The CAPM for an investor that wants to invest in Southwest Airlines
can be found by utilizing this equation and the 10-year T-Bill rate
of 2.96%, the S&P 500 10 year average of 5.27% and the beta of
.99 obtain from www.msnmoneycentral.com. Thus,
=
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
46
=2.96+2.29 =5.25% The CAPM for Southwest Airlines is 5.25%. An
investor could expect to earn a return on their invest of 5.25%
which is greater than the riskless return if investing in T-Bills
at 2.96% and is comparable to the average market premium return of
5.27% with the S&P 500. However, in looking at the weighted
average cost of capital (WACC) for Southwest Airlines, the burden
is spread out amongst the investors so they all share in a constant
average. Yet, the leveraging factor influences the amount of risk
borne by each investing group based upon the risk factor of the
airline (Emery, Finnerty, and Stone, 2007). The average cost of
capital and the burden of debt and equity are leveraged across the
board to determine the required amount and risk, on both debt and
equity for the investor. In looking at the WACC equation for
Southwest Airlines, the leveraging of the debt and equity factor
must be determined. This can be obtained utilizing the Balance
Sheet (Exhibit B) and examining the total liabilities
($9,355,000,000) and the total equity ($4,953,000,000) of the firm.
Therefore L= $9,355,000,000/ ($9,355,000,000 + $4,953,000,000)
which equates to 65%.
= (.35).35 + .65 (.65).65 =.12 + .27
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES = .39 or 39%
47
This calculation reveals that Southwest Airlines has a weighted
average cost of capital of 39%. Financial Performance As exhibited
in Table 1 featured below (Morningstar.com, msnmoneycentral.com,
Emery, Finnerty, and Stowe), Southwest Airlines has shown steady
performance over the past 5 years. In the categories that data was
provided for the industry average, Southwest has beat the average
in nearly all categories. While examining the ratios, it is to be
found that the current ratio for FY08 is 1.03, which allows the
assets in Southwests portfolio to cover their liabilities by a
factor of 1. This has shown consistent over the 5 year period.
Equally debt/equity and the quick ratios hold constant over the
same period. However, to increase this ratio Southwest needs to
undertake a greater capital contribution campaign to boost
liabilities while at the same time increasing inventory.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
48
Table 1: Southwest Airlines Ratio Summary
2004 Debt/Equity Ratio Current Ratio Quick Ratio Leverage Ratio
0.31 1.01 0.73 2.05
2005 0.21 0.94 0.72 2.13
2006 0.24 0.9 0.69 2.09
2007 0.3 0.92 0.63 2.42
2008 0.74 1.03 0.72 2.89
IndustryCurrent year 1.34 1.3 1.3 3.4
S&P 500Current Year 1.02 1.3 1.1 2
Gross Margin Net Margin Return on Assets Return on Equity P/E
Interest Coverage
52.50% 52.60% 49.50% 46.20% 59.80% 4.79% 7.23% 5.49% 6.54% 1.61%
2.95% 4.29% 3.61% 4.27% 1.15% 5.92% 8.98% 7.60% 9.63% 2.99% 0.31
8.2 0.21 8.7 0.24 12.1 0.3 11.5 0.74 4.3
N/A N/A N/A N/A 10.6 N/A
N/A N/A N/A N/A 13.5 N/A
Southwest Airlines has consistently shown a profit over its more
than 35 years in the regional airline industry. This is evidenced
in the gross margin that ranges from a low of 46.2% to high of
59.8% over the 5 year period. This allows Southwest to continue its
operations and keep the gates open. This, coupled with their net
margin, allows Southwest to make a profit year after year. The
profit margins have permitted investors to grow their portfolios
with relatively little risk over the life of the corporation and
the last 5 years. However, it should be noted, as shown in the FY08
Return on Assets and Net margin amounts that the airline has seen
considerable retraction in the amount of profits the company or
investors are seeing. This should hold true as the economy is
dwindling and Southwests fuel hedging program costs increase.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES Working Capital
Management
49
Emery, Finnerty and Stowe describe trade credit as a standard
business-to-business courtesy between suppliers and buyers (2007,
p. 649). Typically, companies will pay for goods or services upon
actual delivery of the goods or services, with added incentives for
faster repayment in the form of discounts one way to increase
short-term financing (Emery, Finnerty & Stowe, 2007, p. 648).
Southwest has a downloadable publication on its website, detailing
its policies on procurement and consideration of potential
suppliers. The publication clearly states: We pay suppliers on time
and in accordance with our contractual agreements when products or
services have been received and we are presented with an accurate
invoice. An accurate invoice bears the appropriate purchase order
number and must match the purchase order in all material respects
(n.a., 2008, p. 4). Additionally, Southwest Airlines is the only
airline to currently hold an investment grade credit rating, which
must be at least BBB+ or higher according to the Standard &
Poors and Moodys. However, Standard & Poors placed a credit
watch on this rating as a result of Southwests 2009 first quarter
loss of $91 million (Loyd, 2009). The future direction of the
economy and fuel prices will ultimately determine Southwests
fate.
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
50
INCOME STATEMENT2008 Period End Date Period Length Stmt Source
Stmt Source Date Stmt Update Type 12/31/2008 12 Months 10-K
2/2/2009 Updated 2007 12/31/2007 12 Months 10-K 2/4/2008 Updated
2006 12/31/2006 12 Months 10-K 2/1/2007 Updated 2005 12/31/2005 12
Months 10-K 2/1/2007 Restated 2004 12/31/2004 12 Months 10-K
2/1/2007 Restated
Revenue Other Revenue, Total Total Revenue
10,694.00 329 11,023.00
9,587.00 274 9,861.00
8,884.00 202 9,086.00
7,412.00 172 7,584.00
6,397.00 133 6,530.00
Cost of Revenue, Total Gross Profit
8,590.00 2,104.00
7,235.00 2,352.00
6,311.00 2,573.00
5,186.00 2,226.00
4,637.00 1,760.00
Selling/General/Administrative Expenses, Total Research &
Development Depreciation/Amortization Interest Expense (Income),
Net Operating Unusual Expense (Income) Other Operating Expenses,
Total Operating Income
0 0 599 0 0 1,385.00 449
0 0 555 0 0 1,280.00 791
0 0 515 0 0 1,326.00 934
0 0 469 0 0 1,204.00 725
0 0 431 0 0 1,058.00 404
Interest Income (Expense), Net Non-Operating Gain (Loss) on Sale
of Assets Other, Net Income Before Tax
0
0
0
0
0
0 -92 278
0 292 1,058.00
0 -151 790
0 90 779
0 -37 339
Income Tax - Total Income After Tax
100 178
413 645
291 499
295 484
124 215
Minority Interest Equity In Affiliates U.S. GAAP Adjustment Net
Income Before Extra. Items
0 0 0 178
0 0 0 645
0 0 0 499
0 0 0 484
0 0 0 215
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
51
Total Extraordinary Items Net Income
0 178
0 645
0 499
0 484
0 215
Total Adjustments to Net Income Preferred Dividends General
Partners' Distributions Basic Weighted Average Shares Basic EPS
Excluding Extraordinary Items Basic EPS Including Extraordinary
Items Diluted Weighted Average Shares Diluted EPS Excluding
Extrordinary Items Diluted EPS Including Extraordinary Items
Dividends per Share Common Stock Primary Issue Gross Dividends -
Common Stock Interest Expense, Supplemental Depreciation,
Supplemental
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
735 0.24 0.24
757 0.85 0.85
795 0.63 0.63
789 0.61 0.61
783 0.27 0.27
739 0.24 0.24
768 0.84 0.84
824 0.61 0.61
806 0.6 0.6
804 0.27 0.27
0.02
0.02
0.02
0.02
0.02
13 105 599
14 69 555
14 77 515
14 83 469
14 49 431
Normalized EBITDA Normalized EBIT Normalized Income Before Tax
Normalized Income After Taxes Normalized Income Available to Common
Basic Normalized EPS Diluted Normalized EPS
1,048.00 449 278 178 178
1,346.00 791 1,058.00 645 645
1,449.00 934 790 499 499
1,194.00 725 779 484 484
835 404 339 215 215
0.24 0.24
0.85 0.84
0.63 0.61
0.61 0.6
0.27 0.27
Source: msnmoneycentral.com
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
52
BALANCE SHEET2008 Period End Date 12/31/2008 2007 12/31/2007
2006 12/31/2006 2005 12/31/2005 2004 12/31/2004
Stmt Source Stmt Source Date Stmt Update Type
10-K 2/2/2009 Updated
10-K 2/4/2008 Updated
10-K 2/1/2007 Updated
10-K 2/1/2007 Restated
10-K 2/4/2005 Updated
Assets Cash and Short Term Investments Cash & Equivalents
1,803.00 1,368.00 435 Short Term Investments Total Receivables, Net
Accounts Receivable Trade, Net Total Inventory Prepaid Expenses
Other Current Assets, Total Total Current Assets 209 209 203 313
365 2,893.00 279 279 259 57 0 4,443.00 241 241 181 51 0 2,601.00
258 258 150 40 0 3,620.00 248 248 137 54 0 2,172.00 3,848.00
2,213.00 1,635.00 2,128.00 1,390.00 738 3,172.00 2,280.00 892
1,733.00 1,048.00 685
Property/Plant/Equipment, Total - Net Goodwill, Net Intangibles,
Net Long Term Investments Note Receivable - Long Term Other Long
Term Assets, Total Other Assets, Total Total Assets
11,040.00 0 0 0 0 375 0 14,308.00
10,874.00 0 0 0 0 1,455.00 0 16,772.00
10,094.00 0 0 0 0 765 0 13,460.00
9,212.00 0 0 0 0 1,171.00 0 14,003.00
8,723.00 0 0 0 0 442 0 11,337.00
Liabilities and Shareholders' Equity Accounts Payable
Payable/Accrued Accrued Expenses
668 0 574
759 0 296
643 0 1,245.00
524 0 1,585.00
420 0 829
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINESNotes
Payable/Short Term Debt Current Port. of LT Debt/Capital Leases
Other Current Liabilities, Total Total Current Liabilities 0 163
1,401.00 2,806.00 0 41 3,742.00 4,838.00 0 122 877 2,887.00 0 601
1,138.00 3,848.00 0 146 747 2,142.00
53
Total Long Term Debt Long Term Debt Deferred Income Tax Minority
Interest Other Liabilities, Total Total Liabilities
3,498.00 3,498.00 1,904.00 0 1,147.00 9,355.00
2,050.00 2,050.00 2,535.00 0 408 9,831.00
1,567.00 1,567.00 2,104.00 0 453 7,011.00
1,394.00 1,394.00 1,681.00 0 405 7,328.00
1,700.00 1,700.00 1,610.00 0 361 5,813.00
Redeemable Preferred Stock Preferred Stock - Non Redeemable, Net
Common Stock Additional Paid-In Capital Retained Earnings
(Accumulated Deficit) Treasury Stock - Common Other Equity, Total
Total Equity
0 0 808 1,215.00 4,919.00 -1,005.00 -984 4,953.00
0 0 808 1,207.00 4,788.00 -1,103.00 1,241.00 6,941.00
0 0 808 1,142.00 4,307.00 -390 582 6,449.00
0 0 802 963 4,018.00 0 892 6,675.00
0 0 790 299 4,089.00 -71 417 5,524.00
Total Liabilities & Shareholders Equity
14,308.00
16,772.00
13,460.00
14,003.00
11,337.00
Total Common Shares Outstanding Total Preferred Shares
Outstanding
739.99 0
734.8 0
783.31 0
801.64 0
784.98 0
Source: msnmoneycentral.com
Running Head: AN ANALYSIS OF SOUTHWEST AIRLINES
54
CASH FLOW2008 Period End Date Period Length Stmt Source Stmt
Source Date Stmt Update Type 12/31/2008 12 Months 10-K 2/2/2009
Updated 2007 12/31/2007 12 Months 10-K 2/4/2008 Updated 2006
12/31/2006 12 Months 10-K 2/1/2007 Updated 2005 12/31/2005 12
Months 10-K 2/1/2007 Reclassified 2004 12/31/2004 12 Months 10-K
2/1/2007 Reclassified
Net Income/Starting Line Depreciation/Depletion Amortization
178 599 0 56
645 555 0 328
499 515 0 277
484 469 0 291
215 431 0 166
Deferred Taxes Non-Cash Items Other Non-Cash Items 6 6 -2,360.00
Changes in Working Capital Accounts Receivable Other Assets
Payable/Accrued Other Liabilities Other Operating Cash Flow Cash
from Operating Activities 71 -384 -1,853.00 32 -226 -1,521.00 -38
-229 1,609.00 131 -151 2,845.00 -5 87 -223 150 102 1,406.00 -9 -59
855 120 -50 2,118.00 -75 -44 231 68 -22 1,066.00 -5 -5 1,322.00 4 4
111 17 17 857 96 96 158
-923 Capital Expenditures Purchase of Fixed Assets Other
Investing Cash Flow Items, Total Sale/Maturity of Investment
Purchase of Investments Other Investing Cash Flow Cash from