Marketing Study of Southwest Airlines

The Hispanic or Latino market is another sub-segment that the Airline cultivates. This is no coincidence since Hispanics have become the biggest and fastest growing minority group in the nation, overtaking African-Americans in 2003. The Census Bureau estimates the number of Hispanics at 38.8 million, compared with 38.3 million Blacks, out of a total U.S. population of 288.4 million. The success of this effort can be seen in Ontario, CA where Southwest Airlines promotes services in Spanish and has become responsible for 53% of passenger traffic at the Ontario International Airport (Arizmendi-Peñaloza and Frasher, 2003).

Competitors and Competition

Air travel in the United States is offered by no less than 11 major carriers (U.S. Air Carriers, 2003): Alaska Airlines, Aloha Airlines, America West, American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, TWA, United Airlines, U.S. Air, and Southwest Airlines; nine National Carriers: American Trans Air, Carnival Air Lines, Frontier Airlines, Hawaiian Airlines, Midwest Express, Presidential Air, Reno Air, Value Jet and Western Pacific Airlines; and nine Regional Carriers: American Eagle, Atlantic Southeast Airlines, Business Express (BizEx), ComAir, Skywest, Gulfstream Airlines, New England Airlines and Reeve Aleutian Airlines (U.S. Air Carriers, 2003).

The airline industry is highly competitive as to fares, frequent flyer benefits, routes, and service. Some carriers competing with Southwest Airlines have larger fleets and wider name recognition. Certain major United States airlines have established marketing or code-sharing alliances with each other, including Northwest Airlines/Continental Airlines, American Airlines/Alaska Airlines, and United Airlines/US Airways. Northwest Airlines and Continental Airlines have announced plans to add Delta Air Lines to their alliance in a transaction which is subject to conditions established by the Department of Transportation.

It is, nonetheless wrong to conclude that other airlines are the only competitors for SWA. It has already been stated that Southwest Airlines positioned its no-frills travel product against all forms of transportation, including auto, bus, rail and all forms of air travel.

Product and Pricing

Product Positioning

Operating under an intensely competitive environment, Southwest Airlines carefully projects its image so customers can differentiate its product from its competitors. Southwest positions itself in all its marketing communications as THE only low-fare, short-haul, high-frequency, point-to-point carrier in America that is fun to fly. Its low-priced fares are a brand equity which it "owns" in the mathematical sense of being the only major airline with a strong score on this attribute based on consumer research (Barlow, 2002).

Southwest's brand exudes an element of fun: a down-home attitude which it leverages to present the consequences of low fares in a positive light. "Dignify" might not be the first word one would think of to describe how Southwest treats passengers: no first class; no food other than peanuts; no assigned seats; no transfers of luggage to other airlines (Teitelbaum, 1992). Southwest's in-flight service has, in fact, become pejoratively synonymous with peanuts; but the payoff in savings is huge. While the average cost of serving meals per passenger in the industry is about $5, Southwest's average cost per passenger is only 20 cents (Rose, 1999).

Market Positioning Strategies

To successfully secure its market position, Southwest needs to be extremely cost-efficient; and cost-efficient, it is.

It has a well defined business model that uses single aircraft type, short hauls, secondary airports, point-to-point versus hub-and-spoke to keep its costs down. It also pays great attention to consumer insights and to brand building, and that devotion contributes significantly to the value of the brand and therefore the value of the enterprise. Customers are selected, targeted, and "trained" in unusual ways.

Southwest tries hard to differentiate itself by doing seemingly weird things. For example, not assigning seats in its flights helps to reinforce its image that it gets passengers to their destinations when they want to get there, on time, at the lowest possible fares. By not assigning seats, Southwest can turn the airplanes quicker at the gate. If an airplane can be turned quicker, more routes can be flown each day. That generates more revenue, so that Southwest can offer lower fares.

Another example of weirdness, on the surface at least, is the color of its planes. Southwest paints its plane with what many would consider to be one of the ugliest paint schemes known to man; but, as SWA Chairman Herb Kelleher puts it: "I've never seen a survey where people state they buy air transportation by the color of the airplanes." In fact, he cites one study commissioned by Southwest concluding that most passengers recognized SWA airplanes because they did not like the color scheme, while all the other airlines were kind of faceless (Henderson, 1997).

Still another example of Southwest Airlines' nuttiness is its use of the word "love" as a promotional tool. This word in the business world sounds phony; it can make most people cringe and give most airline CEO's hives. One might ask, what does the word "love" have to do with this airline? As it turns out Southwest got its start at Dallas Love Field and has used the word "love" to promote the airline in a variety of ways (Colvin, 2001). From any of their three identical websites (www.iflyswa.com, www. southwestairlines.com and www.southwest.com), one could see several advertising campaigns that have featured the word "love." For example, one ad titled "How Do We Love You?" featured the entire Southwest flight schedule. Another ad titled "We're Spreading Love" advertised the rapid growth of the airline. Southwest has also used the word "love" to emphasize its dedication to customer service "delivered with a sense of warmth, friendliness, individual pride, and company spirit." As previously stated, Southwest even lists its stock on the New York Stock exchange as "LUV."

Marketing Strategies

Southwest offers a travel product that is built around flights targeted to specific demographics and ticket pricing that is simplified so that passengers know exactly what they are getting for what they pay. Its ugly Boeing 737 planes that provide pared-down utilitarian service, often likened to cattle cars, is exactly what one would expect for the price that is paid. This is in stark contrast to flights geared for business travelers and other passengers who are used to being pampered, paying full price but ending up disappointed in the end.

Which one is a better model? The major airlines compete by adding benefits. Their proposition has been, and still is, 'We have something more over what other airlines are offering.' Southwest Airlines was able to think outside the box: they have identified consumers not interested in additional frills. Passengers get exactly what they pay for.

Building Brand Loyalty

Airports and airplanes traditionally have a love-hate relationship with the general public. Along with noise pollution generated by aircraft, there are also traffic problems and urban sprawl that airports bring to communities. Whenever there is talk of airport expansion, people raise up their arms in protest: NIMBY! Unless, it is Southwest Airlines that is coming to town.

Politicians, as well as ordinary people in cities in the top US 150 markets where Southwest does not yet fly, ask SWA to come to their city at least once every quarter (Hazell, 1999). These cities are well aware of the "Southwest Effect."

What is the Southwest Effect? Once Southwest Airlines enters a certain market, air fares go down, tourist traffic increases and an economic mini-boom ensues (Meyer, 2000; Messina, 2001). So real is this effect that even competitors say, it's a good thing (Pounds and Weil, 2001). How many airline companies get petitioned by residents and politicians every 90 days with pleas to come to their city? This happens with Southwest Airlines all the time. When SWA enters their market, even hick towns like Buffalo, Hartford, Ontario and Oakland become tourist destinations and in turn, the residents of these cities become frequent travelers to mainstream tourist destinations like Las Vegas, San Diego and Florida.

Pricing Strategies

With a clear customer target, SWA's pricing strategy is to charge the lowest possible fare that still enables the airline to make a profit. This reflects its decision to compete not only with airlines, but with all other forms of transportation, including automobiles (it is cheaper to fly than drive). When SWA enters a new market with fares that undercut prevailing rates by 50% or more, traffic explodes, and Southwest nabs many customers who might have driven before (Zellner, 2001). For example, before opening the route, somewhere around 8,000 people used to fly between Louisville and Chicago weekly; since Southwest entered the market, about 26,000 do. Similarly explosive growth took place after SWA introduced a $49 fare on a St. Louis-Kansas City route that TWA had been flying for $250.

It is no big secret that to be able to offer low fares that can compete with ground transportation, Southwest must keep its operating cost to the bare minimum.

This strategy starts out with flying frequent shorter routes while keeping its prices rock-bottom low. Once, when the next closest carrier's price was $62 for a flight segment, and Southwest's was only $25, one of Southwest's shareholders approached Herb Kelleher, then chairman and CEO, and asked, "Don't you think we could raise our prices just two or three dollars?" "You don't understand," said Kelleher. "We're not competing with other airlines. We're competing with ground transportation" (Barnstetter, 2002). Instead of increasing fares when market gets busier and more people are flying, it simply increases the number of flights. From Ontario, one can fly to Las Vegas for the price of a tank of gas. These fares would not be sustainable unless it is supported by a high passenger load factor - industry jargon for the percentage of seats filled - of 68.1 percent which is the highest in the industry (Southwest posts modest profit, 2002).

Southwest keeps its operations simple: It offers a single class, open seating, and no meals. Its aircraft fleet consists only of one type -- the Boeing 737 -- to minimize training and maintenance costs. Southwest offers a ticketless travel system to trim travel agents' commissions, run its own reservation system, and sells a significant portion of reservations through its Web site.

Southwest must be exceptionally frugal without alienating passengers. In a way, it can cut costs in the customer service areas because its flights are usually one hour or less and it does not offer meals - only peanuts and drinks. Its competition has failed to realize the benefits of Southwest's service and price strategy. Any airline can charge a low price; but very few can make money unless they are operationally frugal. When major airlines like American Airlines, Delta Airlines, Northwest Airlines, TWA, United Airlines, and U.S. Air tried to match Southwest's cut-rate fares, they could not do so without incurring substantial losses. It is estimated that major U.S. carriers would have to cut their costs by 29% to function at operations level of Southwest Airlines (McCartney, 2002). Clearly, by having the lowest operating costs among the major airlines, Southwest can profitably offer low fares where others cannot.

Distribution and Promotion

Product Distribution Strategies

Unlike other airlines, SWA does not rely on travel agents to distribute their products. Travel bookings on Southwest Airlines are done primarily through direct marketing: by phone and the Internet (Miller, 1999), without a middleman. Southwest also does not interline or offer joint fares with other airlines, nor does it have any commuter feeder relationships.

Southwest employs a relatively simple fare structure, featuring low, unrestricted, unlimited, everyday coach fares, as well as even lower fares available on a restricted basis. In January 1995, Southwest became the first major airline to introduce a Ticketless Travel option, eliminating the need to print and then process a paper ticket altogether (Harrison, 1999). This innovation was actually born out of necessity after it was tossed out of three computer reservation systems (United, Continental and Delta's, as these airlines felt threatened by Southwest's competitiveness). This innovation allows customers to completely bypass the computer reservation systems of major airlines by obtaining a confirmation number and showing up for the flight (Freiberg and Freiberg, 1997). Customers loved the idea and the paperwork was reduced tremendously therefore saving money. This practice is now pervasive in the industry, due to its cost savings ability. Currently, if a customer wants a printed ticket, there is usually a surcharge of $20; and if a passenger uses a travel agent, there is an additional $25 service fee.

A year after this innovation (i.e., in 1996), Southwest began offering Ticketless Travel through the Company's home page on the Internet. Six years later, for the year ended December 31, 2002, more than 85 percent of Southwest's Customers were choosing the Ticketless Travel option, and approximately 49 percent of Southwest's passenger revenues were coming through its Internet site. In 2002, the cost per booking via the Internet was about $1, compared to the cost per booking of $6-$8 through a travel agent. Terra Lycos, one of the largest global Internet network search engines, reports that Southwest received 50 percent more Internet searches than any other airline. Southwest's Internet ticketing saves it $50 million a year, or 1% of revenue (Fisher, 2002). To facilitate online bookings, Southwest keeps its website as simple as possible -- perhaps too simple. Some users have called the reservations center to confirm their booking because they don't believe a purchase was actually made in such a short amount of time and with so little effort (Lam, 1999).

Even before the advent of Internet booking, Southwest Airlines' distribution system was already unique. While most airlines relied on independent travel agents to write up to 90% of their tickets, Southwest had steadfastly refused to link up with the computer reservation systems that agents used. Agents who wished to book a Southwest flight had to pick up the phone like anyone else, so much so that many tried to persuade customers to choose another carrier or make the call themselves. The result was that nearly half of all Southwest tickets, even before the Internet bookings were available, were sold directly to passengers, saving the airline a considerable amount of expense (Labich and Hadjian, 1994).

More recently, Southwest introduced another innovation. It was the first airline to use the automated ticket vending machine (ATVM) to sell tickets right at the airport. Customers use ATVM's much like ATM's to purchase tickets simply by choosing the destination city and swiping a credit card. This enables customers to purchase tickets without ever talking to a customer service agent. This reduced the wait to talk to an agent and allowed agents to tend to the needs of others. These machines were made by Southwest's own Technical Services Department, led by Mike Golden, using off-the-shelf parts and putting them together (Harrison, 1999).

Promotion Strategies: Marketing Mix

Promotion, also called marketing communication, encompasses all the activities that an organization does to communicate with others about their product or service and to convince them to use it. The marketing mix used by most businesses consists of advertising, sales promotion, and public relations or free publicity. Whichever tool is used, the object is the same: Southwest Airlines wants to differentiate itself from other airlines as the airline that can get passengers to their destinations when they want to get there, on time, at the lowest possible fares - while having fun. After 9/11, this activity became a very important and probably the most critical function in Southwest's external business activities.

Southwest Airlines has been nothing less than a marvel of marketing, a company that faced down giant competitors and has grown to be one of the most recognized names in air travel (McNulty, 2001). A testament to its marketing savvy was the way the company rebounded after the Sept. 11 attacks. In October 2002, Southwest flew approximately the same revenue passenger miles as it did in October 2000 and was the only major airline to turn a profit for the year. Meanwhile, its larger competitors are struggling to stay solvent. Evidently, Southwest's position as a no-frills, no-hassles carrier appealed to those who still needed to fly--primarily business travelers - but saw other airlines mired in chaos. It did not hurt that Southwest was also quick to change its marketing messages within a week of the attacks. It suspended use of its "Symbol of Freedom" tagline in deference to a more patriotic theme of displaying the U.S. flag. Out of respect to victims, some of its fun-loving ways were also downplayed (Laing, 2001; McCarthy, 2001).

Frequent Flyer Awards

Frequent flyer programs are standard perks in the airline industry. They are designed, not only to build customer loyalty, but also as a popular segmentation tactic to attract business travelers who can afford business class travel. Southwest's frequent flyer program, Rapid Rewards, is quite different from other airlines. For one, it was never meant as a tool to segment the market - it does not discriminate between leisure or business travelers. This may be a turn-off for affluent travelers who would like to earn more miles by traveling first or business class but remember, they are not the target market of SWA. For its target market, this is just one more way of showing Southwest's philosophy that every customer is equally important as the other and making them ALL passengers feel special.

Southwest Airlines approach to frequent flyer rewards is based on number of trips taken; in contrast, other airlines reward people based on miles flown (Southwest Airlines Annual Report, 2002). Quite ironically, a much bigger airline, United Airlines, has become a copy cat with their new frequent flyer program, three trips and the fourth is free. If imitation is the sincerest form of flattery, then Southwest should indeed feel flattered.

Advertising

By a large margin, the most common form of promotion in the airline industry is by advertising in print and television. For airlines, it is a challenge to make advertising relevant and meaningful to different segments of customers. They must avoid a blandness, which lacks appeal and leads to little consumer awareness, as their message can easily get lost in the general clutter of advertising. With the airline product having to conform to being a "safe, affordable, convenient and efficient air service for consumers" - the Department of Transportation's generic view (Shenton, 1994) - there are great difficulties, in an essentially common environment, to achieve brand differentiation.

For Southwest Airlines, promotion starts with the insightful understanding of customer benefits and how to translate those benefits into meaningful products and services. It pays great attention to consumer insights and to brand building, and that devotion contributes significantly to the value of the brand. In both print and television, SWA continues to employ the most basic form of price competition by running ads that encourage people to visit their website for the best online deals (Rewick, 2001).

With this strategy, Southwest has successfully repelled the competitive efforts of online ticket discounters. In September 2000, Southwest began running ads that targeted several such sites, including Expedia.com, Priceline.com, and Lowestfare.com. The basic message to consumers was, "Don't believe the hype." The ads attempted to discredit the notion that the fares offered by these discounters and by other airlines on the Web are cheap and, thus, good buys. These efforts have been very successful. Whereas Southwest generates majority of its revenues from online purchases, other carriers only receive about 6% to 7% of their revenues through the Web (De Lollis, 2002).

Southwest's marketing and advertising goal is to be very clear in their low-fare message but at the same time create and reinforce the company's nutty image (Freiberg and Freiberg, 1997). Southwest attempts to do three things in their advertising: intrigue, entertain and persuade. Southwest encourages employees to dress casually at work. Southwest wants to portray their employees as professional but don't take themselves too seriously. Ad designers try to inject fun and personality in designing SWA ads, giving the target customers a taste for what the Southwest Airlines are going to give them when they get on the plane (cheap but fun!).

Of course this approach is not without peril. Earlier in the airline's history (in 1981 to be exact), while celebrating its tenth year of operation, the airline introduced a multimedia advertising campaign featuring the theme, "Loving you is what we do," and produced an ad picturing six Southwest flight attendants, all purportedly "physical 10's," grouped around a birthday cake, promising, "You ain't seen nothin' yet." That year, after a series of petition drives, stewardesses won the right in their new contract not to wear hot pants on the job (Freiberg and Freiberg, 1997). In June 1981, the airline was found guilty of sex discrimination in a class action suit filed by a man seeking a job as a cabin steward and the airline was ordered to cease its discriminatory hiring practices. They had to learn political correctness along the way, just like everyone else.

Television Sports Advertising

With male business customers generating about half of its revenue, Southwest Airlines is a big advertiser in sports television programming (Lam, 1999). Southwest has built national brand status, in large part through sponsorship deals with professional football, hockey and baseball, a strategy that began in early in the company's history. By reaching the corporate set via sports and other venues, and with business travel evolving from a jet-set lifestyle accessory to a more perfunctory, mundane necessity, Southwest has become a force to be reckoned with in the B-to-B world.

In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL). As the official airline of the NFL, Southwest hopes to build its brand by supporting the popular professional league that attracts millions of viewers every week (not to mention the ratings bonanza of the Super Bowl). It also entered into a sponsorship agreement with the National Hockey League (NHL). While the NHL doesn't command the viewing audience the NFL does, its fans are generally higher educated, more affluent, and Web savvy. One analyst commented, "Southwest is thinking they want a more male-dominated, non-discretionary travel user. The rapid expansion Southwest is undergoing calls for promotion. Here's one promotion that's committed to, through an entertainment product, making the brand that much more exciting" (Rasmusson, 2001).

As an example of their sophisticated sports marketing, Southwest runs spots on sports programming, such as "Monday Night Football," to reach businesspeople who are also sports aficionados. These are people who want to be back home by Monday night even if they have a business trip that same day. An interesting twist to their sports advertising program is that three out of their four NFL ads are targeted to women (Lam, 1999). Perhaps they realize that women have a great influence in travel budgets - both personal and small-business travel budgets; or that women who watch games with men are more entertained by commercials than the games themselves! After 9/11, the ad promotes Southwest's most expensive walk-up fares at $299 each way, down from its previous cap of $399. It is a big reminder that SWA has very low unrestricted fares and if travelers are paying more than $300, they are paying too much. This promotion is followed by the tag line that now people are free to move around anywhere in the U.S.

Southwest's simple marketing approach of emphasizing low fares is one that many industry observers find effective. In CoreBrand's Brand Power study (Callahan, 2002), Southwest's rating, which is a combination of familiarity and favorableness, grew by 1.3 points to 46, between the first and second quarters in 2002. Among airlines, Southwest trailed only Delta Air Lines, a much bigger airline, which had a brand power rating of 50.9 in the second quarter, up from 50.5 in the first quarter.

Southwest is currently in the midst of an aggressive TV campaign targeting business people (Callahan, 2002). It spent $38.5 million on network, spot, syndicated, and cable TV advertising in the first half of 2002, outspending American ($10.9 million) and United ($17.3 million) combined. Southwest is also spending its promotional budget on television ads that advise travelers to visit its website for the lowest prices online.

Public Relations

Southwest craves for "free publicity" just like any business enterprise, and it is a master at getting it in however way it can. One story goes that Southwest's CEO Herb Kelleher and Stevens Aviation CEO Kurt Herwald arm-wrestled to settle an advertising slogan dispute. The dispute was over Stevens Aviation slogan "Plane Smart" and Southwest Airlines slogan "Just Plane Smart". The two decided, that instead of going to court, spending countless dollars on lawyers and court costs; to settle it quickly in an arm wrestling contest with prize money for the winner's favorite charity. The face off took place in front of the media and their own employees. In the end Kelleher was defeated, but Herwald decided to let Southwest keep its slogan anyway. Everyone won, both companies received great publicity, the media had a field day, and charities were given the prize monies (Freiberg and Freiberg, 1997).

Southwest Airlines is big on themes, symbols and symbolisms which generate great interest and free publicity. When Sea World and Southwest Airlines partnered for a promotion, Southwest painted one of its Boeing 737 like a killer whale. The airplane was appropriately named Shamu One. Southwest has added other uniquely painted airplanes to its fleet: Shamu Two and Shamu Three. Lone Star One, Arizona One, California One, Nevada One and New Mexico One were State-themed planes, painted to resemble the specific State's flag. In 1996, Southwest christened one of its planes the Silver One to commemorate, the company's 25th anniversary. Such acts generate tons of local publicity in markets the airline serves (Schoneberger, 2001).

When SWA won the airline industry's most coveted Triple Crown Award for the fifth time in a row, Southwest dedicated one of its planes to its employees, named the plane Triple Crown One and painted 24,000 employee names on it (Schoneberger, 2001). This simple gesture incalculably increased personnel morale, akin to a mass rite of enhancement described by Jones and George (Jones and George, 2003). Of course this gesture has the added benefit of generating tremendous free publicity for the airline.

Such marketing efforts may seem overblown - indeed, analysts say they do little to attract passengers - but more and more airlines are using the look of their planes to send a message by using them as billboards.

Southwest also generates a lot of favorable publicity because of its unwavering support of Affirmative Action Hiring Program (LeClaire, 2002). Initially, CEO Herb Kelleher and other top managers made the strategic decision to ensure that Southwest Airlines was perceived as friendly to minority populations. Since Southwest is headquartered in Texas, which has a particularly large Hispanic-American population, Kelleher was primarily concerned with Southwest's image with Hispanics. In the People Management Department, recruiting managers made an effort to enhance work force diversity by actively promoting an affirmative action hiring program that targeted talented Hispanic individuals. Supervisors monitored the number of Hispanic recruits that each recruiter interviewed, and encouraged them to carefully review their qualifications for potential "fit" with jobs at Southwest.

Similarly, in the Marketing Department managers directed the development of campaigns aimed at Hispanic travelers. In the Customer Service department, managers sought out bilingual employees and strategically scheduled those who could speak Spanish to ensure that non-English speaking customers would always have someone they could communicate with when they arrived to check in for a flight.

The above examples notwithstanding, the fact of the matter is, Southwest Airlines generates a lot of free publicity because it is an excellent company. Every year, it snares free publicity by making the annual lists of "10 Best Companies to Work For;" its stock is perennially one of the "Best Stocks to Own" and its executives make the exclusive "Business People of the Year" lists.

Here are a few examples of free publicity that the company garners due to its excellence gleaned from their website (source: www.southwestairlines.com):

* Jim Parker and Colleen Barrett were named Dallas Business Journal's Business People of the Year 2002.

* Southwest Airlines was named the best performing stock with the best 30 year return since 1972 by Money Magazine in Fall 2002

* Southwest is one of the most admired companies in America, according to the March 4, 2002 issue of FORTUNE. Southwest ranked second among companies across all industry groups, and first in the airline industry in the magazine's 2002 America's Most Admired Companies list. It made the same list for the past 5 years.

* Southwest Airlines has been named a charter member of the International Airline Passengers Association's Honor Roll of Airlines among the World's Safest Airlines. Southwest also has been recognized as one of the world's safest airlines by Conde Nast Traveler.

* On May 20, 2002 The Wall Street Journal reported Southwest Airlines ranked first among airlines for the highest customer service satisfaction according to a survey by the American Customer Satisfaction Index for the first quarter of 2002.

* FORTUNE has consistently recognized Southwest Airlines in its annual survey of corporate reputations. Among airlines, Southwest came out on top as the most admired airline in the world for 1997, 1998, 1999, and 2000. Among all industries, FORTUNE has listed Southwest as one of the most admired companies in the world, year after year.

* Since 1997, FORTUNE has ranked Southwest Airlines in the top five of the Best Companies to Work For in America. Southwest ranked first in 1997 and 1998, second in 1999, and fourth in 2000. Southwest chose not to participate in 2001.

* Southwest Airlines' Rapid Rewards program won top honors as Program of the Year in Inside Flyer magazine's 2002 annual Freddie Awards. The awards for best Customer Service, best bonus promotion, and best award redemptions were also given to Southwest's program.

* Southwest Airlines has been named in the Forbes Platinum 400: America's Best Big Companies. Forbes named Southwest in its January 2002 issue. Forbes also listed Southwest in its 2002 Forbes 500 annual directory, which ranks the top 500 American Companies according to financial performance.

* The Economist Intelligence Unit honored Southwest Airlines at its "2002 Global Corporate Achievement Awards." The airline was recognized for its excellent financial strategy and its ability to adapt to change successfully in the face of strategic and operational challenges. The ranking is based on revenue growth, net earnings, market capitalization, earnings per share, and return on shareholders' equity.

* In April 2002, the National Airline Quality Rating (AQR) ranked Southwest Airlines number four among the top eleven airlines for performance in 2001. The AQR system uses weighted averages and monthly performance data in the areas of on time performance, baggage handling, involuntary denied boardings, and a combination of 11 Customer complaint categories, all according to DOT statistics. The rating is conducted jointly by researchers at the University of Nebraska at Omaha Aviation Institute and the W. Frank Barton School of Business at Wichita State University.

* Business Ethics lists Southwest Airlines in its "100 Best Corporate Citizens", a list that ranks public companies based on their corporate service to various stakeholder groups. The "100 Best Corporate Citizens" list is found in the March/April 2002 issue of Business Ethics.

* The November 2002 issue of Global Finance magazine named Southwest Airlines the "Best Company" in North America for its airline sector. The ranking is based on both objective and subjective criteria including: revenue and profitability growth; market capitalization growth, social responsibility, percentage of revenues, technology or product breakthroughs; crisis control, and aggressiveness in market building.

* On January 16, 2002, the Wall Street Journal reported that Southwest Airlines made the RQ Gold 2001 list. The RQ Gold is a consumer study conducted by Harris Interactive which lists the most visible companies in America with the best reputation. Southwest was ranked number 24 out of 60.

* Southwest Airlines was listed by HISPANIC magazine in the 2000, 2001, and 2002 Hispanic Corporate 100 for leadership in providing opportunities for Hispanics and for supporting recruitment, scholarships, and minority vendor programs.

* Southwest Airlines was recognized for its top-notch service and low fares by Business Travel Magazine. The magazine's 2002 "Annual Best in Business Travel Reader Survey" named Southwest as "Best Low Cost Carrier." The survey is conducted by independent research firm, Mediamark Research Inc., and is voted on by the magazine's business travel readers.

* Southwest Airlines was named the Best Low Cost Airline in the 2001 and 2002 Official Airline Guide (OAG) Airline of the Year awards. OAG is an independent provider of travel information, products and services.

* CIO Magazine named Southwest Airlines in the CIO Web Business 50 Awards in the December 1, 2001 issue. Judges found Southwest.com exemplary of the highest level of business value, design effectiveness, and innovative technology use achievable on the Web today.

* On May 30, 2002, the Jupiter Media Metrix named Southwest the airline that best utilizes the Internet and provides brand synergy between its main line and online presence. The results were part of a new index, the Jupiter Airline CORE (Composite Rating of Online Effectiveness) Index.

E-Commerce Promotion

E-commerce promotion deserves a detailed section in this report because the "Southwest Model" is truly a model to behold when it comes to B-to-C Internet commerce.

It is said that communication is only relevant if it leads eventually to some expression of consumer behavior in brand selection or in terms of purchase (Peter and Donnelly, 2004). The Internet has the unique ability to marry these two aspects and to make action possible on the receipt of information. The business traveler, in particular, is increasingly empowered to arrange travel through use of the Internet.

Leading the pack on Web promotion is Southwest Airlines (De Lollis, 2002). Last year, its revenue from Internet sales jumped 46% while Southwest's closest rival, Chicago-based UAL Corp.'s United Airlines, pulled in a mere 12% from Internet sales. Southwest's site also received the most unique visitors of all the major U.S. carriers in 2002, at 1.7 million to 2.3 million a month.

Southwest has spent a mere $5 million to develop and design its three identical sites: www.southwest.com, www.iflyswa.com and www.southwestairlines.com since 1995 - peanuts when it comes to web commerce investments. In addition to aggressively marketing the site on television and print media -- and on cocktail napkins and peanut bags -- the company also has an impressive record of keeping customers away from online travel agencies and sites like Priceline.com Inc. and Expedia Inc. About 90% of Southwest's ticket sales on the Internet came from its own site last year (Southwest Airlines Annual Report, 2002).

What is the secret of this success? For one, Southwest's users are spared the tedious process of having to register online, and the site is easy to navigate. Can a Web site be too simple? A lot of Southwest Airlines Co. passengers thought so. After it became the first major carrier to sell tickets online in 1996, the airline says, its reservations center kept getting calls from customers who had just booked tickets on the site. The transactions happened so fast and so easily that they feared they had been scammed.

For the scrappy low-fare king, simplicity--including one aircraft type, no meals, and a straightforward fare structure--has always been the key to satisfying customers and improving profits. Southwest's Spartan web site, built on the same customer-service philosophy, is also winning passengers in droves. Therein lays the innovation: Southwest has shown that when it comes to the Web, less can be more. With bigger rivals such as American Airlines Inc. furiously adding new features, such as wireless access to flight information, Southwest is trying to make sure the site stays as smart as it is simple. Don't expect big changes, either. Southwest's Chairman and retired CEO Herbert D. Kelleher isn't likely to be swept up in Web mania: On the computer in his office is a Post-It note telling him how to turn it on (Freiberg and Freiberg, 1997). At Southwest Airlines, KISS is the operative word, and keeping it simple starts at the top.

Southwest likes to e-mail its customers but this relationship is not reciprocal. At least 2.7 million Southwest customers have signed up to receive their itineraries and notification of special fares by e-mail. While it uses e-mail to send information to its customers, it refuses to receive e-mail from them for good reason (Pierce, 2003). Analysts criticize the SWA website on the point that Southwest refuses to accept e-mail from consumers, something most other major companies already do. It has rejected e-mail response systems, even interactive telephone menus, as being too impersonal. Southwest would rather put a human on the other end of the line for customer interactions (Cannon, 2002). The airline says everyone who writes a letter to the airline via old-fashioned mail gets a personal response, and it does not want to jeopardize its reputation by being deluged by so many e-mails it cannot personally respond to.

Internal Marketing

Internal marketing is defined as the continual process by which managers actively encourage, stimulate, and support employee commitment to the company, the company's goods and services and the company's customers (Peter and Donnelly, 2004). It is impossible to overemphasize the importance of having customer-oriented, front-line people as part of the company's communication mix. Southwest Airlines' dedication to quality of its Customer Service is embodied it its 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 (Southwest Airlines Annual Report, 2002). The customer service philosophy that Southwest focuses on is to keep customers coming back. Customer service combined with value is the recipe for Southwest that other airlines seemed to have overlooked.

At Southwest Airlines, the Mission Statement has always governed the way to conduct business. It highlights their desire to serve customers and gives them direction when they have to make service-related decisions. It is another way of the Company saying, "We always try to do the right thing!"

Foremost, Southwest's Mission Statement conveys its wish to never inconvenience their customers. Employees are told that the Airline is in the Customer Service business-they just happen to provide airline transportation. It gives all its passengers the impression that it is a privilege of Southwest to serve their air travel needs.

Southwest's philosophy of "Service for Smiles and Profits" encourages employees to treat customer service as the most important aspect of their job. It appears that when employees strive for this high level of service, the rest takes care of itself and success is inevitable (Southwest Airlines: Service for smiles and profits, 2003). So powerful is the bond between the company and many of its workers that observers, only half-jokingly, have likened Southwest to some sort of religious cult. Former CEO Kelleher proclaims he is not the least offended by such comparisons, contending that his operation has always retained "a patina of spirituality." Says he: "I feel that you have to be with your employees through all their difficulties, that you have to be interested in them personally. They may be disappointed in their country. Even their family might not be working out the way they wish it would. But I want them to know that Southwest will always be there for them (Labich and Hadjian, 1994)." What a comforting thought, and so appropriate, for everyone feeling the grief of 9/11.

At Southwest Airlines, there is a constant search to better service the needs and desires of its customers. To minimize delays caused by heightened airport security after 9/11, the airline sought to improve its customer service by integrating its Rapid Rewards Frequent Flyer, loyalty-based program, with its reservation system to avoid delays in reservation transactions. This integration has allowed customers to get tickets instantly while taking advantage of a simple card swipe reader so as to avoid agents that ask for information such as addresses and name spellings. Southwest spent two months implementing this new Oracle9/Real Application Clusters (Oracle9/RAC) system from start to finish. This is the system that allows the Rapid Rewards customers the convenience of making reservations with a swipe of a card (Southwest Airlines Improves Passenger Check-In Time, 2002).

Southwest Airlines' management puts a priority on employee initiative and responsibility (McCartney, 1995). Southwest is built on the principle that employees are expected to take on an entrepreneurial role in being proactive owners (most employees own stock in the company as part of their benefit program) who are cognizant of corporate values and confident enough with their empowerment to participate in decision-making and continuous improvement. This entrepreneurial spirit championed by top management provides employees with the freedom and responsibility to take effective action and the financial participation through ownership which allows them to benefit from the company's overall performance. Southwest's unique employee involvement has really empowered employees to take on responsibility for maintaining the high performance standards of the company with few complications (Jones and George, 2003).

The process of internal marketing starts at the point of hire. The company's hiring process is very interesting: peers screened candidates and conducted interviews; pilots hired pilots, and gate agents hired gate agents. To better understand what the company sought in candidates, Southwest interviewed its top employees in each job function (e.g., pilots, gate agents, baggage handlers, ground crew) and identified their common strengths, then used these profiles to identify top candidates during the interview process. Southwest hired for attitude as much as aptitude. Lieber (1998) quotes CEO Kelleher, "We want people who do things well, with laughter and grace."

What is the end result of this internal marketing effort? Southwest has the most productive workforce in the industry with 2,400 customers served per employee annually; double its competitors' average productivity. Southwest has the lowest turnover rate among airlines, with less then 4.5% of employees leaving per year. There is also a no furlough policy at Southwest, which has never lain off a permanent employee (McNulty, 2001). In fact, immediately after Sept. 11, management assured its workers and unions that no one would be laid off (Donnelly, 2002). In fact, shortly after September 11, it announced an aggressive hiring program.

Conclusions

Southwest Airlines is one of this country's pre-eminent companies and will continue to be so in the future. As successful as it is, however, Southwest should realize that it cannot survive on the basis of price competition alone. The Company is subject to varying degrees of competition from surface transportation in its shorthaul markets, particularly the private automobile. In short haul air services that compete with surface transportation, price is a competitive factor, but frequency and convenience of scheduling, facilities, transportation safety and security procedures, and Customer Service may be of equal or greater importance to many passengers.

It must continue to build strong brand equity through its unique style. Fortunately, this airline has a huge competitive advantage in their culture of providing excellent customer service. In this area, newcomer JetBlue, can become a potent and strong competitor.

Southwest did a masterful job of controlling fuel as a variable cost in 2002. By hedging future prices, it was able to save the company an enormous amount of money and maintain its profitable earnings history. This strategy has perils, however, if prices plummet in the future as Iraqi oil floods the market. By using the futures market to hedge fuel prices, they may lock themselves to a contract to purchase higher fuel price (like California with its long term energy contracts). It may be more prudent to use short-term options to protect a target fuel price.

The company must continue to look to its employees to control costs for which they are responsible. The company's website has helped Southwest curtail its operating costs. As more and more customers purchase flights online, Southwest saves about $8 per booking, compared to flights purchased through Southwest reservation agents. Web bookings have reached the highest utilization that one can expect; therefore further savings in this area will be hard to come by.

Thus far, Southwest has successfully repelled the competitive efforts of online ticket discounters. As copycats get better at emulating the Southwest model, it is possible that Southwest's dominance will diminish. Full-service airlines are attempting to "Southwesternize" domestic operations by reducing or eliminating the number of seats available for upgrades but they run the risk of permanently alienating their best customers.

Many airlines have found out the hard way that expanding to become number one is not as important as making profits. While some of the bigger airlines are floundering, through a combination of entrepreneurship and shrewd business practice, low-cost operator SWA is sticking to its guns - and is still winning. The larger airlines now know that they cannot simply slash prices and hope to be competitive - instead they must seek additional business and develop new strategies with which to face the future.

Whatever the future may bring, the volatility of the airline industry can never be underestimated. The term "survival of the fittest" has never appeared so apt and the age of the low-cost airline may well be upon us.

In the end, the biggest threat to Southwest Airlines may not be its competitors at all. The war on terrorism has hurt the industry worldwide. Enhanced security measures have, had, and will continue to have, a significant impact on the airport experience for passengers. Security requirements are still evolving on a daily basis; to date, they have not impacted Southwest's aircraft utilization. In response to these measures, the Company has introduced its new automated Boarding Passes, as well as RAPID CHECK-IN Kiosks in many airports and it will continue to expand the latter service offering throughout 2003. It is currently not possible to assess the ultimate impact of all of these events on airline competition. For the foreseeable time, Southwest Airlines future appears bright and so I am not selling my shares of LUV as yet.

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