sw_case1

South west Airline" 2002 case twenty-eigh Andrew c. Inkpen Valerie DeGroot Arturo Wagner Chee Wee Tan Thunderbird September 11 thrust the airline industry into economic chaos, resulting in layoffs, bankruptcies, and the prospect of a tenuous future. On September 22, 2001, President Bush signed into law the Air Transportation Safety and System Stabilization Act. The Stabilization Act provided up to $5 billion in cash grants and $10 billion in loan guaranteesto qualifying US airlines to compensate for direct and incremental losses.Immediately after the terrorist acts, most major carriers announced significant service reduc tions,grounded aircraft, and furloughed employees.At Southwest Airlines (Southwest), there was no loss of pay for employees from layoffs, furloughs, or unpaid leaves. By September 18, 2001, Southwest was operating its pre-September 11 flight schedulewith 100% job security. Because Southwest had the strongestbalance sheet and the highest credit rating in the US airline industry, the company was able to avoid the severe cash flow problems experienced by its competitors. According to the Southwest2001 annual report: Southwest was well poised, financially, to withstand the potentially devastating hammer blow of September II. Why?

Becausefor

several

decades

our

leadership

philoso phy has been: we manage in good times so that our Com pany and our Peoplecan be job secure and prosper through bad times....

Once again, after

September 11, our philos ophy of managing in good times so as to do well in bad times proved a marvelous prophylactic for our Employeesand our Shareholders.

Copyright © 2002 Thunderbird, The American Graduate School of Interna tional Management. All rights reserved. This case was prepared by Professor AndrewC. Inkpen and Valerie OeGroot, with research assistance from Arturo Wagnerand Chee Wee Tan, for the purpose of classroom discussion only, and notto indicate either effective or ineffective management.

THE

US

AIRLINE

INDUSTRY

The nature of the US commercial airline industry was permanently altered in October 1978 when President Jimmy Carter signed the Airline Deregulation Act. Before deregulation, the Civil Aeronautics Board regu lated airline route entry and exit, passenger fares, merg ers and acquisitions, and airline rates of return. Typi cally, two or three carriers provided service in a given market, although there were routes covered by only one carrier. Cost increases were passed along to customers and price competition was almost non-existent. The air lines operated as if there were only two market seg ments: those who could afford to fly, and those who couldn't. Deregulation sent airline fares tumbling and allowed many new firms to enter the market. The finan cial impact on both established and new airlines was enormous. The fuel crisis of 1979 and the air traffic con trollers' strike in 1981 contributed to the industry's diffi culties, as did the severe recession that hit the US during the early 1980s.During the first decade of deregulation, more than 150 carriers, many of them start-up airlines, collapsed into bankruptcy. Eight of the 11major airlines dominating the industry in 1978 ended up filing for bankruptcy, merging with other carriers, or simply dis appearing from the radar screen. Collectively, the indus try made enough money during this period to buy two Boeing 747s1 (Exhibit 1). The three major carriers that survived intact-Delta, United, and American-ended up with 80% of all domestic US air traffic and 67% of trans-Atlantic business.? Competition and lower fares led to greatly expanded demand for airline travel. By the mid-1990s, the airlines were having trouble meeting this demand. Travel increased from 200 million travelers in 1974 to 500 million in 1995, yet only five new runways were

......

> .......I.-' I-' ................................."., N IJ,lN \JJ \JJ Ul -i'>-i'>-i'>\JJ -i'>\JJ ~" Ol OC1' o~(X)~ ....o.N. I»

0'

IJ,lUl

C1' --J \JJ --J N

-o t-'t-'t-'t-'t-'t-'t-'t-' --JC1'--J(x)~ o 0""" t-'t-'UlUl Ul .:-' ~C1' ~--J (X) (X) ~N ~-i'>-i'>~--J~O ~Ul !'l ~\JJ

3

Ul --J :::s

O~NO-O -i'>O--JN\JJ

(x)C1'~--JC1'\JJC1'--J C1't-' ....t.-.'UlONUl

(X)t-'-i'>0(X)

-i'>C1'(x)~(x)000

.......I.-.'t-'t-' t-' ........t.-.'........ N t-' N t-' t-' 0 ....0 \JJ t-' (X) 0 ~ C1' t-' -i'>\JJ t-' ""OC1'\JJt-'\JJ--J--JN-i'>~-i'> ....~ 0 I-' 0

-o

1""1 ~

J-'t-I

N t-'t-'t-'-i'>-i'>-i'>\JJN\JJN ~-.JO:.oUlUl:.oo--Nt-' OO'Ot-'--JOUlUl ....O.O.

t-I.._.:a.

o

-i'>NUlUl-i'>-i'>-i'>-i'>-i'>-i'>C1'C1'C1'--J(x)(x) !'l~~~~~~~~~.:-'t-'~~p~ C1'--JC1'\JJ ....\.J.J--J ....C.1.'--JOUl\JJt-'~(X) t-'--JN-i'>O(x)-i'>-i'>~C1'O\JJ"""NUlUl N(x)C1'\JJ--JUlN\JJONC1'OOOOO

:i"

-i'>'" -i'>

:a I»

.:-' .......t.-.'t-'t-' ....t.-.'t-' ....t.-.'t-'t-'c f>f>.j:>-i'>\JJ-i'>-i'>-i'>-i'>NNt-' .o ......t-' N ....C.1' NIJ,lOC1' ....O.NC1'\JJt-'--JC1'--Jt-'NUl

--J -i'>Ul--J

-o

--J

e, S"

,..., I» ' ."

-

t-' (X) Ul Ul -i'>t-' N ~-i'~>N ~O t-' ~Ul ~Ul C1'Ul ....t.-.'i'>N NUlUlN(x)~

.,

.:-'

(x)-i'>Ul N -i'>0 ~(x)-i'>

"

:::s ~

t-It-It-I~

~N ~-J C1'Ul-i'>\JJ\JJN(X)-i'>C1' ....U.l. UlC1'~-i'>--Jt-'-i'>\JJNt-'O t-'t-'~~NO--JO\JJOO

>

C1'

3.."

,~..,

0'0 l.TIN

I»

.~, :::s

.. ,

:::s

o --IN-i'>\JJ-i'>-i'>-i'>UlUlUl(x)

z

.... 0.

:a .

" ,

~C1' ~--J.:-'~~ ~-i'~>--J~(X)~N ~N

o

..........

,...,»

I

C1'C1'C1'C1'~~

,

IJ,lNN\JJ\JJ-i'>f'o\JJ\JJt-'Nt-':;' N-.JNO~UlNlnOlnON~ ""'OI-'C1'\JJ\JJ ....-.i.'>Ul(X)-i'>i'>~

......

--J(x)(x)~0~ N ~--J~-i'~>O ~~ --J-i'>--J\JJ~(x) t-'-i'>-i'>UlOUl ~O(X)O.j:>N

~N ~O ......~~

~~

\JJ~N

:;

,. .,

>

t-' ....t.-.'

~o~(X)~(X)P

3.."

.:-'~N

,.., .~,

\JJC1't-'0

t-' (X) 0 ....\.J.J--JUli'> --J N t-' --J t-' 0

I»

:::s

"

",

VI

o ...................t.-.'..........t..-..'t-'t-'t-' C ...................N.N.\.J.J.\. :;. J.J.N.N. .j:>N--J~o--\JJUl~N\JJ--J(X)~ OOl.Tl(x)NUlt-'(x)C1'Ul\JJ(x)~~

:::;i

I»

.......t.-.'......t.-.'t-' ....t.-.' ....t.-.'t-'t-':::s 1\l ...... t-'NN\JJ\JJ\JJ\JJt-'t-' .....'." 1J,l1J,lt-'--JC1'N Ni....>\JJ~\JJ~ .j:>....\.J.J(X)--J-i'> C1'Ul~N\JJ..,

is:

...........t.-I

I\lNt-'Nt-'\JJf'o-i'>-i'>N\JJt-';:D -.IN(x)-i'>(X)\JJOOO\JJOUlc.. ........(.X.).~t-'C1'O--J--JN~Ul

1--1

c:: :.

...............t.-.'......t.-.'NNt-' .... t.-.'c:: O'C1'C1'--JUl~~OOC1'C1'-i'>~ IJ,l-o -o -o -o (X) --J -i'>--J -o t-' \JJ ::;" -.J\JJ--J-i'>N--J(x)Ul-i'>t-'-i'>N

:::s

~

Ul t-' ~--J~~

t-' t-'

t-' --J -i'> -i'>t-'Ul --J N --J

\JJN\JJ-i'>-i'> ~-i'~>~ ~C1' ~o~-i'> --JC1't-'--J-i'> UlN(X) .... ~.. ~-i'>000

Ul \JJN\JJ\JJ\JJ\JJN\JJNN\JJ-i'>\JJ\JJ ~-i'~>~ ~\JJ~Ul ~Ul ~\JJ~~ ~o ~Ul ~--J~(X)~o ~C1' ~-i'> --JUlUlON~C1'-i'>O~t-'Ul-i'>-i'> (x)\JJC1'N-i'>-i'>(x)(x)-i'>\JJ(x)~(x)Ul --J-i'>C1'-i'>C1'N-i'>\JJ-i'>(X)C1'OOO

.:-' -o --J--J(X)(X)(X)

....t.-.' ....t.-.' ............ (X)(X)(X)~~UlC1'C1'--J--J--J ~C1' ~(X)~~ ~(X)~Ul ~(X)~N ~~ ~\JJ~C1' ~Ul t-' ~(X)~C1' ~i'~>N OOC1'C1'~UlC1'O(X)Ul-i'> (X)~OUlC1'C1'UlO~-i'>O OUlNN--J o\JJC1'-i'>-i'>Ul (X) C1'0 (X) UlNUlNUl~OOOOO

(X) t-' t-' N N -i'>Ul Ul Ul Ul Ul Ul Ul Ul ~-i'~>(X)~o ~(X)~o ~(X)~C1' ~C1' ~Ul ~(X)~(X)~C1' ~(X) NNONC1'O-i'>O~\JJ"""(x)N \JJUlt-'\JJUl ....-.-.JNt-'t-'C1'(X)~ --J -i'>-i'>-i'>N -i'>0 --J (X) t-' \JJ 0 0

......

~o

....\.J.J-i'>-i'>-i'>UlUlUlUlUl--J--J--J(X)(X)(X)(X) t-'--JC1'(X)(X)\JJt-'\JJUl-i'>-i'>C1'(X)O\JJC1'N ~~~~~~~N"""p~~~.:-'~!'l~ -i'>Ul\JJ\JJC1'N--J~N\JJ(x)~-i'>\JJNC1'Ul ~ONUl(x)~-i'>(x)\JJNOC1'O~Ul(x)Ul 0~--J0\JJ~\JJ-i'>--J-i'>-i'>000000

OOOOOOCONO'ON