A Different Way to Run an Airline
Are empty airplane seats waste? If you were an airline executive, what would your answer be?
Every month the Airline Transport Association publishes the load factors (revenue passenger miles divided by available seat miles—a utilization measure) for U.S. airlines. Business reporters are quick to praise airlines that increased load factors over the previous year. Financial analysts maintain that once an airline load factor exceeds its break-even point, more and more revenue will hit the bottom line. So it's pretty clear that empty seats are waste—unless you are an airline passenger. Or Southwest Airlines.
Completely full airplanes aren't very comfortable. It's hard to find space for carry-on luggage, and people carry on a lot more these days, since most U.S. airlines are charging to check bags. But the real problem comes during the holidays when bad weather wreaks havoc with airline schedules, and there is no spare capacity. Far too many airline passengers have spent Thanksgiving in Denver or Christmas in Chicago instead of getting all the way home for the holidays.
It costs airlines a lot to untangle the mess of a winter storm at a hub, especially with load factors approaching 100%. To soften the financial blow, U.S. airlines long ago stopped providing lodging for passengers who were stranded because of a weather-caused delay, but they still have to find a way to get those passengers to their destination. Inconvenienced passengers are not happy, but most airlines don't seem to worry about the cost of annoyed customers. After all, the bad weather wasn't their fault.
Over the years, Southwest Airlines has reported load factors that were approximately 10% lower than those of other airlines of similar size. This might lead you to suspect that Southwest has been struggling financially—but you would be wrong. Donald Converse summed up the amazing track record of Southwest Airlines in Fast Company magazine in June 2008:3
- Founded in 1971, Southwest Airlines began to establish a consistent pattern of deviating from convention. In 1978 the airline industry was deregulated and 120 plus airlines have gone bankrupt since. Why, in this difficult environment, has SWA continued to grow and thrive? Notably, SWA is the only airline to continuously show a profit every year since 1973. How has SWA managed to increase its traffic by as much as 139%? Here are some facts that might help to understand how SWA has achieved this incredible record:
- The company consistently leads the industry in low fares and dominates the short haul market with an average of 60% market share.
- The company serves over 2400 customers per employee annually—making SWA employees by far the most productive workforce in the airline industry.
- Employee turnover averages 6.4%—again one of the best records in the industry.
- SWA is consistently ranked in the top 100 of the best U.S. companies to work for.
- They have never been forced to lay off employees regardless of external market factors such as recession or high fuel prices.
- They have the best record for baggage handling in the industry.
- They have the best on-time performance record.
- Fewest customer complaints.
- Youngest fleet of airplanes, and the best safety record!
Southwest's stated purpose is to make flying possible for those who would not otherwise be able to afford it. Thus Southwest sees its main competitor as the car, not other airlines.4 Southwest started out in Texas serving three cities—Houston, Dallas, and San Antonio—that form a triangle, about a four-hour drive, or an hour flight, apart. About a year after it was founded, Southwest had four planes on these routes, but it was running out of money, so it sold one of the planes. However, executives decided that canceling a quarter of its flights would be a disaster—this would not lead to higher load factors; it would lead to many fewer customers.
This was the start of Southwest's famous ability to rapidly turn around aircraft at the gate. The ground operations manager decided that planes could be emptied of passengers and filled up for the next flight in ten minutes, allowing three planes to fly the schedule designed for four.5 What Southwest realized is that load factors don't take into account the time that airplanes spend on the ground. By operating with fewer planes, Southwest saved significantly on capital investment and labor costs. Maintaining the same number of flights provided plenty of options for passengers and empty seats for growing traffic and absorbing variation—at a small marginal cost. James Parker, former Southwest CEO, notes:6
- With Southwest's predominantly short and medium haul route structure, an increase in turnaround times of 20 minutes per flight would reduce the available flying time for each aircraft by about two hours every day. Spreading this effect over the entire fleet of more than 450 airplanes would mean the loss of about 900 hours of flying every day. Remember, an aircraft doesn't make any money sitting on the ground. So Southwest would have to buy at least 80 more airplanes. With a list price of around $40 million per 737, this comes to a tidy sum of well over $3 billion. This is money Southwest doesn't have to spend because of its efficient turnaround.
Southwest realizes that increasing its revenue potential is more profitable than trying to make as much money as possible on every flight, and customers get more of what they want at the same time. Southwest's airplanes may be less full than those of its competitors, but the planes spend a lot more time in the air, which more than compensates for the lower load factors. By one account, the typical Southwest 737 is used 11.5 hours a day, compared with an average of 8.6 hours for other carriers.7 Rapid aircraft turnaround leading to high capital equipment utilization bears a resemblance to the use of short setup times in manufacturing, pioneered by Toyota. Both companies discovered new, counterintuitive ways to make more productive use of both capital equipment and people while maintaining increased flexibility in the face of variation in demand. In both cases, their approach trumped the apparent economies of scale enjoyed by their competitors.
Since Southwest can turn a plane around much faster than other airlines, the people involved can be assigned to a new plane more quickly, and thus they are more productive. Short turnarounds have been difficult for other airlines to copy; Southwest's times average 15 to 20 minutes faster than those of their best competitors.8 One of the reasons short turnarounds are so difficult to emulate is that many different departments must be coordinated in a short span of time: pilots, flight attendants, caterers, cabin cleaners, gate agents, operations agents, ramp agents, ticket agents, baggage agents, freight agents, fuelers, mechanics. Southwest nurtures a strong culture of cooperation across these departments; people from different areas routinely help each other out. At many other airlines, work rules and measurement systems discourage such cooperation.9
Jim Parker, Southwest's former CEO, claims that Southwest Airlines isn't really in the airline business at all. The company is in the customer service business; it just happens to fly airplanes.10 He believes that the secret to success in the customer service business is to take good care of your employees, because then they will take good care of your customers, and satisfied customers lead to a successful business. So Southwest focuses on three things: Create a great place to work, provide customers with what they really want, and make sure that the airline always makes a profit so it can stay in business for the long term.