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year-end 2015, Southwest had a fleet of 704 Boeing 737 aircraft serving 97 destinations in 40 states, the District of Columbia, Puerto Rico, Mexico, Costa Rica, Belize, Jamaica, the Bahamas, Aruba, and the Dominican Republic. Southwest planned to begin flights to Cuba in 2016, if approved by the U.S. Department of Transportation.

In 2015, Southwest earned record after-tax prof- its of $2.2 billion on revenues of $19.8 billion, eas- ily surpassing the 2014 record after-tax profits of $1.2 billion on revenues of $18.6 billion. In May 2016, Southwest’s board of directors authorized a $2.0 bil- lion share repurchase program (on top of a recently completed $1.5 billion share repurchase program announced in May 2015) and increased the quar- terly dividend to $0.10 per share starting June 2016, up from $0.075 per share (starting in June 2015) and $0.06 per share in 2014. The June 2016 dividend pay- ment marked the 159th consecutive quarter South- west had paid a dividend to shareholders.

COMPANY BACKGROUND In late 1966, Rollin King, a San Antonio entrepreneur who owned a small commuter air service, marched into Herb Kelleher’s law office with a plan to start a low-cost/low-fare airline that would shuttle pas- sengers between San Antonio, Dallas, and Houston.1 Over the years, King had heard many Texas busi- ness executives complain about the length of time that it took to drive between the three cities and the

In 2016, Southwest Airlines was the world’s second-largest airline in terms of total passengers boarded (144.6 million in 2015), trailing only Delta Air Lines, which boarded just over 180 million pas- sengers in 2015 (counting those on flights operated by Delta’s regional and international joint venture partners). However, based on the most recent data available from the U.S. Department of Transporta- tion, the number of originating domestic passengers boarding Southwest flights exceeded those of Delta and its other two biggest rivals—American Airlines and United Airlines (see Exhibit 1). Southwest also had the enviable distinction of being the only major air carrier in the world that had been profitable for 43 consecutive years (1973–2015). In 2015, South- west was named to Fortune’s list of the World’s Most Admired Companies for the 22nd consecutive year, coming in at number seven.

From humble beginnings in 1971 as a scrappy underdog with quirky practices that once flew mainly to “secondary” airports (rather than high- traffic airports like Chicago O’Hare, Los Angeles International, Dallas–Fort Worth International, and Hartsfield–Jackson International Airport in Atlanta), Southwest had climbed up through the industry ranks to become a major competitive force in the domestic segment of the U.S. airline industry. It had weath- ered industry downturns, dramatic increases in the price of jet fuel, cataclysmic falloffs in airline traf- fic due to terrorist attacks and economy-wide reces- sions, and fare wars and other attempts by rivals to undercut its business, all the while adding more and more flights to more and more airports. The number of passengers flying Southwest had increased from 72.6 million in 2000 to 144.6 million in 2015. At

Arthur A. Thompson The University of Alabama

John E. Gamble Texas A&M University–Corpus Christi

Southwest Airlines in 2016: Culture, Values, and Operating Practices


Copyright © 2016 by Arthur A. Thompson and John E. Gamble. All rights reserved.

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C-312 PART 2 Cases in Crafting and Executing Strategy

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In 1967, Kelleher filed papers to incorporate the new airline and submitted an application to the Texas Aeronautics Commission for the new company to begin serving Dallas, Houston, and San Antonio.2 But rival airlines in Texas pulled every string they could to block the new airline from commencing operations, precipitating a contentious four-year parade of legal and regulatory proceedings. Kelle- her led the fight on the company’s behalf, eventually prevailing in June 1971 after winning two appeals to the Texas Supreme Court and a favorable ruling from

EXHIBIT 1 Total Number of Domestic and International Passengers Traveling on Selected U.S. Airlines, 2000, 2005, 2010, 2013–2015 (in thousands)

Total Number of Enplaned Passengers (including both passengers paying for tickets and passengers traveling on frequent flyer awards)


American Airlines (see Note 1)

93,280 66,384 65,070 65,774 77,297 68,319 Domestic

25,010 24,444 19,962 20,424 20,710 17,951 International

118,290 87,828 85,032 86,198 98,007 86,270 Total

Delta Air Lines (see Note 2)

114,904 106,220 98,590 90,141 77,581 97,965 Domestic

22,828 21,798 18,925 19,390 8,359 7,596 International

137,732 128,018 117,515 109,531 85,940 105,561 Total

Southwest Airlines (see Note 3)

142,408 126,695 115,323 106,270 88,436 72,568 Domestic

2,167 500 — — — — International

144,575 127,195 115,323 106,270 88,436 72,568 Total

United Airlines (see Note 4)

69,179 64,668 65,221 43,323 55,173 72,450 Domestic

25,713 25,203 22,209 9,727 10,356 10,625 International

94,892 89,871 87,430 53,050 65,529 83,075 Total

Note 1: American Airlines and US Airways merged in December 2013, but continued to operate under their separate names through 2014. Previously, US Airways had merged with America West in September 2005. Note 2: Delta Air Lines and Northwest Airlines merged in October 2008; however, combined reporting did not begin until 2010. Note 3: Southwest Airlines acquired AirTran in late 2010; starting in 2013 and continuing into 2014, AirTran flights were rebranded as Southwest Airlines flights. Southwest’s first international flights began when some of AirTran’s international flights were rebranded as Southwest flights in 2013. Note 4: United Airlines acquired Continental Airlines in 2010, and the two companies began joint reporting of passenger traffic in 2012. Prior to 2012, traffic count data are only for United flights.

Source: U.S. Department of Transportation, Bureau of Transportation Statistics, Air Carrier Statistics, Form T-100.

expense of flying the airlines currently serving these cities. His business concept for the airline was simple: Attract passengers by flying convenient schedules, get passengers to their destination on time, make sure they have a good exp