Wednesday, 14 March 2012

Case Study : Southwest Airlines - An Airline in Trouble?

James Parker (Parker), the CEO and vice chairman of Southwest Airlines Co. (Southwest) announced his resignation from the airline, in July 2004. The news came as a surprise to company insiders as well as analysts, who did not expect that Parker would step down just three years after taking over from Herb Kelleher (Kelleher), who had an almost iconic status at the airline. Southwest announced that Gary Kelly (Kelly), the airline's Chief Financial Officer and executive vice president would be taking over as CEO immediately. In a statement, Kelleher, who was the chairman, said that Southwest's board had accepted Parker's resignation "with both deep regret and profound gratitude."3

He also said that he had great hopes on Kelly, under whose guidance Southwest had achieved the strongest balance sheet in the US airline industry. Both Parker and Southwest, maintained that the resignation was due to personal reasons. Parker said that the job was too 'draining' for him and that he did not feel he could cope with it any more. "Sometimes you feel like you've given all you can give," he said.

However, certain analysts believed that there was more to it than that. They linked Parker's resignation to the difficult time he had in the negotiations with the airline's flight attendants union, in which he was involved since 2002.

In early 2004, Parker had to withdraw from these negotiations, because he said the discussions were getting too personal and critical. Kelleher had to be brought in before a tentative agreement could be reached in 2004. Certain analysts said that this affected Parker's credibility among employees, at a company renowned for its harmonious labor relations.

"You would certainly think that the troubles he's had with the unions may have led to his departure," said Bill Warlick, a senior airline analyst at Fitch Ratings in Chicago.

Southwest was the pioneer of low cost airlines (Refer Exhibit-I for features of low cost airlines). It was the first time in its history that the airline had experienced major labor problems.

Otherwise, although Southwest had the highest percentage of unionized employees in the industry (about 85 per cent of its employees belonged to unions), relations between the employees and the management were always positive and cooperative.

The company had also experienced only one strike since its launch in 1971.

Just before Parker's resignation, Southwest had announced that its second quarter profits for 2004 would fall below expectations by 54 per cent, although it was the 53rd profitable quarter in a row for the airline (Southwest was also the only airline in the industry to post profits every year since 1973.)

The fall in profits was assigned to increased labor costs and rising fuel prices. However, many analysts believed that the underlying reason behind all of Southwest's problems was that the culture, for which the airline was famed, was changing.

After an unsuccessful appeal to the State Court, Southwest obtained its certificate for operation after clearance from the Texas Supreme Court.

Southwest's Success Story

Southwest was one of the biggest success stories in America. Up to 2003, the airline had had 31 years of profits in a row. In the years since it was set up, Southwest weathered some major storms and emerged successful. Despite offering a no frills service, it was able to cut out competitors in most markets. Southwest achieved this by offering fares that were considerably lower than those of its competitors and emphasizing customer service.

Trouble Brewing

Things began to change at Southwest in the early-2000s. The changes were not apparent, but analysts felt that the company was undergoing a subtle transformation. External factors like increased competition and rising fuel prices also contributed to the airline's troubles.

Labor Problems
Southwest had a reputation for being one of the best companies to work for. (It was a regular on Fortune magazine's Most Admired Companies list.) People loved working for Southwest, because the company valued its employees and gave them a lot of flexibility. Southwest's motto was 'employees come first, customers come second'.

Can Kelly Replace Kelleher at Southwest?

Did Southwest Change?

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