Southwest Airlines

9-803-133 REV: MARCH 11, 2003 JAMES L. HESKETT Southwest Airlines 2002: An Industry Under Siege

Amid Crippled Rivals, Southwest Again Tries To Spread Its Wings; Low-Fare Airline Maintains Service, Mulls Expansion In Risky Bid for Traffic — Front Page Headline, The Wall Street Journal, October 11, 2001 The Age of “Wal-Mart” Airlines Crunches the Biggest Carriers; Low-Cost Rivals Win Converts As Business Travelers Seek Alternatives to Lofty Fares — Front Page Headline, The Wall Street Journal, June 18, 2002 Vaunted Southwest Slips In On-Time Performance; Airline Famous for Reliability Now Ranks Next-to-Last — Page D1 Headline, The Wall Street Journal, September 25, 2002 Having weathered an unimaginable series of events during the past 15 months, the top management team at Southwest Airlines engaged in a series of discussions late in 2002 intended to insure sound strategic decisions in the face of industry setbacks, volatile responses on the part of competitors, the preservation of a culture formed around a charismatic founder/leader who had turned over the CEO’s job to a successor, and a series of government directives that made it increasingly difficult for Southwest to implement an operating strategy that had differentiated it from its competition. As Colleen Barrett, president and chief operating officer, put it at one gathering of the top management team, “Recent events have made it increasingly difficult to live up to the promise to customers in our ads that ‘You are now free to move about the country. ’” Changes in the airline operating environment after the terrorist attacks of September 11, 2001 were thought by some on Southwest’s management team to make it more difficult for the airline to maintain its distinctive competitive position.

For example, industry bailout efforts by Congress were intended to help Southwest’s competitors that were in the worst financial condition. The need to respond to constantly changing security directives made it harder for employees to create and convey the Southwest SPIRIT. More recently, Southwest’s organization had increased efforts to maintain its relatively high on-time arrival performance levels while its competitors’ levels had risen. Southwest’s managers attributed this largely to the addition of time to competitors’ flight schedules, but it was creating the perception that Southwest’s service levels were declining in relation to those of its competitors. A series of important management decisions had positioned Southwest to resume its pre-9/11 growth.

Just what form that growth might take was subject to discussion. ____________________________________________________________ ____________________________________________________ Professor James L. Heskett prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 803-133 Southwest Airlines 2002: An Industry Under Siege The Southwest Story Southwest Airlines was founded in 1967 by Rollin King and Herb Kelleher in response to a need for increased capacity on major travel routes between major Texas cities. Although the routes were served by large “through” carriers such as American Airlines and Braniff International, often there were insufficient seats on flights making intermediate stops in Texas while arriving from cities outside Texas or departing for destinations outside the state. Because of the demand for seats on the intrastate legs of those flights, fares were high. The Founding Strategy

Because federal regulation of the airline industry made it difficult to start an airline providing interstate service, Southwest’s founders decided to create an intrastate carrier connecting Dallas, Houston, and San Antonio, Texas, roughly an hour’s flying time apart from one another. Their strategy was centered around costs low enough to enable Southwest to establish fares below the cost of driving a vehicle over the same route. With three new Boeing 737s bought at favorable prices because of overproduction, Southwest finally flew its first flights on June 18, 1971 on two legs of what would become a triangular route connecting the three metro areas. Based at Love Field in Dallas and with a need to get attention, the airline’s new president, Lamar Muse, adopted the “love” theme in executing its strategy.

As a result, drinks served on board were called “love potions,” ticket machines were called “love machines,” and cabin “hostesses” (there were no males at that time) were selected for their striking appearance and dressed in suits with “hot pants” and boots (the fashion rage at the time). The hostesses were featured in what today would be called highly sexist ads extolling the distinctive features of the airline, such as stewardesses with seductive voices intoning “what you get at Southwest is me. ” Southwest’s point-to-point service enabled it to achieve high levels of on-time service. Its frequent departures enabled passengers to catch a later flight if they happened to miss one, a feature valued by frequent business fliers to whom Southwest hoped to cater. And its selection of older, less congested airports located more conveniently for business travelers allowed Southwest to achieve faster turnaround times at lower costs.

To achieve frequent departures with just four planes and three cities, turnaround times had to be minimized. This required that employees be given the latitude to do whatever might be necessary to get a plane turned around in the targeted time of 15 minutes; thus, early union contract job descriptions were negotiated with the open-ended clause “and whatever else might be needed to perform the service,” a practice that remained in succeeding years. All of this was done with an emphasis on fun for employees and travelers. Ground and in-flight personnel were encouraged to be creative in the way they delivered required announcements to passengers.

Some sang the messages; others delivered them in dialect (such as an Arnold Schwarzenegger-like “You vill sit back. You vill relax. You vill enjoy this flight. Hasta la vista, baby”) or in Donald Duck-speak. On early flights, passengers who could produce the largest holes in their socks were recognized and rewarded. In-flight contests were conducted to see how many passengers could be fitted into the bathroom at one time. And holidays were celebrated with costumes and giveaways. This emphasized the selection of employees who could be empathetic and bring pleasing personalities to the job. 2 Southwest Airlines 2002: An Industry Under Siege 803-133 Competitive Response

Southwest’s principal competitors, Braniff International Airways and Trans Texas Airways (later Texas International Airlines), responded immediately. They first asked the Texas courts to enjoin issuance of Southwest’s intrastate operating certificate. Then they lobbied and litigated to get the local and federal government (and courts) to force Southwest to abandon Love Field near downtown Dallas and move with other airlines to the newly opened Dallas-Fort Worth International Airport much farther from downtown Dallas. On yet another front, they initiated low-price fare “sales” intended to make it difficult for Southwest to get a foothold in the market. They failed on all three initiatives.

In one pivotal incident, on February 1, 1973, before Southwest had achieved profitability, Braniff International initiated a 60-day “half-price sale” of tickets between Dallas and Houston, offering tickets at $13 (substantially below the full cost of the service) as opposed to Southwest’s $26 fare. With little knowledge of whether the sale would be extended until Southwest might be forced to discontinue service, Southwest’s management countered with an ad proclaiming that “nobody’s going to shoot Southwest out of the sky for a lousy $13” and offering customers an unusual alternative. They could ask to pay either $26 or $13 for exactly the same seats on Southwest flights. Those requesting $26 tickets were rewarded with gifts such as ice buckets or fifths of whiskey. The ploy worked. Fully 80% of customers requested $26 tickets.

The first day of the offer generated the most traffic on Southwest up to that point. Barrett remarked, “At least for one month, we became Chivas Regal’s biggest distributor. ” Within days, Braniff announced the discontinuance of its sale. Yet another of the legends for which the company would become known was forged. Southwest’s Takeoff When Congress passed the Airline Deregulation Act in 1978, making it possible for airlines to begin flying new interstate routes without regulatory permission, Southwest was ready to extend its route network. Its only constraint would prove to be the so-called Wright Amendment, attached to the International Air Transportation Competition Act of 1979.

It restricted interstate flights out of Love Field to the four states contiguous to Texas and was supported by those who had sought unsuccessfully to force Southwest earlier to move its operations to Dallas-Fort Worth International Airport. When Southwest did initiate service to noncontiguous states in 1982, it was from its Texas stations other than Love Field, a practice that it continued to follow subsequently. Shortly after deregulation, however, a policy was adopted that, in spite of expansion opportunities, an effort would be made to manage the annual growth rate in aircraft capacity to about 10% to 15%. This was done to insure that the organization could maintain a strong balance sheet and, as senior managers often said, “manage in good times in order to survive in bad times. In its only significant departure from its growth policy, in 1993 Southwest acquired Morris Air, a regional carrier based in Salt Lake City established on the Southwest model, and retained seven of Morris’s operating stations, all new to the Southwest network. The routes of the two airlines were complementary and enabled Southwest to extend its service for the first time into the Northwest. The acquisition did, however, require the consolidation of two organizations with somewhat different management philosophies. For example, Morris Air’s leadership had been successful in its efforts to avoid unionization while Southwest, embracing the idea of partnering with unions, had become the most heavily unionized airline in the industry and the most strike free. 1 Morris Air was only the 1 Few of Morris’s senior management people remained with Southwest.

June Morris joined Southwest’s board of directors. The only other Morris senior officer who joined Southwest was David Neeleman. He remained only a few months. After 3 803-133 Southwest Airlines 2002: An Industry Under Siege second acquisition Southwest had made at that time, the other having been the acquisition of Muse Air in 1985, which was operated for a short time as a separate and independent company. Southwest’s growth was steady in the face of increasing requests from cities hoping to experience what had become known in government circles as “the Southwest effect. ” This effect inevitably resulted from Southwest’s policy of pricing its service to compete with auto travel.

It required that a fare structure be established that was often 70% below that being offered by other airlines at the time of Southwest’s entry into a market. The result was often a 1,000% increase in traffic on the newly served city-pair markets in one year or less. Even at a time when the list of cities requesting the airline’s service had grown to more than 50, Southwest chose to enter only two or three new cities each year in addition to filling out its existing network of point-to-point flights. (Exhibit 1 contains a 2002 route map along with information about markets served by the airline. ) Southwest’s strategy created a winning model for profits as well.

After breaking even less than two years after its founding in 1971, the airline had enjoyed 30 consecutive years of profit beginning in 1973, a record unmatched by any airline in the world. (Financial and related information can be found in Exhibits 2 and 3. ) Its stock, floated in an initial over-the-counter offering in 1971 and later on the American and New York Stock Exchanges with the trading symbol LUV, turned in, according to Money Magazine, the best performance of any stock in the Standard & Poor’s 500 during that time. This performance was bound to attract other airlines founded on some of the same beliefs. One such airline was People Express, based in Newark, New Jersey and established in 1980 with a lean organization including almost no staff.

It was designed to provide a low-fare, bare-bones service aimed at college students and other pleasure travelers who were willing to pay for all amenities such as checked baggage and on-board refreshments in return for the lowest fares in markets served by the airline. The company grew rapidly both through internal growth and the acquisition of other struggling airlines. However, its failure to meet profit goals led to an unsuccessful effort to reposition the airline for business travelers at about the same time that full-fare competitors began to use their sophisticated reservation and yield-management systems to price services more competitively.

While People’s leadership blamed larger competitors for its subsequent demise, others felt that management had sown the seeds of its own destruction through simultaneous efforts to grow through acquisition, revamp its information systems, and reposition itself in the marketplace. Although Southwest had been dismissed as a niche player and was able to “fly under the radar” for a number of years, by the mid-1990s major airlines were responding with the equivalent of lowerfare “fighting brands” such as Continental Lite in the southeast United States, the United Shuttle on the West Coast, and Delta Express and US Airways MetroJet on the East Coast. As they spread their routes, competition from these airlines temporarily depressed Southwest’s profitability in 1995.

However, it was thought that because they were spawned by full-service airlines with attendant problems of inherited management beliefs, cultures, and labor policies or route structures designed in part to connect through parents’ hubs, lower-fare rivals created by the largest airlines were unable to achieve acceptable levels of profit. Southwest’s management was so proud of its employees’ culture that it periodically hosted “best practice” teams from all industries that wanted to discuss hiring, serving out his five-year noncompete with the merged airlines, he formed JetBlue Airline in 1999. The best-financed start-up in airline history, JetBlue became profitable just six months after it began operations and was thought by some to be a potential future Southwest competitor.

JetBlue, a nonunion organization operating substantially longer flights than Southwest, sought to differentiate customer service and high aircraft and labor productivity through extensive use of technology. For example, everything from passenger ticketing and check-in to in-flight entertainment was based on technological solutions. Similarly, information technology was used extensively as a substitute for front-line coordination of the efforts of ground crews to achieve “the perfect 30-minute turnaround” (later abandoned in favor of 35 to 55 minutes, depending on the nature of the flight). Some jobs, such as those of flight attendant, were designed to be short term in nature. For a comparison of Southwest and JetBlue, see Jody Hoffer Gittell, The Southwest Airlines Way (New York: McGraw-Hill, 2003). 4

Southwest Airlines 2002: An Industry Under Siege 803-133 training, and employee-relations practices. More recently, Barrett had discontinued the practice because, in her words, “I felt that we were devoting too much time, energy, attention, and resources educating the outside world about our culture—as opposed to devoting that time, energy, attention, and resources internally on enhancing and enriching our own culture. ” In the 1990s other airlines around the world began to model their strategies around Southwest’s, often after a visit by their managements to Dallas. The most successful of these included RyanAir, Easy Jet, and GO in Europe as well as Air Asia in the Far East. Strategy

Important elements of the Southwest strategy, some of which were a reflection of the constraints the company faced early in its existence, included a number of things that Southwest did not do. For example, it did not employ the hub-and-spoke route system adopted by many other airlines. Huband-spoke systems were designed to feed large volumes of passengers into hubs where they could be redistributed to connecting flights, all of which was intended to increase average load factors (available seats utilized) and revenues per available seat mile flown. However, they were considered less convenient for passengers who preferred point-to-point flying. And they exacerbated the “domino effect” that one late flight could have on several others. Just as mportant, they were more costly to staff because of the extreme peaks and valleys in the traffic through each hub at “connect” times, an effect that also increased crowding and confusion for connecting passengers. A point-to-point route system also enabled Southwest to speed the turnaround of its aircraft not required to wait for connecting flights and thereby gain greater utilization from a fleet containing only Boeing 737s. The newest of these were purchased for something less than the list price of $41 million under a contract with Boeing signed in June 2000 for as many as 436 Boeing 737s to be delivered through 2012 (on the schedule shown in Exhibit 4). By mid-2001, Southwest’s turnaround time had grown to an average of 24 minutes, a figure that was thought to be at least 30 minutes faster than the average for the industry as a whole.

Contributing to Southwest’s performance on turnaround time, in addition to its route system, were (1) an absence of meals on all Southwest flights, (2) a limited amount of checked luggage on Southwest’s typically 60- to 90-minute flights, (3) a near-uniform configuration for all of its 737 aircraft, (4) a team-oriented approach to ground services with team measures for turning around planes and employees willing to do whatever necessary to get a plane pushed off on time, (5) a highspeed boarding process (described below), (6) a “handoff” of flights from one ground crew to another involving detailed information about numbers of passengers and bags as well as special passenger needs so that the receiving ground crew could make preparations in advance of a flight’s arrival, and (7) the utilization of agents with the latitude to bring a wide variety of resources to bear on the flightservicing process. Southwest neither connected with other airlines nor sold “interline” tickets. Because it targeted business and pleasure fliers with relatively simple itineraries and short trips, these features were not thought necessary. Further, it did not assign seats. Instead, passengers were issued colorful reusable plastic boarding passes numbered so that 30 passengers could be boarded at a time in the sequence of their numbers.

Once on board, passengers took any available seat, thus providing an incentive for an early arrival at the gate. This routine eliminated the time-consuming reconciliation of the double assignment of seats on full flights. And it allowed Southwest agents to keep the plane doors open for last-minute arrivals at the gate. But it led to what Barrett described as “the number one complaint about Southwest’s service, particularly among the uninitiated,” the absence of assigned seats. 5 803-133 Southwest Airlines 2002: An Industry Under Siege Rather than spread its flights thinly over an extensive system, Southwest’s strategy for opening markets was to limit markets served and provide high-frequency departures each day to a given destination.

The intensity of this schedule reduced the consequences of a missed flight and enabled Southwest to retain tardy passengers. Southwest was a maverick in its ticketing processes. Although its flight information was displayed in four computer reservation and ticketing systems operated by other airlines in the early 1990s, it paid $1 per booking only to the SABRE system, the only one with sufficient clout to demand payment. This allowed travel agents using SABRE to print tickets, even though a booking still necessitated a telephone call by an agent booking the ticket. Travel agents hated it because of the extra work for less commission on a lower-priced ticket.

But the policy was thought to save the airline in excess of $30 million per year in computer reservation booking fees paid to airline ticketing systems and increased direct business resulting from travel agents advising customers to book Southwest flights themselves. In 1994, Southwest was ejected from all systems except SABRE. In response, the company’s management was compelled to innovate new means of protecting its own ticket-distribution system over the following eight years. For example, it implemented a highly successful “ticketless” (paperless) travel program and later the development of Southwest. com as a means of using the Internet to sell travel directly to customers. These innovations had the combined effect of increasing sales and further lowering overall distribution costs. Southwest’s frequent-flier program was the simplest in the industry—fly eight flights, get one free.

It had been preceded by a discount ticket program in the early 1970s in which purchasers of 10 flights received a booklet with 11 tickets, often cited by Kelleher as “the world’s first frequent-flier program. ” By mid-2001, Southwest’s operations had grown to encompass 32,500 employees (more than 1,000 married to one another), operating a total of 360 Boeing 737 aircraft (with an average daily utilization of nearly 12 hours per aircraft) connecting 58 airports with 2,650 flights per day. It realized 7. 5% of revenue passenger miles flown by the eight largest U. S. airlines and supplied an estimated 90% of all available seat miles in the “low-fare” segment of the market.

It was the only airline to have been first in on-time performance, lowest in lost baggage, and highest in customer satisfaction for the same year, according to statistics maintained by the U. S. Department of Transportation, having achieved the feat five years in a row. And it had achieved an enviable financial performance. Chairman Kelleher commented: “Most people think of us as this flamboyant airline, but we’re really very conservative from the fiscal standpoint. We have the best balance sheet in the industry. We’ve always made sure that we never overreached ourselves. We never got dangerously in debt, and never let costs get out of hand. And that gave us a real edge. 2 Leadership, Values, and Culture A visit to Southwest Airlines’ headquarters at Love Field yielded vivid impressions of the company’s leadership, values, and culture. The walls of the three-story building (with a five-story addition) were covered with literally thousands of framed photos and awards, many of them showing Southwest employees in their party cloths ranging from black tie and formals to jeans. Many others portrayed employees engaged in community activities together in their free time, often at Ronald McDonald houses for children across the country. 2 Katrina Booker, “The Chairman of the Board Looks Back,” Fortune, May 28, 2001. 6

Southwest Airlines 2002: An Industry Under Siege 803-133 In the hallways, jeans, Texas greetings, and hugs were the order of the day. As one of his colleagues put it, “Jim [executive vice president of operations] Wimberly’s idea of dressing up is to wear socks. ” In response to the question, “What’s the most enjoyable thing about your job? ” posed by the casewriter, one staffer replied after a moment’s thought, “I guess just coming to work every day. ” The response reflected the fact that Southwest Airlines had placed in the top five employers in Fortune Magazine’s “100 Best Places to Work in the U. S. ” every year it had competed for the award. Leadership

Many of the framed photos at headquarters included Kelleher, one of the founders, who had gained fame for his unorthodox but effective style of leadership at Southwest over the years. He could be seen on a customized Harley-Davidson presented to him by his pilot group, at an arm wrestling contest with the executive of another company in order to settle litigation over the use of an advertising slogan, or at the maintenance hangar (by his account, at 2 a. m. ) dressed in a long dress with a purple boa and large purple hat to settle a performance challenge made to the maintenance crew. Kelleher’s style of leadership was so charismatic and infectious that many claimed his retirement would present a serious challenge to his successors and to Southwest’s culture.

By June 2001, Kelleher had turned the day-to-day operating responsibilities over to Jim Parker, former vice president–general counsel and now CEO; Barrett, his long-time associate, former executive vice president–customers, and now president and chief operating officer; and a team of other senior executives, most with long service with the airline. (Exhibit 5 contains an organization chart as of late 2002. ) Less visible to the general public, Kelleher nevertheless retained the position of chairman, with oversight responsibilities for growth strategies and government and airline industry relations. In the transition, responsibility for Southwest’s unique culture remained with Barrett. Parker had been persuaded by Kelleher to join his law firm and later (in 1986) to come to work at Southwest. He was described by one account as “modest and easygoing. Workplace colleagues say he brews the office coffee in the morning, makes his own photocopies, wears khakis and golf shirts to work. 3 In addition to devoting his time to strategic issues, he assumed personal responsibility for the negotiation of numerous labor contracts. Barrett, who had joined Southwest with Kelleher, had begun her career as Kelleher’s secretary, gradually taking on responsibility for “customers” (passengers and marketing as well as employees) and, in a way, anchoring the leadership team behind the scenes while Kelleher performed a much more public role. Shy and unassuming, Barrett spent most of her waking moments engaged in Southwest business. Little was done on the internal or external customer service front without her tacit approval. Values and Culture

For years, Southwest had been operated on “The Basic Principles” of (1) focus on the situation, issue, or behavior, not on the person; (2) maintain the self-confidence and self-esteem of others; (3) maintain constructive relationships with your employees, peers, and managers; (4) take initiative to make things better; and (5) lead by example. Its core values were profitability, low cost, family, fun, love, hard work, individuality, ownership, legendary service, egalitarianism, common sense/ good judgment, simplicity, and altruism. 3 Micheline Maynard, “Southwest, Without the Stunts,” The New York Times, July 7, 2002, Section 3, p. 2. 7 803-133 Southwest Airlines 2002: An Industry Under Siege In 1990, an informal group organized years before by Barrett became the core of a committee formed to plan the airline’s 20th anniversary celebration. It rapidly evolved into what became known as the Culture Committee.

Before, according to Donna Conover, who was named executive vice president–customer service as part of the June 2001 transition plan, “Colleen [Barrett] was the Culture Committee. ” Championed by Barrett and headed by a member of her staff, Susan (Sunny) Stone in 2002, the committee’s goal was to “help create the Southwest Spirit and Culture where needed; to enrich it and make it better where it already exists; and to liven it up in places where it might be ‘floundering. ’ In short, this group’s goal is to do WHATEVER IT TAKES to create, enhance, and enrich the special Southwest Sprit and Culture that has made this such a wonderful Company/Family. The committee comprised 96 employees nominated by their peers from all levels and locations in the Southwest organization, each with responsibility for attending three meetings annually to plan various events as well as for actively participating in three of the events. These ranged from employee appreciation events throughout the system to flight/operations “midnight madness” parties and breakfasts to a Christmas SPIRIT packing exercise in which goody packages were prepared for employees who had to work on Christmas. After several years, members graduated to “alumni” status and retained responsibility for attending two events each year. By 2002, there were more than 250 Culture Committee alumni. The biggest problem apparently was in finding members willing to transition to alumni status.

The biggest companywide event of the year was the annual awards banquet, for which employees from all over the system were brought to Dallas and honored for their length of service. As Conover put it, “People sort of need to come home once in awhile. ” In addition, the Culture Committee sponsored a Heroes of the Heart celebration at headquarters on February 14 each year. Awards were made to groups nominated by others in the organization that had gone “above and beyond” to deliver Southwest service. The company’s values and culture infused everything that it did. For example, Southwest had become well known for its efforts in partnering with unions (essentially invited into Southwest by its management), airports, and suppliers.

Negotiations with unions, including the Teamsters and other national organizations, were entered with the idea of providing the best possible pay and benefits in return for flexible work rules. Efforts were made to maintain good working relations at airports from the top management to the staff in the control towers, where Southwest managers regularly appeared with donuts and coffee. Joint problem solving had become more important as problems with airport security had grown. And Southwest engaged in joint problem-solving exercises with those supplying everything from fuel to the peanuts served on planes. The work of the Culture Committee increased in importance with the growth of the airline.

For example, in contrast to the extensive preparations for Halloween at headquarters (described below), the casewriter observed few decorations on the same day at Southwest’s Baltimore gates but more as he approached Dallas through Houston. Organization A small management team headed up Southwest’s organization (as shown in Exhibit 5). At the very top, the team consisted of Kelleher, Parker, and Barrett, plus three executive vice presidents responsible for operations (Wimberly), customer service (Conover), and corporate staff services (Gary Kelly). Reporting to this team of six were those managing such functions as marketing, government relations, human resources (called People Department), schedule planning, legal, and others. Top 8

Southwest Airlines 2002: An Industry Under Siege 803-133 managers spent an unusual amount of time with one another, making decisions on a cross-functional basis. This philosophy pervaded the organization. In contrast to competitors, the organization was staffed more heavily with managers responsible for coordinating all functions at the front-line operating level. All personnel involved in turning a plane around could be asked by them to help out wherever needed. Failure to do so according to schedule resulted in a “team late. ” Rather than assess individual responsibility, teams were then tasked to figure out how to avoid the problem in the future.

As a result, pilots sometimes handled baggage or helped cabin attendants in picking up the cabin while gate attendants might be seen putting provisions on board for the departing flight. The theme driving this effort, according to Conover, was “doing whatever it takes” instead of “it’s not my job. ” As she put it, “You can talk later about who should have done what. ” The idea of dedicating an operations agent to each flight was somewhat unusual in the industry; other airlines regarded it as an extra expense, even though Southwest’s gate crews, even including the operations agents, were among the most productive in the industry (as suggested by data in Exhibit 6). Employees typically became operations agents after serving in customer service or ramp positions.

They could then become prime candidates for other front-line management jobs. Throughout the organization, stress was placed on the value of “family” in the organization. This led to unusual practices in hiring new recruits, a process that Kelleher once described as “a nearreligious experience. ” Southwest was well known, for example, for its group interviews, involving groups of 30 or more candidates for entry-level positions. Candidates were often asked to stand and describe such things as their most embarrassing moment. The interview team then watched both the presenter and those in the audience for signs of interest, concern, and empathy for the presenter.

The interview team often included frequent-flier customers as well, particularly when customer-contact people were being selected. As one such customer put it when asked why he would take off time from his company to spend a day hiring Southwest employees, “I thought I might learn something and have a little fun doing it. And besides, it’s my airline. ” All of this was part of a process “to hire for attitude,” in Conover’s words. When asked if this policy extended to pilots, she replied, “Oh, my gosh, yes. That is such a close-knit group, but we’re going to have people [other than the internal recruiter and chief pilot] look at them too. They have to have the right attitude. All ground operations (station) employees experienced one to two weeks of technical orientation at individual stations before going to class in Dallas for a week to study everything from the use of company systems to the organization’s values. Southwest’s employees received total compensation roughly equivalent to that of their counterparts in other airlines, but they typically worked more productively for it. This resulted in costs for Southwest that were substantially lower than those of other major airlines (as shown in Exhibit 7). In addition, all employees became members of Southwest’s profit-sharing plan after the end of their six-month probation period, during which it was determined whether they represented a good fit with their peers.

Contributions on their behalf began vesting after 12 months, although benefits began accruing from day one of their employment. No contribution to the plan was required of employees. Company contributions, depending on profits, ranged up to 14. 7% of salary in 2000. By late 2002, the profit-sharing plan owned about 10% of Southwest’s 763 million outstanding shares. Conover commented, “We don’t get enough credit for the plan among our employees. After about five years, you begin to realize how important it is. ” Nevertheless, the turnover at all levels of the Southwest organization was significantly less than in other airlines. Other than for entry-level 9 803-133 Southwest Airlines 2002: An Industry Under Siege ositions, the company hired from the outside talent pool only for specialized jobs, such as in information technology. The Impact of the Events of 9/11 On the morning of September 11, 2001, as reports of plane crashes came in to Southwest’s headquarters, senior executives assembled in the “control center,” which was actually the boardroom. Everyone waited as Southwest’s planes one by one reached the ground safely across the United States. When Greg Wells, director of dispatch, reported that the last Southwest plane had landed safely, there was a huge sense of relief. At that moment, Kelleher commented, “We’ll never be exactly the same industry again. ” Little did anyone know how true that would be.

Conover described the thought sequence following Kelleher’s announcement: First you realize that we’ve got them on the ground. Then you ask, “Will we ever get them back in the air again? ” Then the attitude quickly changed to “We’ve got to get back to work. ” There was never any talk about laying employees off. This attitude is so inbred in us that we didn’t even think “it’s going to be tough. ” The most important decision we made in the hours following the attacks was not to fly before Friday [three days after the tragedy]. The government was urging airlines to fly as soon as Thursday to demonstrate our resilience, and our competitors were preparing to do so. But we decided that after all that had happened, we ouldn’t put our employees through a rampup that we might have to postpone. Immediate Responses Perhaps the most remarkable response to 9/11 at Southwest was one that did not occur. No member of management could recall a conversation about a possible layoff of employees or a cutback in flights. This was not a trivial matter. As CFO Kelly pointed out, “Even though we had roughly a billion dollars ‘in the bank,’ it was in commercial paper; we couldn’t get at it because the markets were closed for several trading days, and we didn’t know what it would be worth when the markets reopened. ” Overnight, security issues made the handling of passengers, baggage, and other matters more complicated and time consuming.

In a way, the challenge was proportional to the number of passengers boarded, and by September 11 Southwest was boarding more passengers than any U. S. airline except Delta. One response was to add more customer service agents to the boarding process for each flight, increasing the average of employees to staff a departure from 3. 5 to 5. 5. As Conover put it, “We knew we had to do it to get over the hump. For the first four or five months, when things were not pretty, customers could at least find a human being. Then we let attitude take over. As we learned how to handle the problem, employees began saying ‘We’ve got too many people here. ’ At that point we let attrition get us back to our former staffing levels. Less than 48 hours after the attacks, Joyce Rogge, Southwest’s senior vice president–marketing, stressed the need to get a message in the form of a public service announcement to the general public, one that would appeal to American patriotism and resiliency while recognizing the bravery of people who had suffered through the 9/11 attacks. Late on the Sunday afternoon after the attacks, she recorded Barrett’s voice on an inexpensive dictaphone machine with a message that was used as a voice-over for a hastily produced television ad showing Barrett’s name and title on a typed title card 10 Southwest Airlines 2002: An Industry Under Siege 803-133 in front of an American flag. It was devoid of the usual Southwest humor. Subsequent television and radio ads profiled Southwest employees, assuring the public that when they were ready to fly, Southwest would be there and ready to fly them. Heightened Security and Regulation

An even greater challenge was faced by Southwest’s governmental affairs office, led by Ron Ricks, who had logged 16 years in his position after serving at the same law firm where Kelleher, Parker, and Barrett had been employed before coming to Southwest. In the 60 days following 9/11, Southwest received roughly 200 directives from the Federal Aviation Agency (FAA), the FBI, and the CIA. Many of these would later be consolidated under the Transportation Security Administration (TSA) created by Congress later in the year, but it did not exist during this period. As Ricks put it, “It wasn’t just the sheer volume of directives. A typical directive required that we implement a new security procedure overnight.

The directive would contain complex ‘terms of art,’ hard for a 22-year-old customer service agent to understand and act on. The alternatives were ‘Do it or don’t operate. ’” Many directives were rescinded by later directives, some no more than 24 hours after the order they rescinded. As Wimberly put it, “Overnight, we became a branch of government. ” Once the TSA was created by Congress, it was staffed with people drawn from the Secret Service, FBI, CIA, and Tobacco and Firearms agencies. This contributed to continuing confusion about directives issued by the TSA. Ricks commented, “Their perceived mandate was that they were fighting a war on terrorism. We were in a mind-set of being in a war too.

And we didn’t know anything about that kind of war. We just concluded that we couldn’t substitute our judgment for theirs. ” Dave Ridley, vice president of ground operations, held a daily call with all 59 Southwest stations. He would go over “today’s directive” and how Southwest would deal with it. For example, one directive required that in the absence of baggage screening, all bags were to be opened at the counter by Southwest employees, apparently with little thought about questions of logistics, employee safety, and what to do if (nonthreatening) illegal contraband were found in the bags. Southwest’s passengers typically had less accompanying baggage than those on other major airlines.

However, they carried a relatively high percentage on board. When the FAA limited carryon luggage to one bag and a personal item, the number of bags checked per passenger began rising. This added work for Southwest’s baggage handling crews and in some cases necessitated enlarging crews to meet plane turnaround schedules. Certain security directives placed Southwest at a competitive disadvantage. For example, many of Southwest’s best customers, because of the “last-second” manner of their travel, fit the profile of those most likely to be thoroughly searched. Barrett estimated that as many as 15% of Southwest’s passengers were being flagged for screening, a figure much higher than for other airlines.

Several of the directives dealt with the tracking of passengers and their baggage from curb to seat. But because it had never had assigned seats, Southwest’s relatively simple systems were not designed to provide more detailed information and had to be reprogrammed. The need to identify passengers requiring detailed screening forced Southwest to abandon its distinctive, colorful, reusable plastic boarding passes in favor of paper passes on which information targeting selected passengers could be printed. 11 803-133 Southwest Airlines 2002: An Industry Under Siege Industry Bailout and Taxation A rapidly conceived bailout for an industry in financial as well as physical peril occupied a great deal of Kelleher’s and Ricks’s time as well.

In the immediate wake of 9/11, Southwest’s competitors, many of which had little in the way of a financial cushion, began announcing cutbacks in both service and employment. In total, roughly 20% of all flights flown by seven of the eight other largest carriers were discontinued, and more than 15% of those employed by seven of the eight other largest carriers (at least 100,000) were laid off. 4 In response to immediate airline needs, an effort was made in the U. S. House of Representatives to pass by voice vote a hastily prepared Air Transportation Safety and Systems Stabilization Act. Southwest executives learned of it the next day. Largely based on “need” (thereby reezing Southwest out of the benefit), the bill did not pass. Ricks commented, “Southwest did not advocate a bailout but did take the position that if the government decided as a matter of public policy that economic reimbursement for our losses was a good thing, then the program should be implemented in a nondiscriminatory way. ” Ultimately, a bill was passed that provided for up to $10 billion in loan guarantees to airlines seeking financing assistance. In addition, it provided for $5 billion to be distributed among all aviation providers based on seat miles (one seat flown one mile) available on September 10, 2001. Out of the latter pool, Southwest received $278 million.

On another front, discussions were under way concerning various methods of taxing airlines to help defray added costs to the government for airline security, especially following the assumption of airport security staffing by the federal government in November 2001. On this front, two taxes were ultimately established. The first, a tax of $2. 50 on each segment flown by a passenger, hit the lowestfare airlines the hardest. However, as Ricks commented, “After 9/11, everyone became a low-fare carrier. Therefore, the potential for a penalty to Southwest was somewhat mitigated on this score. We think the size of the tax is a reason why traffic is slow to return to the airlines.

But Congress realized that it couldn’t pay for obligations it had assumed without it. ” (Monthly traffic trends for major U. S. airlines are shown in Exhibit 8. ) A second tax was assessed each airline to help pay for increased costs to the government for security. Whatever each airline was paying for security prior to the takeover was to be turned over to the government. New Competitive Position In spite of new challenges and taxes, the decision by Southwest’s management to maintain and ultimately to increase schedules and employment after 9/11 had a profound effect on its competitive position in the industry. Market share rose immediately (as shown in Exhibit 8).

Given the immediate plunge in the value of competitors’ stock from 11% to 74%, Southwest’s market value quickly became greater than that for all of the other eight largest airlines combined and maintained that position for months, in spite of the fact that its earnings had suffered substantial declines as a result of lower ticket prices, higher costs, and new taxes. Labor Relations Several labor contract negotiations coincided with Southwest’s apparently successful emergence from the 9/11 crisis. Claims of lower wages than those paid by other airlines in the face of profitable 4 Among the other eight largest U. S. airlines, only Alaska Airlines did not furlough employees following September 11, 2001. 12 Southwest Airlines 2002: An Industry Under Siege 803-133 company performance emboldened several unions to seek more favorable contracts.

Stating that “There’s really nothing more important that we do than have a relationship with our employees,” Parker continued his personal responsibility for negotiations. 5 In spite of the fact that unions took a tougher stance than in the past, an acceptable two-year extension of the pilots’ 10-year agreement (to 2006) was achieved. The mechanics, after rejecting Southwest’s first offer (in a somewhat unusual move), agreed to a second offer. Similar contracts were expected to be signed with other unions. Nevertheless, it raised a question about the degree to which growth had challenged Southwest’s policy of relating closely to its employees.

Observers continued to conclude that the company’s labor relations were still far superior to those of its competitors. As Jonathan Weaks, president of the Southwest Airlines Pilots Association (the pilots’ union), put it, “We don’t want to be just another airline. ”6 Short-Term Challenges: Operating Procedures In response to the 9/11 crisis, other airlines had increased estimated-schedule flight times to reflect increased passenger- and baggage-processing times. With disappointing load factors, many flights as a result regularly arrived 20 minutes or more before their scheduled times. Southwest’s management, on the other hand, had not changed its schedules in the hope that this would continue to benefit aircraft utilization.

In spite of this, average turnaround times in recent months had risen from 24 to 27 minutes, a matter of real concern to management, and Southwest’s reported on-time performance had slipped below that of its rivals (as shown in Exhibit 9). Southwest’s management had discussed several possible responses at various meetings in late October 2002. Among these, one possibility was that of just sitting tight, essentially concentrating on doing the best possible job with the resources at hand in a price-competitive environment and despite sluggish demand for the service. The price of this alternative would be depressed profits and possibly declining morale.

A second response would be simply to reschedule the airline, building more liberal flight and turnaround times into the schedule. However, too often schedules became self-fulfilling prophecies. If this proved to be true, results could be quite costly with serious profit implications. Third, efforts could be made to redesign passenger- and baggage-handling processes once again. Southwest’s practice of boarding passengers in groups just minutes before flight time, then holding the door of the aircraft open for late arrivals, was somewhat at odds with the government directive to single out passengers for a thorough search of luggage at the gate.

Southwest gate agents were instructed to encourage passengers so identified to assemble at the gate for searching as early as possible in the relatively rapid boarding process. Even so, passengers were often still being searched after everyone else had boarded. Those singled out often ended up getting inferior seats even if they arrived at the gate early in order to get a good choice. One solution to this problem, that of adding extra government security guards at Southwest’s gates (probably at the airline’s expense), would substantially increase boarding costs. Fourth, passenger boarding policies could be altered. Other airlines were requiring passengers to be on hand at the gate with greater lead times before boarding in order to accommodate new security procedures.

This would further restrict Southwest’s passengers, a direct contradiction of its past policies and its advertising strategy of freedom “to move about the country. ” 5 Maynard, p. 2. 6 Ibid. 13 803-133 Southwest Airlines 2002: An Industry Under Siege Finally, open seating could be abandoned, insuring that passengers would get a seat they had chosen when they booked the seat. This would require “retraining” regular passengers, some of whom actually preferred open seating. Further, it would likely add delays, especially to full flights on which the probability of assigning the same seat to two people would be greater. Whatever was done would have to be implemented with customers’, employees’, and the government’s needs in mind.

Conover, in charge of customers (both travelers and employees), commented on the success of Southwest’s responses to changing requirements to date: “Now, both government and our employees think we’re invincible. That’s great, but it’s almost a disservice. It has been tough trying to maintain customer service levels and relationships in a whole new environment. We sometimes wonder if we’re in control of our destiny any longer. ” Long-Term Challenges: Growth Strategies Immediately after 9/11, Southwest deferred 19 aircraft deliveries, borrowed a billion dollars, and developed a contingency operating schedule. Initially, little thought was given to strategic growth plans.

The primary focus, instead, was on stabilizing operations, even though decisions were made to go ahead immediately with a previously planned opening of the Norfolk station and begin accepting in early 2002 deliveries of new aircraft. But by late 2002 questions regarding appropriate long-term growth strategies began to surface once again. Over the years, the average flight length at Southwest had gradually increased from an average of 228 miles in the first year of operations, 1971, to about 450 miles in 1998. On Thanksgiving Day, 1998, Southwest experimented with its first nonstop transcontinental flight, between Baltimore and Oakland, necessitating a flight time of about five hours. The plane was filled with passengers who had paid $99 for the flight; almost half of the passengers had never flown Southwest before.

The only problem experienced by the crew was the lack of space to store the trash that accumulated during the flight. Many observers, who attributed much of Southwest’s success to the focus of its operating strategy up to that time, feared that the test might mark the first crack in the strategy. Passenger reactions to the flight were positive. Those who typically flew multiple segments to get to a distant destination were enthusiastic about getting there two hours sooner. They provided “permission” to the airline’s management to introduce other long-haul flights. By late 2002, Southwest was operating 213 flights per day over 1,200 miles in length. (Exhibit 10 contains information about Southwest’s network and flights. Some crew members preferred to work longer flights, enough to be able to staff new flights; others, according to Pete McGlade, vice president– schedule planning, “signed on with Southwest because they like more landings and takeoffs per day of work. ” Because longer flights experienced high-load factors, utilized the existing infrastructure, and did not require additional catering or on-board staffing (with only snack service, the usual three cabin attendants could serve a full planeload of 137 passengers), they generated healthy profits per passenger and operating economics at least comparable to those of shorter flights. This comparison held true only if long-haul flights were operated from cities served by a substantial number of other Southwest flights. By mid-2002, the average aircraft stage (flight) length had grown to 550 miles.

Southwest’s experience with longer flights raised the question of the degree to which the airline should rely on them in its future growth plans. There were a number of opportunities to connect existing stations three or more flying hours apart on the Southwest system. The alternative would be to continue to 14 Southwest Airlines 2002: An Industry Under Siege 803-133 add new cities to the airline’s 59-station network from among more than 100 cities that were requesting Southwest service. Questions were raised from time to time about limits to Southwest’s growth and, when growth was resumed, whether the airline could resume its 14% growth per year between 1980 and 2000.

However, one Wall Street analyst, examining Southwest’s route structure and the density of existing service, concluded that it could double its size without opening one new station. A Late October Visit to Southwest Airlines Headquarters On October 30, 2002, two appropriately contrasting events took place simultaneously during the casewriter’s visit to Southwest’s Love Field headquarters in Dallas. The first, a three-hour emergency exercise, was called unexpectedly by Wimberly at 8 a. m. It involved a simulated report of the crash of a Southwest flight from Houston short of the runway in New Orleans just 30 minutes earlier. The hypothetical drill specified that there were survivors and that they were being evacuated to local hospitals. (Southwest in its entire history had never experienced a fatal accident. The resulting exercise involved hundreds of people mobilized in the form of teams responsible for care (family assistance), employee assistance, business continuation, dispatch, corporate communications, an executive office taskforce (which assembled in the board room under Wimberly’s direction), family notification, manifest, medical services, mortuary assistance, purchasing, reservations, security, technical support, and building services. Many were assembled in a Go Team that boarded a plane pulled up behind corporate headquarters for a simulated flight to New Orleans, during which they were briefed once again concerning their duties upon arrival. They then departed the plane and walked through the processes and decisions for which they would be responsible in the event of a real emergency. It was one of a series of emergency exercises planned for the coming months.

At the same time, many other employees continued their preparations for the annual Halloween celebration, which had been cancelled in 2001 in deference to 9/11. Each department was busy preparing its own decorations and a skit reflecting a particular theme. The legal department was building a biker’s bar from which to present its show. In the executive office, employees were rehearsing for the Rocky Horror Airport Experience presented by Transylvania Scareways. And the maintenance hangar was draped with a large sign proclaiming the name of the show to be presented there, “Hogs and Kisses,” featuring the department’s Harley moto-ballet team. Little work appeared to be getting done anywhere in the building. The ollowing day employees would take hundreds of their children out of school so they could attend a full schedule of skits with their parents. 15 803-133 -16- Exhibit 1 Southwest Airlines Routes and Market Data, November 2002 • Seattle/Tacoma Spokane • • Portland Buffalo/ Niagara Falls • Albany • Detroit • Chicago • (Midway) • Cleveland • Columbus • Indianapolis • Kansas City St. Louis • • Louisville • Baltimore/Washington (BWI) (D. C. Area) • Boise Manchester • (Boston Area) Hardford/ Springfield • • Providence (Boston Area) • Long Island/Islip • Salt Lake City Sacramento • Reno/Tahoe • Oakland • • San Jose (San Francisco Area) (San Francisco Area) Las Vegas • Albuquerque (Santa Fe Area) • Omaha • Norfolk (Southern Virginia) • Raleigh-Durham Tulsa • Amarillo • • Oklahoma City • Nashville Little Rock • • Birmingham • Jackson Burbank Los Angeles (LAX) • • Orange County • • Ontario (Palm Springs Area) • San Diego • Phoenix • Tucson • Lubbock • Midland/ Odessa • Dallas (Love Field) • Austin San Antonio • • El Paso • Jacksonville Orlando • Tampa Bay • • West Palm Beach • Ft. Lauderdale (Miami Area) • New Orleans • Houston (Hobby & Intercontinental) Southwest System Map Corpus Christi • • Harlingen/South Padre Island Southwest Airlines 2002: An Industry Under Siege 803-133 Exhibit 1 (continued) Southwest’s Market Share Southwest’s Top 100 City-Pair Markets

Southwest’s Capacity by Region California 18% Other Carriers 36% Southwest 64% Remaining West 27% East 27% Midwest 15% Heartland 13% Southwest’s Top 10 Airports Daily Departures 170 114 77 87 119 120 131 134 143 183 200 175 150 125 100 75 50 25 0 by ay go nd es ve hv i ll to n as Lo ob ie M id Ve g el la ng An g O ak Sa n la st on N e/ W as o ca g Lo D hi C Source: Southwest Airlines Co. 2001 Annual Report. Ba l tim or H ou La al s s Ph o D as s hi H en w ix e 17 803-133 Southwest Airlines 2002: An Industry Under Siege Exhibit 2 Selected Financial and Other Information, Southwest Airlines, 1998–2001 (in thousands, except per share amounts) 2001

Operating revenues: Passengera Freight Othera Total operating revenues Operating expenses Operating income Other expenses (income), net Income before income taxes Provision for income taxesb Net incomeb Net income per share, basicb Net income per share, dilutedb Cash dividends per common share Total assets Long-term debt Stockholders’ equity Consolidated Financial Ratiosd Return on average total assets Return on average stockholders’ equity Consolidated Operating Statisticse Revenue passengers carried Revenue passenger miles (RPMs, 000s) Available seat miles (ASMs, 000s) Passenger load factor Average length of passenger haul Trips flown Average passenger farea Passenger revenue yield per RPMa Operating revenue yield per ASM Operating expenses per ASM Fuel cost per gallon (average) Number of employees at year end Size of fleet at year endf Common stock price range Common stock price closeg 2000 1999 1998 $ 5,378,702 91,270 85,202 5,555,174 4,924,052 631,122 (196,537) 827,659 316,512 $ 511,147 $. 67 $. 63 $. 0180 $ 8,997,141 $ 1,327,158 $ 4,014,053 $ 5,467,965 110,742 70,853 5,649,560 4,628,415 1,021,145 3,781 1,017,364 392,140 $ 625,224c $. 84c $. 79c $. 0147 $ 6,669,572 $ 760,992 $ 3,451,320 10. 1%c 19. 9%c $ 4,562,616 102,990 69,981 4,735,587 3,954,011 781,576 7,965 773,611 299,233 $ 474,378 $. 63 $. 59 $. 0143 $ 5,563,703 $ 871,717 $ 2,835,788 $ 4,010,029 98,500 55,451 4,163,980 3,480,369 683,611 (21,501) 705,112 271,681 $ 433,431 $. 58 $. 55 $. 0126 $ 4,715,996 $ 623,309 $ 2,397,918 6. 5% 13. 7% 9. 2% 18. 1% 9. 7% 19. 7% 4,446,773 44,493,916 65,295,290 68. 1% 690 940,426 $83. 46 12. 09? 8. 51? 7. 54? 70. 86? 31,580 355 $23. 32-$11. 25 $18. 48 63,678,261 42,215,162 59,909,965 70. 5% 663 903,754 $85. 87 12. 95? 9. 43? 7. 73? 78. 69? 29,274 344 $23. 33-$10. 00 $22. 35 57,500,213 36,479,322 52,855,467 69. 0% 634 846,823 $79. 35 12. 51? 8. 96? 7. 48? 52. 71? 27,653 312 $15. 72-$9. 58 $10. 75 52,586,400 31,419,110 47,543,515 66. 1% 597 806,822 $76. 26 12. 76? 8. 76? 7. 32? 45. 67? 25,844 280 $10. 56-$6. 81 $10. 08 Source: Southwest Airlines Co. 2001 Annual Report. aIncludes effect of reclassification of revenue reported in 1999 through 1995 related to the sale of flight segment credits from

Other to Passenger due to the accounting change implementation in 2000. bPro forma for 1992 assuming Morris, an S-Corporation prior to 1993, was taxed at statutory rates. cExcludes cumulative effect of accounting change of $22. 1 million ($. 03 per share). dThe selected consolidated financial data and consolidated financial ratios for 1992 have been restated to include the financial results of Morris Air Corporation (Morris). ePrior to 1993, Morris operated as a charter carrier; therefore, no Morris statistics are included for 1992. fIncludes leased aircraft. gThe closing price on December 6, 2002 was $16. 27. 18 Southwest Airlines 2002: An Industry Under Siege 803-133

Exhibit 3 Southwest Airlines, Consolidated Balance Sheets, December 31, 2000 and 2001 (in thousands, except per share amounts) December 31, 2001 ASSETS Current assets: Cash and cash equivalents Accounts and other receivables Inventories of parts and supplies, at cost Deferred income taxes Prepaid expenses and other current assets Total current assets Property and equipment, at cost: Flight equipment Ground property and equipment Deposits on flight equipment purchase contracts Less allowance for depreciation Other assets 2000 $2,279,861 71,283 70,561 46,400 52,114 $2,520,219 $ 522,995 138,070 80,564 28,005 61,902 $ 831,536 7,534,119 899,421 468,154 8,901,694 2,456,207 6,445,487 31,435 $8,997,141 6,831,913 800,718 335,164 7,967,795 2,148,070 5,819,725 18,311 $6,669,572

LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities Air traffic liability Aircraft purchase obligations Short-term borrowings Current maturities of long-term debt Total current liabilities Long-term debt less current maturities Deferred income taxes Deferred gains from sale and leaseback of aircraft Other deferred liabilities Commitments and contingencies Stockholders’ equity Common stock, $1. 00 par value: 2,000,000 shares authorized; 766,774 and 507,897 shares issued in 2001 and 2000, respectively Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Treasury stock, at cost: 3,735 shares in 2000 Total stockholders’ equity $ 504,831 547,540 450,407 221,840 475,000 39,567 $2,239,185 1,327,158 1,058,143 192,342 166,260 $ 12,716 499,874 377,061 – – 108,752 $1,298,403 760,992 852,865 207,522 98,470 766,774 50,409 3,228,408 (31,538) – 4,014,053 $8,997,141 507,897 103,780 2,902,007 – (62,364) 3,451,320 $6,669,572 Source: Southwest Airlines Co. 2001 Annual Report. 19 803-133 Southwest Airlines 2002: An Industry Under Siege Exhibit 4 Aircraft Utilization and Fleet Size

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