CASE 4 Southwest Airlines Flying High with Low Costs

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Southwest Airlines sent its first flights alo! in 1971. A!er almost 45 years, Southwest was so
successful that the company was considered, in many ways, the crown jewel of the airline
industry. The organization had achieved the longest continuous stretch of profitability in the
history of the airline industry and was consistently ranked in the top 10 on Fortune’s list of
“Most Admired Companies,” a list that spanned all industries. Southwest’s executives liked to
say that they strove toward a triple bottom-line of People, Planet, and Performance.
In 2015, Southwest was on strong financial ground, despite the fact that the prior 15 years
had been some of the most difficult in aviation history. The airline industry had been hurt by
the 9/11 terrorist attacks and the Great Recession of 2008–2009. Although 2009 had been a dif-
ficult year for the company, Southwest had still managed to eke out a positive net income of
$99 million. The company’s performance improved in the subsequent years, with net income
rising above $400 million and revenues increasing from $10.3 billion in 2009 to more than $17
billion in 2012 (see Exhibits 1 through 3). Southwest achieved its strong financial performance
in large part by having a high load factor, the airline industry’s measure of the percentage of
seats that are filled on an airline’s flights. In 2010, Southwest hit the highest load factor in its
history: 79.3 percent. Following its successful “Bags Fly Free” ad campaign, Southwest also saw
its domestic market share increase by almost 2 percent. Southwest was known for high levels
of both customer service and employee satisfaction. In 2013, Southwest not only rated as the
top airline in a Consumer Reports survey of passengers1 but also reigned at the top of the US
Department of Transportation’s customer satisfaction rankings. By 2015, with the benefit of
lower fuel costs, it achieved record profits of $4.1 billion. Overall, Southwest had an enviable
record of performance.
The US Airline Industry
The airline industry is critical to the health of the US economy. Airlines provide 11 million jobs
in the United States and are responsible for five cents of every dollar of the US gross domestic
product (GDP). For every 100 airline jobs that exist, 388 more jobs are supported outside of the
airline industry.2
A key turning point in airline history was the deregulation of the industry in 1978. Before
deregulation, the Civil Aeronautics Board regulated all passenger fares, which meant the price
was the same for each flight between two cities. The board also regulated industry entrances
and exits; mergers and acquisitions; and even airlines’ rates of return. Typically, any given
market had only a few airlines, and price competition was essentially nonexistent.
Following deregulation, numerous new entrants moved into both established and
unserved markets, and fare prices began to drop quickly. The average passenger fare in
1978 was about 8.49 cents per mile. In 2009, that price, adjusted for inflation, had decreased

CASE 4 Southwest Airlines Flying High with Low Costs

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