February 4, 2021
TPL Insights: Building Peak-Performance Cultures #53 – Southwest Airlines: More Elements of their Secret Sauce
The culture at Southwest, that secret sauce that so many have tried to replicate, has evolved over time. It was once idiosyncratic to a particular time and place, the 1970s, and has since become one that is highly inclusive, extremely diverse, very collaborative, and incredibly innovative. The one constant is the focus on high performance relationships and staying ahead of the curve. They constantly challenge the airline industry status quo and traditional norms, often making the impossible possible. For example, major carriers typically use a hub-and-spoke strategy. Hubs give them pricing power and spokes give them efficiency. As Southwest started as a short-haul carrier without hubs, it had none of these benefits. That was a major weakness. No hubs meant no pricing power and no spokes and short haul routes meant compromised efficiency. Southwest’s quick turnaround strategy, and its ability to execute flawlessly, was a direct result of the relationships that formed, and the problem-solving that took place among frontline workers in different departments that are typically siloed in other carriers. Southwest’s weakness became one of its major strengths.
Other carriers have tried to copy Southwest’s quick turnarounds. Makes sense, right? Why wouldn’t you? United, Continental, Delta, US Airways, Jet Blue, Metrojet and many others have tried, and all have fallen well short of Southwest’s performance. Quick turnarounds require an operational strategy based on agility, speed, reliability, and trust. Pulling this off requires highly effective and collaborative relationships among all the players involved. An intense focus on teamwork among workers in functional departments that usually don’t talk to one another is key. Communication and coordination among disparate departments is a source of strong competitive advantage at Southwest, made possible through unified leadership, shared purpose, vision, mission, and values.
Because of Southwest’s innovative solutions to reducing the costs inherent in short-haul flying, flight length is now positively correlated to cost per seat mile – the shorter the flight, the lower the costs. Likewise, flight length is now negatively associated with aircraft and labor productivity. The shorter the flight, the higher the productivity. Southwest’s innovations have changed the underlying logic of production in the airline industry, basically turning the standard operating model on its ear. Most of these innovations, which defy conventional wisdom, were motivated by the ambitious, passionate, often counterintuitive input from front line workers who live and breathe Southwest. They are constantly coming up with ways to delight customers, make money, and have fun doing it.
Reward systems are aligned to reward behavior that leads to better relationships and constant innovation. For fiscal year 2019, pre-COVID-19, Gary Kelly, who has a base salary well below most industry CEOs, got a $1 million bump in total compensation when the carrier set records for revenues and profits. That same year, median compensation for all employees soared to $101,302, an increase of more than $22,000 from 2018. Most of the increase came from a profit-sharing pool that averaged nearly $12,000 per employee. Southwest also signed a new contract with mechanics in 2019 boosting pay. Gary Kelly’s total compensation in 2019 rose to $8.77 million, more than he’d ever been paid, by 12.8% for a record year; yet well below Doug Parker’s $12 million at American and Ed Bastian’s $15 million at Delta. Compensation is yet another area where it is obvious that Southwest values its employees. When the company does better, so do its workers. 2020 of course was a different picture, with the country’s six largest airlines losing $35 billion, and Southwest reporting a $3.1 billion loss, as COVID-19 all but brought air travel to a halt. Revenue for the year plunged to $9 billion, from 2019’s record $22 billion. The difference was Southwest’s competitors cut headcount and employee pay dramatically, and Southwest did neither.
I spoke to a young Southwest Airlines ticket agent in late 2019, about how she thought her employer had been able to create so many raving fans and enthusiastic employees at the same time. Just as I asked the question, she broke out in a huge smile and then started laughing out loud. She said: Well, we just have fun around here and we know what we’re trying to do. We know we’re trying to delight customers, not just satisfy them. We figure out ways to solve problems in unconventional ways. And we don’t care that much about what the rest of the industry is doing. While the rest of the industry is nickel and diming the customer, charging extra for checked and now carry-on bags, charging for snacks and charging extra for a little more leg room, we give this stuff away. Two checked bags and two carry-ons fly free at Southwest, we give you as many snacks as you want for free and our standard seats have more leg room than United’s upgraded seats. At Southwest, when the company wins, all our stakeholders win. Our employees win, our customers win, management wins, our unions win, and our providers win. We’re all about our purpose, mission, and values. We are empowered through these things and there are no limits to where we will go to help the customer connect with what’s important in their lives. This conversion was one of many I’ve had with Southwest employees since we’ve been studying peak performing organizations. This, I believe is an axiom, if you can’t find evidence of an organization’s secret sauce on the front lines, there is not any.
The purpose of all these blog posts is to share what we’re learning about building cultures of peak performance. In future posts, we’ll dig further into how Southwest Airlines checks all nine boxes in terms of practicing the nine principles we’ve observed in organizations that outperform their peers. Unified Leadership, Disciplined Hiring, Leading with Purpose, Stakeholder Engagement, Cost Leadership, Measuring Everything that Matters, Customer Experience, Clarity in Everything and Staying Ahead of the Curve. These are the principles that drive peak performance cultures. If you’d like to talk about how we can help your organization, please give us a call.
Consultants in Retained Search & Leadership Advisory