February 27, 2013
“Growth is easy. Saying no to bad growth is hard.” ~Peter Drucker
When we last left Southwest Airlines they were a model of a company that understood its core convictions and used this focus to grow and succeed, while their competitors danced in and out of bankruptcy and generally made air travel the equivalent of a P90X workout program. In 2011, however, the company made a move that some would interpret as flying (pardon the pun) in the face of Drucker’s advice. In a push to grow the company by gaining new routes domestically and internationally, specifically Mexico and South America, they purchased AirTran Airways.
Unlike many companies, Southwest has grown through relentlessly following a model that is based on three pillars:
– Low fares
– A fun customer experience
– On-time arrivals and departures.
Focusing on this strategy guided them in using smaller airports as the hubs for their flights. By avoiding the O’Hare’s and DFW’s of the country, the company was able to sidestep the level of congestion, in terms of both travellers and flights, that contribute to the long lines and erratic arrival and departure schedules that have made flying a necessary evil for many passengers. The ability to pay lower gate fees due to the smaller size of its hub locations also contributed the firm’s ability to offer low fares to its patrons. Not to mention the fact that the gate agent telling jokes over the PA system is generally frowned upon at D/FW
In making the decision to purchase AirTran, Southwest made a calculated decision that they could incorporate a new company, its personnel and existing commitments into a culture that serves as the foundation for its success. Whenever a business looks outside itself to grow it is taking on a number of tasks that test the organization managerially, culturally and financially.
For Southwest, their acquisition of AirTran raises a series of questions that go to the heart of their business. Will providing service in larger airports infringe on their ability to continue to achieve their 10-minute turnaround time goal? Will AirTran pilots and flight attendants still go out of their way to make it a “fun” experience? Will the newly added requirements for international travel impact their ability to provide the quick ticketing and easy boarding that has been a key to their continually high levels of customer satisfaction? How will the higher gate fees and added fuel costs for longer flights impact their ability to continue to offer the customers low fares? In short, will they be able to continue to deliver on the paradox of low cost and excellent customer service? Based on the company’s assertion that the full integration of AirTrans won’t be complete until 2014 the answers to these questions lie in the future, but the early returns are somewhat foreboding.
In 2010, the year before the acquisition, Southwest had an operating income of $988 million on revenues of $12 billion. 2012 found the company’s revenues increasing by 42% ($17 billion) from 2010, but operating income fell by 59% compared to its pre-merger level. This drop in operating revenue obviously falls within the parameters of Drucker’s assertion. Whether Southwest’s decision will ultimately prove to be an example of “smart” growth remains to be seen. What their experience to date does exemplify for the rest of us is that whenever a company moves outside its core competencies, it can place its ability to continue to continue to do what it does best at risk.