3 5556 025 410 200

Proceedings of the 36th Annual MeetingTransportation Research Forum

Volumes

1 and 2

November 3-5 , 1994

Daytona Beach , Florida

Published and Distributed by :

Transportation Research Forum1730 North Lynn Street , Suite 502

Arlington , VA 22209

603

Beyond the " Southwest Sensation :" A Resource -BasedStrategic Analysis of Southwest Airlines 'Competitive Advantage and it

s Implications

James A. Kling * and Ken A.

Smith **

ABSTRACT

The phenomenon of

Southwest Airlines and its positive performance in comparison to

other U.S. passenger airlines has generated considerable publicity and attention . This paper goesbeyond simply relating th

e

particulars of

the " Southwest Sensation " and attempts to determine

the

underlying reasons for

the

airline's success . The analysis uses the

strategic management

derived resource -based theory of

the firm asa framework to examine the performance of

Southwest Airlines . Specifically , the paper addresses the

sustainability of

Southwest'scompetitive advantage , th

e

potential for competitor duplication of

its strategies , and the

implications for carriers in the U.S. airline industry . The paper discusses the human , physical ,

and organizational resource bases which Southwest uniquely possesses and appear to be

responsible for

its

above average performance .. Significantly , the authors conclude thatSouthwest's resource base , and thus its successful strategies , will not be easily duplicated b

y

other airline firms . In conclusion , Southwest appears to have the

underlying strength to sustain

its competitive advantage and continue driving fundamental change upon the U.S. airline

industry .

INTRODUCTION

From a management perspective , any firm that conspicuously and positively sets itselfapart from it

s competition in profits , customer service , and strategic direction deserves study andanalysis . In the airline industry , th

e

phenomenon of

Southwest Airlines and its anomalous

performance in recent years has

generated both popular media attention and

interest frompractitioners and academicians . The " Southwest Sensation "may have hit its recent peak in the

spring of

1994 , when it announced record annual profits for

1993 -- its twenty -first consecutive

year of

profitability , achieved the

industry's best "Airline Quality Rating " by

the

NationalInstitute for Aviation Research , and it

s founder and leader appeared on

the cover of

Fortunemagazine under th

e

headline : " Is Herb Kelleher America's Best CEO ? " Beyond the

media

sensation , the

Southwest Airlines story generates some very interesting questions and potentiallyimportant management implications . Is Southwest's performance advantage significant ? Whatstrategies and tactics separate Southwest from other airlines ? These questions have beenaddressed thoroughly b

y

the popular press and will be reviewed briefly in this paper . Moreimportantly from a

n airline management perspective are questions regarding the sustainability

of

Southwest's competitive advantage and whether other airlines can

and should try to emulate

604

Southwest's operations . In order to properly address these latter questions it is necessary toanalyze Southwest's performance and management techniques in a more sophisticated and

theoretical context .

The purpose of this paper is to use the strategic management derived resource -basedtheory of the firm as a framework to examine the performance of Southwest Airlines ascompared to the rest of th

e

U.S. airline industry . The resource -based theory of the

firm focuses

on

the idiosyncratic characteristics of

competing firms and how

these characteristics contribute

to competitive advantage (Barney , 1991 ) . Two underlying assumptions are key to the resourcebased view : ( 1 ) firms in an industry are different with respect to th

e

strategic resources they

control ; and ( 2 ) these resources are not perfectly mobile across firms with the result thatdifferences between firms ca

n

be long lasting . Accordingly , the

focus is on the differencesbetween firms , particularly in terms o

fthe resources a

t

their disposal . By

analyzing Southwest's

resource base under this theoretical perspective , this paper attempts to identify the true source

of

Southwest's competitive advantage , the

sustainability of

that advantage , and theappropriateness o

f

competitor attempts at duplication .

THE " SOUTHWEST SENSATION "

Before probing into the firm's underlying resource base , a brief review of

the elements

of

the "Southwest Sensation " is in order . In management jargon , the firm appears to enjoy a

" competitive advantage " over its rivals . According to Michael Porter , " Competitive advantagegrows fundamentally out o

f

value a firm is able to create for

its buyers that exceeds the

cost of

creating it " (1985 ) . A firm with a competitive advantage provides greater value to its customersand should achieve superior performance (profits ) compared to other firms in its industry .

Competitive advantage may sometimes be

subtle and difficult to illustrate , but in the case of

Southwest Airlines it is remarkably clear . The advantage manifests itself in the form of higher

profits , low operating costs , and superior customer service quality .

Southwest ,now the

sixth largest U.S. airline based on

the

number of

passengers carried ,

is noted for its remarkable financial performance in an industry racked by bankruptcies and red

ink in recent years . As

can be

observed in Table 1 , Southwest's profitability clearlydistinguishes it from other major U.S. carriers . For the past three years , Southwest has been

the

industry's profit leader , most recently earning $ 161 million in 1993 while most airlines

continued to report losses , and it was the only airline that was profitable during the

1990 to 1993

time period .

One key to this profit performance is Southwest's low

cost structure , and everycompeting airline manager has taken note o

f

this well publicized aspect of

the "SouthwestSensation . " In 1992 , Southwest's cost per available seat mile equalled 7 cents while theindustry average was 9 cents (HBS , 1993 ) . A

s

can be observed in Table 2 , the airline has the

lowest per -mile seat costs in the

industry despite also having the shortest average flights . This

is remarkable because research has consistently demonstrated an inverse relationship between

flight length and per -mile operating costs (Bailey , Graham , and Kaplan , 1985 ) . Importantly ,

Southwest's cost advantage does not appear to be eroding ; its costs increased at approximately

the same rate as

the industry average between 1988 and 1992 , allowing them to maintain this

605

TABLE 1

U.S. Airlines ' System Net Profit (Loss ) in Millions of Dollars

Airline1990 1

199191 1992*

AmericanUnited

Delta

USAirNorthwest

SouthwestContinentalTWAAmerica WestAlaska Air

(78 )

96

(154 )

(411)( 10)

47

(1237 )

(238)

(75 )14

( 165 )

(335 )

(239 )

(260 )( 3)

27

(341)

35

(222 )11

Cumulative

1993 1990-1993

(274) (314 ) (831 )

(417 ) (50) (706 )

(569) (226 ) (1188 )

(590) (393) (1654 )(275 ) (115 ) (403 )59 165 298

(299 ) NM (1877 )(403 ) NM (606 )(132 ) 37 (392 )(77 ) (45 ) (97)

* Does not include FASB 106

special accounting charges

NM Net profit figures for

Continental and TWA in 1993 are notmeaningful due to credits

resulting from their emergence from bankruptcy . Note that both airlines had 1993 operatinglosses .

Sources : U.S. D.O.T. , Air Transport World World Airline Report , June 1994

aspect of

their competitive advantage (Kling , 1993 ) . Simplistic explanations of Southwest's low

cost structure do not seem to apply ; Southwest has a unionized work -force , the average pay of

its employees is closest to American Airlines , and at 7.3 years its fleet of planes is the youngest

of

all

themajor airlines (Bowen and Headley , 1994 ) . What is responsible for

Southwest's low

cost structure ? As

will be discussed shortly , it appears to result from a resource base thatdiffers from other airlines .

In consideration of

its very low cost structure and the poor customer service records of

former low

cost carriers such as People Express , a surprising element of the " Southwest

Sensation " is its stellar customer service reputation . Southwest captured in both 1992 and 1993

the industry's so - called customer service triple crown --best on -time performance ,

lowest rate of

lost bags , and fewest passenger complaints . A summary of airlines ' performance

in these three areas can be

seen in Table 3 . A more sophisticated analysis of nineteen customerservice and quality factors is conducted annually b

y

National Institute for

Aviation Research at

Wichita State University , and in 1993 Southwest displaced American as

the

U.S. airline with thebest overall airline quality rating score (Bowen and Headley , 1994 ) .

606

TABLE 2

Selected Operational Data for the U.S. Airline Industry -- 1992

Food ExpenseCost PerASM

FlightLength *

Average

$ WageAirline per 100 RPM *

American

United

Delta

US AirNorthwestSouthwest

Continental

TWAAmerican WestAlaska Air

8.93 c

9.60

9.44

10.83

9.09

7.03

8.39

9.04

7.10

10.50

799 mi.800

625

496

699

375

*774

710

618

624

$45,80154,380

63,078

60,970

58,105

44,035

34,205

57,876

31,687

45,808

55.6 C

45.356.8

70.2

40.7

2.6

56.5

39.130.1

98.0

Average 9.0 652 48,595 49.5

*Domestic , 2nd Quarter Data

ASM = Available Seat Miles , RPM =Revenue Passenger Miles

Sources : HBS (1993 ) and U.S. D.O.T. RSPA Form 41

TABLE 3

Selected Service Quality Data for

the U.S. Airline Industry -- 1993

On - Time Bags Lost per 1000 Complaints perPercentage Passengers 100,000 PassengersAirline

American

United

Delta

US AirNorthwestSouthwest

Continental

TWAAmerican WestAlaska Air

80.8 %

78.4

76.7

82.9

85.9

89.5

79.0

82.5

85.5

84.5

5.68

6.415.66

5.835.84

3.78

6.075.02

4.39

5.74

1.05

.84

.50.66

.62

.18

1.62

1.92

1.11

.33

Average 82.3 % 5.44 .88

Source : U.S. D.O.T. Air Travel Consumer Reports

607

Southwest's service reputation is not a new phenomenon ; since it began in 1971

the

airline has offered low , flexible fares while earning a reputation with passengers forfrequent , reliable service and friendly employees . Southwest's success and popularity is n

o

longer in question ; its annual growth rate has been around 20% in recent years , and a 1993

study by

the

U.S. Department of Transportation found that Southwest now has the highest totalmarket share in the top 100 U.S. city -pair markets (Donoghue , 1993 ) . While the airline hasroots and a strong presence in Texas and th

e

southwest U.S. , its current size (sales $2.3 billion )

and reach (over 45 cities including such northern destinations as Chicago , Cleveland , Detroit ,

and Baltimore ) make Southwest a legitimate major player in the U.S. airline industry . Theimplication --Southwest's edge in customer service quality is not due to some geographic fluke

or

its

small size ; it must be the result of

real differences between Southwest and other airlines .

In summary , Southwest has succeeded in providing high quality service ata low

cost .

In a 1988 speech , Kelleher quoted airline executive Michael Levine , now at Northwest :

" It's very easy to be expensive and good . And its very easy to be cheap

and bad . Southwest Airlines walks the biggest tightrope in the Americanairline industry because it's inexpensive and excellent at the same time . "

This favorable competitive position exists because Southwest’s management developed ,

implemented , and sustained a strategy designed to achieve a competitive advantage .

Interestingly , this strategy has remained remarkably consistent through both deregulation andindustry consolidation , and it was well publicized . As summarized in Table 4 , the airline'sstrategies and tactics have been laid out in speeches b

yits CEO , Herb Kelleher , described in its

annual reports , scrutinized in industry publications , and detailed in the general business press

(HBS 1993 ; Henderson , 1991 ; Kelleher , 1988 ; Kling , 1993 ; O'Brian , 1992 , SouthwestAirlines , 1993 ) . Henderson (1991 ) in Ai

r

Transport World describes the firm's strategy as

" low -fare , high frequency , short -haul , point - to -point , single class , non - interlining , and ... funloving . "

Fundamentally , Southwest's strategy entails building two separate but complementarybases o

f

competitive advantage : high service quality and very low cost as outlined on

the nextpage . In subsequent sections w

e

argue that the

success and sustainability of

Southwest'scompetitive advantage a

re functions of

the

company's resource base .

SOUTHWEST'S RESOURCE BASE

It is evident that Southwest's strategy has been effective . What is not so readily apparent

is why other airlines have not attempted to imitate Southwest's strategy given the fact that the

strategy has been widely publicized . That others have not attempted to replicate Southwest's

success suggests that something underlies Southwest's strategy that others are not able to

duplicate . We believe it is Southwest's resource base .

608

TABLE 4

Summary of Southwest's Operational Strategies and Tactics

Service excellence has been built on the following:

Very high frequency of service on short distance , frequently traveled routes

Convenience and accessibility provided by locating at smaller , close - in , and lesscongested airports ;

Superior customer relations achieved through high employee morale and a " fun "organizational climate ; and

Low , unrestricted fares, allowing passengers to make plans on short noticewithout paying the high , full fares charged by other airlines.

To provide high service quality at a low price , Southwest has developed a very

low

cost structure built upon the

following elements :

Only one type of

aircraft in its fleet --Boeing 737s ; (Compared to an average of

6.6 types for othermajor carriers ) ;

High utilization of

aircraft ( SW gate " Turn -around " equals 20minutes , compared

to the industry average of

55 minutes ) ;

High labor productivity ;

Avoidance of

traditional hubs and their associated operational costs ;;

Minimal food , reservation , baggage handling , and other overhead expenses ; and

Modest , controlled growth to avoid excessive debt , resulting in the only

Investment grade credit rating in the

U.S. airline industry .

609

The resources of a firm include such things as the assets , capabilities , organizationalprocesses , information and knowledge that enable th

e

firm to conceive of

and implement

strategies that improve its efficiency and effectiveness (Daft , 1983 ;Wernerfelt , 1984 ) . Barney

(1991 ) has classified firm resources into three general categories . First are a firm's physical

capital resources , composed of

the

physical technology used in the firm , its plant and equipment ,

its geographic location and its access to raw

materials (Williamson , 1975 ) . Second are

the

firm's human capital resources . These include the

training , experience , judgement , intelligence ,

relationships and

insight of

individual managers and

workers in a firm (Becker , 1964 ) . Thirdare the firm's organizational capital resources . These include th

e

firm's formal reporting

structure , its formal and informal planning , controlling , and coordinating systems , and

the

informal relationships among groups within a firm and between a firm and those in its

environment ( Tomer , 1987 ) . In the

following paragraphs , we enumerate the resources uponwhich Southwest has built its competitive strategy .

Observing Southwest's physical capital resources in comparison to those of

its

competitors , one is struck by

the

resources that Southwest does not have . Southwest , aloneamong major airlines , has chosen not to invest in a hub -and -spoke system and th

e

physical

terminal infrastructure that is required to support such a system . Southwest does not have an

investment in a computerized reservation system , nor does it provide meal service . The result

is lower costs , especially those associated with ground terminal operations . Airline consultantMorten Beyer has calculated that American Airlines ' pe

r

passenger station (terminal related )

costs equal $24.46 , while Southwest's station costs are only $ 7.13 per

passenger (Donoghue ,

1993 ) . In contrast to other airlines , Southwest has invested in resources which allow it to

efficiently conduct its primary business of point - to -point transportation . Southwest's 160 planes

are all Boeing 737's , and this fleet commonality is a significant factor in achieving high aircraft

utilization rates and good on -time service . Southwest's concern about its passengers '

convenience has also led

it to develop facilities at smaller , close - in airports such as Love Field

in Dallas , Houston Hobby , Chicago Midway ,

and Detroit's City Airport .

Among Southwest's most important human capital resources are Herb Kelleher (CEO )and h

is top management team . Kelleher has provided the company with vision and strategicleadership since it began service in 1971. Further , topmanagement hasmanaged th

e

company's

human resources strategically . The company has built psychological ownership of the company

on the part of employees through optional profit sharing programs which totalled 8.2 % of

employee wages in 1992 , and stock options ; 10 % of

the company is now owned by

employees

(HBS , 1993 ) . Although Southwest employees are mostly unionized , workers are trained for

multiple jobs and flexibility is a requirement ; pilots routinely help flight attendants and baggage

handlers to finish tasks so that planes can be

turned around quickly . As a result , Southwest nowbenefits from a skilled , loyal , motivated , and productive work - force . A recent quote b

y

Gary

Barton , a Southwest Vice President , sums up the commitment of Southwest's human resources :

"Our employees recognize their future is tied very closely to the

fortunes of

Southwest "

(Velocci , 1993 ) .

Southwest also has several organizational capital resources that are essential to its overall

strategy . First is its reputation for

delivering high quality service , a reputation that reflectsSouthwest's distinctive definition o

f

service quality . While many airlines define service quality

610

in terms of such ancillary services as in -flight food service and lounges for

frequent fliers ,

Southwest defines service quality in transportation -related terms such as frequency of flights and

on - time performance . Second , while Southwest is structured asa fairly traditional functional

hierarchy , emphasis is placed on open communications both vertically and horizontally across

the

company . This open communication contributes to employee morale and psychological

ownership . Third , Southwest has emphasized the

development ofa " fun " culture , with the

expectation that fun

translates into friendly service . Thus , a culture committee was formed to

make sure that Southwest's " small family and spirit " was maintained as

the company grew

(HBS , 1993 ) . Together , Southwest's organization and culture keep the organization focused on

providing convenient and affordable transportation to its customers .

Importantly , while each of the resources listed above may contribute individually to

Southwest's success , there is synergy derived from the "bundle " of resources . The " Turn

Team " is an excellent example of

how Southwest's resources complement each other and

contribute to the firm's overall competitive success . Short turn -around times at gates (averaging15-20 minutes for Southwest compared to the industry norm o

f

50-60 minutes ) is a critical piece

of

Southwest's superior service delivery and low

cost structure . The firm's physical resourcescontribute to this remarkable performance . The a

ll Boeing 737 fleet allows ground and flight

crews to routinize and standardize gateway , fueling , and baggage loading activities . The use of

smaller , less congested airports minimizes gate -holds and

the

time spent in queues on

the

airfield . The organization's unique definition of

service quality eliminates the need for timeconsuming activities such a

s assignment of

seats , loading of food , and insuring hub connections .

The flexibility and commitment of

Southwest employees , along with the " fun " culture ,makesminimizing the time between arrival and departure a spirited challenge for the " Turn Team .

By" bundling " these resources to achieve extraordinarily short aircraft turn -around times ,

Southwest is able to generate high levels of

customer satisfaction ata low cost .

1

THE SUSTAINABILITY OF SOUTHWEST'S COMPETITIVE ADVANTAGE

Beyond the identification of

strategic firm resources , resource -based theory is concernedwith the extent to which such resources can provide a firm with a competitive advantage . Afirm enjoys a competitive advantage when either o

f

two conditions exist : ( 1 ) when it isimplementing a unique value creating strategy , one not being implemented b

y

any ofits

current

or potential competitors (Barney , 1991 ) , or ( 2 ) when the

firm ismore effective at implementing

value creating strategies than competitors pursuing the same or

similar strategies (Porter , 1985 ) .

Thus , competitive advantage may result from the

utilization of

resources that are unique to the

firm , or

from the more effective use of

resources common among competitors (Wilkins , 1989 ) .

Further , resource -based theory asks the question : given a competitive advantage , can it

be

sustained ? According to Barney (1991 ) , " a competitive advantage is sustained only if it

continues to exist after efforts to duplicate that advantage have ceased . " Thus , the concept of

sustained competitive advantage depends on

the possibility of competitive duplication . A

sustained competitive advantage may result when other firms are unable to duplicate the benefits

of

the strategy , or when a firm is able to more completely exploit similar resources-- eventhough competing firms are not significantly different in terms o

f

the

resources they possess .

611

According to resource -based theory , a resource (or bundle of resources ) must have fourcharacteristics to be capable of providing a fi

rm with a sustained competitive advantage (Barney ,

1991 ) . First , the

resource must be

valuable , in that it exploits opportunities and / or neutralizesenvironmental threats . If the resource does neither , it is not strategic and cannot provide a

competitive advantage . Second , the resource must be rare among a firm's current and potentialcompetitors . If the resource is common among competitors , they will be able to replicate

quickly any innovation that results in higher profits so that no lasting competitive advantage can

be attained . But valuable and rare resources can only afford sustained competitive advantage

if firms that do not have them cannot obtain them . Thus , a third condition necessary fora

resource to provide a sustained competitive advantage is that the resource must be imperfectly

imitable -- that is , it cannot be easily imitated by

competitors . Finally , the

resource must have

no

close substitutes . In the following paragraphs , Southwest Airlines ’ resource base is evaluatedagainst these criteria .

The value ofa resource can be

assessed in terms ofits contribution to the firm's ability

to generate above average profits or" rents . " Resource -based theorists including Castanias &

Helfat (1991 ) and Peteraf (1993 ) identify a number ofways in which resources can contribute

to firm profitability , all

of

which are observable in the case of

Southwest .

One source of profitability is the exploitation of superior resources that are

in short supply .

Known in economics as Ricardian rents these profits derive from the effective use of scarceresources -- resources competitors d

o

not

have or

cannot use as efficiently . Herb Kelleher ,

Southwest's CEO , has an " unorthodox personality and engaging management style " and this is

credited for

much of

Southwest's success (Labich , 1994 ) . Kelleher himself regularly creditsthe entire Southwest work - force , who have been recruited over a number o

fyears fo

r

their sense

of

humor , energy and flexibility . Another source of above average profitability stems from risktaking and entrepreneurial insight in a

n uncertain or complex environment . These

entrepreneurial or Schumpeterian rents (Mahoney & Pandian , 1992 ) often derive to the firm that

is able to move most quickly to take advantage of

new environmental opportunities . Southwestdeveloped a high -volume city -pair route structure and single plane type fleet configuration whilecompetitors developed hub and spoke route structures and diversified fleet configurations ; th

eresultant lower cost structure now permits Southwest to achieve above average profits , anexample o

f entrepreneurial rent . A third type of profitability takes the form of quasi rents ,

defined as

the difference between the value ofan

asset in its first best use and its value in its

next best use (Castanias & Helfat , 1991 ) . The notion underlying quasi rent is that certainresources gain value a

s they become specialized to a particular use or

firm . Many of thebenefits Southwest obtains from it

s single plane type fleet contribute to quasi rents . Forexample , the high level of pilot productivity a

t Southwest results from the

simplification of

crew

scheduling ; every Southwest pilot can fly

every one of

the

firm's Boeing 737 type aircraft .

This is one important reason that Southwest’s pilots fly

75-80 hours amonth , compared to 45-60

hours at other airlines (Velocci , 1993 ) . Southwest’s pilots are paid near the industry average ,

but their productivity is high due to the number of

hours they fly. Should one of

Southwest'spilot's go to work fo

ra competitor , they would not be as productive because of the

less efficientscheduling associated with multiple aircraft types . Thus , their productivity is firm specific . A

fourth source of profitability takes the form ofmonopoly rents . In general , monopoly rents

result from a restriction of output rather than an inherent scarcity ofa resource (Peteraf , 1993 ) .

612

As an example , the

presence ofmobility barriers as described by

Caves & Porter (1977 ) explains

the profitability Southwest derives from its domination of

small , close - in airports such as Love

Field and Midway ; Southwest has effectively limited significant competition at

these small , gaterestricted airports . Thus , taken separately and a

sa whole , Southwest's resources are valuable .

But Southwest's resource configuration is not only valuable ; it is also rare . Herb

Kelleher is a rare human resource . He is unique among leaders in the airline industry , and hisvision and spontaneous character a

re central to the

strategy and organizational culture Southwest

has developed since 1971. According to Labich (1994 ) the

work climate is rare , " The oldfashioned bond o

f loyalty between employees and company may have vanished elsewhere in

corporate America , but it is stronger than ever at Southwest . " Toa large extent , Kelleher has

contributed to the rarity of

Southwest's other resources .

One valuable , rare , but intangible resource Southwest commands is its reputation for

high

service quality . Southwest's unique definition of service quality is based on Kelleher's perceived

role for his firm . He recently stated that , "We've created a solid niche -cour main competition

is the

automobile . We're taking people away from Toyota and Ford " (Woodbury , 1993 ) . Thus ,

Southwest's definition of

service quality revolves around convenient , reliable , and friendlytransportation rather than customer amenities such a

sfirst class upgrades and other " perks . " A

s

a result , what customers expect from Southwest is different from what they expect from otherairlines . For example , a frequent domestic and international flier o

n United Airlines maycompare United's service amenities and food to British Airways ' and Singapore Airlines ' .

However , a Southwest passenger flying between Los Angeles and Phoenix will be highlysatisfied with a convenient , on -time , low -cost , no - frills flightbecause the alternative is a six hourstint behind the wheel and a trip to the MacDonald's drive -thru . Since the other major U.S.airlines have promoted their own " full service " images , the different expectations passengershave o

f

Southwest is indeed a rare resource , as is Southwest's ability to consistently meet theseexpectations .

Southwest's fleet configuration is also a rare , if not unique , strategic resource . No othermajor airline follows the single plane type fleet format ;most airlines have between si

xand eight

aircraft types . Interestingly , competitors showed no signs of

reducing the

number of

aircrafttypes between 1988 and 1992 and several are adding aircraft types o

f differentmanufacturers ,especially the Airbus A320 and Fokker F100 models (Kling , 1993 ) .

Southwest's motivated work -force and positive management labor relations are also rare

in the airline industry . In the 1993 update of The 100 Best Companies to Work for in America ,

Southwest is ranked in the

top ten ; only one other passenger airline , Delta , made the

top 100

list (Levering & Moskowitz , 1993 ) . Employees enjoy working at the airline and they are

especially devoted to CEO Kelleher . In contrast , a recent trade journal article on airline labor

issues summarized the industry's overall management -labor relations as " ...marked by

deep

distrust and officials in both camps say they cannot imagine much improvement in theforeseeable future " (Velocci , 1993 ) .

From this discussion it is clear that Southwest's resources are rare as well as valuable .

The picture that emerges is that ofa company significantly different from its competitors in its

resource configuration and resultant strategies . But given Southwest's superior performance and

itswidely publicized strategy ,why have competitors not copied Southwest's formula for

success ?

Are Southwest's current competitive advantages truly sustainable ?

613

Valuable and rare resources can only afford sustained competitive advantage if firms thatdo not have them cannot obtain them . Thus , the third condition necessary fo

ra resource to

provide a sustained competitive advantage is that it cannot be easily imitated by competitors .

It may be difficult or impossible fora competitor to imitate a strategic resource for any one of

three reasons . First , the ability to obtain the resource in question may be dependent on unique

historical conditions . Southwest's unique fleet configuration provides a case in point . As a

relatively young carrier , Southwest was able to develop its fleet of Boeing 737s unhindered by

previous investment in other types of

aircraft . In contrast , older carriers cannot easily change

to a single plane type fleet because of

their investment in other aircraft and the resources to

support them . While a new carrier might be able to imitate Southwest's fleet configuration ,

existing competitors would find a conversion too costly . Southwest's domination of MidwayAirport provides another example . When Midway Airlines went out o

f

business , Southwestseized the opportunity to move into the Chicago market through Midway Airport . Given thelimited possibility o

f expansion at Midway , Southwest now dominates the airport and other

carriers are effectively locked out from achieving a substantial market presence there . Thus ,

while the

fleet configuration and domination of

small airports are understood by

the competition

to be sources of

Southwest's competitive advantage , they are

hard to replicate because of

mobility barriers created by

historic conditions .

A second reason a resource or strategy may be difficult to imitate is because it is socially

complex . Such resources might include the

interpersonal relations among managers in a firm

(Hambrick , 1987 ) , a firm's culture (Barney , 1986 ) , or a firm's reputation among its

customers

(Klein & Lefler , 1981 ) . Southwest's reputation for

high service quality is an example ofa

socially complex resource . As

discussed previously , travelers expect something different fromSouthwest than they d

o

from the competition . Other examples of socially complex resources are

Southwest's loyal , flexible , and motivated work - force and its people -oriented culture . Both are

the result ofa complex mix of

leadership , recruiting , training , and " incentivizing .

Accordingly , it is hard to dispute Kelleher's assertion that " Our people are so energetic they

couldn't be replicated " (Woodbury , 1993 ) .

Finally , a resource or strategy may be

difficult to imitate because links between theresources possessed b

ya firm and its competitive advantage are causally ambiguous ; that is , the

way the resources controlled by

the firm generate competitive advantage is not clearly

understood . Given Southwest's openness regarding its strategies and the analysis of

Southwest

in the

industry and popular press , we do

not believe that causal ambiguity has played a

significant role in the

lack of

imitation by existing competitors .

The final criterion for a resource to serve as

the basis for a sustained competitiveadvantage is that is has no close substitutes (Barney , 1991 ) . In the case of Southwest Airlines ,

its power in the

market comes from the synergy among its resources , or its resource

configuration asa whole . While we can conceive of substitutes for individual resources in

Southwest's bundle of

resources , it is difficult to see how these substitutes could be

used

individually to replicate Southwest's overall strategy and resultant success . For example ,

Continental Airlines has a very low cost work -force due to low compensation rates , and it hasrecently launched a Southwest clone operation named " Cal Lite " that seeks to duplicate th

e

quick

turn times of

Southwest . But Continental is unlikely to ever have the leadership and humanresource strengths o

f

Southwest ; indeed , the airline has chewed up

nine presidents in the last ten

614

years (ATW , 1993 ). One could also conceive of a new airline with a homogeneous fleet ofA320s, which are more efficient than Southwest's 737s. But could that new airline find asubstitute for Southwest's presence at strategically located , close - in airports such as Love Fieldand Midway ? Clearly , Southwest has captured some resources for which there are nosubstitutes , similar or dissimilar .

IMPLICATIONS FOR THE AIRLINE INDUSTRY

The " Southwest Sensation " that is characterized by the

airline's high profitability , lowcosts , and superior customer service is real , substantial , an

d

appears to have considerablecompetitive staying power . A strategic analysis of the airline using resource -based theoryindicates that it commands a se

t

of strategic physical , human , and organizational resources of

which many are valuable , rare , inimitable , and non -substitutable . While the set

of unique

resources is substantial , there are several which stand out and bear revisiting in the summary .

Foremost among these is Southwest's managerial leadership and its highly motivated , productive ,

and flexible work -force . These human capital resources are critically important for a servicefirm , but positive labor -management relationships are rare in the airline industry and cannot be

created quickly or easily . Secondly , Southwest is unique in the physical resources that it has

not invested in for

the

long run ; all

other major airlines have committed to hub -and -spoke

systems and the

physical infrastructure , reservation systems , personnel , and diverse fleets whichsupport hub operations . Lastly , Southwest has created a unique set o

f

customer expectations

which makes it easier for Southwest to satisfy customers within its

low cost structure . This is

an important organizational capital resource , and will not be easily replicated by

existing firmsthat have spent years establishing themselves a

s full service airline brands . As discussed in

detail in this paper , the combination or

bundle of

resources that Southwest has constructed is

truly daunting . We believe that Southwest's resources provide it with a strong basis forsustainable competitive advantage into the foreseeable future . In this context , th

e" Southwest

Sensation " is not overstated ; this paper supports the position that Southwest may have thecompetitive power to force fundamental change upon th

e

U.S. airline industry .

Therefore , the first significant implication for

the airline industry is that Southwest

Airline's competitive threat to existing carriers is not likely to recede , and considering its growth

rate appears to be increasing . Furthermore , Kelleher seems to enjoy his airline's competitive

prowess ; he has recently signalled his intention to " retaliate " and " attack " if competitors targetSouthwest's existing markets (Labich , 1994 ) . U.S. carriers will have to respond in a mannerthat is determined b

y

their own resource bases . For large airlines with hubs and stronginternational networks , this may require abandoning most short -haul routes and focusing solely

on long -distance markets not vulnerable to Southwest's formula of

success . For smaller airlinesthe competitive response is less clear , but a risky strategy would appear to be ignoring altogether

the

competitive impact of

Southwest's success and tactics .

An important implication for established U.S. carriers , both large and small , is that it

will be very difficult for traditional full - service airlines to remake themselves in the image of

Southwest . As stated earlier , it is the combination and synergy of valuable resources thatSouthwest possesses that makes it very hard fo

r

other airlines to duplicate its competitive

615

advantage . The best opportunity to do so probably would occur in the

creation of highly

autonomous subsidiary firms which might be able to create a corporate culture similar to

Southwest's by

carefully selecting employees , having very flexible labor agreements , andcreating a set o

f

customer expectations separate from the larger parent airline . On the

positive

side , the parent airline would be

able to provide equipment , gates and slots at important airports ,

finances , and information systems to launch such a carrier in a relatively short time period . Themodels for such an endeavor a

re General Motor's Saturn Corporation and the non -union regional

less -than -truckload firms established by

national LTL motor carrier firms such as

ConsolidatedFreightways .

Additionally , airline management strategists may wish to develop a greater understanding

of

resource -based theory . They may find that their firm's resources suggest strategies to pursue ,

or

specific opportunities that fit the firm's resource base .Managers that understand resourcebased theory might be less likely to follow strategies that are n

ot

appropriate for their firms .

ample , as a part of its growth strategy , USAir bought Piedmont and PSA , apparently notrecognizing that th

e

key resources possessed by

these firms were their human resources andorganizational reputations --not their physical assets . Consequently , when USAir systematicallydismantled these important characteristics and imposed it

sown organization and culture o

n

theacquisitions , it destroyed their basis fo

r

competitive advantage . Had USAir understood the

resources upon which Piedmont and PSA had built their success , itmight have found them lessattractive acquisition targets o

r

maintained the separate identities of

PSA and Piedmont . In

general , one can use resource -based theory to identify the

key strategic resources that serve as

foundations for

competitive advantage , thereby adding significantly to one's understanding of

strategy

In conclusion , the hyper -competitive nature of

the U.S. passenger airline industry in

recent years has created new winners and losers in the industry and has demanded a re

evaluation of

traditional airline strategies and assumptions . The immediate contribution of this

paper is to establish that the " Southwest Sensation " ismuch more than a simple media creation ;

our analysis of

Southwest Airlines demonstrates that its underlying resource base strongly

supports a sustainable competitive advantage within the U.S. airline industry . Additionally , thestrategic management derived resource -based theory o

f

the firm seemed a particularly

appropriate tool for

explaining the

exceptional performance of

Southwest in recent years .Academic researchers and practitioners may wish to use this theoretical framework in futureanalyses o

f

the airline industry and firm performance .

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ENDNOTES

* College of

Business , Niagara University , Niagara University ,NY 14109 .

** School ofManagement , Syracuse University , Syracuse , NY 13244-2130 .