404-058-1

~
o
• ,....-t
I ' Southwest Airlines:
U Generating Competitive Advantage Through
Human Resources Management
Q)
, I

, I

This case was written by Senthil Ganesan, under the direction oJGopal Saxena,
ICFAI Business School Case Development Centre. It is intended to be used as the
basis Jor class discussion rather than to illustrate either effective or ineffective
handling oja management situation.
The case was compiledJrom published sources.

© 2004, ICF AI Business School Case Development Centre, Hyderabad, India.

Distributed by The European Case Clearing House, England and USA .

North America, phone: +17812395884, fax: +17812395885, e-mail: ECCHBabson@aol.com.

Rest of the World, phone: +44 (0)1234750903, fax: +44 (0)1234 751125, e·mail : ECCH@cranficld.ac.uk.

All rights reserved. Printed in UK and USA. Web Site: http ://www.eceh.cranfield.ac.uk .

 404-05 8-1

Southwest Airlines: Generating

Competitive Advantage through

Human Resources Management

"J've always fen Ihallhere's no reason Ihal work has 10 be suffused wilh seriousness, Ihal professionalism can 'I be
worn lightly Fun is a slimulanllo people. They enjoy Iheir work more and work more productively "
- Herb Kellehe~ Co-founder and Chairman I
'Working here (Southwesl Airlines) is Iruly an unbelievable experience. Th ey treat you with respect, pay you well,
and empower you. They use your ideas to solve problems. They encourage you to be yourself I love going to
work'·'
- Employee teslimony'

Introduction
Texas-based SouthwestAirlines (Southwest) was regarded as the most admired and most profitable airline company
in the US. By 2003, it was also the most dominant short-haul, high frequency airline in the US. Southwest flew more
than 64 million passengers a year to about 58 cities in 30 states. Its average aircraft trip length was 548 miles, with an
average duration of approximately 1.5 hours.
While the entire US airline industry had been performing poorly since 2001 (the industry reported acombined loss
of $17.7 billion for 2001 and 2002, with expected loss of $13 billion for 2003 3 ) , Southwest's financial performance
continued to be strong. For 2003, Southwest reported revenues of $5.9 billion and a net income of $442 million. During
the past five years, Southwest's stock had nearly doubled while the S&P 500 was down by about 10%.
Following the terrorist attacks in September 2001 , major US air-carriers like American , United , Northwest,
Continental, Delta,etc. had grounded atotal of 240 aircrafts and had laid off more than 70,000 workers 4 . In comparison ,
Southwest had not grounded any of its 375 planes nor laid off any employee (In fact, Southwest had not downsized a
single employee since its inception in 1971). Instead, Southwest added more routes and flights and hired more workers.
After the attacks, Southwest gave hourly updates of events to its 35,000 employees. Its top three leaders chose to
work without pay for the rest of the year and the staff voluntarily raised more than $1.4 million to keep the airline afloat.
On September 14 2001 , Southwest put nearly $216 million into the employee profit sharing plan to show its commitment
to staff.
Many believed that Southwest owed its continuing success to its co-founder, Herb Kelleher (Kelleher), who had
instituted a unique corporate culture that was dubbed the "Southwest Spirit. " The culture put a premium on the dignity
of the employees. The company repeatedly stressed that it valued its employees more than its customers. Infact, the
I Freiberg, Kevin, Jackie Freiberg and Peters, Tom. "NUIS~: soUiwteSrAl'lines' aozy r;l"pe ta-- 00s100SSiKJ personal ~ss," Bantam Doubleday De.l1Pubfishi1g, 1998.

? Miffiman, John, Jeffery Ferguson, David Trickett and Bruce Condemi. ·Spirit and community at South...wst Aiines: JolKTlai of Ofganizatic.,al Change Management, Volume 12, NO.3, 1999.

3 M cnael Arndt and Wendy ZeUner, "How to fIx the airfines. ~ Business Week, Apnl 14th 2003

~ Wendy ZeHner and Mchael Amd~ ·Hok:ling steady." Business Week . February Jrd 2003.

 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

corporate mantra was: "customers come second...and still get great service." The culture also encouraged fun at the
work place. Kelleher's idea of having fun while at work had widely spread across the company. Serious attention was
paid to parties and celebrations and the corporate headquarters was filled with pictures of Southwest employees at
parties, awards, trips, celebrations, and banners.

Background Note
Southwest Airlines began operations in June 1971 with three Boeing 737 aircrafts, serving the Texas cities of
Dallas, Houston and San Antonio. The fleet made six round trips between Dallas and San Antonio, and 12 round trips
between Dallas and Houston- for as little as $20 one way (competitors were charging $30) and without asingle tray of
food . The headquarters was located in Love Field (close to Dallas downtown) and operated from the Love Field
airport, unlike the major players such as American, Continental Airlines, etc., which preferred the busy Dallas Fort
Worth (DFW) International airport. One of its earliest advertising campaigns was- "Make Love, Not War", a theme that
is still applied today. The airline positioned itself as a low cost, point-to-point, short-haul carrier and considered the
trains, buses and cars as its major competitors.
From the beginning, Southwest concentrated on flying to airports that were underutilized and close to ametropolitan
area- for example, Love Field in Dallas, Hobby in Houston, etc. It avoided the hub and spoke model and flew point-to­
point, thereby minimizing connections, delays and total trip time. By avoiding busy metropolitan airports, Southwest
achieved quicker turnaround times and could offer multiple flights to a particular route. For example, a Southwest
aircraft spent an average of eleven hours in the air daily, compared to the industry average of eight. Southwest
operated only one aircraft type, the Boeing 737, which simplified the company's scheduling , maintenance, flight
operations and training activities. As of 2003, Southwest operated 375 Boeing 737s.
By concentrating on short-haul trips and eliminating the hub and spoke model, Southwest appealed to a number
of business and pleasure travelers who preferred a point-to-point service. There was also no assigned seating on a
Southwest flight. Upon arrival, each passenger holding a reservation was given a reusable plastic boarding pass with
numbers from 1to 137, the maximum load of the 737 aircraft. Passengers were then loaded in groups of 30 and the
boarding passes were collected for use on the next flight. Standby passengers were boarded, if seats were available,
in the order in which they signed up at the departure gate. By eliminating conventional boarding passes, the boarding
time was significantly reduced and greatly helped the airline maintain its schedule. Southwest did not offer meal
services on its flights. Southwest estimated that meals could add $40 per passenger to the cost of a flight and hence
offered passengers only beverages, peanuts, light snacks such as cookies, pretzels, etc. Cocktails, beer, and wine
were available for purchase. On longer duration flights, Southwest allowed fliers to bring their own food .
By early 2003, Southwest had expanded its operations to about 58 cities in the U.S, offering more than 2,700
flights aday. Southwest held the reputation for winning the coveted "Triple Crown" (awarded by the US Department of
Transportation) the maximum number of times. Triple Crown awards were given to airlines that demonstrated Best
On-time Record , Best Baggage Handling, and Fewest Customer Complaints. Southwest won the award the first time
for the month of May 1988 and since then had won more than thirty times, in addition to the five annual Triple Crowns
for 1992, 1993, 1994, 1995, and 1996.

The Southwest Spirit

The Southwest Spirit (Exhibit I) guided the human resources policies at the company. Southwest's employee
mission was :
"". Above all, employees will be provided the same concern, respect, and caring attitude within the organization
that they are expected to share externally with every Southwest customer. "s

Czap~w.ki. Anm..N. Ferguson Je"ery. and John M.'iman. ·Southwest Ai .,..: Howlntomat ma:keting pOOls succass: M<w1<el>1g Managemenl SeplOct 200t.

3
 Southwest Airlines Generating Competitive I.lrRI::lm:m", Human Resources

The Southwest was based on three principal values:

Work can be fun, it can be play... enjoy it
Work is ImportanLdon't spoil It with seriousness.
are one makes a difference.
Southwest characterized the first two values as having "fun at workplace" and the third as being "sympathetic to
needs and treating them with utmost dignity."

Exhibit I
Southwest Spi rit
rr""",,,,,Io philosophy tned to promote a positive attitude among employees. Some of the values, which
tried to encourage, included:
1- are #1. The way you treat your employees is the way they will treat your customers.
2. Think small to grow big.
3. in the good times for the bad times.
4. Irreverence is okay.
5. It's okay to be yourself.
6. Have fun at work.
7. Take the but not yourself.
8. someone's so hire for attitude and train for skill.
9. Think of the company as a service that happens to be in the airline business
10. Do whatever it lakes.

11, Always practice the Golden Rule others rather than being served), internally and extemally.

Source: Freiberg, Kevin, Jackie and "Nuts!: SouthweslAirlines' crazy recipe for business and
personal success," Bantam Doubleday Dell Publishing, 1998
Kelleher was a proponent of
wore costumes on
lead, employees wore costumes festivals and
at company celebrations. Flight attendants told compartments wearing bunny
suits, teased fliers with magazine pictures of exotic food items when asked what the on-board menu was, etc. Southwest's
casual dress policy was intended to reinforce its fun-loving, relaxed and spontaneous atmosphere. Having excessive
fun at workplace did not mean that slacked at work. were to work hard, be flexible so as to
keep staffing requirements at a minimum. On many top managers and were seen helping ground
staff with boarding, baggage handling, food etc.
The other principal belief in Southwest culture was to treat with and 10 care for them. The
company achieved this by a work that fostered teamwork and instilled a sense of pride in being
a part of Southwest Not were to be a part of the company, but so were their families, who
were often invited to in company activities and celebrations. The broad idea was that if employees were
treated properly, then they would perform better.
Southwest employees including flight attendants, customer service handlers, etc, were
encouraged to take whatever action they deemed necessary to meet customer need or help fellow workers, even if it
meant breaking company policies. If employees made mistakes in jUdgment, they were not punished, but given feedback
on how to improve the next time. On certain occasions, employee errors were as the company felt that this
would translate to added attention to details in the future. Southwest also empowered its workforce by consistently

4
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

obtaining their feedback on how they thought the company was performing or how, in their opinion, should it be
progressing. Southwest expected this amicable work ambience to translate into effective customer service. Southwest
often stated that its customer service would be "... delivered with a sense of warmth, friendliness, individual pride, and
company spin'f."
Southwest motivated its employees with various incentives. Those employees with no absences or late arrivals
over a three-month period, for instance, received two free, space-available airline tickets (which permitted a person to
travel free if there were seats available on a particular flight). They could use these tickets any way they wished, even
give them away to a friend . Southwest also instituted many awards. The company's most prestigious award was the
"Founder's Award ," given only in the years where a continuous history of significant achievement merited special
recognition. This award was reserved for those who went beyond the call of duty on a consistent basis in community
service, outstanding job performance, implementation of creative solutions to complex problems and introducing
innovative ideas and programs. Southwest also honored employees with the "President's Award ," given to an employee
who had demonstrated the virtues and values held by Southwest in high esteem: showing compassion for customers,
untiring support for co-workers, willingness to learn new things, leading by example, embracing change, keeping
promises and bringing asense of humor and fun to the job. Other awards and recognition included "Leadership Award"
for continually exemplifying and personifying the principles behind Southwest's mission statement and "Community
Relation Extraordinary Award" for efforts on the company's various community involvement projects. "Top Wrench
Program" distinction was awarded to the best mechanic, and the "Top Cleaner Award" was given for maintaining
superior aircraft appearance.

Competitive Advantage through People

Southwest had very early on recognized the importance of its employees in achieving a position of competitive
advantage in the industry. In 1989, the company renamed its traditional personnel department as "The People
Department." This department took care of recruitment, people services, learning and development, and compensation
and benefits. The department's mission statement read:
"Recognizing that our people are the competitive advantage, we deliver the resources and services to prepare our
people to be winners, to support the growth and profitability of the company, while preserving the values and special
culture of Southwest Airlines."6
The company took great pride in preserving and spreading the Southwest Spirit. It used in-house newsletters,
videos, annual reports, etc. to diffuse the culture. Part of this effort was the setting-up of the "Culture Committee" in
1990. This committee consisted of committed team leaders from different levels of the organization, dedicated to
communicating the airline's mission, vision, values, norms and philosophies. One of the first results of this committee
was a series of "cultural exchanges" with 1,000 to 2,000 people gathered in an airplane hanger. A few years later,
"Back to Basics" program was conceived, when 65% of the employees had been with the airline for fewer than five
years. The program encouraged people who had been with the company for many years to retell their own stories
about what made Southwest successful.
Many field programs were designed to foster the company spirit. Southwest launched "Walk-A-Mile" program
where employees were invited to volunteer a day off, to work with colleagues in a part of the company distinct from
their usual function. This experience provided new insights into operations with which employees were more likely
unfamiliar. Senior executives worked at the gate at an airport, handled reservations, or took over one of the jobs in
their department for a day. To induce participation, Southwest promised free tickets to volunteers , provided that at
least half the workforce signed up. Another related program was "Mind the Gap," which organized the entire workforce
into cross-functional groups in order to instill awareness of the host of functions connecting one employee to another.
Interacting with colleagues from other functions not only fostered closer teamwork, but also resulted in innovative
ideas.
To further instill the "Southwest Spirit" throughout the company, Southwest paid great attention to its recruitment
and training activities.
I WWN. SOuttlwest.oom
---------------------------

5
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

Recruitment
Most of the job applicants were either the airline's customers or those who came across an advertisement featuring
Kelleher dressed as Elvis Presley, Southwest's job advertisements were largely unconventional with messages like:
"Work In A Place Where Elvis Has Been Spotted, , , The qualifications? It helps to be outgoing , Maybe even a bit
off-center, And be prepared to stay awhile, After all, we have the lowest employee mover rate in the industry, If this
sounds good to you, just phone our jobline or send your resume ,Attention: Elvis,"?
Other advertisements included:
"You don't have to surrender your individuality to work for Southwest Airlines,"
"Work is importanLdon't spoil it with seriousness,"
One advertisement for people with computer skills showed a picture of a techno-nerd, with a tape holding his
glasses together and read:
"We're not looking for your average computer geek ,"
All these job advertisements, aimed at promoting the company culture, indicated that the company was looking for
people who had agreat sense of humor, were altruistic in nature and were team players, Such practices were followed
based on the assumption that humor could help people thrive during change, remain creative under pressure and
work effectively and enthusiastically, To test for such traits, Southwest's intelView process included group intelViews
where applicants told jokes and role-played a variety of situations to demonstrate teamwork, a sense of humor, and
the capacity to act spontaneously, Potential employees were asked to give afive-minute presentation about themselves,
As the presentations were delivered, the intelViewer watched the audience to see which applicants were using the
time to work on their own presentations and which were enthusiastically cheering on and supporting their potential
coworkers,
The screening process at Southwest was very elaborate and selective, Company reports suggested that only 4%
of the more than 90,000 people who applied for work at Southwest each year were hired, Candidates were given the
opportunity to share their backgrounds in an informal, conversational setting, This was done to assess how each of
them behaved in front of a group, typical of a Southwest work setting, Applicants were also given crayons to draw a
picture that told the story of their life, Prospective employees were also asked:
"Tell me how you recently used your sense of humor in a work environment. Tell me how you have used humor to
diffuse a difficult situation,"
Each candidate then went through a three-step intelView process conducted by a recruiter, a supelVisor from the
hiring department and a peer. IntelView by peers was considered a strong component of the recruitment process, For
example, pilots hired other pilots, often coming in on their day off to do background checks, Southwest's frequent fliers
were also invited to be on the intelView panel when customer contact people were being intelViewed,
Southwest placed the highest importance in its selection process on employee values and attitudes, rather than on
their technical abilities, The important criterion was if a candidate gelled well with the company culture, Ann Rhoades,
a senior executive of the People Department, described one intelView incident, which portrayed the importance of the
right attitude
"We even turned down a top pilot who worked for another major airline and did stunt work for movie studios. Even
though he was a great pilot, he made the mistake of being rude to a Southwest receptionist. Teamwork is critical. If
they say 'I' too much in the intelView, they don't get hired.''8
Kelleher further explained:
We can train people to do things where skills are concerned. But there is one capability we do not have and that is
to change a person 's attitude, So, we prefer an unskilled person with a good attitude rather than a highly skilled person
Freiberg, Kevin, Jack. Freiberg and Peters, Tom.· uts!: Southwest Akines' crazy fecipe (or bu -ness and personal success,' Bantam DCIlbieday Dell PublisNn9, 1998.
~ ~Southwest Alrhnes,' TransJK)(1d UnIVerSity, 2000.

6
 404-058-1

Southwest Airlines Generating Competitive Advantage through Human Resources Management

with a bad attitude. We take people who come out of highly structured, hierarchical, dictatorial corporate environments
if they have the attitude potential. They may have just molded their mannerisms to conform to that rigid environment.
When we have them here for a while, they learn they can relax ...and let their real selves come out.''9
During the interview process, Southwest offered a very relaxed atmosphere to the candidates. On one particular
occasion, eight pilots attended an interview, dressed up formally- dark suits, shoes and socks. When the interview
panel suggested that they wear something more relaxed, six of them accepted the invitation and changed to Bermuda
shorts. They remained dressed in suit coats, ties, Bermuda shorts, dress shoes and socks during the interview. All
these six pilots were hired.
Southwest attached great importance to the job of flight attendants, as they worked on the front-line, in direct
contact with the customers. In the recruitment process for flight attendants, Southwest very often included its customers
to do the assessment. The interview process consisted of an application, a phone-screening interview, agroup interview,
three additional interviews (two with line employees), and a consensus assessment and vote. The entire process
focused on identifying the applicants with a positive attitude and an aptitude for working in teams.
Southwest rejected thousands of applicants a year, but it was extremely courteous to them as it viewed them as
potential customers. Interviewing managers called rejected applicants and counseled them so that they could be
successful in their next job interview.

Training
Southwest placed great emphasis on training to prepare its people to be able to function in a team. It considered
employee training to be a continuous process rather than a one-time event following recruitment. Throughout his or
her career, an employee underwent training in a number of activities. This was done to make them feel enriched at
work and also to enable them to perform flexibly in a variety of positions as required. In addition, employees were
assigned mentors who explained the company culture and policies, in addition to helping them with their day-to-day
work. Every major aspect of airline operations - mechanics, in-flight activities, customer service, operations, baggage
handling, provisioning, reservations, etc. - had its own training department, which provided training in technical skills.
Most of the training at Southwest was conducted at its University of People, which offered a variety of specialized
courses on customer service, team building, decision-making, employee relations, performance appraisal,
communications, stress management, safety, and career development. In addition, a range of innovative programs
like New Hire Celebration, Frontline Leadership, Leading with Integrity, Customer-Care Training, etc. were also offered.
New Hire Celebration (it was not called orientation) was designed to get the new employees prepare themselves for
the advanced level courses. Frontline Leadership Program was aimed at all those in supervisory roles or above. The
Leading with Integrity Program trained first-time managers and the Customer-Care Training Program targeted flight
attendants, pilots and other employees.
Once employees were hired, they were immediately given a celebration greeting into the company. They began
their "celebration" with a scavenger hunt throughout the building. They were given a time line with specific dates in
Southwest's history and were asked to fill in the details of Southwest's achievement on those dates. They were
encouraged to view the memorabilia decorating the corridors and also question other employees to fill in the details.
This exercise helped the new employees to come in contact with different people working at the headquarters. Then
they were shown a series of three videos:
The Southwest Airlines Shuffle: Incorporated rap music performed by various employees describing their
job functions. Kelleher appeared as Big Daddy-a.
Graveyard Video: Presented an overview of the airline industry. It also included interviews with Southwest
employees and customers, who shared their work and traveling experiences.
The Spirit Weaver: Honored the past by documenting some of Southwest's history.

• 0 00, James Gampben, ~Cr.afting an Ofgallizationa! culture. Herb's hand at Soutil'Msst Aiimes,r CXganlzational Oyn am.iCS. AutllTln 1992

7
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

All new employees were exposed to the history, principles, values, mission, and culture of the company. They
were also told how the company viewed leadership and management. Throughout the training period , emphasis was
laid on teamwork and team building, all in good humor. For instance, new employees often did acelebratory skit at the
conclusion of their training. Part of the New Hire Celebration also involved how existing supervisors and managers
welcomed their new recruits. The recruits were required to write a letter describing their first week experience. If their
first day was not memorable, then their supervisor had to wear a baby bonnet and carry a pacifier for the day. So the
supervisors and managers outdid themselves by making sure the cubicle was ready, that the person had someone to
go to lunch with, that the way to the rest room was clearly marked, etc.
Leading with Integrity was a three-day training session that was aimed at developing positive communication and
leadership skills. Guest speakers often lectured on the operational aspects of the company like basic principles of
Southwest's leadership, interviewing techniques, giving employees effective performance appraisals, employee
assistance program , etc. Other significant training programs included:
The Up and Coming Leader: A six-month program for managers. The employee received training in every
department within the company and at the conclusion of the program received 360-degree perfonmance feedback
from the various department heads, peers and subordinates.
The Climb: A two-and-a-half day outward-bound course attended by existing work teams. The logic of this
program was that it was difficult to get people to change in their normal work setting. The team lived together
in the woods, completely cut-off from phones, cars, etc.At the end of the program, each team was required to
develop an action plan to ensure that their new behaviors were effectively transferred to their work place.
The Front-Line Forum: 12-15 individuals with 10-15 years experience in the company were brought together
to discuss how the company was doing and how it had changed. They met with top officers and explored
questions like "We promised you something around the culture and spirit of the company Have we delivered? "
Other than such structured programs, the People Department also organized a number of well thought out
management training activities. Each year, the department selected a new activity that instilled an important corporate
value such as teamwork, trust, hanmony or diversity. In one exercise called "Oz," managers took ajoumey "to uncover
the mysteries behind being an effective employee and leader at Southwest." Some of the stops along the journey
included building a network of trust in the workplace and exploring how fear affected that value. In "Crocodile River,"
participants were given two-by-fours, which they utilized to cross a simulated river, thereby enhancing teamwork in a
perilous situation.
Sherry Phelps, Director of Corporate Employment, summarized Southwest's human resources policies:
"We have the most productive workforce in the industry. The reason : strong company culture. Southwest is a
company that encourages its people to express their individuality. We don't tell anyone: You have to be an entertainer
in your job, but, if that is your natural bent, then you can use any creativity and talent that you have to get your job
done. That is why flight attendants at Southwest have been known to sing the safety instructions and why pilots have
been known to tell jokes over the PA system."l0

The Positive Effect

Since its inception, Southwest had encouraged its employees to identify with others at the company, deliver great
customer service and have fun . This, in their opinion, had provided them with significant competitive advantage in the
industry. According to Libby Sartain , Vice President of the People Department:
"We spend more money to recruit and train than any other airline. We take time to find the right people to hire, at
all levels within our organization, and we spend time training them . We really believe in the notion of 'one bad apple.'
It's like a religion here.As a result, our turnover is far lower than at other airlines. We want people who are not looking
for ajob, but rather who are looking for acause. If we are evenly matched with our competitors on everything else, we
will win on customer service.""
~erney. Donald, "Crea:ing a motivated wr;:rtforce · HR Focus, August 19'96.
! Gittell, Jody Hoffer. ~Investrlg in relabonships: Harvard Business Review. June 2001 .

8
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

The positive effect of the Southwest Spirit was evident from various instances. One employee had traveled along
with an elderly passenger to make sure that she was able to catch her connecting flight. On another occasion, a
Southwest employee took care of a dog for two weeks, when the dog's owner was told that he could not take the dog
on board on his vacation . Other examples included driving customers to destinations when they missed anight, having
a customer stay at their home when they were undergoing medical treatments in an unfamiliar city, paying for a
customer's ticket when they did not have enough money, etc. Pilots have held a barbecue in appreciation for the
mechanics. Pilots, deciding to thank the reservation agents, had also come in and spent a shift with them. Flight
attendants and pilots worked along with provisioning and ramp people to stock airplanes, pick up trash and load bags.
Though salary levels at Southwest were generally lower than that of the rivals, employees worked harder than
their counterparts. For example, Southwest pilots routinely flew nearly 80 hours a month, compared to an average of
about 50 hours by pilots at other airlines 12 Southwest pilots were paid for each trip, not each hour, so they had a
strong interest in keeping flights on schedule. Pilots were known to constantly push air traffic controllers to get quicker
routings to their destinations. Flight attendants, on an average, clocked 150 hours a month, compared to about 80
hours elsewhere. Such instances meant to show the high level of motivation that Southwest employees possessed. As
put by Richard Sweet, Senior Director of Field and Product Marketing:
"The reason most people are working here is not monetary or material. Culturally, having a working atmosphere
that is fun and flexible is what motivates us most. The incentive program is there to help us stay focused but it's the
culture that motivates me most, having the spirit that we're working as a team-not as individuals, but as family."'3

Exhibit II
Southwest Airlines: Principal Values

Unlike many companies, Southwest had not formally documented its principal values. The authors of the book "Nuts'
Southwest Airlines' Crazy Recipe for Business and Personal Success," however, had identified certain principles,
which Southwest consistently tried to instill in the employees. These principles included :
Profitability
Ownership
Low cost
Legendary service
Family
Egalitarianism
Fun
Common Sense/Good Judgment
Love
Simplicity
Hard-work
Altruism
Individuality

Source: Freiberg, Kevin , Freiberg, Jackie and Peters, Tom, "Nuts': Southwest Airlines' crazy recipe for business and
personal success," Bantam Doubleday Dell Publishing, 1998

" Sally Dcnnel~, ' One _ e's m"!llc.· TIme. October 28U, 2002
1:\ Kenneth Hein, ~Rewar dl n g relationships,· lncenltve, January 1999

9
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

Exhibit III
Southwest Airlines: Five Year Annual Income Statement

In Millions of U.S. Dollars 12 Months 12 Months 12 Months 12 Months 12 Months

(except for per share items) Ending Ending Ending Ending Ending
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
Reclass.
12/31/00
Revenue 5,835.0 5,426.0 5,470.0 5,578.7 4,665.6
Other Revenue, Total 102.0 95.7 85.2 70.9 70.0
Total Revenue 5,937.0 5,521.8 5,555.2 5,649.6 4,735.6

Cost of Revenue 4,087.0 3,731.1 3,630.4 3,487.3 2,913.4

Gross Profit 1,748.0 1,694.9 1,839.5 2,091.4 1,752.2

Selling/General/Admin. Expenses, Total - - - - -

Research & Development - - - - -
Depreciation/Amortization 3840 356.3 317.8 281.3 248.7
Interest Expense(lncome) - Net Operating - - - - -
Unusual Expense (Income) - - - - -
Other Operating Expenses, Total 983.0 1,017.0 975.8 859.8 791.9
Total Operating Expense 5,454.0 5,104.4 4,924.1 4,628.4 3,954.0

Operating Income 483.0 417.3 I 631.1 1,021.1 781.6

Interest Expense, Net Non-Operating (58.0) (89.3) (49.3) (42.3) (22.9)

InteresUlnvest Income - Non-Operating 24.0 37.0 42.6 40.1 25.2
Interest Income(Exp), Net Non-Operating (34.0) (52.3) (6.7) (2.3) 2.3
Gain (Loss) on Sale of Assets - - - - -
Other, Net 259.0 27.7 203.2 (1.5) (10.3)
Net Income Before Taxes 708.0 392.7 827.7 1,017.4 773.6

Provision for Income Taxes 266.0 151.7 316.5 392.1 299.2

Net Income After Taxes 442.0 241.0 511.1 625.2 474.4

Minority Interest - - - - -
Equity In Affiliates - - - - -
Net Income Before Extra. Items 442.0 241.0 511.1 625.2 474.4

Accounting Change - 0.0 0.0 (22.1) 0.0

Discontinued Operations - - - - -
Extraordinary Item - - - - -
Net Income 442.0 241.0 511.1 603.1 474.4

Preferred Dividends - - - - -
Income Available to Com Excl ExtraOrd 442.0 241.0 511.1 625.2 474.4

Income Available to Com Incl ExtraOrd 442.0 241.0 511.1 603.1 474.4

Basic Weighted Average Shares 783.00 772.56 762.97 748.62 754.60

Basic EPS Excluding Extraordinary Items 0.565 0.312 0.670 0.835 0.629
Basic EPS Including Extraordinary Items 0.565 0.312 0.670 0.806 0.629

Dilution Adjustment 0.0 0.0 0.0 0.0 0.0

Diluted Weighted Average Shares 822.00 809.42 80712 796.32 803.89
Diluted EPS Excluding ExtraOrd Items 0.538 0.298 0.633 0.785 0.590

Source: http://finance.yahoo.com

10 ~s.\J'lE..l$~

l~o~

""""-",,I
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

Exhibit IV
Southwest Airlines: Five Year Annual Balance Sheet
In Millions of U.S. Dollars As of As of As of As of As of
(except for per share items) 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
Restated
12/31/00

Cash & Equivalents 1,865.0 1,815.4 2,279.9 523.0 418.8

Cash and Short Term Investments 1,865.0 1,815.4 2,279.9 523.0 418.8
Accounts Receivable ­ Trade, Net 132.0 174.4 71.3 138.1 75.0
Total Receivables, Net 132.0 174.4 71.3 138.1 75.0
Total Inventory 93.0 86.0 70.6 80.6 65.2
Prepaid Expenses 59.0 43.4 52.1 61.9 52.7
Other Current Assets, Total 164.0 112.8 46.4 28.0 20.9
Total Current Assets 2,313.0 2,232.0 2,520.2 831.5 632.6
Property/PlantJEquipment, Total- Gross 10,550.0 9,455.7 8,901.7 7,967.8 6,849.0
Accumulated Depreciation, Total (3,107.0) (2,810.2) (2,456.2) (2,148.1) (1,840.8)
Property/PlantJEquipment, Total- Net 7,443.0 6,645.5 6,445.5 5,819.7 5,008.2
Goodwill, Net - - - - -

Intangibles, Net - - - - -

Long Term Investments - - - - -

Other Long Term Assets, Total 122.0 76.3 31.4 18.3 12.9
Total Assets 9,878.0 8,953.8 8,997.1 6,669.6 5,653.7
Accounts Payable 405.0 362.0 504.8 312.7 266.7
Accrued Expenses 650.0 529.1 547.5 499.9 430.5
Notes Payable/Short Term Debt - 0.0 475.0 - -
Current Port. of LT DebtJCapital Leases 206.0 130.5 39.6 108.8 7.9
Other Current liabilities, Total 462.0 412.2 672.2 377.1 256.9
Total Current Liabilities 1,723.0 1,433.8 2,239.2 1,298.4 962.1
Long Term Debt 1,332.0 1,552.8 1,327.2 761.0 871.7
Capital Lease Obligations - - - - -

Total Long Term Debt 1,332.0 1,552.8 1,327.2 761.0 871.7

Total Debt 1,538.0 1,683.2 1,841.7 869.7 879.6
Deferred Income Tax 1,420.0 1,227.5 1,058.1 852.9 692.3
Minority Interest - - - - -
Other Liabilities. Total 351.0 318.0 358.6 306.0 291.8
Total Liabilities 4,826.0 4,532.1 4,983.1 3,218.3 2,817.9
Redeemable Preferred Stock, Total - - - - -

Preferred Stock - Non Redeemable, Net - - - - -

Common Stock, Total 789.0 776.7 766.8 507.9 505.0

Contd..

11
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

Con/d...

Additional Paid-In Capital 258.0 135.8 50.4 103.8 35.4

Retained Earnings (Accumulated Delecit) 3,883.0 3,455.4 3,228.4 2,902.0 2,385.9
Treasury Stock ­ Common 0.0 (62.4) (90.5)
Other Equity, Total 122.0 53.7 (31.5)
Total Equity 5,052,0 4,421.6 4,014.1 3,451.3 2,835.8
Total Liabilities & Shareholders' Equity 9,878.0 8,953.8 8,997.1 6,669.6 5,653.7
Shares Outs ­ Common Stock Primary Issue 789.39 776.66 766.77 756.24 749.14
Total Common Shares Outstanding 789.39 776.66 766.77 756.24 749.14
Employees 32,847 33}05 31,580 29,274 27,653
Number 01 Common Shareholders 12,114 11,858 11,324 10,223 10,548

Source: http://finance.yahoo.com

Exhibit V
Comparison of Fundamentals

Name Southwest Airlines AMR Corporation Delta Airlines, Inc Continental

Co. Airlines Inc.
Total Sales $5.94 Billion $17.44 B $13.3 B $8.87 B
Total Income $442 Million -$1.23 B -$773 M $38 M
Sales Growth 7.5% 0.8% N/A 5.65%
Income Growth 83.4% N/A N/A N/A
Net Profit Margin 7.4% ·7% -5.8% 0.44%
DebtJEquity Ratio 0.26 N/A 23.17 7.33
Source: Research Wizard, www.moneycentral.com

12
 404-058-1

Southwest Airlines: Generating Competitive Advantage through Human Resources Management

Exhibit VI

Five Years Stock Performance of Southwest Airlines (LUV) compared to that of the S&P 500

Index, American (AMR), Continental (CAL) and Delta Airlines (DAL)

S8.P 500 INDEX Spl its:'"

as of 5-Apr-2004

+100%

+50% ~----~~------~~r---=---~~=-------~--------~~

~I~~t€~~~~~~t~=~~~~~~:::t~~:::=t1 LUV
~

-100%r-~~~~~-=-=~~~--~~~~~~~~~~~--~~~
JanOO Jan01 Jan02 Jan03 Jan04
40
~ 30 'Vo lullle ---f----------+------t--!---------_!-----------+--1
o
~ 20~----_!~--------4_------cl--_+----------~--------~_4

~ 10~----_!~--------4_------+-_+------~--~--------~~
O~~~-w~__~_w~~~Md~~~~~~~~~~~. .

Copyright 2003 Yahoo' Inc. http://finance.yahoo.colll/

Source: http://finance.yahoo.com

13