What Offshore Vendors can learn from Southwest Airlines

Even though Southwest Airlines only flies in the US, its case study has been analyzed over and over again in business schools and executive seminars worldwide – and deservedly so. I had the opportunity to write a first-hand case study on the company 25 years ago. As part of our Corporate Strategy course, 3 of us MBA students had to analyze and present to the management of Southwest, then a small, primarily Texas focused airline. The management politely smiled when we told them they should expand to the Midwest and Northeast. I remember something along the lines of “we avoid union and snow affected airports”. Five years later, Southwest was flying in and out of Chicago.

Two decades later, they have blanketed the US and have consistently generated profits as the industry around them bleeds red ink. They have morphed and morphed, yet stayed remarkably disciplined - and become the preferred airline for so many small businesses like mine.

Southwest today has 10% market share in the US passenger market. As offshore vendors inch up their own market share around the world they can learn lots from another so called "low-cost" competitor - and about how it has survived and thrived even against mean, almost unfair, competition. "Low-cost" may turn off some offshore firms keen to move up the value chain - but really they are more of a industry price leader, just a fair and predictable price leader.

a) Stay disciplined in pricing

When Southwest started off as a regional airline, they wanted to be competitive with car travel. They did not care with other airlines were charging – they wanted people to think about flying rather than driving. Even today they do not appear to care what other airlines charge. Fly last minute, coast to coast and the fare is capped at $ 299 (when others do and they could would charge 2-3 times that). Predictable, fair pricing has been their mantra.

Many offshore firms see Accenture, IBM etc rates as their ceiling. China, Philippines, "work at home moms and dads" – that is the competition. Keep focused on the “car” competition.

b) Stay even more disciplined in operations

In recent months Southwest has been praised for hedging its fuel costs as oil prices went over $ 50 a barrel. Not just recently - see this article from 2001 – they have institutionalized it. Look at other “bet the company” strategies. They only fly Boeing 737s for lower training, maintenance and other efficiencies. If the FAA grounded that plane in case of a design flaw, the company would be out of business in a few weeks. They primarily fly to secondary airports – Baltimore, Fort Lauderdale, Oakland, Chicago Midway – all near major cities, but much cheaper to operate from. In some cases they mis-calculate. Their decision to not fly in to the major New York airport JFK has allowed a new competitor Jetblue to thrive. But they stay focused on core operational principles.

If a customer expresses concern about Pakistan’s nuclear threat to India, the offshore vendor response is often deflective. Something like “but we have this back up center in Australia”. Like it or not, your GDM is your competitive asset. Live by it, die by it, optimize it. Insulate your clients from the wage inflation and staff turnover – that’s your version of the fuel hedge.

c) Accept fact that some will never embrace you.

I have made it a habit whenever I fly Delta (the other half on my travel is on Delta or its subsidiary, Song) to ask my neighboring passenger what he/she thinks of Southwest. 90% of the time I will get comments like “cattle car”, “milk-run” (In the past Southwest used to primarily fly segments that were an hour in length, so there were frequent stops. Now they also offer coast to coast non-stops). Southwest will never convert these passengers.

Similarly, some IT executives will never engage an offshore firm. Quit analyzing why. Like Southwest, find niches. Southwest has developed a lucrative business around weekend trip to football games, and linking passengers to cruise lines and a variety of other niches.

d) Under promise, over deliver

Southwest informs you they do not serve meals, so bring your own – but when you get on you get packaged snacks. Not a gourmet meal, but more than they promised. They have no capacity controls on award seats - other airlines only free up 5 to 10% on any flight to frequent flier award seats. Their management always behaves like they are a low-tech airline (competitors like American were praised for their Sabre reservation and yield management systems). Yet almost all my dealings with them – reservations, changes, refunds, boarding passes - are on-line.

3 years ago, a client asked me to survey 25 of the largest offshore users in US and Europe. I was blown away by the positive feedback on flexibility, performance and other attributes of their offshore vendors. The early adopters are clearly delighted – the challenge for offshore vendors is to replicate that experience en masse. Will your CMM Level 5 certification mean zero software defect? No – but do not just say it - explain what the customer can expect from that.

e) Manage your growth

I wrote Herb Kelleher, the CEO of Southwest a letter 5 years ago asking why he did not franchise his model around the world. He could have – now copy cats like Ryan, Jet Air are replicating his model. You could say – missed opportunity, or focus. Southwest could easily expand capacity at 15 to 25% a year as other US airlines decline in stature. They like steady growth of 5 to 10% - manageable growth.

I see many offshore firms chase after every vertical industry, every opportunity. Many offshore firms talk about growth in thousands of employees every quarter. If you can manage it, fine. If not, do it right, not because others are doing it.

f) Get ready for meaner competition

Reagan said about Washington’s motto: “If an (industry) moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it”. Washington has gone out of its way to apply that logic to Southwest. Congress has kept on subsidizing unprofitable competitors for years even as Southwest has shown it can make money.

Then there is the infamous “Wright amendment”.While there is currently another movement to repeal it, in the past, the competition has pulled every lever – to keep the shackles around Southwest in place. (During a previous repeal effort, the CEO af a competitor is rumored to have told an elderly lady who lived near Love Field : “Lady, fine – I will fly my biggest, god dammed jets over your house all day long if the repeal happens”. And this was at a cocktail party - ouch!)

Offshore vendors sometimes complain about unfair, sometimes racist competition. Compared to what Southwest has gone through, they have seen nothing yet! Prepare for it, do not let it distract you too much. And please - try and keep all politicians out –US, EU, Indian, Chinese - all! See my blog “Imagine there’s no countries…”

g) Finally – have some fun!

Herb is a fun-loving, chain smoking businessman and he defines the company culture. Southwest has some of the friendliest, happiest staff in the airline industry. They tell jokes on flights and are nice enough to let my kids tell their own lame Sponge Bob jokes to the entire plane!

Too many offshore firms are creating workaholic cultures and want to hire only engineering and computer science graduates.

Southwest has shown hiring “attitudes” more than “aptitudes” is a winning formula. They know smart MBAs like me are not really that smart. If I was, I would have walked out of that board presentation 25 years ago and bought lots of stock in this little airline with the goofy trading symbol of “LUV”...