In business school I had the opportunity to write a first-hand case study on Southwest Airlines. As part of our Corporate Strategy course, 3 of us MBA students had to analyze and present to the management of 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. And then went through fierce, withering attacks from the established major airlines.
Today, cloud vendors like salesforce and amazon find themselves in a similar situation as they disrupt on-premise application and infrastructure vendors. Marc Benioff’s missionary “End of Software” is drawing bigger and bigger crowds as he now morphs that to “End of Maintenance”. But the established vendors are starting to issue “manifestos” and launch their own “low-cost airlines”. They will not disappear easily - cloud vendors can learn so much from Southwest now in its fourth decade of surviving and thriving even against mean, almost unfair, competition.
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 around $ 400 (when others would charge 2-3 times that).
"Low-cost" may turn off some cloud vendors under pressure from Wall Street - but really they are more of a industry price leader, just a fair and predictable price leader.
Many cloud vendors see SAP and EMC and EDS prices as their ceiling – no, those are exorbitant. It needs to be a fraction of that if the industry has to get “keep the lights on” below the 70% level of IT spend today. Keep focused on the “car” competition.
b) Stay even more disciplined in operations
Southwest has been praised for hedging its fuel costs. 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.
Like Southwest, cloud vendors need to get 2,3,5% advantage from multiple sources - multi-tenancy, commodity chips and storage, open source infrastructure software, next-gen green data centers; young, hungry systems integrators. As Bob Warfield says – you have to stick to bedrock cloud principles like multi-tenancy. Live by it, die by it, optimize it. Continuous improvement in price/performance means continually finding new 2,3,5% efficiencies – 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 (my non-US travel is mostly on Delta) 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 move to the cloud. Security, control. “don’t get fired for using IBM” – every excuse in the book. 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 which the majors ignored.
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 few capacity controls on award seats - other airlines barely free up 5 % 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.
Not just lower TCO, clouds help turn fixed IT costs into variable, they turn capex into opex, they dramatically lower provisioning time. They offer better SLAs than most internal data centers and outsourcers. Quietly keep delivering all these extra value points.
e) Manage your growth
I wrote Herb Kelleher, then CEO of Southwest a letter a few 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 cloud vendors listening too much to Wall Street which is addicted to the high margins bigger vendors have squeezed from their lock-in at customers. But American’s huge investments in yield management software did not sustain its sky-high fares and margins beyond a short while. Cloud vendor revenues and margins will continue to improve in time as they scale– don’t need to force the pace.
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.
In the past, the competition has pulled every lever – including the infamous “Wright amendment” to keep the shackles around Southwest. During an amendment 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!
Cloud vendors complain about the FUD established vendors throw at them. A single outage and the on-premise vendors go “see. I told you”. Same with security and privacy. Compared to what Southwest has gone through, they have seen nothing yet! Prepare for it, do not let it distract you too much. As Laef Olson CIO of RightNow says “Over the past several years, I’ve seen objection after objection to cloud-based computing crumble in the face of determined innovation. “
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 jokes to the entire plane!
I see cloud vendors trying to “grow big” by hiring from larger, established vendors.
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 and bought lots of stock in this little airline with the goofy trading symbol of “LUV”...
