Southwest Airlines: High Tech, Low Costs

By Tom Steinert-Threlkeld  |  Posted 2005-04-10

Southwest Airlines: High Tech, Low Costs

Gary Kelly
Southwest Airlines

TITLE: Vice chairman of the board and CEO
TENURE: 8 months on current job; 19 years at company
EDUCATION: B.B.A. in accounting from the University of Texas at Austin; Certified Public Accountant.
CHALLENGE: Be profitable, while remaining the lowest-cost passenger airline in North America

Southwest Airlines is the only U.S. carrier to be profitable every year since 1972. Starting July 15, Gary Kelly has been chief executive of the carrier that made point-to-point flying, alternative airports, unassigned seating, friendly service and low fares its signatures. Hes a numbers man, favoring discipline and schedules, where longtime chief Herb Kelleher was better known for heavy cigarette smoking, drinking Wild Turkey and antics that kept the upstart in the news. Now, Kelly faces a glut of flying capacity, low-cost rivals such as JetBlue and increasing complexity, from post-Sept. 11 security requirements to customer expectations that mean maybe assigned seating isnt such a bad idea. [ital] Baseline [end] editor-in-chief Tom Steinert-Threlkeld talked to the one-time carpenters apprentice about how he uses technology to help keep Southwest turning planes around quickly and maintaining its primary advantage: low costs.

Q. "All carriers are now low-cost carriers," you said recently. How are you thinking about using technology next, to remain the lowest-cost airline in the industry?

A. I think all carriers are low-fare carriers. To survive, all carriers are going to have to be at least lower-cost carriers. Were looking for ways to improve every aspect of our business, from customer service delivery to the efficiency and productivity of our airline operation, so that we can continue to be tops in all categories. We want to remain the low-cost producer in the industry so we can be the low-fare airline.

Q. One key technical piece of this is lowering your distribution costs. How did this start?

A. The first element was to become ticketless. We became electronic or ticketless back in the mid-1990s, and today were probably about 90% to 95% ticketless. Customers who use credit cards are eligible for online transactions, and today bookings account for about 65% of total revenue. Im sure that will continue to grow. I wouldnt be surprised if we hit 75% [this year] and even blow through that.

Q. How much does this save you?

A. In the old days, when there was a 10% travel agency commission paid, my guess is it cost us somewhere around $10 a booking. Were probably paying somewhere between 50 cents and $1 per booking [for electronic transactions].

Q. Youve said your airport operations technology lags your reservations technology.

A. For years, we had a very simple point-to-point route network. It wasnt until the late 1980s that we even implemented a reservations and ticketing system. Before that, it was cash registers, literally. So that was step one.
Next page: Eliminate Waiting.

Eliminate Waiting

As we integrated our ticketing and reservation processes, the boarding pass was left manual. So until 2003, all customers would queue up in the gate area and exchange their boarding passes. Then we began distributing boarding passes from multiple points in an airport. Later, we added boarding-pass generation via Now we have self-service kiosks, and were adding functionality to those units this year. So thats what I mean when I say, were behind. It was a choice that we made up until 2003, to keep our operations simpler.

But in this post 9-11 environment, with the additional security procedures that we have, customers want the convenience of being able to get their boarding passes at multiple locations and reduce the number of lines they stand in at airports. That became important for us, to meet those needs from a customers perspective and remain competitive. It has the added advantage of being more cost-effective, because we dont need as many customer service agents.

Q. Are you catching up?

A. Our airport operations have gone through dramatic change since 9-11, with numerous additional security procedures heaped on our people, where we had to staff up even more to handle that. Now weve gotten more and more efficient. The federal government has taken over most of the checkpoint operations. Were finding that the hiring requirement at the airports is dramatically reduced.

Q. What else tells you that youre becoming more efficient?

A. One statistic is the number of people per aircraft. We peaked at about 95 employees per aircraft around 2000 or 2001. Our target, historically, has been around 80. Today, were down to around 73 or 74.

Q. What are the primary causes?

A. The primary areas of improvement have been reservations, where we need fewer reservation agents per aircraft, and the airports, where we need fewer customer service agents per aircraft. That again flows from more customer self-service.

Q. After you became CEO, how long was it before you decided that CIO Tom Nealon would report directly to you?

A. I dont think I ever really had a thought that he would report anywhere else. I think it makes sense to organize around peoples strengths and not make things unnatural. Ive got a different background than [predecessor] Jim Parker and a different background than Herb Kelleher. Technology was reporting to me at the beginning of 2001; we had sponsored a great deal of change in the technology organization and in the technology that was deployed throughout Southwest from 2001 to 2004. And I didnt want to interrupt the momentum that we had. Tom Nealon and I have an outstanding relationship. Hes a very fine Southwest officer. Were very proud of his accomplishments as well as those of the entire technology group.

Next page: Technology Equals Productivity

Technology Equals Productivity

Q. Is it a matter of a long-standing relationship?

A. Its also strategic. If were going to continue to press for productivity improvements, technology plays a critical role in that. You need to have a CIO who is a businessperson and has a say in business process change. And I definitely wanted the rest of our team to know that our CIO was going to be one of most senior executives.

Q. How involved do you get in the decision on what system to buy or put in place?

A. I dont know that Im going to get involved in a lot of technological decisions, per se. Tom is our subject-matter expert. Certainly, I keep abreast of our major technological efforts and when were going to get them, and how much theyre going to cost.

Q. How do you look for technology to fulfill business objectives?

A. Well, it really spans every area of the company. The challenge that we have for every employee and every work group is to be the best in the airline industry. Have the best time performance, have the best customer service satisfaction rankings, have the lowest cost, consistently offer the best fares, have the best information to make decisions. So were looking for all those things from technology. And, of course, it has to be delivered in a cost-effective way.

Technology is one of those areas where you can spend yourself wildly out of control. Fortunately, weve actually flatlined our technology spending. The cash spend for 03, 04 and now 05 is hovering around about $170 million [per year] or less. Thats total capital and people costs. And the number of people in our technology department also is not growing.

Q. Whats changed?

A. A decade ago, we were woefully under-resourced and had more construction projects than could be effectively managed. So now we try to be much more disciplined about it. This is how much were going to spend, this is our multiyear work plan, were going to give you what we promise, on time.

Its not perfect, though. For example, ATA Airlines declared bankruptcy in October and put its Midway [Airport] operation up for sale. We wanted to continue to grow in Chicago, which we have been undertaking for 20 years. So what did that translate into? A need to code-share with ATA, the first time we had ever done that, and there was no technology in place to do the code-share. But from a dead start at about Thanksgiving, that technology was in place on Jan. 16 for the first day of sale. That was something we couldnt have done in the past.

Q. Youre trying to apply the Southwest way of running an airline to the way you develop code. How so?

A. Rather than have one flavor of every different airplane type, we have one. The 737. Were trying to do the same thing in technology. We have a way of constructing the software that all our developers use. We have a single data architecture. We have a standard testing approaches, where we will rarely allow shortcuts. Its not quite as crisp as the airplane approach, because we have three decades of other stuff that were still supporting, but weve certainly become a lot more disciplined in our choice of technologies .

Q. How do you get what you want out of technology?

A. I try to shepherd the process, but not dictate to our officers what choices to make. I just demand that their decisions are well thought-out, and that there is a business case for the true choices.

Next page: Keep Managers Focused

Keep Managers Focused

Q. How do you manage the process?

A. First of all, our executives are close to the projects. They know what theyre doing, but they also know why theyre doing it. And there are frequent updates from the people doing the work and the business leaders, as well as Tom Nealon and his team.

Q. What kind of "cockpit" do you have? And talk about the importance of Tuesdays.

A. We have a scorecard with all the major projects. We try to group them in terms of broad initiatives, and then we try to track the benefits that should flow back from these investments.

Weve designated Tuesday as our day to manage ourselves. One Tuesday, well focus on customer operations. The next Tuesday will be more on aircraft operations, and then the next Tuesday could be on the back office or what we would call enterprise management. We actually bring in the entire executive team every other Tuesday, when we have more specific update sessions. These meetings are where I get my reports.

Q. So how do you track results?

A. We have a different approach to make sure the process changes are taking place once the technology is implemented, to make sure that indeed we are realizing the [gains] we were expecting. Were finding thats far more difficult. We can build the stuff, but now were trying to get better at [tracking] all the change that flows from there. Its just another element to be added to our management agenda.

Q. When will you do that? Wednesdays?

A. Wednesdays the technology group [already] has what they call "toll gates." This is basically a five-step process, where you get approval, you design, you build, you test, you deploy. In the toll-gate [system], the programming staff cant proceed from one step to the next until everything is trued up. So if customers are lagging in defining the requirements for the design stage, you cant begin construction.

Q. How are you planning to get a better sense of who your customers are? How will you keep track of all flights a person takes with Southwest, and what that person wants?

A. Heading toward 80 million boardings a year, theres a lot in there to know and manage. So, yeah, were pursuing customer relationship management techniques, and weve got applications to get insight on our customers wants and dislikes. In the end, were simply trying to improve their airport experience and their in-flight experience. Thats our two primary focus areas.

Q. How, for instance, does information technology helps you solve the "fat passenger/two tickets" problem-and avoid possible customer antagonism? Shouldnt you be able to know every time an overweight person wants to get on a plane and allow for it ahead of time?

A. Thats a wonderful example. If you know your customer and you have exactly the information you need, its just customers with special needs [youre dealing with]. Everyone wants to travel on time. But well be better prepared to have an on-time departure and, therefore, arrival if we know we have, say, 15 wheelchair needs on a given flight. So, improving the information and putting it in a form that helps make for fast, accurate decisions absolutely will improve customer service.

Q. How does I.T. play a role in your "10-minute turn" of airplanes at airports?

A. It plays a big role. In terms of specific planning for a turn, having all the right information helps us achieve a lot of efficiencies. Its a big priority for us, to make better decisions. One of the things you have to do with an inbound flight is make sure you can handle the 12 wheelchairs or what-have-you, and marshal the right resources to move out again.

Q. Youre considering reserved seating, a sea change for Southwest. Why? What systems will you need to support that?

A. From a technology perspective, we want to be prepared for assigned seats if we are ready to make that choice. All the infrastructure would need to be in place. We want to be sure that if someone went to a kiosk, they could get their seat assignment. Its not rocket science.

Rocket Fuel