When It Is Time For More Business Innovation
Posted on Mon, Jan 02, 2012
A frequently cited example of how innovation led to exceptional business success is the case of Southwest Airlines (SWA). Years ago, I had the pleasure of meeting Mr. Rollin King, co-founder of Southwest Airlines, when he and other speakers like myself were making presentations at a corporate seminar. (After retiring from the company in 1988, King formed his own corporate education company.) I recall his telling the seminar participants that the original idea for their innovative “low-cost” airline approach was sketched out on the back of a cocktail napkin. Thanks to the wonders of the Internet, I think I found a reasonable representation of that original drawing.
SWA started back in 1967 with the idea that an airline could make money simply by providing point-to point, short haul flights within a triangle of Dallas, Houston and San Antonio. It has since expanded the concept over the years and now flies to 72 cities in 37 states in the US. 
Several weeks ago, when I participated in a corporate training program for SWA, I learned that the company was planning to expand its service to Hawaii. To do this, it announced that it was going to purchase Boeing 737-800 planes that could make the longer trips to Hawaii and also to spend more on training the pilots for these longer over the water flights. Does the planned expansion to Hawaii signify a change in direction of its “low cost” business operations model? Why does it feel it needs to fly to Hawaii?
Here’s my take on this. The heart of the SWA strategy is to keep costs down by avoiding the “hub and spoke” system of the major airlines (which SWA people call “legacy airlines.”) This reduces the time spent on the ground for planes, while waiting for passengers of connecting flights. This also enables economies of scale to keep the costs of maintenance down (with only one type of plane, the Boeing 737, inventory and training costs are reduced). But higher fuel costs are making it harder for all the airlines (both low-cost and “legacy”) to make money. Furthermore, relatively more fuel is used during take-off and so this especially hurts SWA and its short-haul, point-to-point system.
To top this off, I was surprised to learn that on average SWA’s pilots are the highest paid in the passenger airline industry (pilots for UPS and FedEx on the average have higher salaries). For one thing, they work longer hours than their counterparts in the legacy airlines. For another, the financial pressures that legacy airlines such as Delta and United Continental have experienced in the past have led to agreements with the pilots’ unions for salary caps or reductions. In addition, SWA tends to higher more experienced pilots who then start off at SWA at higher levels than the newly entering pilots in other airlines. It’s pretty hard to run a low-cost airlines with rising fuel costs and pilots’ pay. I have to believe that SWA believes that expanding its routing to such popular leisure travel destinations as Hawaii will boost its profit margin. Maybe SWA feels it is time for more business innovation. We discuss the process of developing innovation for businesses in “Business Innovation: The Art of Creative Thinking." Happy New Year and since I'm originally from Hawaii, I'll also say "Hau'oli Makahiki Hou!"