How Culture Creates Competitive Advantage

When Southwest Airlines (SWA) began operations in 1971, it had three airplanes and a route structure that included just three cities in Texas. It was not much more than an idea that Herb Kelleher drew up on a cocktail napkin at the Saint Anthony Hotel in San Antonio, Texas. Today, Southwest is an international carrier with 700 airplanes approaching $20 billion in annual revenues and topping $1 billion in net income. From the beginning, the company built its competitive advantage around a simple, efficient operating model and a culture unique to air travel.

The most astonishing factoid about Southwest is that it has not had a single layoff in its 44 years—a stunning accomplishment in an industry that leads the economy in bankruptcies, re-organizations, mergers and companies that have disappeared. Think Eastern and Pan Am.

“SWA is known for its policy of hiring for attitude and training for skill, but what keeps the culture machine humming is the careful leadership and management of it.”

Consider also another astonishing factoid. Southwest gets a lot of resumés from people who want to work there. Last year, it received 178,299. Gary Kelly, the company’s CEO who has been with the airline for 29 years, 15 of them as CFO, says, “We pay about the same for our airplanes and pay about the same for gas. That doesn’t leave a whole lot of cost left. So we have to be more productive with the workforce, which is about a third of any airline’s cost structure.”

SWA is known for its policy of hiring for attitude and training for skill, but what keeps the culture machine humming is the careful leadership and management of it. In the beginning, this effort was led by Colleen Barrett, who passed the baton on to SVP for Culture & Communications Ginger Hardage. After Hardage retired, Linda Rutherford took on the role. The position reports directly to the CEO and the person in it oversees the culture throughout the company. “I don’t know how to fly an airplane,” Kelly explains. “I can’t change the oil in an engine. Even some of the customer service things, I would have to be trained on. So it’s really a team effort.”

It’s not rocket science. Storytelling is part of the culture that binds people to a purpose. A Dayton, Ohio customer agent offered to take a customer’s pet hamster to the agent’s home for a month while the customer visited a sick mother in another city. A five-year-old boy waving enthusiastically at an SWA plane taxiing along a tarmac got a thrill when the pilot opened his window and waved back. The boy’s mother captured the incident on camera and sent it to the company in appreciation.

Dining in a Dallas restaurant one evening, Gary Kelly and his wife were astonished when a waiter came to their table to say that two SWA pilots also at the restaurant had recognized the couple and anonymously paid their bill. They also sent a note of appreciation—written on a cocktail napkin a lá Herb Kelleher.

Any company can create a competitive advantage from its culture by instilling processes designed to keep it going. At Chief Executive’s CEO Talent Summit in Dallas, J.P. Donlon spoke with Gary Kelly to learn how SWA does it.

Q: Explain how your talent strategy aligns with your business strategy.
GARY KELLY: I’m very proud of the fact that we’ve never had a layoff. When I started in the ’80s, we had 5,000 employees. We’ve obviously grown significantly since then. So it’s not just a lack of layoffs. We offer great jobs that pay well and have a terrific healthcare program, a wonderful retirement plan and flight privileges that our employees really enjoy. It is a great experience.

But it’s never just one thing. It’s a combination of many things that helps make us successful. We have a decades-long reputation of being a great place to work that attracts people to want to join the Southwest family. We’re probably the only company in 2009 during the depths of the recession that didn’t have a layoff. And, of course, the other remarkable thing about the company is that we’re an airline, an industry notorious for failures and bankruptcies. In fact, every major airline that existed when I first started in the 1980s is gone.

“We have a passion for what we do and we look for people that share that passion.”

Q: They’re either gone entirely or were recreated through bankruptcy. It’s quite an indictment of the industry. Conversely, it illustrates what the risks are. For us, we focus on our people and we’ve held true to that over the last 30 years. If you take great care of your people, they’re going to take care of the customers and that should take care of everything else. What do you seek in people? Obviously when hiring pilots or maintenance there are technical skills, but what are the other criteria and how do you know how to get it?
GK: We have a passion for what we do and we look for people that share that passion. Our mantra is, we hire for attitude and we train for skill. Since our early days we seek people who don’t just have the skill, but also have the passion and the attitude to take care of each other and to take great care of our customers. We work hard to identify that. Many people want to be a part of a team like this. But many times we’ll have employees that say, “You know what? This just isn’t for me and it’s not the right fit.”

Q: What screens do you use to confirm that the people you hire have the right stuff as far as SWA is concerned?
GK: It’s probably more art than science, but every person who gets hired has to go through our people department. We have a process. We don’t use a personality test, but we talk to people, and we look for signs. For example, we look for people who are humble and have a great sense of humor. You can ask the right questions to figure out if somebody really is going to be a good fit. If someone comes in and is rude to the receptionist, that’s not for us. We look for good-hearted people who want to work hard and serve others.

Q: The company has grown from 5,000 people to 47,000. How do you maintain standards and the culture when you’re many times your initial size?
GK: If you’re going to have a team, you’ve got to invest the time to create the relationships. The bigger the company gets, the more effort it takes. We use a variety of techniques to do that. Right near my office is a group called Internal Customer Care that keeps track of important things happening in our employees’ lives. It could be marriages, births or sad things that are happening. It alerts us to reach out and do the appropriate thing. I get a pile of thank you notes and in turn I send out thank you notes. It’s creates a very human connection. It’s basic, but very meaningful. That’s why we put the heart symbol in our logo. We’re not the American Heart Association, but our employees believe in the heart and when we deviate from living by the golden rule, people call each other on that. It makes for a very powerful culture.

Q: When I spoke to you on the telephone a few weeks ago, you were writing notes to various employees. That must take a lot of time out of your busy life
GK: But that’s what families do. Families share stories. Families have a history. Families like to come together. And families write notes. And they share joys and share sorrows. That’s just what we feel like we have here at Southwest.

Q: Southwest’s competitive model has been fairly well established since its inception. Why haven’t other startups or other airlines disrupted you?
GK: The last 15 years have been really interesting. The world has changed a lot and in that period, we have more low-fare, low-cost competition than ever before. Most have difficulty matching the total package. Southwest offers great service and low cost which is an unbeatable combination.

If you have one or the other, you might win. If you don’t have either, you’re probably going to lose. We work hard to have both. We have more competition today. Nobody has a single aircraft tight focus like we do. Nobody operates on a point-to-point basis. Nobody has the heart, as well the attention to low cost. So it makes us unique and again that’s a great competitive advantage for us.

J.P. Donlon :J.P. Donlon is Editor Emeritus of Chief Executive magazine.