CEO Herb Kelleher knew the company was in trouble when his sister-in-law raved that she had received magnificent service on a Southwest flight. He asked how many people were aboard? Two pilots, three flight attendants…and herself. After 18 months of operation, they had lost more than $5 million.

A major turning point came when Southwest abandoned its service to Houston’s new Intercontinental Airport, and moved to older Hobby Airport, which was closer to the city’s downtown. Overnight, the passenger load doubled.

Why does your company exist? What customer segment can you best serve? Southwest exists to make a profit, achieve job security, and make flying affordable for more people. The company’s executives decided that the strategy for achieving this would be to provide the best service and lowest fares to the short-distance, frequent-flying, point-to-point traveler.

What is your competitive advantage? Where can you add more value than anyone else? A typical 737 in the Southwest fleet is used 11.5 hours per day, compared with the average of 8.6 hours for other carriers. The airline focuses on opening markets that are overpriced because it is confident it can bring fares down by at least 33 to 50 percent.

Dramatically lower fares, and superior service, created a tremendous amount of new business by converting people who previously could not afford to fly into regular passengers. Southwest also developed peak and off-peak pricing.

Companies must know who their customers are and what they really want. With airlines, business customers are time-sensitive, and willing to pay higher fares for flights during business hours. Leisure customers are price-sensitive, and willing to fly at non-peak hours in exchange for lower fares.

Southwest, the countries most profitable airline, remains obsessed with keeping costs low to maximize its profitability, rather than increasing counterproductive costs in order to increase its market share. Many firms have made critical mistakes by confusing the two concepts. Market share is about becoming bigger, not necessarily about making money.

Organizations may do well by breaking some conventional rules. Southwest refuses to diversify its operating standards. The company flies only one type of aircraft, the Boeing 737. This improves the bottom line in several ways. Training is simplified, because all pilots, flight attendants, and mechanics are qualified on every plane in the fleet.

Southwest keeps it simple. Travel agents have to phone Southwest’s reservation offices, instead of having direct access through a computer. The $2 that is saved per traveler adds up to millions of dollars each year. They save money by serving peanuts and using the food gallery space for additional seats.

Southwest turns speed into an advantage. Its average turnaround time is half the industry average and has the best on-time performance in airline history. Southwest uses 35 fewer planes than an airline with average turnaround time. Considering that a new 737 costs $28 million, their capital savings approaches $1 billion.

Companies should manage the good times so they can to well in bad times. Southwest expands into only one or two cities each year, so that it can devote enough time to creating Southwest’s unique culture in each location.

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