In order for companies to maximize profits and productivity, it is important that they implement managerial economics on both a day-to-day and strategic basis. This paper will compare and contrast Southwest and Continental Airlines from a managerial economic perspective. The goal of the paper is to critically analyze both companies on their use of managerial economic practices. The Airline industry is a capitally intensive industry, and because of this companies within the Airline industry focus greatly upon cost, as well as revenue generation.
If costs increase beyond control, profitability will soon decrease. Southwest were quick to learn that if they were going to run their company in a profitable manner they had to first establish their market, and then make every effort to keep costs low. In the early 1970’s soon after their inception, Southwest established the ten-minute turn. This was the ability to unload and reload passengers, refill the plane with gasoline, and make all the necessary checks, all within a ten-minute window. They had to keep their planes in the air as much as possible, because of their low price, high frequency market niche.
Part of the great strength they’ve had, is that they have consistently followed a pattern of keeping costs low in every place they have gone. ” (Freiberg, 1996, p35) Continental also looked to keep costs low. In 1994, Continental was renowned as a cost cutting airline. “We were stuck in our mold of being a cost cutting airline, and if you weren’t talking about cutting costs, nobody at the top wanted to hear you” (Bethune, 1998, p10) The problem Continental experienced were that they cut costs to such an extent that it became the culture of the company.
When Gordon Bethune became CEO in 1994, he looked at cost from a different perspective. “One of my key questions in any decision is not only what does it cost to do something, but what does it cost not to do something? ” Continental had to begin to look at costs from every angle, not just purely from a monetary cost perspective, but what decisions would benefit the company in the long-term, 1994 was the beginning of a company turnaround. Cost Effective Hiring; Determining Potential Productivity Southwest put a lot of time and effort into their hiring process.
Southwest and outsiders considers them to be one of the best companies to work for in the United States. For this reason Southwest implement procedures to ensure they receive the best possible skilled workers. This is not to say that Southwest only employ academic high flyers, but they have become a company known for operating outside the box. Potential employees have to have a sense of fun, and entrepreneurial attitude. “Southwest has tailored the general principles of targeted selection to hire people with a special kind of spirit. (Freiburg, 1996, p67) It could be said that Southwest employ what other companies consider “risky workers. ”
Southwest look upon so called “risky workers”, as employees who have the ability and potential to take the company to the next level. Southwest allow their employees freedom and empowerment to make decisions that would otherwise be held for upper management, If employees have to side step the rules to make on the spot decisions, they are encouraged to use their own intelligence and impetus to benefit all involved.
Southwest also implement an important screening process. They look towards attitude as well as technical skills. “By hiring the right attitude, the company is able to foster the Southwest Spirit, the quality that makes employees go that extra mile if required” (Freiburg, 1996, p69) By implementing their unique screening costs, Southwest are able to boast results of having one of the lowest turnover, and highest productivity rates in the industry, justifying their methods. Southwest implement their methods of recruiting, to positively bias their applicant pool. We probably have 25 applicants for every job that’s available at Southwest. ” (Kelleher, 2003)
A key to Southwest’s success in their screening and hiring process is to maintain a budget for training programs throughout the organization. Once an employee has been hired, it is vitally important for the company to invest in human capital be able to increase the productivity and motivation of that employee. In the recession that took place during the time after 2001, a number of companies cut their training and advertising budgets.
Southwest on the other hand maintained their training as they continued to look long-term. “We actually increased our training budget during that time,” says Rita Bailey, former director of the University for People training program. “It’s our crown jewel, a place to come and feel inspired. I’d put the programs we developed against any others out there. ” (Taylor, 2003) Continental struggled with their company in the early 1990’s, employee turnover was high, and bureaucracy filled every level of the organization, stifling progress.
When Bethune took hold of the reigns, one of his objectives was to make significant changes to the way employees were seen in regards to empowerment within the organization. Their employee manual left no room for flexibility, so that was cast aside. Continental started to train their employees in a similar mold to Southwest. Employees now had more freedom to see incidents in a different light, and deal with them accordingly. ”
A passenger with an unusual situation was a dangerous character to be avoided, not a challenge to be resolved. (Bethune, 1998, p109) Self-Selection and the Workforce Southwest and Continental both require credentials, and signal to potential employees about what they require in that particular position. Differing job opportunities require varying prerequisites depending on the position. Southwest have varying wage structures and initiate probationary, or first year wages, often with increases in the second year. Requirements for the job include; ability to lift certain weight, to have a certain waist size, and other requirements the company deems necessary.
Both Southwest and Continental have an overwhelming number of applicants for jobs with their company; this is why signaling, probationary periods, and credentials become extremely important for maintaining a profitable, productive workforce. Motivating the Workforce Having a motivated and productive workforce is an extremely important part of running a successful business. When Gordon Bethune took over as CEO of Continental Airlines in 1994, employee motivation was at an all time low. In 1995, during Continentals worst days of their financial crisis they posted their 10th consecutive year of losses.
Continental employees actually removed the insignia from their uniforms to avoid being asked uncomfortable questions when off duty” (Bethune, 1998, p6) In years where the company posted losses, company executives were in the habit of union busting, so employees were paid far below industry average. Their reward for this was regular lay-offs, wage reductions, and broken promises on wage snapbacks and profit sharing. Bethune was able to turn Continental around in a matter of a few short years. Between 1995 and 1997, wages increased by an average of 25%, sick leave went down an average of 29%, and turnover decreased 45%.
Continental made a concerted effort to motivate the workforce to produce a better product; they have managed to achieve this through hard work and sacrifice and are now more successful because of it. Southwest is a company forged by the success of all members of the organization. Southwest have always valued the importance of their employees, and because of this have made every effort to keep employee motivation as high as possible, even through difficult circumstance. Southwest invite employees to enter into profit sharing plans, a way to increase motivation.
They think that if you are an owner, you will think like an owner, and most importantly, act like an owner. Because of this, the organization will benefit. They implement schemes such as the “walk a mile in my shoes program” to allow employees to gain perspective into the way the company runs in different areas or departments. An example of this would be pilots doing the job of the turnaround crew to appreciate what they contribute. “Employees at Southwest exhibit a tremendous sense of ownership for the success of the business, because they truly believe that what they are doing makes a difference” (Freiburg, 1996, p105)
Layoffs and Buyouts By 1996, Continental had managed to turn their company around. They had managed to generate profits for a company that hadn’t made a profit in ten years prior to 1994. Because of this, their employee turnover had been reduced 45 percent since 1994. Unfortunately for Continental to become successful between 1994 and 1996, it was crucial that they reduced service to cities that proved to be unprofitable. Employee lay-offs were inevitable, their maintenance facility in Los Angeles had to be closed, and outsourcing had become a more profitable option.
Because of this Continental had to let go of close to 1800 jobs. Continental Airlines did attempt to save as many jobs as they could, but during their restructuring stage, all could not be saved. “We did everything we could to move employees to other Continental locations or help them find work at other locations” (Bethune, 1998, p91) In the time after the 2001 terror attacks, Continental had to lay-off 20% of their 12,000 strong workforce, although they attempted to avert 1,000 of those lay-offs by offering a buyout plan. (Sweat, 2001)
Southwest pride themselves in having an extremely low turnover and no furloughs of employees. Southwest has one of the lowest employee turnover rates in the Airline industry, around 6. 4% per year. Southwest also makes a point to not lay-off their employees. Kelleher, Chairman of Southwest states “It would never enter our minds, if you focus on the long-term, the well-being of your business and its people, you won’t do it. ” (Freiburg, 1996, p7) In troubled times, growth strategies were scotched, new plane deliveries were delayed, the renovations at headquarters were scrapped.
But with $1 billion in cash and no debt, layoffs never had to be considered. Former CEO James F. Parker: “We are willing to suffer some damage, even to our stock price, to protect the jobs of our people. “‘ (Conlin, 2001) Southwest is yet to lay-off an employee in their 34-year history. Human Capital and On the Job Training Investing in human capital is a necessity in today’s business world. Southwest insists on investing on human capital throughout their organization. They offer employees the ability to increase their knowledge of the organization through programs such as the “walk a mile in my shoes program.
This allows employees of one department to work in other areas of the company to increase their understanding of the overall organization. Southwest’s employees become involved in specific training in their respective positions so they can perform their job to maximum potential. Southwest believes in employees being their biggest resource, therefore investing in human capital becomes necessary for growth. In the change in Continental’s strategy in the mid 1990’s they realized that investing in their employees had now become even more crucial to success.
In 1994, the company had offered 48 training courses, with an anemic attendance of 200 people. In 1996, after executives trimmed the courses down to seven, all under the core competencies, 5,000 people attended. (Flynn, 1997) Continental also introduced programs to increase employee moral. The first to let employees know executives were willing to push up their sleeves for the change process, as well as to enforce the idea that all employees must work together. Because of this, the first Go Forward Day was held in 1995.
On Memorial Day, one of the carrier’s biggest business days, the corporate offices closed, and 600 of 1,000 corporate office employees worked at the airports. The field services and flight operations teams supplied these upper-level people with a half-day of training beforehand, so when they were put to work, serving drinks, lifting bags and helping passengers. The practice was so wildly popular with employees and customers; the company now does it every holiday. (Flynn, 1997) Productivity of Employees Southwest has been a company renowned for high productivity of its employees.
It has ranked the highest in the airline industry with a five-year average of twenty-four hundred customers served per employee. The company serves almost double the amount of customers than any other airline. They also get more productivity out of their planes. This is why customer service ranks so highly on Southwest priorities. Continental has also made steps to increase the productivity of their employees. From the slump of the mid 1990’s, they have made concerted efforts to involve their employees in the day-to-day operations to increase productivity.
The key to Continental’s turnaround: Communicate, communicate, communicate! Employees don’t just read about the company’s profitable earnings. Now, thanks to a complete 180-degree turn in communication, employees read, hear, watch, debate and question just about everything that goes on in their company. Every single workday, employees can peruse the one-page daily company newsletter for updates on the previous day’s performance in baggage handling, on-time performance and complaints, for news on company doings and a listing of how the company’s stock performed the day before. Flynn, 1997) Bethune wanted to ensure that while the company was moving in the right direction, employees had full knowledge of daily events, something that had not happened in the past. “They could go to their daily update from corporate headquarters, they could go to my weekly voice-mail messages, they had other internal resources to turn to for information. ” (Bethune, 1998, p199) Payment Structures and Work Incentives Both output and input based pay are implemented within the airline industry depending on the position of the employee.
Positions such as flight attendants are paid on an output based pay structure. Flight attendants receive a salary structure based upon number of flights they take. They are paid a probationary amount for the first six months, which increases over time. As they are paid by flight, their output can be monitored. Positions such as middle managers are paid on input based salary, as their output is more difficult to measure than that of a flight attendant. The goal of both Southwest and Continental is to continually assess compensation, so employees remain as productive as possible.
Monetary Benefits Southwest and Continental have structured their compensation to include more benefits than purely a straight salary. One of the special benefits of working at Southwest and Continental is flying free. Effective the first day of employment, Employees, spouses, eligible dependent children, and parents of Employees have unlimited space-available travel privileges. Discounted travel arrangements with other carriers are also available, subject to eligibility requirements and other restrictions. Participation in the profit sharing plan is offered to all eligible employees.
The plan is funded by company contributions to profit sharing accounts. Company contributions are made when the company meets profitability goals set each year. The 401(k) Plan is designed to help Employees to prepare for the future. Eligible Employees may contribute up to 50% of their pay to the plan on a pretax basis. A company match is offered based on employee groups. Rollovers are accepted from the employee’s former employer’s qualified plan. (www. continental. com) The stock purchase plan was specially designed to allow employees to share in the success of the company.
Through the plan, employees may invest in Southwest and Continental Airlines stock through payroll deductions. Employees pay only 90% of market value for the stock. The company pays broker commissions on stock purchases. Employees are also given the benefit of medical, dental, vision, and life insurance coverage. (www. southwest. com) Non-Monetary Benefits Potential employees will look at monetary benefits when applying for a job, but it is often the non-monetary, or hedonic benefits that make the job fun for the employee in order for them to come back week after week, year after year.
Southwest make a habit out of celebrating their success. If they feel they deserve a celebration that is exactly what they will do. Celebrating anniversaries, holding large Christmas parties, chilli cook offs, Halloween parties, and spontaneous parties have made Southwest famous. The culture at Southwest has become something to be envied, and is something other companies strive for. Even as the company rows in size, it makes every effort to maintain that culture that put the company on the map 34 years ago. Continental on the other hand is beginning to build a culture that makes employees proud of being a part of.
As Continental has improved its relationships with its employees over the past decade, they have now become a Fortune 100 top company to work for; the company is moving in the right direction. Conclusion From reading both Nuts and From Worst to First, it became obvious that both Southwest and Continental use managerial economics to improve the value of their organization. From a strategic planning level down to the everyday operations of the firm ensuring correct implementation of managerial economic practices has allowed both organizations to grow and succeed.
Continental have had their fair share of difficult times, but through the introduction of the right man for the job CEO Gordon Bethune, the company has managed to turn in the right direction. Southwest, built on a solid foundation, have developed into a well-managed company that continues to move forward into the future. My main criticism of the Southwest book, was that is was written from an extremely optimistic viewpoint, the authors obviously being big fans of Southwest.
The book was not shy in retelling the many successful ventures of Southwest, but held back on the many problems they have encountered in their history. From Worst to First on the other hand gave information from a negative and positive perspective, although as Gordon Bethune wrote the book, we also might assume some level of bias. Both books were an extremely useful learning tool, a refreshing change from many dry textbooks. They demonstrate that there is no one-way to run a company, even within the same industry, Southwest and Continental being examples.