Southwest and Continental Airlines: A Managerial Economic Perspective

Southwest and Continental Airlines: A Managerial Economic Perspective

Introduction

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