Air-Traffic Delays. Increased air-traffic control delays caused by higher travel demand and related airport congestion were expected to negatively influ- ence customer satisfaction. 5. Environmental Regulation. Following actions in Europe, various U.S. groups were advocating new standards and taxes on airline emissions. 6. Open Skies Agreement. Legislation allowing greater access to U.S. markets by non-U.S. carriers was expected to increase competitive pressure. Establishing a major hub in a city like Chicago or Atlanta required a huge investment for gate acquisition and terminal construction. JetBlue’s new facility at JFK in New York opened in 2009 and cost about $800 million. Although hubs created inconveniences for travelers, hub systems were an efficient means of distributing services across a wide network. The major airlines were very protective of their so-called “fortress” hubs and used the hubs to control various local markets. For example, Northwest (now Delta) handled about 80% of Detroit’s passengers and occupied nearly the entire new Detroit terminal that opened in 2002. And, Northwest’s deal with the local government assured that it would be the only airline that could have a hub in Detroit. When Southwest entered the Detroit market, the only available gates were already leased by Northwest. Northwest sub- leased gates to Southwest at rates 18 times higher than Northwest’s costs. Southwest eventually withdrew from Detroit, and then re-entered, one of only three markets Southwest had abandoned in its history (Denver and Beaumont, Texas, were the other two; Southwest re- entered Denver in 2006). Recent U.S. Airline Industry Performance Despite steadily growing customer demand, the airline industry always seemed to be one recession away from crisis. In 2013, the major airlines were on track to be profitable, a marked contrast to the heavy losses of just a few years earlier (with the exception of Southwest). The continuing consolidation in the industry was expected to lead to lower operating costs and higher ticket prices. After the September 11, 2001, terrorist attacks, domestic airlines lost about $30 billion. The continuing specter of terrorism cast a long shadow on the global airline industry. In the United States, passengers were frustrated by increasingly more-invasive security pro- cedures. Volatile fuel costs were a constant uncertainty, and new entrants continued to put pressure on the incumbents. Other pressures on the industry included: 1. Customer Dissatisfaction with Airline Service. Service problems were leading to calls for new regu- lation of airline competitive practices. 2. Aircraft Safety Maintenance. The ageing of the gen- eral aircraft population meant higher maintenance costs and eventual aircraft replacement. The introduc- tion of stricter government regulations for older planes placed new burdens on operators of older aircraft. 3. Debt Servicing. The airline industry’s debt load exceeded U.S. industry averages. Southwest Airlines Background In 1966, Herb Kelleher was practicing law in San Antonio when a client named Rollin King proposed starting a short-haul airline similar to California-based Pacific Southwest Airlines. The airline would fly the Golden Triangle of Houston, Dallas, and San Antonio and, by staying within Texas, avoid federal regulations. Kelleher and King incorporated a company, raised initial cap- ital, and filed for regulatory approval from the Texas Aeronautics Commission. Unfortunately, the other xas-based airlines, namely Braniff, Contin and Trans Texas (later called Texas International), opposed the idea and waged a battle to prohibit Southwest from flying. Kelleher argued the company’s case before the Texas Supreme Court, which ruled in Southwest’s favor. The U.S. Supreme Court refused to hear an appeal filed by the other airlines. In late 1970, it looked as if the com- pany could begin flying. Southwest began building a management team, and the purchase of three surplus Boeing 737s was negoti- ated. Meanwhile, Braniff and Texas International con- tinued their efforts to prevent Southwest from flying. The underwriters of Southwest’s initial public stock offering withdrew and a restraining order against the company was obtained two days before its scheduled inaugural flight. Kelleher again argued his company’s case before the Texas Supreme Court, which ruled in Southwest’s favor a second time, lifting the restraining order. Southwest Airlines began flying the next day, June 18, 1971.” When Southwest began flying to three Texas cities, the firm had three aircraft and 25 employees. Initial flights were out of Dallas’ older Love Field airport and Houston’s Hobby Airport, both of which were closer to downtown than the major international airports. Flamboyant from the beginning, original flights were staffed by flight attendants in hot pants. By 1996, the flight attendant uniform had evolved to khakis and polo shirts. The Luv theme was a staple of the airline from Table 1 Southwest Across the Years 1971 1999 2007 2012 Size of Fleet (End of Year) 4 306 515 Number of Employees 195 29,005 34,378 Number of Passengers Carried 108,554 52,600,000 101,947,800 Number of Cities Served 3 55 64 Number of Trips Flown 6,051 602,578 1,160,699 Total Operating Revenues (Millions $) 2.33 4,736 7,369 Net Income (Millions $) -3.8 433 645 Sources: Company press releases and Southwest Airlines Fact Sheet at http://www.southwest.com/about_swa/press/factsheet.html. 694 46,000 109,000,00 97 >1,284,800 17,100 421 designed to increase revenue by (a) bringing in new customers, including new Rapid Rewards members, as well as new holders of Southwest’s co-branded Chase Visa credit card; (b) increasing business from existing customers; and (c) strengthening Rapid Rewards hotel, rental car, credit card, and retail partnerships. Recent Service Changes In 2007, Southwest made various changes to its service offerings, including Three new fare categories, including higher-tier fares for business travelers. New boarding processes; for example, travelers could pay extra to board first. Allowing customers with high status in the frequent flier program to board first. Increased emphasis on corporate sales. Promoted the “two-bags-fly-free campaign” aggres- sively. The rationale for the 2007 changes was explained by CEO Gary Kelly: We’ve always been a business traveler’s airline. At the same time, over 37 years we hadn’t done much to try to cus- tomize the travel experience for the varieties of customer needs that we had. It was one-size-fits-all, and in today’s competitive environment we felt that was not the best way to remain on top. We had the desire to improve our overall customer experience for the business traveler. In 2011, Southwest launched its new Rapid Rewards fre- quent flyer program. Under the new program, members earned points for every dollar spent, whereas under the prior program customers earned credits for flight segments flown. The new frequent flyer program was Table 2 Operating Data Southwest’s Performance Southwest bucked the airline industry trend by earn- ing a profit for 40 consecutive years. Among the major airlines, Southwest consistently ranked first in fewest over- all customer complaints as published in the Department of Transportation’s Air Travel Consumer Report. For example, in December 2012, there were 18 complaints reported against Southwest and 140 against United. In Zagat’s 2010 airline survey, Southwest won awards for top website; best consumer on-time estimates-domestic; best check-in experience; best value-domestic; and best luggage policy-domestic. The average Southwest flight had a duration of about one hour and 55 minutes and a length of 694 miles. This was up from 462 miles in 1999 and 394 in 1996. Each plane flew about seven flights daily, almost twice the industry average. Planes were used an average of 13 hours a day, about 40% more than major carriers like Delta and United. Table 2 shows that Southwest’s cost per available seat mile was lower than the legacy Alaska Southwest American Delta JetBlue United US Airways 86.6% 80.4% 84.1% 85.796 84.3% 85.1% 14.52 14.18 16.79 11.34 17.07 Load Factor Operating cost per ASM (cents) Revenue per ASM (cents) On-time departure rank On-time arrival rank 16.71 18.22 85.7% 17.79 18.89 16.49 14.82 16.30 12.45 17.26 #2 #11 #14 #5 #13 15 #3 #2 #8 #15 #4 #12 14 #5 Calculated by dividing operating revenue by available seat miles. Source: U.S. Department of Transportation (US DOT).

Developing and altering organizational charts is an important skill for strategists to possess. This exercise can improve your skill in altering an organization’s hierarchical structure in response to new strategies being formed. Instructions Step 1 Develop an organizational chart for Nestlé. On a separate sheet of paper, answer the following questions: • What type of organizational chart have you illustrated for Nestlé? • What improvements would you recommend for the Nestlé organizational chart? Give your reasoning for each suggestion. Step 2 Now consider the following: • What aspects of your Nestlé chart do you especially like? • What type of organizational chart do you believe would best suit Nestlé? Why?