Walking into the Dallas headquarters of Southwest Airlines, a quote from founder Herb Kelleher greets you, etched in marble on the lobby wall. It’s a tribute to the employees of Southwest Airlines, who have “transformed an idea into a legend.” The words are not just there for show.
When I sit down with Tom Nealon, president of the $20 billion air carrier, and bring up the quote, he lights up like a Boeing 737 cockpit panel. “Our vision is to be the most loved, most flown, and most profitable airline,” he says. “That’s a pretty bodacious goal.”
The airline, notably, started flying from Dallas’ Love Field in 1971, and has “LUV” as its ticker symbol. But what exactly does “most loved” mean? Nealon explains that it’s about strong customer relationships and loyalty. “We’ve got to be innovators,” he says. “We are about hospitality, reliability, and efficiency.”
This is Nealon’s second stint at Southwest. He served as Senior Vice President and Chief Information Officer from 2002 to 2006, before leaving for JCPenney. He began consulting for Southwest again in 2010, and then formally rejoined the company as Executive Vice President of Strategy & Innovation in 2016, taking on the title of President last January. In this role, he’s still active in the company’s innovation activities, participating in monthly meetings the innovation team has with key executive stakeholders.
Southwest is the country’s biggest airline, with 55,000 employees serving 115 million passengers annually. It is also the US airline with the longest track record of continuous profitability: 44 years. We spoke with Nealon in his modest office overlooking Love Field in early December.
How does Southwest define innovation?
We think of innovation in terms of the whole customer experience. What are the pain points of the customer experience? What can we address? Where do we need to spend our time? Where do we need to spend the resources? We know experience starts with the inspiration to travel, booking, the whole airport check-in, the TSA, the gate experience, the whole concourse experience, boarding, right through in-flight and arrival.
We know where the pain points are for the customer, [and] we also know where the pain points are for our employees. We know what we need to work on and solve. So that’s how I think about innovation…It’s important that there’s some type of guiding framework. Southwest’s [looks like this]:
- How do you identify ideas?
- How do you turn those ideas into concepts that you actually want to pursue?
- Those concepts may make it to the next step, or may fall flat
- If it’s worth pursuing you [create] a fast prototype
- If we do well in the fast prototype, then you take it to pilot, scaling the product and beginning production
- If it does well, we take into production.
That’s the framework that exists now, and that’s how we prioritize and identify what we work on. [We have] a massive pipeline of ideas. I can promise you, they’re not emanating from just from the innovation team. They’re emanating from the organization.
How do you organize innovation activities?
[It’s] a little bit unique, and I like it a lot, because it’s not innovation by itself in a lab. First of all, it’s a small team. So by virtue of that, it’s very important that we’re working across the organization.
The innovation team is paired with the continuous improvement team, and it’s [also] paired with the data science team… So the convergence of those three things—continuous improvement, innovation, and data science—is a really powerful triad. I am not sure if our structure is unique, but I think it’s very intentional, and there’s real synergy and leverage having those three things together.
Does your reputation as a low-cost, no-frills carrier hinder innovation?
I don’t consider us to be a no-frills airline… I think the product is a very rich product. When you think about…first class, lie-flat sleeping seats, and that kind of thing—that’s not who we are.
I think by virtue of the fact that we carry 115 million passengers a year, we have to find ways to be innovative. If you’re a first-class passenger or a passenger flying on coach…the customer expects to have a good airport experience, a good digital experience, and an easy check-in process. I think the digital elements transcend class of service.
How does the innovation team interact with the rest of the company?
We have a standing team of senior executive staff [a sub-group of 12 of Southwest’s Senior Management Committee members] who are all around innovation, and we go over to the lab every month, and we’re going through what’s next on the list. Where are we on the pipeline for this one? …What are we going to do next? There’s a level of engagement—and these aren’t innovation people—these are senior executives, these are directors, these are station leaders. That’s the value of it. It’s not just an innovation team thing. It’s embraced.
What resistance are you encountering to innovation?
The answer is none. I think that if we were doing it within the closed society innovation thing, and were coming in and encroaching on ground operations and the marketing customer experience team, there’d be all kinds of resistance. But it’s such the opposite of that because they’re coming to the innovation team and saying, “Here are the ideas. Help us prioritize and see what else is in the hopper, and then let’s work together.” Honestly, I’m not saying that like this is La La Land, where everything is perfect. But honestly, we aren’t seeing a resistance to ideas. What we’re seeing is a push to do more, faster, which is why it’s really important to have a framework…because you can’t do everything, so you really have to have a system without stifling it. I want to keep the ideas percolating; I want to keep the concepts flowing, but at some point you do have to say, you can’t work on everything.
Last fall Southwest conducted a six-week test of “digital wayfinding,” a way to deliver more information to customers in the form of digital signage and an app at its Dallas Love Field airport. Tell us more about the test and how it was received?
The Dallas test was really just about what were the pain points for the customer. We mapped out the whole customer journey and we zeroed in on the day-of-travel experience. We wanted to know what could we solve. [And] we’re trying to speak in our voice, not sterile data; we’re trying to have fun with it.
[One] of the things that were most valuable from my perspective [was] de-planing. You’re getting off the plane and looking for your connection. You’ve noticed that there’s a sign as you’re getting off the plane. On that sign is not every flight…it was only the flights for people getting off the plane, so it was curated for just who’s on that plane. It tells them very clearly, “You’re at gate whatever and you have plenty of time,” or “better hustle up.”
There were all sorts of operational things like that—you had big gate signs, up on the columns. [It was] very clear, the font size and color-coding. So you can look down the terminal, if you’re a customer, and understand which gate is yours, what color is it. And it’s also pretty good if you’re a station leader or station employee, because you can look down and if flights are running behind, they’re red, so [you can see] where you need to deploy more resources quickly. So a station leader, shift leader, or supervisor can look down and say, “That concourse is looking pretty good right now,” or, “That concourse has two hot spots; better get some resources down there.” It was a clear visual cue.
The other one I liked a lot—it was fun was because our customers know us, but don’t really understand the operations. So we had a countdown clock. [It told customers that] the aircraft was in range; the aircraft is on the ground and taxiing; we’re cleaning the plane; we’re now deplaning; we’re getting ready to board. So people know what’s going on. I tell you it sounds kind of silly, but…if [customers] are more aware, they feel more in control. As opposed to “Where’s the plane? What’s going on?” We’re telling them, “This is what we’re doing.” That’s really calming.
Part of the digital sign test was also mobile. [An app called Air Way was tested by users recruited by the innovation team.] One of the elements put cameras at the gate area. What that allows you to do [is you] can go to Chili’s [Grill & Bar] or Starbucks and sit down and keep an eye on the gate from your phone. And when people start lining up, you’ll walk down. As opposed to just sitting at the gate area. Part of the reason that’s important is that it gives people more control and more understanding and…the gate holding areas are fine, but as you know not every gate holding area has 175 seats in it. It’s not that they don’t want to put seats in it, [but] airports have space constraints; it’s expensive real estate… By the way, it’s not bad for the airport concessions either. It’s a win-win for the concessions and the customers…
There were nine elements to this test. We’re not going to go with all nine elements, but each one was serving a purpose. We were testing the reaction to each of the elements. There were probably five or six we determined were having a real impact.
How does your outsider status help you in your position?
I like the fact that I’ve had exposure in different industries. I’ve been in consumer goods, I’ve been in retail, I’ve served financial services companies, and I’ve been in airlines. Very different industries, but if you think about what we do at Southwest…consumer goods, to a large extent is a big logistics game… We do a lot of logistics at Southwest. Retail has a pretty heavy e-commerce and merchandising element and digital marketing element, and that’s a healthy expertise and skillset to be able to bring in. Financial services is about high-volume transactions, digital, mobile capabilities. [At Southwest], we do all those things.
[Southwest] has many elements of financial services, in terms of the transaction intensity and workload intensity; it has a lot of the elements of an online digital e-comm player, and it has a lot of the elements of a big logistics company.
I think bringing those experiences has been really valuable to me and I’d like to think it’s been valuable to the company. I’m really comfortable with who I am and where I’ve been.
Tell me a little more about Southwest’s mobile strategy and how it’s evolving?
There are three very significant advantages to that strategy:
- We aren’t paying commissions to the OTAs [online travel agencies] or the GDSs [global distribution systems, like Amadeus, Galileo, and Sabre.] That’s a lot of money. When you’re carrying 115 million passengers a year, that’s a lot of commission fees. We’re not doing that.
- By virtue of the fact that our inventory is only sold on our store, it’s kind of like a specialty store, as opposed to a big department store. Our competitors have very limited visibility into what we have available, in terms of the inventory and fares. They can certainly shop the store, but they’re not going to get anywhere near the information that would be available to them if [our inventory] were on an OTA… We don’t expose our schedule or our fares to the competition.
- We know an awful lot about our customers because the transaction is with us, so we can tie it to their history. There are all sorts of other techniques where we can pull other information in, and begin to build a profile of the customer, so we have much richer customer insight and customer data, and that’s very valuable. That gives us very rich set of customer information.
Has Southwest set up a separate lab for its Innovation Team?
The [X Airline Innovation Lab] is where we mock up parts of the airport [and the] customer experience. Heather [Figallo, Senior Director of Innovation, Design, and Entrepreneurship at Southwest] leads our innovation team, and she’s really essential. Heather’s fantastic, but the lab isn’t one person. She has a very strong, innovative team. These people are like idea generators.
The startup accelerator MassChallenge just expanded to Texas, and Southwest is one of the sponsors, helping to fund 100 local startups. How does that work into airline’s innovation strategy?
We’ve been trying to figure out how we make sure that we’re not becoming insular in our ideas or our thinking… [To learn more about the MassChallenge approach, Southwest recently sent 10 members—a quarter of its senior management committee—up to MassChallenge’s headquarters in Boston for an off-site.]
I think it’s important for myself and our senior leaders to be exposed to how startups think and how they problem solve… In return, all these entrepreneurial innovators could probably benefit from the thinking of some of our great financial people or our really strong operational leaders, just in terms of how do you communicate? How do you structure? Here are the kinds of questions that you really want to ask when you’re trying to sell this… We give a lot of that company maturity and thought process to them, and I think we get a lot of their entrepreneurial and creativity thought process back.
Who vets the ideas?
Our chief executive officer [Kathleen Wayton] is in there throughout this whole process. Kathleen is one of the key people we need to have close to this, as is Ryan Green [chief marketing officer], because a large part of his world is digital, so he’s got to be in this stuff, as does Steve Goldberg, who runs ground operations. He’s got 40,000 employees. It’s the largest work group in the company. Steve has got to be all over this, because it will invariably impact his work group, and he’s one of the biggest champions for innovation.
We have an innovation meeting tomorrow. It’s a two-hour monthly meeting. It’s one of my favorite meetings. … It’s intellectually stimulating and it’s fun and you can see the impact.
What are the biggest challenges Southwest faces?
It’s having a well-defined process to winnow out the weak; support, test, and solidify the stronger; get them to prototype; get them to the next step of pilot… By the time you get to pilot, you’re really refining. But there’s got to be a path to production… There’s got to be technology resources and there has to be financial resources that are held in reserve. In the annual planning process, you can’t say,
“I have two very good ideas. I’m not sure what they are yet, but I have two.” You have to have unallocated resources—people, technology, and money that you can deploy against these ideas.
Are things hardwired into Southwest’s brand identity that it’s unwilling to change?
Yes, the no change fee [no charge to change flights], two bags fly free, friendly employees, that’s just part of our product. We’re criticized often by various analysts for not charging those fees, because it’s worth a lot of money. That’s how airlines make money. And we actually counter that one of the things that makes us unique is that, and for whatever we’d pick up in fees, we’d probably lose in customer loyalty, because now we’re not different. I think it is a differentiator; it’s a promise that we’ve made to our employees and our customers, because that allows our employees to serve our customers well. If we break that promise it makes their job harder. It’s harder to be hospitable when you have to say, “Here’s your change fee…”
We have a cost structure [that is] uniquely advantaged versus the industry… That allows us to offer low fares. We’ve always had people who really do…want to follow the Golden Rule, in terms of how we treat each other and customers. Those are the core things. We’ve always been financially very disciplined and deliberate, and you could say conservative.
What must businesses do to prepare for the future?
You’d better be good at your fundamentals, your core tenets, but I think any company going forward has got to be very, very good at those three things: continuous improvement and continuous refinement of how we do things; data science (if you’re not good at data science, you’re in trouble); and innovation. The world is changing faster than ever, and the consumer is more powerful than ever. Industries are being changed, transformed, destroyed by changes in technological capabilities. You’d better be thinking about it; you’d better be addressing it; and you’d better be planning your path forward.
A good friend of mine who led teams through changes had a saying: “If you don’t like change, you’re going to hate extinction.” I really do believe if you’re not thinking about being excellent at your fundamental tenets, and then really playing to win on those three things…you’re going to hate extinction.
We’re being proactive and deliberate in terms of building that set of capabilities out. What’s fun to see is [that] it’s inspiring to the organization… It’s exciting to them to see us really playing offense on these domains. I think it sets a tone.