Introduction
By October 2002, Southwest Airlines had apparently weathered the initial crisis to the airline industry that resulted from the September 11, 2001 ("9/11") terrorist attacks. Most of the large national carriers had experienced huge losses in demand, profitability and market share, while in contrast Southwest's low-fare operations had thrived, even in the face of declining earnings. Yet, only a year after the attacks, Southwest and the industry in general faced still unknown future changes to its operating environment. There was already a new dynamic of security becoming a priority consideration, and new governmental directives and taxes meant to ensure and maintain that security. This new security dynamic had already impinged on Southwest's key operating strategy of customer-friendly service, due to boarding delays and resulting lower on-time arrival performance levels. Consequently, because of decreased demand due to lingering customer fears, depressed macroeconomic conditions, new federal taxes, and the perception of declining service, Southwest began to experience what other carriers already had: reduced revenue, increased costs and declining profitability.
Therefore, post-9/11 and amid the general industry malaise, Southwest's management is challenged with strategic decisions regarding the rate and manner of future growth. Also, the changes to the operating environment, such as increased security requirements, taxation, restrictive governmental regulations, and unpredictable responses on the part of competitors, created challenges to Southwest's operating strategy of offering a differentiated low-cost, customer-friendly service. Consequently, the central issue facing Southwest's management is: How sh ...