1 Comparing internally consistent HR at the Airport Express Train (AET), Oslo, Norway and Southwest Airlines (SA), Dallas, U.S.A. Bård Kuvaas and Anders Dysvik, BI Norwegian School of Management

This case study provides a comparison between internally consistent HR in two very different organizations with respect to size (small versus large), age (new versus old), ownership (an independent company reporting to the Norwegian Trading and Business Commerce versus listed), competitive strategy (cost leadership and customer service versus differentiation and customer service), and national context and labor laws (Norway versus the U.S.A.). The main similarity, besides that they both operate in the travel industry, is that they try to achieve competitive advantage through people by implementing internally consistent HR. Internally consistent HR is the degree to which the various HR practices are internally consistent, complementary, and reinforcing each other. Historical background of the SA and AET Despite the severe economic collapse that hit the airline industry in 2009, Southwest Airlines (SA) still prevailed and managed to remain profitable. The results for 2009 marked SA’s 37th consecutive year of profitability. SA was established in 1971, with three Boeing 737 aircrafts. SA became a major airline in 1989 when it exceeded the billion-dollar revenue mark. Southwest is currently the United States’ most successful low-fare, high frequency, point-to-point carrier. SA operates 537 Boeing 737 aircrafts between 68 cities and more than 3,200 flights a day coast-to-coast, making it the largest U.S. carrier based on number of domestic passengers 1 . CEO of SA, Gary C. Kelly, concluded the 2009 Annual Report to Shareholders by stating that: “I will forever be grateful to our People for what they achieved in 2009. They preserved, with dramatic challenges, continuous change, and amid much economic anxiety. Despite that, they produced outstanding results in ontime performance, baggage handling, and Customer satisfaction. Our Customers rate Southwest service levels, arguably, higher than ever. And, we remain among the top low-cost producers of major airlines, and America’s preferred Low Fare airline. Our Employees are the best and the reason Southwest continues to outperform our competitors.” Clearly, the CEO of SA believes that their remarkable success comes from their employees, and how they are selected, trained, managed, and taken care of, as we will explain in this case study. SA is a widely debated and cited success story. When first we approached The Airport Express Train (AET), we thought it was just another company trying to benchmark “the SA way”. Trying to imitate a success company, however, may be a risky venture, as evidenced by the problems Delta experienced when implementing Leadership 7.5 in 1994 – an effort to reduce Delta’s costs per available seat mile to match SA’s 7.5 cents (Wright & Snell, 2005). However, after having interviewed Kari Skybak, the Director of HR at the AET, we learned that they did not know much about SA. Rather, her own inspiration with respect to HR at the AET derives from how Janne Carlsson, the former CEO of Scandinavian Airlines (SAS) who transformed the company in the early eighties by creating a businessmen airline with exceptional customer service and punctuality. In 1982, SAS was the most punctual airline in Europe and for the year 1983 SAS was awarded the title "Airline of
1

http://www.southwest.com

2 the Year" by Air Transport World 2 . Another inspiration, in particular with respect to the importance of nice and clean trains, is from Walt Disney’s emphasis on quality and keeping their facilities clean and customer-friendly to the largest extent possible. The AET 3 is member of an International niche of approximately 40 Air Rail Links who have the dedicated task to bring flight passengers to and from major airports. The major airport served by AET is Oslo Airport – Gardermoen, carrying more than 18.1 million passengers in 2009. In 2008, AET had approximately 300 employees (100 conductors, 120 train stewardesses and 20 customer consultants) and served a total of 5.7 million passengers. It currently has 16 trains and 217 departures each 24 hours. The AET has 10 minutes departures between the airport and Central Oslo, a distance of 47 kilometers, and 20 minutes departures through the city into the heavily populated suburbs close to the airport. Recently, AET extended its line by another 20 kilometers westwards to the city of Drammen. The AET is a young company established in 1998 with the goal of achieving a total public transportation share for airline passengers of more than 50 per cent. Getting people to leave their cars behind and change their travel habits drastically required a solution that was better than anything else available with respect to short travel times and comfort, reliability and punctuality. Trains were also considered to be the best environmental solution. Since the beginning, the philosophy of the AET has been to deliver an exceptional product, down to the smallest detail. For instance, while you will often see other trains covered by pieces of graffiti, AET trains are always cleaned before they are used. The customer is at the centre of attention and the train journey should be highly comfortable and easy. Accordingly, the AET prides it self with effective ticketless payment solutions, good travel warranties and effective procedures to manage disruptions. For comparison purposes, the fare for travelling from downtown Oslo to the airport is NOK 170 4 and from Drammen to the airport NOK 250. In contrast, the fares for travelling with the Norwegian State Railways are NOK 100 and 182, respectively. Accordingly, the AET attract customers that are willing to pay more for a more pleasant journey. The AET’s market share is currently 36 per cent, which is the world’s highest market share for an Air Rail Link service. In combination with other means of public transportation (buses and public trains) the total share of public transportation is now 60 per cent, compared to the goal of 50 per cent, which was set in the nineties. The AET has a 96% punctuality rate within 3 minutes and a regularity rate in comparison to planned journeys of 99.6%. These numbers are especially impressive when compared to trains operated by the Norwegian State Railways which score markedly lower on the same effectiveness measures. AET has also experienced a remarkable development in customer satisfaction ratings from 92 per cent in 2001 and 2003 to 96 per cent in 2008 and received several customer satisfaction and brand awards. In 2010 they were ranked first on the Norwegian Customer Satisfaction Barometer, while the Norwegian State Railways came out among the last on the list (ranked as number 179 among 190 companies). Earnings before interest, taxes, depreciation and amortization (EBITDA) have risen from NOK 87 million in 2000 to NOK 195 million in 2008. With respect to HR and employees, AET was awarded as number one on the Great Place to Work ranking in Norway in 2008 and came out third in 2010. AET’s business concept is to offer the best means of transportation to and from Oslo Airport by emphasizing security, punctuality and service. AET achieves this “through a unique identity, the most effective solutions and an enthusiastic staff.” Thus, and as in similar ways of that of SA, the AET emphasizes its people, security, profitability and the environment.
2 3

http://www.plane-spotter.com/Airlines/SAS/Main.htm http://www.flytoget.no/eng/About-Flytoget 4 1 USD is approximately NOK 5,90

3

The context for HR in Norway Compared with other countries, a high percentage of the adult population in Norway (4.8 million as of January 2010) is in employment (Statistics-Norway, 2010a). This is mainly due to the majority of Norwegian women being in employment (7 out of 10 women and almost 8 out of 10 men) (Olberg, 2008). The unemployment rate in Norway is low, and currently at 3.3%. For the last twenty years, there has been a large increase in the number of people working in the service industry and in jobs with higher demands for formal education, whereas the number of employees working in traditional production industry has declined. In Norway, approximately 64% are employed in the private sector and 36% in the public sector. 40% of the employees in the private sector are members of trade unions, compared with 81% of employees in the public sector (Olberg, 2008). The Norwegian welfare state represents a cornerstone in the Norwegian society and thus exerts considerable influence on work conditions in Norway. The fundamental principle for the Norwegian welfare state is that its citizens should contribute based on their assets, and receive based on their needs. Norwegian citizens enjoy considerable benefits “from the cradle to the grave”. Examples of benefits provided are free health care for all, free education up to Master’s level for those eligible, unemployment benefits and sickness benefits from the first day of unemployment or sickness for all, retirement pensions from the age of 67 for all, and 5 weeks of paid vacation annually for all members of the working population (Hatland, Kuhnle, & Romøren, 2001). In addition, when giving birth, parents are given 46 weeks of leave of absence with 100% pay or 56 weeks of leave of absence with 80% pay, and nearly all children are offered a place in a kindergarten from the age of one year. The welfare system is capitalized majorly by taxes, and the average tax rate of Norwegian employees is 25% (Statistics-Norway, 2010b). These selected benefits, along with a range of additional ones illustrate why Norway was recently ranked the second best country in the world to live in by the United Nations (UNDP, 2009). With respect to the work context in particular, the working conditions in Norway are regulated by the Working Environment Act issued by the Ministry of Labor in 1977. In section 12 of this Act, it is emphasized that jobs should provide workers with a reasonable degree of freedom, opportunities for learning and career development, variation and meaningful content, recognition and social support, and to relate their work to the wider societal equation. These requirements were introduced in joint agreement between the main labor organizations in Norway representing both employers and employees (Gustavsen, 1977), and actually based on research on Norwegian organizations emphasizing the role of employee involvement at work (Thorsrud & Emery, 1976). Despite the fact that a labor friendly law does not guarantee good working conditions, Norwegian employees experience among the highest levels of satisfaction with their working conditions among European countries (EWCO, 2007). These conditions include aspects of work conditions perceived by employees such as job security, having good friends as colleagues at work, feeling “at home” in their employment organization, being provided with opportunities for personal development, getting well paid for doing their job, and having good opportunities for career advancement. With respect to other aspects of working conditions such as pay differences, the differences between hourly wages among employees in Norway are among the lowest across the 30 countries included in the Organization for Economic Cooperation and Development. In 1995, the top fifth percentile with respect to hourly pay wages in Norway earned 1.98 times the hourly pay wages of the average worker. In 2006, this difference had marginally increased to 2.08 times (Dale-Olsen & Nilsen, 2009). In contrast,

4 in countries such as Canada and the U.S., the difference in hourly wages was almost four times between the top and lowest tenth percentile in the 1990s (OECD, 1996). The operational and HR contexts in SA and the AET Jeffrey Pfeffer (1998a) has summarized labels such as high involvement, high commitment, high performance or soft HR in a set of seven practices that characterize most organizations producing profits through people. In the following, The AET and SA are briefly compared along these practices. Employment security SA provides job security for their employees because they do not want to put their best assets, their people, in the arms of the competition. Besides, it is much easier to achieve flexibility and cooperation in becoming more efficient and productive when promising employment security. As former CEO, Herb Kelleher has written: Our most important tools for building employee partnership are job security and a stimulating work environment. . . . Certainly there were times when we could have made substantially more profits in the short term if we had furloughed people, but we didn't. We were looking at our employees' and our company's longer term interests. . . . [A]s it turns out, providing job security imposes additional discipline, because if your goal is to avoid layoffs, then you hire very sparingly. So our commitment to job security has actually helped us keep our labor force smaller and more productive than our competitors’ (Pfeffer, 1998b). Even following the aftermath of 9/11, SA did not lay-off a single employee owing to the average cut in flights by 20% and average layoff by 16% of the workforce in US airline industry in the weeks that followed after the attack. Rather, SA used the crisis as an opportunity to show that they were serious when they talked about “taking care of our people”. According to Jim Parker at SA (Gittell, Cameron, Lim, & Rivas, 2006), “We are willing to suffer some damage, even to our stock price, to protect the jobs of our people.” According to Director of HR at AET, Kari Skybak, they do not have any official policy that promises job security. But, on the other hand, they have never been confronted with situations where downsizing would be an option. After all, the company has grown continuously since it was established in 1998. Selective hiring Organizations that promise job security and that want to obtain profits through people need to ensure that they recruit the right people in the first place. This requires, among several things, to be an attractive employer and have a large applicant pool from which to select. In 2009, SA received 90,043 resumes and hired 831 new employees. The company spends a lot of time screening and hires primarily for attitudinal fit with the SA values and culture (e.g. they want happy people and team workers), since skills can be learned. Kari Skybak at AET tells that they also recruit based on attitudes that fit with the company values, which are effectiveness, innovation, and enthusiasm. In practice, they try to ensure that their employees act as ambassadors of the company. In the last round of recruitment in 2009, they received 400 resumes for 12 train stewardess positions. In 2010 the company will also introduce recruitment cards that their employees can distribute to former colleagues or to friends. Self-managed teams and decentralization as basic elements of organizational design

5

Part of SA’s cost advantage comes from having people who will do what is required to have extremely short turnaround time (the time from an aircraft arrives at the gate until it leaves it). Short turnaround times and being on time require teamwork among those responsible for different operations (e.g. check in, boarding, mechanical operations, cleaning the aircraft, baggage handling and so on) and that every employee feels responsible for almost everything. Accordingly, at SA, they typically use team goals rather than functional metrics. A Boston Consulting Group consultant noted that “Southwest works because people pull together to do what they need to do to get a plane turned around. That is part of the Southwest culture. And if it means the pilots need to load bags, they’ll do it” (O'Reilly & Pfeffer, 2000). Also at the AET, they put heavy emphasis on decentralized decision making, as employees on the trains have the authority to solve any problem that may arise on the spot and immediately. High compensation contingent on organizational performance SA’s compensation practices include comparatively heavy use of collective pay for performance (as opposed to individual), compressed pay levels, and consistent treatment, i.e. not giving executives large raises when employees are being asked to accept pay freezes. The company adopted the first profit-sharing plan in the U.S. airline industry in 1973. Through this plan and others, employees own about 8 percent of the company stock. At the AET, the conductors are better paid than their largest competitor, the Norwegian State Railways. Train stewardesses, however, have slightly lower pay levels than in the Norwegian State Railways, but higher than comparable positions in the service industry. But according to the number of applicants per available position and the Great Place to Work ratings, this does not seem to negatively affect the attractiveness of the company. The AET does not have a collective pay for performance plan. Training Given SA’s emphasis on selecting for attitudes and fit and employment security, heavy investment in training becomes an important part of the package of internally consistent HR practices. At SA’s University for People, approximately 25,000 employees are trained each year (O'Reilly & Pfeffer, 2000). Several different training programs are conducted, with emphasis on content such as doing things better, faster, and cheaper, customer service, understanding other employees’ work, and how to keep the culture alive and well. As in SA, all newcomers in the AET begin by attending an introduction program. This three-day training program includes general information about the company and its different functions and operations, training in customer service and communication, on the job training where the newcomers follow the operations of a regular train, and visits to every train station, to the head office and the maintenance department. On the first day of the program, the top management team, including the CEO, welcomes the newcomers. After the program, a top management representative holds a brief speech and hands out a certificate stating that they have completed the training program. After the introduction program, conductors and train stewardesses complete five-week programs dedicated to their different functions, where they are trained in for instance security, communication, and the specific AET culture. In addition, e-learning programs are offered that make it easier for shift workers to conduct training. Newly hired administrative employees engage in a four-week program, where most of the time is spent on train and train stations in order to learn and understand the daily operations of the AET. This training is also

6 useful because the administrative staff is mobilized when incidents happens (e.g. delays and cancellations), i.e. administrative employees travel to the stations to assist customers and operational employees. In 2009, a new training program that educates hosts for Norway’s capital, Oslo, was introduced. The program is offered in order to provide additional developmental opportunities for the employees and at the same time increase customer service by providing employees with in depth information about Oslo. The program is mandatory for newcomers, but optional for current employees. Reduction of status differences A fundamental premise of getting competitive advantage through people is that companies are able to get the most and best out of all of their people. At SA, the atmosphere is extremely informal and egalitarian, and everything is done in order to point out that every single employee is important. Compressed pay and benefits are parts of this, but the value statement from the early eighties, the Golden Rule, sums up SA’s approach: ”Above, all, employees will be provided the same concern, respect, and caring attitude within the organization they are expected to share externally with every Southwest customer.” The AET also emphasizes few hierarchical levels and informal communication between all employees. Also, top management is not only called upon in cases of incidents on the train or the stations, they regularly have to spend time on the trains at the least once a month. Sharing information Widespread sharing of information on such things as strategy, financial performance, and operational metrics ensures that employees have the information to be involved and able to contribute to do things better and it signals that they are trusted that they will not misuse the information. At SA, information on costs, operations, and financial data, including how SA is doing compared to its competitors, is shared among all employees. Since the AET operates almost round-the-clock several steps have been taken to ensure sharing of information throughout the company. The main information channel is intranet, but SMS, internal leaflets, and notice boards are also used. Intranet publishes information on the news of the day at the AET, facts and figures, strategy and business plans, financial and operational results, work processes and regulations, employee manuals, who does what at the AET including pictures of every employee, and a calendar with important meetings, training activities and social arrangements. Summary and case questions Both SA and the AET are successful companies, but learning from success stories is risky for several reasons (Pfeffer & Sutton, 2006). As a final note, then, it should be mentioned that the value of implementing the type of HR described as high commitment, high involvement or soft, is also supported by research evidence. First, a meta-analysis (Combs, Liu, Hall, & Ketchen, 2006) of the relationship between HR and organizational performance including a total of 19,319 organizations and 92 individual studies shows positive relationships for HR practices such as heavy focus on training, high compensation, widespread participation, selectivity in hiring, internal promotion, flextime, the existence of grievance procedures, and employment security. Even more importantly, a significantly

7 stronger relationship is found for systems of internally consistent or aligned HR practices than for individual practices. In addition, and at the micro level, meta-analyses suggest that important work outcomes (e.g. in-role and contextual work performance) come from being empowered and provided with job autonomy (Humphrey, Nahrgang, & Morgeson, 2007), job security (Sverke, Hellgren, & Nãswall, 2002), feeling that one is being treated fairly (Cohen-Charash & Spector, 2001), perceiving support from the company (Rhoades & Eisenberger, 2002), and being affectively committed to the company (Meyer, Stanley, Herscovitch, & Topolnytsky, 2002; Riketta, 2002) – to name a few. Questions: 1) What are the main similarities and differences between SA and the AET with respect to HR issues? 2) There are remarkable differences between SA and the AET, how can they succeed by a relatively similar set of HR practices? 3) SA and the AET have completely different strategies, but a similar set of HR practices. How does this observation fit with the importance of match between strategy and HR? See for instance Paauwe (2009) for this particular question. 4) Given the different nations, their culture and labor laws, do you think it is more easy or more difficult to gain competitive advantage through people in the U.S.A. than in Norway and similar countries (e.g. Sweden and Denmark)? 5) The AET is currently planning to expand its services from being an airport train company exclusively to compete on other routes in the area surrounding Oslo. Will it succeed by using the same HR strategy or should the HR strategy be changed in order to fit with a different market segment? References Cohen-Charash, Y., & Spector, P. E. (2001). The role of justice in organizations: A metaanalysis. Organizational Behavior and Human Decision Processes, 86, 278-324. Combs, J., Liu, Y., Hall, A., & Ketchen, D. (2006). How much do high-performance work practices matter? A meta-analysis of their effects on organizational performance. Personnel Psychology, 59, 501-528. Dale-Olsen, H., & Nilsen, K. M. (2009). Lønnsspredning, lederlønninger og andre topplønninger i det norske arbeidsmarkedet. Oslo: Institute for Social Research. EWCO (2007). Fourth European Working Conditions Survey. Dublin: European Foundation for the Improvement of Living and Working Conditions. Gittell, J. H., Cameron, K., Lim, S., & Rivas, V. (2006). Relationships, layoffs, and organizational resilience: Airline industry responses to September 11. Journal of Behavioral Science, 42(3), 300-329. Gustavsen, B. (1977). Legislative approach to job reform in Norway. International Labor Review, 115(3), 263-276. Hatland, A., Kuhnle, S., & Romøren, T. I. (2001). The Norwegian welfare state. Oslo: Gyldendal Akademisk. Humphrey, S. E., Nahrgang, J. D., & Morgeson, F. P. (2007). Integrating motivational, social and contextual work design features: A meta-analytic summary and theoretical extension of the work design literature. Journal of Applied Psychology, 92(5), 13321356.

8 Meyer, J. P., Stanley, D. J., Herscovitch, L., & Topolnytsky, L. (2002). Affective, continuance, and normative commitment to the organization: A meta-analysis of antecedents, correlates, and consequences. Journal of Vocational Behavior, 61, 20-52. O'Reilly, C. A., & Pfeffer, J. (2000). Hidden value: How great companies achieve extraordinary results with ordinary people. Boston, Massachusetts: Harvard Business School Press. OECD (1996). OECD employment outlook: OECD Olberg, D. (2008). The Norwegian workforce. Oslo: Institute for Labor and Social Research. Pfeffer, J. (1998a). The human equation: Building profits by putting people first. Boston, Massachusetts: Harvard Business School Press. Pfeffer, J. (1998b). Seven practices of successful organizations. California Management Review, 40(2), 96-124. Pfeffer, J., & Sutton, R. I. (2006). Hard facts, dangerous half-truths, and total nonsense: Profiting from evidence-based management. Boston, Massachusetts: Harvard Business School Press. Paauwe, J. (2009). HRM and performance: Achievements, methodological issues and prospects. Journal of Management Studies, 46(1), 129-141. Rhoades, L., & Eisenberger, R. (2002). Perceived organizational support: A review of the literature. Journal of Applied Psychology, 87(4), 698-714. Riketta, M. (2002). Attitudinal organizational commitment and job performance. Journal of Organizational Behavior, 23(3), 257-266. Statistics-Norway (2010a). Focus on labor. Oslo: Statistics Norway. Statistics-Norway (2010b). Focus on taxes. Oslo: Statistics Norway. Sverke, M., Hellgren, J., & Nãswall, K. (2002). No security: A meta-analysis and review of job insecurity and its consequences. Journal of Occupational Health Psychology, 7(3), 242-264. Thorsrud, E., & Emery, F. E. (1976). Democracy at Work. Leiden: Martinus Nijoff. UNDP (2009). Human Development Report 2009. New York: United Nations Development Programme. Wright, P. M., & Snell, S. A. (2005). Partner or guardian: HR's challenge in balancing value and values. Human Resource Management, 44, 177-182.