Kelleher's eccentric approach to business has paid off big.
Since the beginning of airline deregulation in 1978, only one startup has thrived over the long run: Southwest Airlines. Hundreds of others failed, unable to match the quirky, dependable, and most of all affordable service that Southwest provides. And unable to withstand the competitive pounding that the majors dished out to challengers. Southwest started as a tiny regional transporter shuttling passengers around Texas and is now a cross-country powerhouse with 3,400 daily flights offering exceptional service, lower fares and a lighthearted atmosphere—flight attendants have been known to dress in Hawaiian shirts and break into song during the trip. The formula translated into 35 consecutive years of profitability, a feat unmatched by any other airline. Last year the carrier had sales of $9.8 billion.
Southwest Airlines co-founder Herb Kelleher, 77, who will step down this month as executive chairman after 41 years on the board, probably ranks as one of the most fun-loving entrepreneurs in business history. Noted for his eccentricities, sharp wit—he once challenged another aviation exec to a televised arm wrestling match instead of litigation—and the ability to carefully balance a cigarette and a cocktail, Kelleher brought a boost of charisma and perseverance to running an airline. His shareholders couldn't be more thankful. Here is his story, as told to TIME's Kristina Dell.
Herb Kelleher: We came up with the idea to create a regional, low-fare airline at a bar, sketching out our thoughts on a cocktail napkin, more than forty years ago. I've found that many of the greatest ideas surface in bars because that's where many people cultivate inspiration. It's certainly true in my case. I was practicing law and Rollin King, a businessman and aviator who had experience operating small planes, was one of my clients. (And Southwest's co-founder.) John Parker, a banker in San Antonio, Texas had raved to King about his flight on Pacific Southwest Airlines (PSA) a regional carrier operating in California. "Why not start an airline like that in Texas?" he told King. The quality of their service and the reasonable nature of their fares impressed him.
That day King suggested to me that we look into starting an intrastate carrier in the Lone Star State. I was somewhat skeptical until I looked into PSA. The more I saw what they were doing in California, the more enthusiastic I became about replicating it in Texas. At the time, the Civil Aeronautics Board (CAB) governed all air service in the U.S. and it had not granted a new certificate for our kind of operation in 40 years. It was a club that was closed to new carriers—the airlines didn't want competition. Since they wouldn't grant a federal certificate for a new airline to travel between states, the only real chance we had to start a carrier was to do it on an intrastate basis, which is why we did it in Texas. We could operate solely within a given state, serving only passengers traveling within that state. Texas justified an airline because it was big with large metropolitan areas that were far apart. Airline fares were high and the quality of service was poor so we saw an opening. In March 1967 we incorporated the company and I went on the Board of Directors. We knew we were going to have a lot of opposition from incumbent carriers, but it was fiercer than we had ever anticipated.
For the next four years the only business Southwest Airlines performed was litigation, as we tried to get our certificate to fly. After the first two years of defending lawsuits, we ran out of money. The Board of Directors wanted to shut down the company because we had no cash. So I said, "Well guys, suppose I just handle the legal work for free and pay all of the costs out of my own pocket, would you be willing to continue under those circumstances?" Since they had nothing to lose, they said yes. We pressed on, finally getting authorization to fly after about 16 court appearances that included the U.S. Supreme Court, the Texas Supreme Court and the D.C. Circuit Court of Appeals. Our first flight was to take off on June 18, 1971 and fly between Dallas, Houston and San Antonio. I was excited about being in the airline industry because it's a very sporty business. But the regulatory and legal hoops enraged me. I thought if we can't start a low cost airline and the system defeats us, then there is something wrong with the system. It was an idealistic quest as much as anything else. When we brought the first airplane in for evacuation testing (a simulated emergency situation) I was so excited about seeing it that I walked up behind it and put my head in the engine. The American Airlines mechanic grabbed me and said if someone had hit the thrust reverser I would have been toast. At that point I didn't even care. I went around and kissed the nose of the plane and started crying I was so happy to see it.
After four years of unrelenting legal warfare with three other carriers, here we were, ready for our first flight. But the day before we were supposed to take off, the opposing carriers got an injunction forbidding us from flying, challenging the nature of our certificate. I headed to the Texas Supreme Court to make my case as to why the injunction should be dissolved, after staying up all night in the attorney general's library trying to figure out my argument. I asked for a writ of mandamus not to enforce the injunction. For the second time in the history of Texas it was granted.
Our planes took off as scheduled on June 18th. Our competitors—Braniff, Trans Texas and Continental Airlines—immediately tried to put us out of business. They attempted to get us thrown out of Love Field Airport in downtown Dallas because they knew we couldn't survive if we had to move to the new Dallas-Fort Worth (DFW) airport on the outskirts of town. We were a short-haul carrier and DFW is a long-haul airport. It would have taken people as long to drive to that airport as it did to fly to Houston. The case went all the way up to the U.S. Supreme Court—twice—our third appearance there. We won and later on two of the carriers received indictments for violating federal antitrust laws.
In 1972 we had to sell one of our four airplanes to get enough cash to make payroll of 198 employees. We hired Lamar Muse to operate the company because he had airline experience and was a resourceful guy. He did a tremendous job getting us off the ground. I was planning to go back to my law firm, but Muse got into a scrape with the Board in 1978 and they asked me to become the chairman. I accepted and later on became CEO in 1981, a position I held for 20 years.
The airline industry dubbed Southwest Airlines a maverick. Not only did we fly point-to- point, straight to your destination instead of using a hub and spoke approach, but we also dispensed with assigned seats and had cash registered tickets so we could turn around our planes in about ten minutes at the jet way. Planes make money in the air, not sitting on the ground. We didn't have a secret formula; our employees were just motivated. With better efficiency and hard work we could lower our costs and charge much less.
At the same time, we took a light-hearted approach to the business, encouraging our flight attendants to show their personalities if they felt like it. It's not something we train people to do. I just thought most people would rather be entertained than bored on a flight. We made our first, very small profit in 1973 and set up our profit sharing plan, the first one in the American airline industry. This was the first of 35 consecutive years of profitability for Southwest Airlines, which is unprecedented among airlines.
After the federal government deregulated the airline industry, carriers could fly where they wanted and charge any price. Houston to New Orleans became our first interstate market and we doubled the number of passengers traveling there. When I first started working, only about 15% of American adults had ever flown on a commercial flight. Today it's about 85% and we are responsible for a large portion of that because our cheaper fares let a lot more people fly. In some city pairs we increased airline traffic by over 2,000 percent in one year. Today Southwest Airlines goes between 64 cities in 32 states, from coast to coast. We have the most passengers of any airline in the U.S. and probably in the world.
But, it really wasn't until the mid-1970s that I believed we would make it as an airline. The litigation was behind us and other carriers started to see us as a different business. We were short-haul and they were long haul. They wanted to fly passengers cross country whereas we carried a great deal of discretionary traffic like families on vacation, tickets the other airlines didn't favor because they usually meant lower fares.
In 1991 we started buying fuel futures so our jet fuel prices are considerably lower than the spot market. Our analysts sure did call that right. This year 70% of our fuel consumption is hedged at the equivalent of $51 a barrel while the market is at $125 a barrel. It's saving us a considerable amount of money since we burn a billion and a half gallons of fuel a year. Airplanes aren't Honda Civics.
I'm most proud of the 37 years of job security we've given our employees at Southwest, having never involuntarily laid off any employee in an industry that has dispensed with over a million workers worldwide. They've earned it through their energy and dedication.