Kelleher in 2001
Michael O'Neill—Corbis/Getty Images
By Shawn Tully
January 16, 2019

At Southwest Airlines’ headquarters in Dallas, employees strolling the corridors stop to chuckle at a kind of mirth-filled museum depicting its legendary co-founder hugging and mugging. Southwest folks love to gawk at a life-sized cutout of a sequined Herb Kelleher impersonating Elvis, or push a button that plays recordings of the icon’s laugh in three ascendingly boisterous versions. “In the halls, you’d always hear him before you saw him, and when you saw him, his greeting was a bear hug,” a Southwest manager told this reporter in 2014.

Kelleher’s passing on January 3 at age 87 evoked sundry stories headlining his fabled flamboyance. The obituaries noted that when rivals claimed travelers thought too much of themselves to fly an airline with cattle-car boarding and no assigned seats, let alone sans first class, Kelleher posed in an ad with a bag over his head, and jokingly offered the bags to Southwest customers so they could hide their “shame.” Indeed, Kelleher’s wisecracking, chain-smoking, hard-drinking image sent the message that a workforce of happy-go-lucky oddballs won the most loyal customers.

But Kelleher’s zaniness at times obscured his achievement in building the three sturdy pillars Southwest stands on to this day. First, he virtually invented—and then successfully operated, a rare accomplishment for a founder—a revolutionary business model, the low-cost carrier. Second, he deployed prudent financial management to keep Southwest’s wings level in turbulent times. Third, in an industry plagued by America’s worst labor relations, Kelleher managed to nurture what’s arguably corporate America’s most loyal workforce.

Kelleher shows off his zaniness, 1990.
Pam Francis—Liaison/Getty Images

By creating that architecture, Kelleher stands as the most successful leader in the history of commercial aviation. As CEO from 1981 to 2001, Kelleher piloted Southwest from a tiny carrier that operated half-a-dozen planes in its native Texas towards what it is today, the nation’s most popular domestic airline, flying 120 million passengers annually. Along the way, Southwest has made money for 45 straight years, and greatly enriched shareholders.

In a 2017 interview, Kelleher acknowledged that he’d partially copied the low-cost model from PSA, an airline that initially offered bare-bones service inside California, and hence wasn’t subject to prices dictated by the Civil Aeronautics Board (CAB). (PSA later struggled as a full-fare carrier and was bought by U.S. Airways.) Kelleher saw that the key to low costs was keeping a carrier’s biggest investments, aircraft or capital on wings, in the air more hours a day than its competitors’. To get there, he eschewed hub-and-spoke networks that required that most planes leave in two big batches at peak times, mid-morning and late afternoon, and instead flew between cities “point-to-point” with no intermediate stops. To lower maintenance costs, Southwest operated only one aircraft model, the Boeing 737. Kelleher also found that “short-haul” routes of less than three hours, even at low prices, were a lot more profitable than, say, transcontinental flights, because the fares charged per mile were higher, and Southwest could turn the planes far faster.

When it invaded expensive, quasi-monopoly markets, Southwest crushed prices. Its entry into the Baltimore-Washington to Cleveland route in 1993 lowered round-trip fares from $340 to $19, and boosted traffic 15 fold in a year, a prime example of how the “Southwest effect” brought air travel to the masses. Under Kelleher, Southwest became the template for durable budget carriers that continue to democratize air travel, including JetBlue, Spirit, and Ryanair.

For a born innovator, Kelleher was a surprisingly conservative operator, especially in handling Southwest finances. “We manage in good times so we’ll do well in bad times,” he’d tell his lieutenants. While competitors went astray buying hotels and rental car companies, Kelleher believed that Southwest could do only one thing well, transport customers at the lowest cost with the best service. Southwest’s balance sheet was typically the strongest, and least-leveraged in the business. Interestingly, Kelleher reckoned that Southwest’s practice of never laying off or furloughing employees not only fostered excellent labor relations, but discouraged excessive spending. He often stated that the rule forced Southwest to operate with a lean workforce so that it wouldn’t be excessively over-staffed in down markets, and could buck the industry pattern of firing big swaths of workers in a downturn. That discipline drove Southwest to get maximum productivity from its workforce––the flight attendants, rather than maintenance crews, cleaned the cabins on arrival.

Kelleher created the rare airline culture where employees greet customers with grins and jokes instead of venting their resentment towards management on the job. No imperial perks for the boss. Kelleher gave himself an interior office with no windows and left the best views for the employee cafeteria overlooking runway 13F at Love Field. His hiring progress was rigorous, requiring candidates to sit multiple interviews in the same room with other candidates to see if candidates were listening and respectable when others were talking or just focused on themselves. He was looking for cockeyed optimists, extroverts like himself who loved to entertain. To make sure the employee fit, Southwest to this day offers jobs on a six month probationary period so managers can view how the new gate agents and flight attendants click with customers. For Kelleher, an assortment of rap-singing flight attendants, pilots uncorking corny jokes, and folks who loved to high-kick in the company chorus lines made the best army. “Culture is intangible, it’s spiritual, you can’t buy it,” Kelleher said in the 2017 Q&A.

It’s clear that the airline leaders who most closely follow Kelleher’s humanist vision are the most successful. This writer recently followed Delta CEO Ed Bastian as he rallied employees in Salt Lake City. Bastian’s motto is that “if you take care of your employees, your employees will take care of your customers.” That dictum could have come from Kelleher, and it’s helped make Delta America’s most successful global carrier. (Southwest is mainly domestic.) In conclusion, to judge how nurturing the human nature of an enterprise can produce profits, consider that in Kelleher’s 20 years as CEO, Southwest posted total returns to shareholders averaging 20.0% a year, the best performance of any company in the S&P. And by following Kelleher’s template, Southwest has continued to drive strong returns under his long-term protégé and current CEO Gary Kelly. In most companies, the bland lead the bland. Corporate “fun” is seldom viewed as an asset. Herb Kelleher was the clown with a spine of steel, who proved that spreading fun could be the greatest asset of all.

A version of this article appears in the February 2019 issue of Fortune with the headline “Remembering Herb.”

 

SPONSORED FINANCIAL CONTENT

You May Like

EDIT POST