CryptocurrencyLeadershipInvestingClimate ChangeMost Powerful Women

Strategy Session: Southwest CEO Gary Kelly’s guide to succession planning

July 5, 2021, 8:00 PM UTC
Photo illustration by Fortune; photo: Jed Kirschbaum—TNS/ABACA Press/Reuters

It’s Gary Kelly’s turn to give up the pilot’s seat.

After 17 years at the controls, the longest tenure of any CEO at a Big Four airline, Kelly is stepping down in early 2022 to make way for Bob Jordan, a 33-year Southwest veteran who’s long been one of his top lieutenants. But Kelly, who just staged a roaring takeoff from the pandemic that no big rival can match, will be staying on as executive chairman, meaning he’ll continue to be a Southwest employee with an office down the hall from his successor. Ideally, Kelly will be shifting from day-to-day decision-making to the role of ensuring a smooth changeover, helping Jordan grow in the job and serving as a kind of super-consultant with a deep grounding in the airline’s operations and intimate knowledge of the vaunted Southwest culture.

Southwest-50-Anniversary-Gary Kelly
Southwest Airlines chairman and CEO Gary Kelly in December 2020. Kelly’s 17-year tenure makes him the longest-serving CEO for a major U.S. carrier.
Courtesy of Stephen M. Keller/Southwest

It’s a new role for Kelly, but a familiar turn for the company, as it mirrors the pattern that Kelly and his predecessor, Herb Kelleher, followed many years ago. As Kelly told Fortune, “Working for the former CEO can be tough.” Kelly ran Southwest for four years—from his appointment in 2004 until Kelleher’s retirement in 2008—under the legend who had cofounded the airline and served a long stint as CEO himself. And the flamboyant, outspoken Kelleher, famous for swigging Wild Turkey and chain-smoking Camels, didn’t hold back when it came to disagreements, big or small.

Yet Kelleher recognized that the executive chairman’s role was to advise the CEO and support Kelly once he’d made a decision, even those Kelleher initially counseled against. “I’d already worked for Herb for 18 years before becoming CEO,” says Kelly. “Herb was so iconic, and so invested in the details of the business.” Given that Kelleher continued to follow every aspect of Southwest’s operations as executive chairman, says Kelly, it wouldn’t have been surprising if he’d make life difficult for his new CEO.

Below, Kelly expounds on everything he’s learned about executive succession—and tells a few tales from the airline trenches as well.

A free hand

But when Kelleher offered Kelly the job, the executive chairman assured Kelly he’d have a free hand. “Herb just made it clear to me, ‘You’ll be the CEO, and I’ll be the chairman. You’ll make the decisions,’” says Kelly. “Herb had very strong views, but he also let me know it was up to me.” Kelly says that Kelleher didn’t try to set strategy by advocating new initiatives. He’d wait until Kelly made the proposals, then weigh in. “What Herb did for me was let me go first,” recalls Kelly. “When he had an issue as chairman, he didn’t stand in my door wagging his finger telling me what to do before I brought it up. The proposals had to come from me first. Then when I broached the subject, he might give me an earful.” But Kelly says that though Kelleher always made his case, he never once tried to veto Kelly’s decisions.

That the two men helped write and adapt the one-of-a-kind Southwest playbook assured that they were of one mind on the power of its low-cost model and the importance of cultivating an intensely loyal workforce. “We were so well aligned that although we did disagree on some big issues, those disagreements were relatively rare,” Kelly notes. He cherishes that from Kelleher’s retirement in 2008 to his passing in 2019, the legend kept an office at the Dallas headquarters, and remained a valued counselor to Kelly.

Internal trumps external candidates

The value of deep insights into how Southwest works, into its business and people, persuaded Kelly and the board to pick an internal candidate. “It was never my desire to bring someone in from the outside,” says Kelly. “The board and I wanted someone who understands Southwest’s history, culture, and people. The evidence is strong that the CEO successions that are most successful choose internal candidates. We had too many really good candidates to look outside. It’s a big risk to bring in a CEO from the outside.”

Kelly also notes that he and the board never considered announcing a change in leadership during the crisis. Although Kelly turned 65 in March of 2020, it was clearly a matter of pride for the long-serving CEO to guide Southwest through the crisis and to the cusp of a strong comeback. “Part of making the transition was finding the right time when things are stable, and don’t add to the kind of uncertainty we had [at the height of the pandemic],” he says. “I haven’t run out of gas, but a good leader doesn’t stay too long. It’s not fair to the next generation. By January, I believed, and so did the board, that the worst was behind us, and it was time to interview candidates for CEO.”

Kelly has long been Jordan’s mentor. “I’ve worked with Bob longer than I worked with Herb,” says Kelly. “He’s been my strong right arm all that time.” While Kelly first served as controller, then as CFO for 15 years before taking the top job, Jordan has cycled through a broader range of positions, following Kelly as controller, then leading procurement, heading technology and strategy, and rising to chief commercial officer before taking his current position as EVP of corporate services. In that job, he oversees human resources, management of airport and maintenance facilities, and the campaign to secure the landing times and gates that enabled Southwest’s daring expansion into sundry new markets during the pandemic.

Southwest-Gary Kelly Exit-Bob Jordan
Southwest Airlines Chairman and CEO Gary Kelly congratulates Executive Vice President of Corporate Services Bob Jordan, who was named as the next CEO of the airline.
Courtesy of Stephen M. Keller/Southwest Airlines

Kelly seeks to bring what he calls Herb’s “gentle touch” to his new role. They’ll be a long-serving team, since Kelly’s slated to remain executive chairman until at least 2026. He wants Jordan “to talk to [him]” as freely as he sought advice from Kelleher. How Kelleher handled their few significant clashes, says Kelly, is a template for the executive chairman’s proper role of providing counsel rather than giving orders. When Kelly first took charge in 2004, their initial arrangement called for Kelleher to play a major role in planning new routes. “As it turned out, I made all of those route decisions,” says Kelly. “And Herb didn’t agree with some of the choices in 2004 and 2005.” Kelleher, for example, objected to the move into LaGuardia that in 2009 marked the airline’s first foray into New York City. Kelleher never tried to overrule Kelly’s picks. And they worked out so well that his objections to Kelly’s calls quickly receded.

Picking his battles

After ascending to CEO, Kelly set a top goal that Kelleher had battled for years to achieve, but finally sidelined over fears that political carnage outweighed the benefits. Kelly was determined to win rights to fly from Love Field in Dallas, the airport where Southwest first launched in 1971 but was long banned by opposition from American Airlines, the dominant carrier in Dallas, and numerous authorities. Gaining entry required repeal of a federal law called the Wright Amendment. “Herb was reluctant to take on that fight,” says Kelly. “The forces aligned against repeal were formidable: Congress, the City of Fort Worth, the City of Dallas, American Airlines.” Kelleher didn’t rate the chances of success worth the titanic political battle that was bound to ensue.

Southwest-Gary Kelly Exit-Herb Kelleher
Gary Kelly with Southwest Chairman Herb Kelleher at a Boeing 737-700 unveiling at BWI Airport.
Courtesy of Marty Katz/Southwest Airlines

But after Kelleher made his case, he supported Kelly’s crusade. Kelleher lobbied hard alongside Kelly to reach the goal he’d long cherished but considered impossible. It took a decade, but in 2014, Congress ended the restrictions, enabling Southwest to establish a strong base in its home city.

The art of the hedge

Another pioneering move: It was Kelly’s success in hedging jet fuel prices that propelled his career early on. The practice also gave Southwest an edge over rivals when he became CEO. One of the biggest risks to airlines are the big, unpredictable swings in fuel prices that account for one-fifth to one-fourth of airline operating costs. “When I started as CFO in 1989, no one was hedging,” he says. “We were first to do it during the Gulf War, and we’re the only ones who stuck with it consistently from then to the present. It’s served us extremely well, not to protect earnings every quarter, but to shield the balance sheet. A lot of rivals didn’t have the financial strength to do it.”

In 2004, Kelly’s first year as CEO, skillful hedging landed a windfall of $454 million, and made the difference between a profit and small loss. “Profits from hedging allowed us to grow after 9/11 in the 2000s when others were in bankruptcy,” says Kelly.

During Kelly’s 17-year tenure as CEO, Southwest has prospered more than any other U.S. airline. Through the end of 2019, the carrier notched the unrivaled record of achieving 47 profitable years in a row. In 2011, Kelly bought budget competitor AirTran for $1.4 billion, a deal that expanded Southwest’s reach to Washington National airport as well as the giant Hartsfield-Jackson airport in Atlanta. That deal boosted Southwest’s status as the nation’s largest domestic carrier based on the passengers it originates each year, a title it holds to this day. Jordan played a key role in securing the acquisition, and served as president of AirTran when it became part of Southwest.

The AirTran deal also took Southwest international for the first time, adding routes to the Caribbean and South America that it has since extended to 14 foreign destinations from Mexico City to Nassau in the Bahamas, not to mention flights from the West Coast to Honolulu and four other destinations in Hawaii. During the pandemic, Kelly maintained Southwest’s record of no pay cuts or layoffs, although thousands of employees opted for early retirement or temporary leave. Now, virtually all of them are flying once again.

In fact, Kelly shrewdly capitalized on the pandemic to greatly expand the Southwest network just as competitors retreated. He deployed planes that otherwise would sit idle in the desert to serve no fewer than 17 new destinations, soon to be 18 with the addition of Syracuse, N.Y. Southwest gained entrée into three big airports where it was formerly absent as other carriers relinquished gates and landing times: Chicago O’Hare, Miami International, and Houston Intercontinental. Most of the new locales are beach or mountain vacation spots, such as Palm Springs, Colorado Springs, and Sarasota. And it’s leisure travelers who are flocking to the airports in the reopening, while business travel remains severely depressed.

Dramatic flair

Kelleher, who rode to work on a Harley and once settled a legal dispute with an arm-wrestling match in a Texas arena, was a celebrated showman. Surprisingly, Kelly––the former accountant––cuts his own swatch as a performer. Every Halloween, he wears an outrageous costume to the office. His favorite role: the Gene Simmons Kiss character. “I wore big platform shoes,” recalls the six-foot three-inch Kelly. “I rented shoulder pads with spikes and wore a leotard. I was going to do my own makeup, but one of our departments had a professional makeup artist who did the job.”

Another memorable impersonation was Edna Turnblad, a character immortalized by actor Divine in Hairspray. “I was flying to Austin that day to meet friends, and I was still in costume,” marvels Kelly. “TSA wouldn’t let me on. My appearance as Edna didn’t match my photo ID. We had to summon our Dallas station manager to vouch for me.” Kelly’s also known to play guitar in company rock bands variously titled the Southwest Warriors and the Why Nots. He allows that “I’m not much of a guitarist” and uncharacteristically hangs in the background strumming rhythm guitar.

The travel outlook for 2021 and beyond

While Kelly is highly, and justifiably, optimistic about Southwest’s future, he believes that the pandemic has turned the industry’s outlook from balmy to turbulent. “My 35 years have been a wild ride,” he says. “We’d seen lots of instability over the years, and we’d caused a lot of that instability, as did ultra-low-cost carriers with their no-frills approach. The instability continued in every decade. But in the 20-teens, the industry had finally settled down and stabilized. We’d seen consolidation. Fuel prices fell.” And then the pandemic hit. “The stability prior to the pandemic doesn’t mean the industry will be stable coming out,” he continues. “This will be a trying time for the industry.”

The main reason, he says, is the near-collapse of business travel. “That means that more seats will be chasing fewer customers,” says Kelly. “It will be extremely difficult for airlines to match supply with demand, and do it at pricing levels that are profitable.” In fact, this period reminds Kelly of the aftermath of 9/11. “There’s no law that after two more years everything will be fine,” he cautions. “In the 2000s, the industry saw year after year of painful change. There’s no guarantee that things will smooth out anytime soon.”

But when rivals are debt-ridden and retreating, Southwest charges on. That’s what Kelly did in the pandemic. The “we’re unbeatable” spirit that Herb Kelleher passed to Gary Kelly may be the torch that above all others, Kelly relishes passing to Bob Jordan.

More must-read finance coverage from Fortune:

This is the first installment of a new series called Strategy Session, where we ask leaders to go in-depth on a particular element of leadership. To support our journalism, subscribe today.