EOY master award. Profile of a profitable airline that inspires uncanny customer employee loyalty.
In a brutally competitive business, Southwest Airlines' Herb Kelleher has built a continuously profitable $1.2-billion company that inspires uncanny loyalty in customers and employees alike. How?
"This is the one guy in a troubled and extremely difficult industry who has done something that has worked for a long period of time now" -- Don Burr
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Wreathed in a gauzy haze of cigarette smoke, Herb Kelleher paces his office like the trial lawyer he used to be. He recounts his airline's stormy advent, telling how the company finally got off the ground in 1971, flying four planes in varying states of emptiness between three Texas cities. Four years earlier, in 1967, when Kelleher had cofounded Southwest Airlines Co. and first applied for certification to fly, Braniff, Texas International, and, to a lesser extent, Continental had jumped all over the upstart, dragging it into court and claiming to any judge who would listen that the Texas market couldn't possibly support another carrier.
Three years of bitter legal skirmishes followed, culminating in Kelleher's pursuing the case all the way to the U.S. Supreme Court. By then Kelleher, Southwest's corporate counsel, was getting heat from cash-drained investors to throw in the towel, and he'd resorted to providing his legal services pro bono to the fight. "Braniff and Texas International would later be indicted for trying to chase our investors out of the underwriting syndicates and boycotting our vendors," he says, disbelief rising in his voice. "I felt enraged by this. You know, anger can be a great motivator. For me, this became a cause. I was a crusader freeing Jerusalem from the Saracens."
Kelleher, a serious chain-smoker, throws himself into an overstuffed chair and fishes through a pack of smokes on the glass-topped coffee table before him. He is so enveloped in his recounting of Southwest's fiery baptism that he places the cigarette in his mouth backward and readies to light the filter before being warned off.
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War
To understand the essence of Southwest Airlines, you must first know that Herb Kelleher is a man of extreme tenacity and depthless energy. He sleeps four hours a night; he reads two or three books a week. The rest of the time, when he isn't lighting cigarettes, he is inhaling naphtha fumes and loving the high. "We tell our people all the time, 'You have to be ready for change.' In fact, sometimes only in change is there security," says Kelleher, leaning forward in his chair.
Kelleher is a keen student of military history. He likens his early fight against much larger rivals to the ruinous trench warfare of World War I, an over-the-top frontal assault by massed forces against Southwest, withstood only by dint of Kelleher's will. In the aftermath, Kelleher moved his troops up into the hills, where he could husband his strength and in the future engage the enemy on his terms, not theirs.
That Southwest has done, having methodically expanded its franchise from its fragile Texas base to now include 124 planes flying between 34 mostly midsize airports, mainly in the Sunbelt and the Midwest. That "hit 'em where they ain't" strategy has yielded results. In 27 of those airports, Southwest is the leading carrier in passenger boardings. "We deliberately formulated a policy of geographical distribution -- a corporate trust fund, you could say -- by diversifying our assets," says Kelleher, now propping a foot up on the coffee table before him. "Now you can't fight us like you would a war in Europe. This is more like a war in the Pacific. You have to take us pillbox by pillbox, palm tree by palm tree."
Structurally, Southwest is unique among major American airlines. Its competitors have built centralized empires -- most of which are now distended and in danger of collapse. Wedded to the "hub-and-spoke" system, those carriers fly huge planes between major airports and link them with a galaxy of "feeder" flights from lesser sites. On paper, the hub-and-spoke concept makes sense, but in practice it ties up too many valuable assets at a handful of pressure points in the system.
Southwest's layout is more akin to a spiderweb, spun one strand at a time, flexible enough to disperse assets and dissipate stress. In airline jargon, Southwest is a "short-haul, point-to-point" carrier. It has no recognizable hub. It flies short distances nonstop, the average flight being 55 minutes. Southwest flights do not make connections with others, do not transfer baggage, do not serve meals, do not offer assigned seats. Southwest does not subscribe to expensive computerized reservation systems. It does relatively little business through travel agents because the margins on its fares are too thin. But by eschewing such services, the airline offers passengers rewards of more lasting value: frequent, reliable service and rock-bottom fares.
"People always want higher-quality service at a lower price, provided by people who enjoy what they do," says Kelleher, summing up Southwest's reason for being. The results have been astonishing. Since the U.S. airline industry was first deregulated, in 1978, 169 airlines have failed, merged, or died before their first flight ever left the tarmac. Southwest, meanwhile, has been profitable in each of the past 18 years. In 1990 it was the only major U.S. carrier to show a net profit based solely on operations -- while offering the lowest fares in the industry. Southwest's overall costs are the lowest of any major carrier (defined as one that brings in more than $1 billion in revenues), yet its work force is among the industry's best paid.
Southwest's ability to produce those kinds of numbers seems the stuff of smoke and mirrors. It springs, however, from two essential sources: the Southwest culture as embodied and promulgated by Kelleher, and a coherent business strategy to which the airline has religiously clung.
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Esprit de Corps
Herb Kelleher, the industry maverick, inspires deep loyalty at even the lowest ranks in a $1.2-billion company that now employs 9,500 people. That loyalty arises from employees' keen awareness of the quixotic dimensions of Kelleher's early struggle to get Southwest off the ground and see it survive. That struggle long ago became part of Southwest lore.
Employees' loyalty, in turn, is nurtured by their knowledge of who Herb Kelleher is. He studied philosophy and literature at Wesleyan and graduated at the top of his law-school class at New York University. Gary Barron, Southwest's chief operations officer and formerly one of Kelleher's legal partners, calls him "the smartest, quickest lawyer -- not to mention the best judge of people" he's ever seen. Yet Kelleher, for all his credentialed brilliance, is just plain "Herb" to his workers. Jim Wimberly, Southwest's head of ground operations, says Kelleher has "a knack for really being with you, even if you're one person in a crowd of 1,000." Wimberly likens the gift to that of a master politician -- minus the insincerity.
