A Boy and His Airline
No kid ever had more fun with his favorite toy than Herb Kelleher has in running Southwest Airlines.
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On August 9, 1987, Kelleher implicitly declared defeat. He closed down TranStar and sold many of the airplanes to Lorenzo. The TranStar experience was a costly one. That year Southwest made only $20 million, a 60 percent drop from 1986. Even more than being a financial drain, the purchase was an egregious example of Kelleher going against his own strengths and the philosophy of the airline. But wallowing in what went wrong is not part of Southwest’s culture. Even now Kelleher prefers to see it as a good try, not a mistake. “If things had turned out differently,” he says, “we would have had a hell of a foothold on the long-haul market out of Hobby.
Keep Moving
In late 1978 Kelleher called a meeting of his senior officers and told them Southwest Airlines could not just settle back and rely on Texas business commuters as a cash cow. Like a jet plane, Herb Kelleher and his airline need to keep moving. “We had run our string in Texas. Our growth was stymied,” Kelleher recalls. Indeed, Southwest was too dependent on the Texas economy. At one time 50 percent of the airline’s revenues flowed from the Dallas-Houston route. Southwest needed to diversify geographically. The senior officers were reluctant to venture too far out of Texas. “It was almost a mystical thing,” explains Kelleher. “It’s like we were scared of the outside world.” But Kelleher’s fears were exactly the opposite—he didn’t want to be fenced in. Of course, Kelleher prevailed. Southwest started service to New Orleans, Oklahoma City, Tulsa, San Francisco, St. Louis, Chicago, and Detroit. Given the drop in oil prices and real estate values, it’s a good thing Kelleher did not sit back and count on Texans to provide him with a sinecure. Today just 4 to 6 percent of the airline’s revenues are derived from Dallas-Houston travelers.
Part of Southwest’s problem was that it could not expand from its base at Love Field. In early 1979 then House majority leader Jim Wright of Fort Worth, in an effort to protect the hub status of DFW airport, tried to ban all interstate traffic out of Love Field. Kelleher flew to Washington for a three-month battle, mustering all of his political skills and personal connections to fight one of the most powerful men in Washington. Kelleher quickly ceded Wright the House side and concentrated his efforts on the Senate, where an old buddy from law school, Oregon senator Bob Packwood, tied up every piece of aviation legislation until Wright agreed to compromise. The compromise, known as the Wright Amendment, gives Southwest the right to fly out of Love Field to the four states bordering Texas.
What the Wright Amendment means is that Southwest passengers can’t fly straight from Love Field to Los Angeles; they have to buy a ticket for each leg of the journey. Moreover, their bags can’t fly direct either but must be removed from the airplane and reloaded at every hop. The amendment even prohibits Southwest from advertising its Los Angeles flights in the Dallas area.
Financial analysts and the big carriers regard the Wright Amendment as a boon to Southwest since it is the lone carrier out of Love. Kelleher doesn’t. “If other carriers think it’s so great, let them come into Love and live with it,” he says. Why doesn’t he do what he’s good at—challenge the amendment in court? “Because I told Jim Wright I wouldn’t when I sat down in his office and we wrote the compromise,” he says.
Unable to expand any further out of Love Field, Kelleher began looking for a new base of expansion and settled on Phoenix. Since 1984, Kelleher has doubled Southwest’s daily departures from Phoenix Sky Harbor International Airport, and he is now in a head-to-head battle with America West, which is based in Phoenix and has the largest share of the market. Southwest operates out of dingy forty-year-old Terminal One, so old fashioned that passengers have to walk outside to go from one gate to another. Far from being ashamed of the facility, Kelleher launched an ad campaign, bragging that Terminal One is more convenient to parking areas. Meanwhile, America West holds forth in modern, fortresslike Terminal Three. Southwest won’t remain in Terminal One forever. Over the strong objection of America West, Kelleher won an 8–0 victory before the Phoenix City Council in December for access to sixteen gates at the airport’s fourth terminal, which will be completed in 1990. By then, Kelleher expects Phoenix to be Southwest’s busiest city.
Last November Kelleher went on an all-out raid in the Phoenix area by slashing fares and aggressively advertising Southwest’s on-time record. America West’s chief executive, Ed Beauvais, matched Kelleher fare cut for fare cut. Now both airlines are offering $19 one-way tickets from Phoenix to Los Angeles, San Diego, and Las Vegas. Some analysts believe that Kelleher may be not just after the Phoenix market but out to take over America West as well. Beauvais expanded rapidly, and in 1987 showed a loss of $45.7 million, but he quickly moved to cut flights and personnel and is managing to hang on.
Kelleher’s heaviest artillery in Phoenix is the same as it is in Texas—his personality. Recently he appeared on Phoenix television stations with a brown-paper bag over his head. He was identified as the Unknown Flyer. The thirty-second ad was in response to America West’s charge that Southwest passengers are embarrassed to fly such a no-frills airline with “plain” planes. “If you’re embarrassed to fly the airline with the most convenient schedules to the cities it serves, Southwest will give you this bag,” says the Unknown Flyer. He then offers the bag to the passengers who are embarrassed to fly the airline with the fewest customer complaints in the country. Kelleher then lifts the bag from his head and offers to give the bag to anyone who flies Southwest “for all the money you’ll save flying with us.” The final scene shows Kelleher in a shower of money, grinning at the camera.
Such antics are a regular part of his day. When Kelleher painted one of his 737-300’s to look like Sea World’s killer whale and christened the airplane Shamu One, he got a telephone call from American Airlines’ Crandall, who congratulated him for the marketing gimmick. “Just one question,” asked Crandall. “What are you going to do with all the whale shit?” In a nanosecond Kelleher replied, “I’m going to turn it into chocolate mousse and spoon-feed it to Yankees from Rhode Island.” The following Monday, Crandall, a Yankee from Rhode Island, received a large tub filled with chocolate mousse with a Shamu spoon stuck poetically in the center.
Like Shamu, the company icon, Kelleher may be a showboat, but his basic instincts are those of a killer. The lesson of the Phoenix war is that in the era of deregulation, it’s attack or perish. Competition and mergers have wiped out the smaller, weaker airlines. The moment America West showed a loss, it became a target for acquisition. Kelleher believes the reason no airline has tried to take over Southwest is its strong balance sheet. Says Kelleher in killer-whale fashion, “The way to avoid a takeover is to keep moving and stay strong.”
Kelleher says he feels like he’s been in the Twilight Zone: Before deregulation in 1978, the top ten carriers transported 90 percent of all passengers; in the ten years after deregulation, the same thing is still true. Nonetheless, Kelleher is still an advocate of deregulation. It was Southwest’s early record of low fares and getting high investment returns that helped convince the U.S. Congress that deregulation of the industry would benefit passengers. But deep fare cuts that are endemic to airline warfare make shareholders nervous. One evening he was complaining about the fare wars over dinner with his daughter Ruth, who looked at him and said, “Stop whining, Dad. You started this.”
Kelleher believes that what needs revamping are the facilities that make air travel possible. Since deregulation, traffic has nearly doubled, from 243 million passengers annually to 468 million, but a major airport hasn’t been built since DFW, fifteen years ago. Now he’s lobbying Congress to build more airports, runways, and traffic-control systems. The main reason Kelleher is not expanding to the East Coast is that air traffic is too congested; he can’t turn his planes around fast enough.
Of course, the question not only for Southwest stockholders but for Texas travelers is, What’s next for Herb Kelleher? Once, Kelleher fancied a career in politics; when he lived in San Antonio, he gave serious consideration to running for the Texas Senate. Lamar Muse believes to this day that Kelleher will succeed Lloyd Bentsen in the U.S. Senate. “Herb is, by nature, a political animal,” Muse says. In pursuing the primary goal of the airline business—shareholder profits—Kelleher has also used the airline to engage in the larger pleasures of war and politics.
Besides, since Southwest Airlines is an extension of Kelleher, he is not prepared to imagine it without him. “The history of Southwest Airlines is still unfolding,” says Kelleher. “I’m not finished yet.” The board of directors is concerned that a man who smokes five packs of cigarettes a day has not identified a clear successor. Employees wander the halls of the headquarters, wondering what would happen to them and their airline if Kelleher dropped dead of a heart attack. When Roy Spence, the president of Austin-based GSD&M, Southwest’s advertising agency, was asked what would happen to the airline if Herb died today, Spence became slack-jawed. He took a few seconds to think about it and then said, with a straight face, “Herb ain’t never going to die.”
Certainly he shows no signs of slowing down. During a rollicking Christmas office party, a group of employees performed their own parody of the “Twelve Days of Christmas,” satirizing various aspects of life at Southwest Airlines. “On the first day of Christmas Herbie gave to me a Jaguar and a big raise,” sang the employees. Kelleher sat at the front table, happily presiding over the pandemonium. His mood improved with each passing verse, as employees petitioned him for no more mistagged bags, no more frequent-flier double credits, no more Fun Fares, and every Friday off. When he rose to respond, Kelleher congratulated them with a revealing remark. “My worst fear,” he told them, “is that one day Southwest Airlines will grow old and stuffy.”
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