Texas Monthly Talks
Herb Kelleher
(Page 2 of 2)
Certainly one of the significant differences is size. We have grown enormously. And, you know, I’m frequently asked to address the question of how we’ve maintained the morale of our people as we’ve gotten bigger. What we tell people is, “You keep that as job one, no matter how big you get. You improve your communications. You set up a culture committee to keep the fire alive.”
Southwest has had one for years.
Oh, for years and years and years. We don’t just have a central culture committee; we have one at each facility across the country. I think we’ve been pretty successful in going from 198 people to 35,000 and keeping the esprit de corps alive. At many other companies, they give up as they get bigger. They say, “We’re so big now that we can’t keep this joie de vivre, this effervescence, in our company.” We’ve always said, “It’s the most important thing we have, and we’re going to do everything that’s needed to maintain it.”
One of the inevitable consequences of doing what you’ve done for as long as you have is that other people copy you.
I’ve noticed that as well. But I also think leadership by example is very important. Southwest has never had any disputes over our executives’ being paid too much. Because, quite frankly, we’ve always made sure they were underpaid. We’re not afraid to show our people that we’re not in it for ourselves. Let me give you an example: We negotiated a contract with our pilots in which they took a five-year pay freeze in return for getting stock options. Well, it wasn’t part of the deal, but I immediately took a five-year pay freeze.
Voluntarily.
Voluntarily. To honor what they had done. And I have turned down many, many millions of dollars in salary and options because it didn’t set a good example. Our officers have never received a salary increase that is larger on average than our noncontract employees have gotten. In other words, if they get a 3.5 percent increase, our officers get a 3.5 percent increase. We’ve always done that.
What about price competition? It seems to me that you no longer have a stranglehold on the low-price market.
Yeah. That’s one of the things that we have been confronting. After 9/11, many of our competitors went into Chapter 11 and severely cut their employees’ pay and benefits and became more cost-effective as a consequence. Some that didn’t go into bankruptcy used the threat of bankruptcy as an opportunity to get concessions from their employees. During that whole period, Southwest continued to increase employees’ wages and continued to make contributions to a profit-sharing plan and continued to give a full 401(k) match. And so our labor costs have gone up substantially, as compared with theirs. We don’t regret that, by the way. That’s not an expression of sorrow.
Explain.
We’re perfectly happy with having, generally speaking, the highest pay for employees in the domestic industry. They reward us with tremendous productivity, which lessens the effect. And the other airlines disadvantaged their people. I’m not saying they didn’t have to, in the sense of “either we do this or we fail,” so it’s not a criticism. I’m just talking about the economic effects of it. They became more cost-competitive for a while. Now, of course, with fuel prices soaring, the cost advantage they secured through Chapter 11, or the threat of Chapter 11, is disappearing. I think you’ll find that Southwest’s fare advantage is increasing steadily as the other airlines increase their fares.
How are you not having to increase yours? The fuel prices that they’re paying are the same fuel prices that you’re paying. The bad economy in which they’re operating is the same bad economy in which you’re operating.
Because we’ve been fairly farsighted in hedging our fuel costs [signing contracts guaranteeing they’ll pay a certain amount no matter how high—or low—the price ends up in the future]. Last year our hedges saved us $727 million. It’s huge. That’s not to say that our fuel costs haven’t gone up; thirty percent of our fuel purchases are unprotected by hedges. That’s 450 million gallons a year. And so if fuel goes up by 50 cents, you’re still looking at a lot of additional cost.
Tell me how you’ve managed the post-9/11 piece. The airline industry has weathered it, but Southwest seems to have weathered it a little bit better than the other guys.
I’ve always expressed the aphorism that we manage in good times so we do well in bad times. In other words, don’t get carried away by euphoria. Just because times are good from a standpoint of the economy and passenger traffic, remember that the bad times are going to come, particularly in the airline industry, because it’s so sensitive to an economic downturn. So when 9/11 happened, we had the most conservative balance sheet in the American airline industry, the lowest cost per available seat mile in the American airline industry, and the most liquidity in the American airline industry. In effect, we were prepared.
Even though you never could have predicted how cataclysmic it would be.
Further, we said, “We might be able to make more money if we furlough somebody, but that’s hardly the way to treat our employees.” So we decided that we were going to operate every flight when the fleet could come back up, and we were going to keep every person employed. That’s always been the history of Southwest. The thing I’m most proud of is that we have never had an involuntary furlough of even a single employee. And during the time that I’ve been connected with the airline industry, airlines throughout the world have probably furloughed a million people.
Tell me about the big lessons you’ve learned in the years you’ve been in this business.
You want to create an environment in which people can be themselves—to be effective in business you don’t have to look like a brick. You can make anything complex if you want to, and you can spend innumerable hours debating things that are of no consequence, so you have to prioritize. Fight hierarchy and bureaucracy as hard as you possibly can. Don’t ever let it become the master; always remember it’s the servant. And quickness is important, particularly in the airline business, because your principal capital assets travel at more than five hundred miles an hour. They’re not shoe factories. If a shoe factory closes in Seattle, you can’t move it to San Antonio and have it competing there within a couple of hours, but with airplanes you can. I’ve always said that I want us to strike with the speed and alacrity of a puma.
Before we wrap up, what about your smoking? Not too long ago you were still at five packs a day.
I’ve cut back to three. It was a huge sacrifice. I was afraid I might have to go into rehab.
Once an outlier, always an outlier.
Let me tell you what happened to me last August. I was outside Presbyterian Hospital in Dallas—I’d gone to visit a friend of mine—and I was having a cigarette. And this fellow I knew came out of the hospital and said, “What are you doing out here?” And I said, “Actually, I’m developing a melanoma so I can sue the hospital for making me stand out in the sun to smoke. I’m building up a tort case.”
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