Herb’s Flight Plan
Record profits. Great service. A wacky corporate culture. Yeah, yeah, we’ve heard it all before. But where will Southwest Airlines go in the future? Everyplace. And where will Herb Kelleher go? No place—for now.
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It’s a typical day at anything-but- typical Southwest Airlines. Employees scurry around the company’s headquarters on the edge of Dallas’ Love Field in jeans, T-shirts, and other casual attire. Upstairs in the executive suite, their gregarious commander-in-chief, Herb Kelleher, is wearing his CEO power suit: a denim shirt, gray slacks, and topsiders. Having fun at work tops the agenda here, and Kelleher sets the tone, joking with colleagues, hugging female and male co-workers, and gleefully plotting the course for Southwest’s flight into a new millennium. At an age when other chief executives have retired to the golf course or the tennis court, Kelleher, who turns 68 on March 12, is the Energizer Bunny of the skies: He keeps going and going, beating the drum for low fares and frequent hops between more and more cities.
The beat, though, is changing. The hops are getting longer, and Kelleher—as much as he insists that he doesn’t plan to retire—can’t keep going forever. What’s arguably the most successful airline in the business, one that transformed the way people think about travel, is in the midst of its own evolution. The tiny carrier that began flying almost 28 years ago between Dallas, Houston, and San Antonio and built a reputation on short, no-frills flights is now taking giant leaps to both coasts. And it’s landing in some unlikely places. On March 14 the airline will jump all the way to Islip, Long Island’s MacArthur Airport, its first entrée into the New York market. “We’re going to continue to add new cities,” Kelleher says—perhaps two or three each year.
Looking at Southwest’s expanding route map, with lines connecting dots all over the country, it’s clear that the company isn’t just the national airline of Texas anymore. It’s a national airline, period. And it’s only going to get more national as time goes on.
At the Seattle Airport last fall to catch a flight back to Texas, I did a double take: a Southwest plane was taking off. It’s a familiar sight at Love Field, Houston’s Hobby Airport, and the other airports all over Texas, of course, but to see the familiar tan, red, and orange stripes streaking down a runway in the Pacific Northwest was startling. It underscored just how far Southwest has spread its wings.
Since its very first flight—from Dallas to Houston—the airline has pushed into every corner of the country and into the largest aviation markets: Chicago, Los Angeles, and in recent years, the East Coast. Since starting service to Baltimore in 1993, it has added flights up and down the Atlantic seaboard: to Florida and Providence, Rhode Island, in 1996; to Manchester, New Hampshire, last June; and now to New York, from which Southwest will initially make twelve daily nonstops (eight to Baltimore, two to Chicago, and one each to Nashville and Tampa). “In the early years, if anyone had suggested we’d be going into the Northeast or Chicago, we’d have laughed,” says Rollin King, who founded Southwest with Kelleher and served for seven years as its president (though he is now retired, he still sits on the company’s board, as he has since the company’s inception). When it started flying, the airline had only three planes, and it had to move them around quickly and keep them in the air to survive. Today Southwest has a fleet approaching three hundred planes and flies to more than 50 cities in more than half the states in America. Analysts say the cities it will likely serve next are Allentown, Pennsylvania; Richmond, Virginia; Greensboro, North Carolina; and Fort Myers, Florida. Southwest will say only that it has 150 to 160 cities on its list of prospects and doesn’t like to commit to anything too far in advance. “We try to stay fairly nimble in our opportunities,” says Jim Wimberly, its executive vice president of operations.
As Southwest expands, though, its once-sharp image as a short-haul airline is getting blurry. While it still flies point to point rather than hub to hub, as its larger competitors do, the average length of its flights has jumped from five hundred miles in the early nineties to more than six hundred miles by the end of last year. The average fare has crept up too, from just under $60 in the early nineties to about $75 today. At the end of 1998, about 300 of its more than 2,300 daily flights—roughly 13 percent—lasted two hours or longer. Until recently, passengers could fly cross-country on the airline only by making a stop in Nashville, Albuquerque, Phoenix, or Kansas City, Missouri. (It hasn’t routed those flights through Houston because they would compete against long-haul flights by American and other big airlines; it hasn’t routed them through Dallas because a federal law known as the Wright Amendment prohibits long-haul flights from Love Field.) These days, however, Southwest is nearly transcontinental. Last Thanksgiving it made a test run of its first nonstop flight from Baltimore to Oakland, which cost $99 each way. The next month, it added three daily nonstop flights from Baltimore to Phoenix—at two thousand miles, the longest regularly scheduled flight in Southwest’s history.
“When we first started flying,” says King, “we thought fifty minutes to an hour was about the longest customers would take for single-class service with no amenities at all, other than drinks and peanuts. It’s as much that the traveling public has changed.” Indeed, seduced by cheaper fares, passengers seem willing to give up expensive perks like meal service, movies, assigned seating, and first-class sections in favor of cattle-car boarding, peanuts, and packed Boeing 737s. On long flights many people bring boxes of Kentucky Fried Chicken or other food of their own aboard, though that may no longer be necessary; Southwest recently amended its food-service policy, and now, on certain flights, flight attendants offer a “snack pack” with a sausage link, cheese, crackers, and a granola bar.
The long flights have also been an adjustment for the flight attendants, who are used to short jaunts and snappy service, says Paul Sweetin, the president of the Transport Workers Union Local 556, which represents Southwest’s five thousand flight attendants, himself included. “The long hauls have been a real big problem,” he says, “because our group is not used to it, and neither are the passengers. Passengers get a little irritable on the long hauls, and there’s not a lot for the flight attendants to do.”
Why is Southwest messing with a strategy that has worked so well for so long? Kelleher contends it isn’t. ‘We’re not changing our niche or anything,” he says, adding for emphasis that longer-haul, low-frequency service is merely “an adjunct.” Yet he knows that Southwest has a strong incentive to make longer flights, and not only because passengers like the low fares. In October 1997 a new law took effect that reduced the 10 percent federal excise tax on domestic airline tickets but added a new tax on each segment of a flight per ticket. By the year 2002, the tax will be $3 per segment. Airlines that fly short, frequent hops will pay substantially more, while those that fly long distances will pay less. Southwest can’t jack up fares significantly to offset the tax if it wants to continue offering the lowest fares in its markets, so it has started hedging against those higher costs by rapidly adding flights of more than one thousand miles.
How quickly can Southwest expand? That depends on how quickly it can get planes. It flies only one type of aircraft, the Boeing 737, in an all-coach configuration to simplify operations and save on training, scheduling, and maintenance costs. The airline has ordered 129 new Boeing 737-700s, which can fly faster, farther, higher, and more quietly and efficiently than the older planes. Last year Boeing fell behind on its deliveries, delaying Southwest’s service to Islip, but the production problems have been smoothed out. Southwest now plans to get 29 of the new planes by the end of 1999; all systems go.
If success has been good for Southwest and its employees, it has also had the inevitable effect of turning a small company into a big one. Its annual revenues, about $4 billion, are greater than those of several formidable companies, including Clorox and Estée Lauder. It’s also the nation’s most consistently profitable airline, with profits for 26 consecutive years, the last 7 of them company records.
All of which is to say that as much as it still tries to preserve its small-shop atmosphere, the reality is that Southwest wields a big stick in the airline business nationally and even internationally. A slew of airlines in the United States, Europe, and Japan have tried to copy its low-cost, short-haul model with varying degrees of success. Continental tried it with Continental Lite, racked up $100 million in losses in 1994, and pulled the plug on the venture a year later. Smaller carriers like ValuJet (now called AirTran), Kiwi International, and Western Pacific Air also adopted the short-flight, low-fare formula. Richard Branson’s Virgin Atlantic Airways set up a low-cost European operation, Virgin Express, and Branson has said he wants to start a Southwest-type airline in America if he can persuade Congress to ax a federal law restricting foreign ownership of U.S. airlines. Large carriers like Delta and US Airways also have set up low-cost divisions, and American late last year announced its purchase of Reno Air, a struggling low-fare carrier that serves West Coast cities (see “The Canadian at American,” page 25). Meanwhile, a week after Southwest announced its service to Long Island, American said its commuter partner, American Eagle, would begin flying there.
In the past, being small gave Southwest a financial and psychological edge. “The essence of it is not being big, it’s being good,” Kelleher says. “I always tell our folks, ‘Think small and act small and we’ll get bigger. Think big and act like you’re big shots and we’ll get smaller.’ We’ve got to preserve that small-company feel and rapport with people.” Yet as the airline has grown to look more like its big competitors, the scrappy attitude and nurturing culture have proved hard to maintain. Southwest employs almost 26,000 people today, three times as many as it did in 1990. “It was much easier in the early days, when we were fighting for survival, to get the ‘defending the Alamo’ mentality across,” King says.
Preserving that culture is “probably one of the biggest challenges that we have,” says Colleen Barrett, Southwest’s executive vice president of customers and its corporate-culture guru. One of the first things the airline does when it adds service to a new city is set up a local “culture committee” to transplant its egalitarian values to the new location. Southwest encourages what many other companies try to eradicate: camaraderie among employees, revelry on the job, laughter in the halls, individuality, the wearing of “play clothes”—remember the hot pants worn by its flight attendants in the seventies? Its corporate headquarters has been converted into a kind of massive scrapbook; the walls are covered with cards, letters, and photos of employees, their families, and their pets (framed and matted at Southwest’s expense). Birthdays and job anniversaries are cause for celebration. “I keep Kodak and Hallmark in business,” Barrett jokes.
Those “intangibles,” as Barrett and Kelleher like to call them, have very tangible effects. The management and employees of Southwest have one of the best relationships in the industry, and the airline has one of the lowest turnover rates (Fortune magazine recently named the company one of the nation’s best places to work). Labor strife is minimal compared with that of other airlines; even though 86 percent of its work force is unionized, Southwest has had only one strike—in 1980, when mechanics walked off the job for six days. But as the company grows, it gets harder to make employees feel part of a family. Sweetin says many of the flight attendants feel a sense of “detachment” now that Southwest has grown so large. “Herb and Colleen still believe in that small-company atmosphere,” he says. “But the thing is, no matter how much you believe in it, it will never be there, because as the company grows, it gets harder to make employees feel part of a family.”
Hiring new employees also isn’t as easy as it used to be, although Southwest has no shortage of job applicants. The kind of people it’s looking for—workers who are not only skilled but also a good fit with its culture—are more difficult to find. “We have to work harder today to hire the kind of attitude that we want than we did five years ago, and we have to interview far more people to get one position filled,” Barrett says. “That is a huge challenge.” Once hired, it’s almost impossible to get all the new people to the Dallas headquarters for indoctrination into Southwest’s culture, so Barrett and other “missionaries” go to them, spreading the word about the company’s democratic values. Kelleher also does his part to steer employees in the right direction. “A guy said to me the other day, ‘In my department … ,’” Kelleher says with a laugh, “and I said, ‘Oh, are you not part of Southwest Airlines anymore? Excuse me, I didn’t realize you’d split off. Have we notified the SEC?’”
Exporting Southwest’s values and attitudes to new venues, though, has hit some turbulence. The airline had the most problems in Los Angeles and Chicago, where high-strung customers didn’t readily warm up to Texas friendliness. When Southwest started serving Chicago’s Midway Airport, in 1990, its boarding areas were small and jammed with travelers who had “steam coming out of their ears,” Barrett recalls. “You tell them you’ve got a delayed flight and they are over the ticket counter at your people.” Southwest responded by investing $20 million to make improvements at Midway, including more gate space, and bringing in more experienced managers who could handle the pressure.
That begs the question of New York: How will famously tense Gothamites respond to the arrival of a Texas company known for its hokey antics (such as singing flight attendants) and hyperextroverted CEO? Kelleher—who is a New Jersey native—isn’t worried. As he points out, Southwest’s foray into the Northeast has been smooth compared with its experience in the midwest and on the West Coast; in fact, the airline received a warm reception in Providence and Manchester, where travelers hungry for more flights and lower fares have taken big hair and twangs in stride. “When Southwest announced it was coming, northern New England hit the lottery,” says Brian O’Neill, the Manchester airport’s assistant director. Once Southwest and MetroJet (US Airways’ low-cost carrier) began offering service from Manchester last summer, fares to destinations like Chicago were cut in half, and locals cheered. The story is similar everywhere Southwest begins new service. “Where fares have gone down,” Kelleher says, “is our route map.”
Such confidence. Such a can-do attitude. Few companies seem so personified by their CEO, and few CEOs seem so adored by so many of their employees. “Everybody loves Herb,” Sweetin says, adding that while Kelleher is “a shrewd businessman,” he genuinely cares about the men and women who work for Southwest. The polar opposite of a stuffed shirt, Kelleher has a well-known appreciation for Wild Turkey (whose master distiller gave him 65 private-label quart bottles for his sixty-fifth birthday; he gave away all but one). And, true to form, rather than hide his chain-smoking, he flaunts it.
It’s hard to imagine Southwest flying into the future without Kelleher, but that too will change. Not that he plans to leave the company anytime soon. Except for pilots, the airline doesn’t have mandatory retirement—one of its secretaries is eighty years old—and Kelleher shows no sign of slowing down. “Hell, no,” he says. “You know, Franco never retired; he just died. Oh, wait. How about, ‘Albert Schweitzer never retired; he just died’? Would that be better than Franco? Do you think?” He breaks into a wide grin. “Of course you’ve heard that there’s no point in discussing this because I’m immortal.”
Kelleher’s current five-year employment contract doesn’t expire until the end of the year 2000. At the moment, he says, he’s inclined to renew it, meaning he’d be in his mid-seventies when it comes up again. He’s not taking anything for granted, though. “The board could throw me out, the employees could decide they don’t like me much, and I could be gone,” he says. “But barring anything like that, I’m interested right now in continuing on as long as Southwest Airlines wants me around. And when Southwest Airlines doesn’t want me around, then it can throw my carcass out on the sidewalk. And it won’t hurt too much because I’ve been thrown out of lots of bars. My face has skidded on a thousand sidewalks.”
It doesn’t look like he’ll be tossed out on the street anytime soon, but if he is, there’s no one waiting to step in—and that’s by design. “One of the things we really work hard on stamping out is corporate politics,” Kelleher says. “We don’t have time for it. We’re still a small carrier compared to our adversaries, and we spend a lot of attention snuffing out turf building along with bureaucracy, hierarchy, and ego, all of which are anathema to us.” Indeed, the subject of succession hasn’t come up at Southwest’s board meetings. “We have a conversation with Herb about that every year or so,” King says, “and he gives an honest appraisal of the people working for him. So far he hasn’t been able to say this person or that person should be his successor. But he has always been able to say what he’d recommend that we do if he got run over by a train.”
Until he retired on January 1 of this year, Gary Barron, Southwest’s executive vice president and chief operations officer, was viewed as Kelleher’s heir apparent. Jim Wimberly, who took over Barron’s job, now looks like a top contender. Barrett, the highest ranking woman in the airline industry, ranks second on the company’s list of officers and goes back a long way with Kelleher (when he was just a lawyer, she was the legal secretary at his firm). But she says she doesn’t have his long-term vision. “One reason Herb and I are such a good team is we’re almost total opposites,” she says. “He’s the visionary. He’s got all these glorious ideas but doesn’t have a clue how to get from A to B. I’m not very visionary, but I’m very systematic, very organized, very time conscious.” Kelleher will only say, “We do have a couple of generations of potential successors here.”
And while some people can’t fathom a Southwest Airlines without Kelleher, King says outsiders probably focus too much on his personality. “I don’t think it’s as important as it’s made out to be,” he says. “And I hope it’s not, because no one lives forever. The airline is not Herb, and he’s not the airline. I think he’d agree with that.”
Kelleher does agree—except, of course, for that part about not living forever.