We are on a mission of love. There are no other words to describe it. After a meeting of Southwest Airlines’ Culture Committee, sixteen of us have deployed down a dim, windowless hallway in the company’s inner sanctum at Love Field, in Dallas. I am following a young woman named Jamie Lanham, who is wearing a metallic-pink cowboy hat, a pink tutu, and blue jeans. She is very excited. “Don’t you love this?” she asks. “People here eat this up.” She’s talking about celebration-crazed Southwest, which loves partying and commemorating events and putting on shows and dressing up in funny outfits. The idea that an airline would have a 129-person committee dedicated to such a thing might seem a little strange, but not when it’s Southwest, the same company whose flight attendants deliver safety instructions in rap and whose co-founder has shown up on flights dressed as the Easter Bunny.

Our mission is to sneak up on a department known as Crew Scheduling, then shower its workers with praise, adoration, and, yes, love, for no other reason than that they are doing one heck of a good job. Showing love and appreciation to fellow workers is a bedrock principle at Southwest. The committee’s job is to make sure no one forgets that. Team members carry trays of cupcakes, buckets of candy, and a hand-painted poster that reads “To the Best People Movers in the Business.” As if they needed more of these sorts of things, they also have a pile of “Kick Tail-a-Grams,” messages of thanks and encouragement addressed to individual workers. When we enter the work area, the team members disperse. They tape the poster to the wall. They distribute the Kick Tails. They hand out the goodies. As we return to the main conference room—where we will rejoin eight other groups that have been on similar missions—they whoop, fist-bump, and high-five one another.

If this strikes you as altogether too sophomoric, rah-rah, and naively cheerful for a heavily unionized, publicly traded, $15 billion corporation in a profit-obsessed, viciously Darwinian industry, I would make two observations. First, you will never be hired at Southwest Airlines, where your cynical, non-relentlessly-upbeat attitude would stick out like a tarantula on a wedding cake. Second, you are missing the point, which is that it is precisely this oddball, love-based, employee-first, party-down culture that has made Southwest Airlines one of the most formidable and feared competitors in the world, a company that has left in its wake dozens of wounded, dying, or dead legacy airlines—including, most recently, Fort Worth’s American Airlines, which was bleeding $100 million a month until it declared bankruptcy, in November. “We like to win,” says Ginger Hardage, the senior vice president of culture and communications, with a dazzling smile. “The way we beat our competitors is by delighting and surprising our customers. We win with outstanding customer service. We win by appreciating our fellow workers.” The company also wins by crushing its rivals and putting them out of business.

It is this mind-set that has carried Southwest through the worst decade in the history of air travel. The nightmare began with 9/11 and included two brutal economic downturns, the quintupling of oil prices, and the transformation of airport terminals into sensor-studded high-security zones. During those years, an astounding number of airlines went bankrupt, including United, Delta, Northwest, and US Airways. Carriers lost more than $50 billion, shed 160,000 jobs, slashed routes, and watched as their stocks plummeted to all-time lows or lost their value entirely. Even in an industry that has always been inherently risky, the first decade of the twenty-first century stood out as an unalloyed disaster.

But not for Southwest. The airline has emerged from the wreckage as the clear winner. The company made billions. It did not lay off a single employee or ground a single plane to save money. It bought new jets and added flights. It became the nation’s largest domestic airline, carrying a record 104 million passengers last year. Its $3 billion acquisition of AirTran in 2010 gave it access to Atlanta’s Hartsfield–Jackson, the busiest airport in the country, and ultimately its first international destinations, in Mexico and the Caribbean. Southwest’s “Bags Fly Free” campaign has been one of the most successful marketing strategies in recent history. The company has been an industry leader in customer satisfaction for nearly two decades, and this year it ranked number four on Fortune magazine’s list of the “World’s Most Admired Companies.”

Success, however, has come at a price. Southwest made a series of daring decisions in the past decade—in stark opposition to what its competitors were doing—that allowed the company to ride out the storm, but as a result, the airline is no longer the scrappy short-hop carrier that flew only into quirky airports like Love and Hobby, gave out flimsy pieces of plastic as boarding passes, and often charged half what other airlines did. And though it remains one of Texas’s most iconic companies, customers who are old enough to remember know that Southwest is very far from the days when attractive women wearing orange hot pants and white go-go boots served Bloody Marys on the 8 a.m. “Love Bird” from Dallas to Houston.

Yet in an era when the airline industry is barely more popular than Congress, and many passengers consider flying a form of slow torture, with its endless lines, delays, fees, and security hassles, the airline has managed to chart a new course that has left its competitors idling on the runway. The question is, How did Southwest do it?

It is easy to forget, in this age of iPhones and text messages and nonstop flights to Frankfurt and Tokyo, just how profoundly Southwest Airlines changed the way Texans lived and did business. The transformation began in 1971, when Southwest, a shoestring operation sketched out on the back of a cocktail napkin in San Antonio’s St. Anthony Club by founders Herb Kelleher and Rollin King, began flying three Boeing 737’s between Houston, Dallas, and San Antonio. The new airline had two noteworthy characteristics: its fares were dirt cheap, and, owing to its amazing efficiency in turning planes around at airport gates, it was able to keep those jets almost continuously in the air. Before Southwest, it usually made sense for a businessman to drive from San Antonio to Houston for an afternoon meeting. Not anymore. For $40 you could hop on a flight with incredibly friendly hostesses and wisecracking pilots and be in Houston for the meeting and lunch—and still be back in San Antonio by late afternoon to shoot a round of golf. Texans who were loyal to their cars flocked to the airport, and the better Southwest did, the more flights it added. Its flight service began to resemble a bus schedule. In this way, the airline shrank the state, linking its major cities in a way they had never been before, and prompted enormous numbers of people to choose flying over driving.

For its spectacular early success, the upstart airline was rewarded with a vicious fight for survival. Southwest was blackballed, boycotted, and even prevented from using airport fuel hydrants. It was sued in 1972 for refusing to help pay for the new DFW Airport, choosing instead to operate out of Love Field, which was closer to downtown and where planes could be turned around faster. Braniff once undercut Southwest by offering a $13 fare between Houston and Dallas, to which the company responded with an ad campaign saying “Nobody’s going to shoot Southwest out of the sky for a lousy $13.” Kelleher, a five-pack-a-day smoker with a fondness for 100-proof whiskey who also happened to be a brilliant tactician with killer instincts, pointed out that Braniff was trying to drive Southwest out of business, and as it turned out, Braniff and Texas International Airlines were both indicted in 1975 for scheming to do precisely that. In 1979 the competition once again moved against Southwest, using Congress as an ally. Lawmakers passed the so-called Wright Amendment, named for Fort Worth congressman Jim Wright, which severely restricted Southwest’s flights from its home base at Love Field.

But the airline soldiered on. A lawyer by training, Kelleher spent much of his time in litigation, often taking on teams of corporate attorneys. His company became a cause as much as an airline, and embattled employees got caught up in the new culture (the airline even chose “LUV” as its symbol on the New York Stock Exchange). His name appeared on bumper stickers that read “Fly Southwest. Herb Needs the Money,” and he once arm-wrestled a competitor for the right to use an advertising slogan (he lost). When rival America West claimed that passengers were embarrassed to fly on a discount airline that fed its customers peanuts, Kelleher kept up his flamboyant, madcap image by putting a paper bag over his head and appearing in a television ad as the “Unknown Flyer.”

Yet he understood the importance of smart business decisions as much as he understood the power of his public persona. Costs were kept at absurdly low levels, which allowed Southwest to offer fares that its rivals simply could not compete with. The company saved money by flying primarily one type of jet, by flying to smaller airports where traffic was low and planes could be turned around in as little as ten minutes, and by flying point to point instead of using the usual hub-and-spoke system. Its workforce was among the most productive in the country, from pilots and flight attendants to baggage handlers and cleaning crews. At Southwest, everyone did whatever it took to keep planes on time and in the air. It soon became Texas’s favorite little airline, as powerful a homegrown brand as Imperial Sugar or the Dallas Cowboys. By the late eighties, it was growing exponentially and had a virtual monopoly on air travel in the state.

Texas would never be the same—and neither would the airline industry. When Southwest opened gates at Baltimore/Washington International Airport in 1993, for example, fares dropped 70 percent, which in turn caused the number of passengers to increase sevenfold. Southwest had, in effect, created a huge market that had never existed before, and it continued to do this all over the country, often blowing traditional carriers out of cities they had been operating in for years.

Southwest was not only cheap but also fiercely competitive. In 1994 United Airlines, then the largest carrier in the world, unveiled its own short-hop airline, the United Shuttle, which mimicked Southwest, down to its no-frills service, 737-only aircraft, low fares, and electronic ticketing. Southwest responded by showing just how tough it could be. In a letter to employees, Kelleher announced, using military terms, that United Shuttle “will launch its initial direct assault against Southwest, in the western part of our route system.” He pointed out that United had $1 billion in cash and one hundred airplanes in reserve that could be “hurled against us.” He added that one of the key elements in the struggle was Southwest’s “devotion to warm, hospitable, caring, and loving Customer Service.”

Relishing the underdog role, employees took up the challenge. Some workers at the Albuquerque reservations center even wore fatigues. There was no immediate and dramatic victory, but as time went on, it became clear that United Shuttle couldn’t pry passengers away from Southwest. By 2000, two out of three shuttles between Los Angeles and San Francisco were either delayed or canceled. A year later the much-hyped shuttle service was quietly folded back into United, which itself declared bankruptcy in 2002, having proved that it could not compete head-to-head with a carrier a fraction of its size.

“Southwest’s business model is not rocket science,” says Kevin Freiberg, the coauthor of the best-selling book Nuts! “You can fly point to point the way they do, you can hire the way they do. Just take their model and emulate it. But what you can’t emulate is the culture and spirit of the people. When United said, ‘We are going to have this great shuttle on the West Coast and turn planes faster and do all this better than Southwest,’ the unions just said, ‘The hell we are. You want us to let pilots come down and throw bags? What turnip truck did you just fall off of?’ ”

Southwest’s culture was visible to the public mainly in the form of its customer service, which could range from whimsical and even zany to compassionate. Most passengers encountered the zany part in the air: flight attendants, for example, informed passengers that in the event of a loss of cabin pressure, they should immediately stop screaming, deposit a quarter, and unlike President Clinton, inhale. There were almost as many stories about Southwest employees going out of their way to help customers. An Amarillo ramp agent took pity on one flier, stranded by bad weather, who had no money and no place to stay. The agent drove him home, two hours one way, to Lubbock.

Meanwhile, Southwest kept adding new routes and new cities. The pattern was always the same. The company would go into a new city, drive down fares, and increase traffic. Southwest consistently received the lowest rate of complaints of any airline and often led the pack in on-time arrivals. It was one of the first airlines to go ticketless and allow online booking. Its relationship with its employees was on display in the early nineties, when workers created a program called “Fuel from the Heart” to have money withdrawn from their paychecks to help the company cope with the high cost of fuel during the Gulf war. As the economy hummed along in the mid- to late nineties, so did Southwest.

During the last decade of the twentieth century, it seemed as though nothing could stop Southwest’s astounding growth. “The nineties, in retrospect, were just cruise control,” says Gary Kelly, who started with the company in 1986 and became CEO in 2004 and chairman and president in 2008. “Every year we were buying planes, adding routes, hiring employees, adding cities, making profits, and the stock was really soaring. We did a lot of things right. But we ran that play. The vision that we had in the seventies was being run out.”

Still, no one could have predicted how quickly the good times would come to an end.

It took only 102 minutes on September 11, 2001, from when the first plane slammed into the north tower of the World Trade Center to the building’s collapse, to destroy the country’s idea of what the twenty-first century was going to look like. The attacks cut deeply into the airline business because the weapons the terrorists used, after all, were passenger jets. There were massive new security concerns. People were afraid to fly. In the days after 9/11, airlines collectively found themselves losing up to $300 million a day. American and Northwest announced an immediate 20 percent cut in flights. Houston-based Continental said it would lay off 12,000 of its 56,000 employees. For weeks air travel essentially came to a complete halt, and the industry plunged into the recession.

Suddenly Southwest’s simple, stripped-down technology systems were viewed as a huge security liability. The airline had been known for having neither tickets nor boarding passes for the sake of efficiency and keeping costs low. Before 9/11, Southwest didn’t even have the ability to print a boarding pass. To make things more difficult, Kelleher had stepped down as CEO three months earlier, installing Jim Parker in the job (Kelleher stayed on as chairman for seven more years). Any corporate transition is difficult, but given the outsized role that Kelleher had played, his replacement was almost certain to suffer by comparison.

Now Parker was being tested in ways no one could have imagined. The company had long had a no-furlough policy—a core tenet of the culture was that Southwest did not lay people off. Parker asserted this policy again. “It was a very difficult time,” says Ginger Hardage. “We slashed budgets to the bone. We stopped doing a lot of charitable giving. We had employees write in, suggesting we discontinue lawn services. They were willing to bring in their own lawn mowers. The leadership team took voluntary pay cuts.” The company also negotiated a deal with Boeing to defer deliveries of jets. “We were profitable in the fourth quarter of 2001, and that may be one of the more significant accomplishments in the company’s history,” says Kelly. “We didn’t ground any aircraft, and we didn’t furlough any employees.”

This was partly due to the flexibility that came with being smaller and more decentralized than its competitors. Southwest, which had approximately three hundred planes and 31,000 employees at the time, could act faster than other airlines. “While other carriers were cutting back on personnel, we hired 1,500 customer service agents,” says Jim Wimberly, who was the chief operating officer at the time. “We knew that given the short-haul nature of our business plan, we had to do everything to get the airport experience back to normal. We also took immediate advantage of cutbacks at our competitors. Our analysts would watch the computer systems of other airlines and notice that America West was canceling three flights from Phoenix to L.A. Where it made sense, we would just add and replace them. We were nimble enough to take advantage primarily because of the relationships we had with each other. There were no internal barriers. There were thousands and thousands of small decisions like that that were made every single day.”

As always, Southwest took care of its customers. On September 11, a Southwest jet was forced to land in Grand Rapids, Michigan, and the pilot was told that he would have to wait four hours on the tarmac before unloading passengers. Instead, the crew of the 737 grabbed an idle luggage loader and used it to improvise a ramp to escort passengers to the ground. Crew members then arranged for buses to take them to the Amtrak station and paid for their train tickets home.

After 9/11 most airlines refused to refund tickets for passengers who were afraid to fly. Southwest never hesitated to give money back, despite the risk. “There was just so much uncertainty,” says Wimberly. “There were hundreds of millions of dollars at stake. We really didn’t know how it would turn out. It could have turned out to be one of the biggest goofs ever.” Sometimes passengers reciprocated the love: in the months following 9/11, some of Southwest’s loyal customers sent checks to the airline to help it get through the hard times. In addition, the company took care of its employees by funding the company’s profit-sharing plan, another risk that paid off, in part because it helped ensure the company’s over-the-top productivity in those critical months.

Though it avoided the trouble that had led rivals into bankruptcy, Southwest suffered anyway. Having grown by leaps and bounds for as long as anyone could remember, it now settled into survival mode. It also encountered the first real labor turbulence in its three decades of existence. The airline had always been known for its harmonious relations with its unions, but in 2002 the company entered a painful two-year negotiation with its flight attendants that centered on work rules, benefits, and compensation. It soon became one of the company’s harshest tests.

One reason for this was that the attendants turned the full force of Southwest’s culture back on the company. On Valentine’s Day 2003, they staged what Thom McDaniel, the president of Transport Workers Union Local 556, which represents Southwest attendants, calls “a very friendly protest.” They sang karaoke in the airports, tweaking the lyrics to the song “Love Will Keep Us Together,” and handed out Hershey’s Kisses and valentines—a far cry from picketers’ grimly staking out sidewalks with “Unfair” signs. McDaniel’s group also held a “Summer of Tough Luv” tour in cities across the country. “It had the feel of Woodstock,” he says. “We had our little handouts with pictures of old VW buses.” They believed flight attendants weren’t being paid fairly and claimed their salaries lagged behind the industry average by 30 percent.

“We felt in many ways that this was our effort to save the culture,” McDaniel says. “The real problem was that Southwest had been telling us for years that we were the key to their success, and our people actually believed that.” The effect on the company that touted love as a core value was traumatic. “It was a total culture shock,” he says. “There had been some hard feelings within the company, even from our own flight attendants, over the kind of stance we had taken and the tactics we had used.”

Those feelings extended to the executive office. McDaniel’s group poked fun at Parker’s refusal to respond to their offers by staging a “Where’s Jim?” event, based on the Where’s Waldo? books. Parker abruptly withdrew from the negotiations in 2004, replaced at the table by Kelleher and president Colleen Barrett. Six weeks later an agreement was reached, and Parker resigned soon after, a stunning blow to an airline that had prided itself on the stability of its management. Though he did not say the labor negotiation drove him out, people inside and outside the company believed that it had. Parker was replaced by Kelly, a mild-mannered accountant who is famous around the office for his costumes at the annual Halloween parties, including Hairspray’s Edna Turnblad, a member of the band Kiss, and a green-skinned Frankenstein.

At an employee banquet with 2,500 people right after the negotiations closed, Barrett’s announcement that the company had finally reached an agreement with the flight attendants was greeted with scattered boos. According to McDaniel, she told them to stop. “She said, ‘No, no, no. We don’t do that,’ ” he says. “ ‘We’re family, and families sometimes disagree and sometimes they fight, and they resolve their differences and move on.’ This was the president of the company saying this. She wasn’t sugarcoating it.”

The culture survived, in many ways, because Colleen Barrett was the one who had invented it. Known inside the company as the “Queen of Heart,” she had started as Kelleher’s secretary when he was still a lawyer in San Antonio and had risen through the ranks at his side. For years she had served as the main enforcer of the Golden Rule, the notion of loving your fellow employees, the idea of servant leadership, and the company’s “inverted pyramid” of value, in which employees rank first in importance, followed by customers, and then shareholders.

“We use the word ‘love’ a lot,” Barrett told me during a 2003 interview in her cramped, windowless office, a legacy of Kelleher’s egalitarian desire to keep his employees from competing for corner offices. “That’s pretty edgy in corporate America. I think that the sentimentality of family, the sharing, and the loving are the basis of who we are.” How was Southwest able to keep renewing its culture? One answer lies in its interview process. Since the company was so picky about its requirements, it hired only one percent of all applicants. Managers used such things as a humor test to weed out unacceptable candidates. (For example, prospective pilots were sometimes asked to change into Southwest shorts during their interviews; if they weren’t good sports, they failed.)

Though its workers had become some of the highest paid in the business—its senior pilots made $200,000 and up—its workforce was also by far the most productive in the industry, giving Southwest a labor cost advantage over its larger competitors. Its employees turned planes around so fast that Southwest gates often handled nearly twice the number of planes and flights that other airlines could manage. “The simple fact is that the company manages to turn flights with far less personnel than our peer airlines,” says Jacob North, a pilot and spokesperson for Southwest’s pilots union. “Our head count has a lot to do with the efficiency of our model. When there is not a lot of fat, there is not a lot of fat to trim.”

There was something else too. In the late nineties, Kelly, then CFO, had begun experimenting with a financial practice called fuel hedging that no other airline was taking seriously. Essentially it means putting money down to lock in the price a company will spend on fuel in the future and betting on which way the price of oil will go. The right bet can save a company from the whipsawing effects of oil prices. The wrong bet can result in huge losses, as it did in 2008 at Cathay Pacific Airways, which lost $980 million, and United, which lost $519 million.

When the price of oil took off after 1999, and the cost of jet fuel with it, Southwest already had multiyear hedging contracts in place. (Oil prices rose from an average of $27.40 a barrel in 2000 to $37.66 in 2004 and $91.48 in 2008; currently the price hovers around $100.) By the end of 2011, Southwest had saved an astounding $4 billion through its fuel hedges. When I asked how he had managed this, Kelly said, “The thing you have to understand about us is that we are good at so many things. We are good at customer service, but we are not one-dimensional. You can’t just be good at one thing and expect to survive.”

In 2001 Southwest became the largest domestic carrier in the country, with 63 million passengers. Its success with fuel hedging helped shelter it from the horrors that beset the rest of the industry, and over the next four years other airlines collectively lost $35 billion—and few of the legacy carriers seemed to have any idea how to stop the hemorrhaging. Though they cut routes and grounded planes, they were still trapped between rising fuel prices, declining passenger travel, and union contracts that made it difficult to scale back their labor costs. Where Southwest had always been a lean, stripped-down operation, the legacies tended to have significantly higher basic costs, and they paid for that now. Many sought protection: in 2002 United Airlines and US Airways declared bankruptcy; in 2005 Delta Airlines and Northwest Airlines did the same. Two major carriers that did not seek protection in those years were also based in Texas: Continental and American. The former had already gone bankrupt twice before merging with United, and American finally succumbed last November, after years of losses.

In 2004, while most of the other airlines were cutting back on flights, Southwest decided to go back to its old ways. The airline bought 150 planes over the next five years, moving in on destinations abandoned by other carriers. It took advantage of the bankruptcy of ATA Airlines to purchase six new gates at Midway Airport, in Chicago. It opened service in Pittsburgh in 2005, where US Airways had practically given up on the market. Southwest also set about overturning the Wright Amendment, which had severely limited the cities it could fly to out of Love Field.

Most of these moves paid off quickly and handsomely. Chicago has become an example of this: with 240 departures a day to 55 cities, it is now the airline’s busiest operation. In Denver, between 2005 and 2010, United’s market share went from 48 percent to 27 percent, while Southwest’s shot from zero to 26 percent. In St. Louis, Southwest’s market share jumped from 26 to 40 percent, while American’s dropped from 44 to 21 percent. This sort of success was repeated in a number of cities, with comparably dire effects on competitors. In Las Vegas, US Airways’ share dropped from 21 percent to 8 percent in the same five years. Once the Wright Amendment was overturned, in 2006, Dallas soon became one of Southwest’s fastest-growing markets (the amendment’s final provisions will expire in 2014).

And as it did in the months after 9/11, Southwest showed that it could survive a steep recession. In 2008 United and American began to charge fees for checked baggage, at up to $25 per bag. The rest of the industry followed, and some passengers were soon paying more than $100 for their bags on round-trip flights. Southwest decided against following the herd. It was a risky decision, since it defied the entire industry. More importantly, the company was turning its back on billions of dollars of new revenue, which kept most of the other airlines afloat.

“We quickly became aware that we were going to be the only holdout on bag fees,” Kelly says, “and we realized at the same time that we could take a unique position. That seemed like a good idea. But then 2009 unfolded with the recession, and suddenly it became a fairly dramatic decision. We lost money in the first quarter of 2009.” Soon a chorus of analysts and commentators were lambasting Kelly for his wrongheaded move. “We were very worried,” he says. “We were preparing to ground airplanes and furlough employees for the first time in company history. And the argument was ‘We’re not going to charge bag fees?’ It was a difficult, scary time.”

But the company held fast. In June 2009 Southwest launched “Bags Fly Free,” which mocked the other airlines’ practice of nickel-and-diming their passengers. “We decided to trust our customers,” says Kelly. “We believed that if we told them what we were doing, they would support us.” Southwest also used the campaign to remind customers that it had never charged for changing or canceling tickets either, though the major airlines had been doing it for fifteen years. “We thought of adding a change fee,” Kelly says. “But we threw cold water on ourselves and asked, ‘How can you charge change fees if what you stand for is that you don’t charge fees?’ ”

The result of the marketing campaign was profound. According to Southwest, this helped add one full percentage point of market share in little more than a year, which is remarkable in a world where share typically changes at a glacial pace. The airline increased passenger loads by 10 percent and produced fully $2 billion in new revenue. Its profit rose from $99 million in 2009 to $459 million in 2010, setting records along the way for operating revenue ($12.1 billion), passenger miles (78 billion), and passengers carried (88 million).

That doesn’t mean Southwest won everywhere it went. In some cases, the trimmed-down legacy carriers proved worthy adversaries. US Airways, which had used its two bankruptcies since 9/11 to radically trim costs, turned out to be a tough competitor in Philadelphia. In September 2011 the Philadelphia Inquirer noted that “Southwest has been retreating in Philadelphia from a peak of 71 flights to 20 cities to 55 flights to 18 destinations.” The company had plans to eliminate four more cities in the coming months. “They really thought US Airways was dying,” says airline analyst and investor Wayne Rutman. “So their high-percentage bet went wrong.”

There were other bumps along the way that hurt Southwest’s carefully tended image. In April 2011 passengers experienced a terrifying moment when the roof of their jet peeled back in mid-flight. Though the 737 landed safely, the airline was forced to ground eighty of its older planes for inspection. Then, two months later, the public learned that a pilot had accidentally broadcast a profanity-laced tirade from the cockpit in which he insulted women, homosexuals, and the elderly, putting Southwest on the defensive once again. It was not the kind of news the company wanted to deal with as it celebrated its fortieth anniversary.

As Southwest began to look to the future, the contrarian company surprised the industry with a decision that sounded downright . . . normal. Over the years, the other major carriers had grown by acquisition, with mergers between United and Continental, Delta and Northwest, and US Airways and America West. That had never been Southwest’s style, until the announcement in September 2010 that it had acquired AirTran. Overnight, the company increased in size by 25 percent and radically changed its strategy. Southwest had never flown internationally, as AirTran does, and its fleet consisted only of Boeing 737’s, whereas more than half of AirTran’s planes were the smaller 717’s. Observers worried that Southwest was just a little too special to try to merge with another carrier. If ever there was a mission tailor-made for the Culture Committee, it was the addition of AirTran’s roughly 8,000 employees to Southwest’s 35,000.

Southwest, it became clear, was breaking its old rules. But that was not unexpected, because many others had already been set aside: in the old days, Southwest flew mostly short hops of 250 miles or less. Now flights averaged 648 miles. The company once shunned major airports. Now it flew out of Boston Logan, Atlanta’s Hartsfield-Jackson, Denver International, New York’s LaGuardia, Philadelphia International, and LAX—part of the reason its 10-to-15-minute turnarounds have swelled to 28 minutes. That, in turn, has hurt its once legendary punctuality. The onetime industry leader in on-time arrivals, Southwest is edging toward the middle of the pack. According to the U.S. Department of Transportation, it ranked seventh out of eighteen carriers in on-time travel for the twelve months ending in November 2011. It recently ranked ninth out of sixteen carriers in incidence of mishandled baggage. And as sacrilegious as it might sound, recent studies have shown that though Southwest continues to have generally low fares, they are often not the cheapest.

The other big change, as all Southwest customers know, is in the carrier’s seating policy. For more than three decades, open seating was like Mosaic law—it was what Southwest was all about. Many considered it unthinkable to change it. But by 2005, business travelers were becoming dissatisfied with Southwest’s service, particularly with full, long-haul flights where they often ended up in the middle seat. Thus began, in 2006, what Kelly calls a “volcanic dispute” inside the company about the seating process, which was the number one passenger complaint. “First there were theories that we could turn our airplanes faster with assigned seats, because it is more orderly to do it that way,” says Kelly. “And then people said, ‘We all know customers prefer assigned seating anyway.’ On the other hand, we had people who do this every day saying, ‘Hey, we know how to do this, and open seating is better.’ ”

After extensive testing in San Diego and San Antonio and a series of customer surveys, the conclusion became unmistakable: planes board faster with open seating than with assigned seating. “There is something about the anxiety of not knowing which seat you are going to get that causes people to move faster,” says Kelly. The company’s ultimate solution was to keep open seating but designate three general boarding groups. In addition, fliers could purchase an upgraded ticket to ensure a place near the front of the line in the “A” group. While this is clearly a “fee,” Southwest insisted that, because it is voluntary, it was not like bag or ticket-change fees. To further shore up its appeal to business travelers, Southwest inaugurated a revamped frequent-flier program in March 2011. So far the reviews have been fair to good.

Does all this mean that Southwest is becoming like the other legacy carriers? To its employees, the very idea is heretical. “The worst thing you could say about us is that we are like every other airline,” says Hardage, “because we work very hard to be different.” In some ways, the company still is. It continues to have the best safety record in the history of the industry and has never had a passenger fatality (though a jet skidded off a runway in Chicago in 2005, hitting a car and killing a six-year-old boy).

And it’s clear the same enthusiasm from the early seventies is still alive and well. On a recent Southwest flight from Austin to Dallas, one of the flight attendants serenaded the cabin with her off-key version of a song from Bye Bye Birdie over the intercom: “We love you, passengers, oh yes, we do. We love you, passengers, and we’ll be true. When you’re not near us, we’re blue. Oh, passengers, we love you.” It was almost embarrassingly sincere. On another flight the attendants turned the lights out in the aircraft, produced a battery-powered candle, and sang “Happy Birthday” to a passenger. Perhaps that’s why Southwest still receives by far the fewest customer complaints among the largest carriers in the business and ranks high in customer satisfaction, as it has for most of the past two decades.

Now that Southwest is a mature company in a highly competitive industry full of slimmed-down legacy carriers and innovative low-cost airlines like JetBlue, how can it duplicate its success? The answer is that it can’t. The world is too different. Southwest is too big, and it is no longer growing at its old frenetic rate, back when it was an upstart that flew short routes exclusively in Texas. As it turns out, a key part of its formula was its rapid rate of growth. In an industry where pay is determined by seniority, a fast-growing airline is continually adding new, junior personnel, thus holding down average labor costs. “If you don’t grow or reduce capacity, your labor costs eventually start to choke you,” says Wimberly, the former COO. “Given the cost structure of air carriers, your options are limited. Now, with American Airlines’ bankruptcy, Southwest might have one of the highest labor costs of all the major carriers. I don’t know how it is going to play out exactly, but there may be a choice between a modest targeted layoff or minor pay reductions—or both.” Neither, of course, has ever occurred at Southwest.

Underscoring this risk, Kelly sent a strongly worded warning last December to all Southwest employees. “All the majors from 1989 have gone bankrupt,” he wrote. “Pan Am. Eastern. Braniff. Continental. America West. TWA. US Air. United. Delta. Northwest. And now, American. Every single one failed. . . . Why? Not because of customer service, but because of high costs. Great customer service cannot overcome high costs.” He also pointed out that “while our costs are still lower, our advantage has been cut in half.”

One sure way out of this dilemma is to restore growth, and many industry insiders are betting that Southwest’s future lies in international flights, the final frontier for the airline. The AirTran acquisition means that Southwest will soon fly to eight destinations in Mexico and the Caribbean, the first time it has ever flown outside the continental United States.

“They are going to have to find new sources of revenue, and international seems to be the place to do that,” says William Swelbar, an airline analyst at the Massachusetts Institute of Technology. “The U.S. marketplace is full, even for a low-cost carrier like Southwest. It has the range to get to Central America. Obviously Hawaii is on its radar screen. It is really left with no choice but to expand its business outside the forty-eight contiguous states.”

And AirTran is showing Southwest how to do that. Perhaps the biggest question right now is how Southwest will handle the merger of the two companies. An encouraging early sign, say Southwest’s managers, came when the pilots of both airlines ratified their seniority agreements quickly and with relatively little fuss. There are other signs that the two cultures may be a good fit, says Robert Jordan, Southwest’s executive vice president and chief commercial officer, who 
has also been president of AirTran since 
the acquisition.

“I was told that AirTran’s biggest party of the year is their holiday party in Atlanta on December 3,” he says. “I got a note saying that I was supposed to kick this party off. I said, ‘Fine, I will be happy to say a few words and kick it off.’ The AirTran people said, ‘Oh no! You have to say a few words, and then you have to lead the crowd in the cha-cha slide!’ That’s the kind of cultural thing that you would see at Southwest.” It may be a new world, but it’s one where Herb Kelleher would still fit right in.