Evan Smith: The Austin American-Statesman editorialized that the two FAA inspectors who were whistle-blowers in the safety controversy involving Southwest planes should be celebrated as heroes for putting their careers at risk. Do you agree?

Herb Kelleher: I’ll tell you what, Evan, I really don’t know. I have no personal knowledge of the interaction between our maintenance department, the FAA regional office, and these particular inspectors. I mean, this thing burst on us as kind of a bombshell, and nobody was aware of the fact that there were any issues. It’s hard for me to comment because it involves personal relationships and, apparently, some dysfunction within the FAA.

ES: I went on Southwest’s Web site and saw the blog that the company publishes—

HK: You’ll notice we put all the bad stuff on there.

ES: —and you posted portions of your testimony and [Southwest CEO Gary] Kelly’s before the Transportation and Infrastructure Committee of the U.S. House, as well as the response to it, which was, indeed, largely negative. Do the people who wrote, in effect, “I’ll never fly Southwest again” understand exactly what happened here?

HK: Well, let me tell you exactly what happened. We have a program for modifying the classic 737’s, to eliminate the possibility of cracks. And we were engaged in that modification program; essentially you’re filling or replacing the skins on the airplane. Now, that’s good, right? And in the course of doing that, you are relieved of a lot of inspection requirements under another airworthiness directive. And they interrelate. You do this mod work, and you don’t have to do the inspection. So a very excellent engineer, in issuing new engineering orders subsequent to the modifications, left out a small portion of the airplane. I’m not trying to minimize it by saying it’s a small portion, but it was about six tenths of one percent of the skin of the airplane, which he thought no longer needed to be inspected because of the modifications that had been made. Okay? Now, these airplanes are inspected eighty times a year. It’s not that the airplanes weren’t inspected.

ES: If you read the newspaper coverage of this story, you might not get that impression.

HK: Exactly. That’s what I’m trying to correct, because we have four times as many regular inspections as are required, and I’m talking about inspections involving the fuselage—I’m not talking about a first officer’s walk-around on the ramp to look at the airplane. So all of these airplanes were thoroughly inspected. And when this came to our attention, we immediately notified the FAA and said, “Hey, wait a second, there’s a small area that we haven’t inspected for the last six or eight months.” And the FAA said, “Fine, we understand. Just get it corrected, do the inspections, and you can keep flying.” That’s where the problem came in.

ES: In the FAA’s reaction.

HK: Yeah. I’m not saying we shouldn’t have known better, but, anyhow, that was what was done: The little portions of the airplanes were inspected, as is required. The basic point is, there was never any danger. The airplanes are perfectly sound, perfectly solid. It’s a fail-safe design by Boeing. There won’t be any structural damage if you have a crack. To give you an idea of what I’m talking about, when your aging airplane first becomes subject to these inspections for cracks, the FAA gives you 4,500 cycles [takeoffs and landings] before you have to start [making repairs]. That’s a year and a half of flying!

ES: If the issue is the FAA’s oversight and not anything Southwest did, why might the company be fined more than $10 million?

HK: I’m on somewhat dangerous ground here, but I said the same thing at the hearing. This turned into a big political issue and that influenced the amount of the fine. I can’t vouch for this, but I did read an article the other day that said the legal department at the FAA originally proposed a $300,000 fine.

ES: Anything else related to safety and Southwest that we in the public need to know?

HK: The other point that I tried to make at the hearing was that Southwest has the best safety record, insofar as passenger fatalities are concerned, of any airline in the world. We’ve operated the most flights, 16 million, and carried the most passengers, 1.2 billion, without a passenger fatality. Knock on wood, that’s the best record ever, and it’s gone on for 37 years. I’m Irish, but I don’t have 37 years of Irish luck.

ES: When the average person sees you testifying before Congress, he thinks, “Didn’t that guy retire?” In fact, until May of this year you were still Southwest’s executive chairman.

HK: We made it very plain when Jim Parker stepped in as CEO in 2001, and we put out a press release at that time that said that I was not retiring, that I was going to continue to handle certain responsibilities for Southwest Airlines. I’ve actually been working full-time, which for me is seven days a week, ever since then. Now, in deference first to Jim and then Gary Kelly, I stopped giving interviews, I stopped talking to the financial community, and I even stopped going to some big company events because I didn’t want anybody to think I was competing with them for attention. I took a much lower public profile. But I never retired.

ES: Congressional testimony is one of those responsibilities?

HK: Governmental affairs is an area I’ve handled on behalf of Southwest Airlines for more than thirty years. I enjoy it. I have a lot of respect for the committee and its members. And I think, if queried, they know me as a very straightforward person who has always told them the good and the bad.

ES: Your candor has been a hallmark of your time at Southwest.

HK: I’ve always said that it’s attributable to my low IQ. I can’t afford to lie because I can’t remember. But that’s just the Southwest Airlines way of doing it. That’s the way we’ve always done it. So at the hearing, I said, “Hey, we screwed up. But don’t equate that with being unsafe.”

ES: I want to step back from the current controversy and ask, because you’re one of the only people at the company now who has the fullness of perspective back to the beginning—

HK: I’m the Methuselah of Southwest Airlines.

ES: —how the company is doing compared with the old days. Give me the elevator speech.

HK: Should we turn on the Muzak? I think Southwest is doing very well. I’m quite pleased with what it’s doing and how it’s doing it.

ES: The company has changed.

HK: Woody Allen made a movie called Sleeper—the guy went to sleep for, what was it, twenty years [editors’ note: actually, it was two hundred years, but who’s counting?] and then woke up. If you had gone to sleep in 1971 and awakened in 1991, you probably wouldn’t have recognized Southwest. We had changed. But I don’t want our people to be afraid of change. I want them to welcome change—substantive change for good reasons. Change is something that has always transpired at Southwest. You don’t change your principles or your philosophy, but tactically you adjust to outside competition and forces.

ES: What do you think are the biggest differences between the early days and today?

HK: 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.”

ES: Southwest has had one for years.

HK: 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.”

ES: One of the inevitable consequences of doing what you’ve done for as long as you have is that other people copy you.

HK: 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.

ES: Voluntarily.

HK: 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.

ES: What about price competition? It seems to me that you no longer have a stranglehold on the low-price market.

HK: 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.

ES: Explain.

HK: 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.

ES: 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.

HK: 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.

ES: 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.

HK: 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.

ES: Even though you never could have predicted how cataclysmic it would be.

HK: 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.

ES: Tell me about the big lessons you’ve learned in the years you’ve been in this business.

HK: 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.

ES: Before we wrap up, what about your smoking? Not too long ago you were still at five packs a day.

HK: I’ve cut back to three. It was a huge sacrifice. I was afraid I might have to go into rehab.

ES: Once an outlier, always an outlier.

HK: 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.”