World Changers

If you were writing the script for a movie on entrepreneurship, you might be tempted to open the first scene with a shot of two friends huddled together at a bar sketching out their ideas for a new business on a cocktail napkin. The business that would come from it would then be one of the most successful enterprises ever created, generating more wealth for investors than any other company for more than twenty years.

Yet that’s exactly what happened when attorney Herb Kelleher and Rollin King got together in 1966 at the bar of the St. Anthony’s Club in San Antonio. The napkin scrawls outlined a plan to create a low-fare airline in Texas. When King initially suggested the idea, Kelleher’s immediate reply was none too promising: “Well, that sounds kind of nutty to me.”

In those days, the airline industry was heavily regulated, and all the entrenched carriers would do everything and anything to keep newcomers out. But there was a loophole in the law, allowing for the creation of an airline that would fly only intrastate routes.

So Kelleher put in $10,000 of his own money to get Southwest Airlines started and then spent the first ten years of the company’s life defending Southwest against lawsuits from existing competitors Braniff Airways and Texas International. “It was like all of the hounds of the Baskervilles were simultaneously ripping and nipping at us,” he remembers. “One of the papers at the time said, ‘Don’t bother spending your money on a movie or going to see a play or attending a concert. Just come over and watch Herb Kelleher and the lawyers for Braniff and Texas International cut each other into little bits and pieces.’”

Three years into the battle, Southwest ran out of money. “The board of directors said, ‘Let’s just shut this down.’ And I said, ‘I’ll pay all the costs out of my own pocket and work for nothing to see if we can get this thing going.’ And fortunately, it did go.”

“Go” is one of the most understated ways to describe what next occurred. Though it took five long years from the meeting in the bar to the first flight in June of 1971, Southwest turned out to be one of the greatest entrepreneurial stories ever written. In an industry plagued by fare wars, recessions, and skyrocketing fuel costs that have led to vast amounts of red ink, Southwest marked its thirty-eighth consecutive year of profitability in 2010, a feat unmatched in U.S. aviation history. Now the largest U.S. domestic airline, Southwest totes up more than $12 billion in annual revenues, boasts thirty-five thousand employees, and flies to seventy-two cities. No less important, one analyst noted that the airline has been responsible for 90 percent of all of the low-fare competition that exists in America.

Kelleher, now retired from the airline, long set the pace for what had become known as one of the most enjoyable places to work in America. He was the embodiment of the company’s fun culture, known to dress up as Elvis for corporate events, help with baggage handling during the holidays, and hand out Wild Turkey bourbon during flights.

For such an outsized, fun-loving person, you would never have guessed that tragedy found Kelleher early. His father, general manager of a Campbell Soup plant in New Jersey, died when he was all of twelve years of age. One of Kelleher’s brothers was killed in World War II. His sister went to work in New York, leaving Kelleher and his mom at home. It was not unusual, he recalls, for his mother to stay up until four in the morning engaged in deep conversations with him. “She talked a lot about how you should treat people with respect,” recalls Kelleher. “She said that positions and titles signify absolutely nothing. They’re just adornments; they don’t represent the substance of anybody. I was kind of her disciple. She taught me that every person and every job is worth as much as any other person and any other job.”

When he took an aptitude test at Wesleyan University, where he was majoring in English, Kelleher discovered that there were three things he was best suited for: being a journalist, an editor, or a lawyer. He chose law, going to New York University Law School, and found it “exceedingly valuable training. Find out what the facts are, not gossip. Identify what the issue is, then find a resolution. That’s helpful in anything you do in life.”

It certainly prepared him, especially for all those years of litigation to get Southwest off the ground. Even after the company was flying its first routes, the cofounder continued to practice law, becoming chairman of Southwest in 1978. But it wasn’t until early 1982 that Kelleher moved over full-time as chief executive. By the time he left the top job in 2001, the company’s market capitalization was larger than American’s, United’s, and Continental’s combined—and Kelleher had become an entrepreneurial legend.

The business of business is people. In a lot of companies you have to surrender your personality when you show up for work. People think you’re not really being serious and diligent and applying yourself the way you should unless you look like an automaton. We never felt that way. We always felt that if you allow people to be themselves at work, they will enjoy what they are doing. They’ll be more productive as a consequence of enjoying it. Another thing we’ve done is we don’t think you should just be interested in people for their work persona. We take a great interest in their personal lives as well. There is no one at Southwest Airlines who has any significant event in his life, be it good or bad, a birth or a death, who doesn’t hear from us.

At Southwest Airlines, you can’t have a baby without being recognized—getting communication from the general office. You can’t have a death in your family without hearing from us. If you’re out with a serious illness, we’re in touch with you once every two weeks to see how you’re doing. We have people who have been retired for ten years, and we keep in touch with them. We want them to know that we value them as individuals, not just as workers. So that’s part of the esprit de corps.

And then, we put in the first profit-sharing plan in the airline industry. Our people were very cognizant that they were owners. And there are two stories that I just love. Western Airlines asked to borrow a stapler in Los Angeles, and our customer-service agent went over with the stapler to their counter, and the Western ticket agent said, “Why are you waiting?” He said, “Because I want the stapler back. That affects our profit sharing.”

Another classic was down in San Antonio, when one of our customers was railing at one of our customer-service agents and said, “Don’t you know I’m a shareholder of Southwest Airlines?” And the customer-service agent looked at her and said: “Lady, we all are.”

That was powerful. [Yet] we’ve never thought that compensation was the primary motivator. If somebody was working just to be compensated, we probably didn’t want them at Southwest Airlines. We wanted them working in order to do something in an excellent way. And to serve people.

So we said to employees: “This is a cause, this is a crusade. This isn’t just an ordinary corporation, and you’re doing a lot of good for everybody. We’re proud of you, and we want you to have psychic satisfaction when you come to work.” We get people who take a 25 percent cut in pay because they say: We just want to enjoy what we’re doing.

We tell people if you want a suggestion box you have identified yourself as a failure as a manager because really if you were talking to your people the way you should you don’t need a box. A box is a way of establishing distance between people, not bringing them together. We’ve always operated on the thesis that a company can have a personality and people can be themselves.

Years ago the business schools used to pose it as a conundrum. They would say, “Well, who comes first? Your employees, your shareholders, or your customers?” But it’s not a conundrum. Your customers come first. And if you treat your employees right, guess what? Your customers come back and that makes your shareholders happy. Start with the employees and the rest follows from that. And of course you have to find the right people with wonderful attitudes. We did a lot of digging (for the right people).

I was talking at the Yale Graduate School of Business some years ago. In the Q&A session, one of the students stood up and said, “It seems to me you’re talking more about a religion than a business.” And I said, “If you feel that way about your business, I think that’s good. That’s a plus.”

The word power really aggravates me. The word power should only be used in connection with weight lifting and speedboats. Forget about power. Think about nurturing and growing people and giving them the opportunity to do a lot of different things. It’s amazing how many businesses slot people. And once you’re in a slot, that’s it. It’s like the post office. The letter goes into that slot and that’s where it remains. But people have greater potential and far greater capabilities than you’ll ever realize unless you give them the freedom to go into areas and to experiment with different things. We had some people come to us one day and they met with three of our folks on a very complex systems issue. After they left they called me and said, “Herb, we were tremendously impressed with the people who represented Southwest during this meeting.” I said, “Well, it may interest you to know that not one of them has a college degree.” Collegiality and fluidity is how Southwest works.

We are probably more religious about hiring than many priesthoods. Hiring well is a religion at Southwest. We have a People Department. Not human resources, which sounds as if it’s mining coal or steel. So one day somebody in our People Department comes to me and says, “Herb, I’m getting a little embarrassed because I’ve interviewed 34 people for a ramp-agent position in Amarillo.” You know what my response was? “If you have to interview 134 people to find the appropriate person to be a ramp agent in Amarillo, do it.” Because the most important thing is to get the right people, and if you get the wrong ones, they start poisoning everybody else.

We have a good many MBAs, but we look at them for attitude as well [as business smarts]. We will hire someone with less experience, less education, and less expertise than someone who has more of those things and has a rotten attitude. Because we can train people. We can teach people how to lead. We can teach people how to provide customer service. But we can’t change their DNA.

You might say that we tend to hire humble MBAs—people who think they’re just starting out on their career and have a lot to learn. Like any lawyer will tell you, it takes at least five years to become a really good practitioner. And that’s why we look for humble MBAs. They understand they have to get to know the operations of the company, to get to know how we treat people. They have to know how to handle customers. And once they’ve done all that, then they’re ready to start doing planning and all those other things.

First of all, low costs are very important, but if you don’t have a lot of capital, you can’t fight a war of attrition. And we’re the strongest airline in the industry financially. So if somebody wants to charge the same fares as we do with higher costs and lose money, that’s fine. If they want to fight a war, we’re ready to go two years or five years or ten years—whatever it takes—in order to be successful.

But it’s not just the low fares. We have the best customer-satisfaction record, based on Transportation Department statistics, of any airline in America, the fewest complaints filed per 100,000 passengers carried. So you’re not just getting low fares, you’re also getting wonderful customer service. One thing I tell our people is that the intangibles are much more important than the tangibles because anybody can buy the tangibles, but nobody can replicate the intangibles very easily. And I’m talking about the joie de vivre—the spirit of our people.

When deregulation took place, our fabulous Austin advertising agency, GSD&M—otherwise known as Greed, Sex, Drugs, and Money, for what reasons, I have no idea—said to me: “Herb, now we have deregulation. Anybody can fly anyplace they want to. They can charge anything they want to. What’s special about Southwest Airlines?”

I said: “Our people.” And that was the origin of the “Spirit of Southwest Airlines” campaign. Now, that’s a big risk because you know what you’re doing in the newspapers? In the magazines? On television, on radio? You’re telling all your prospective customers: Our people are the best. They’re warm. They’re hospitable. They’re happy to see you. They want to help you.

If you’re wrong, you slit your own throat. We’ve gotten one complaint in five years that said: Southwest Airlines employees aren’t that way. But here’s the kind of letter that we got: “Herb, I went through El Paso the other day, and I was sold a ticket by a customer-service agent who just isn’t like Southwest Airlines. There is something wrong with this agent.”

You see the distinction? Not that Southwest Airlines is a bad apple, but this person is a bad apple, and I don’t understand how you can allow that person to continue to work for you. And so, it was proven in the field through that kind of exposure that our people are special.

A guy calls our Dallas reservation center from St. Louis, and he tells the reservation agent that TWA has canceled its flight out of DFW [Dallas—Fort Worth airport] to St. Louis on which his eighty-five-year-old mother was supposed to fly, and that he’s very concerned about her coming over to Love Field after having to make an intermediate connection in Tulsa. So the reservation agent says: “I’m going to be off in five minutes. I’ll pick her up at DFW, drive her to Love Field, and fly with her to St. Louis to make sure that she gets there okay.”

A guy has a heart attack at Love Field. He goes to the hospital. Our ticket agent stays there all night, calling his wife to let her know how he’s doing. I got a letter from a passenger on another airline who said, “Herb, I couldn’t believe it. I had gotten off the airline, went to the parking lot, and I had a flat tire. And one of your people came along and changed the tire for me, and I said, ‘You know I didn’t fly Southwest Airlines.’ He said: “I don’t care.’” That has nothing to do with whether you fly Southwest Airlines. That’s the kind of folks that we want.

We say everybody is a leader, no matter what your job is. We want you to focus on customer service—and not just to the outside world—[we want] customer service to the inside world. If [employees] pollute our other people internally and they in turn savage the people who are doing the work outside, the whole company has just rotted.

All the employees at Southwest Airlines get stock options because we feel that everybody, no matter where they work or what they do, should have an ownership position in the company. And we have seven, I think—or maybe eight—collective-bargaining agreements with our unions.

We’re the most heavily unionized airline in America that also has a stock-option base. [Employees] get options as part of their union contract, and they’ve done pretty well. I flew into San Antonio once, and Connie, who’s been working there for a good many years—about fifteen, I guess—said, “Herb, can I talk to you alone?”

And when you look at the expense of an option, what is it? If the options are underwater, they have no cost because no one ever exercises them. If they do exceed the strike price, then all the other shareholders benefit enormously.

The thing that would disturb me most to see is layoffs at Southwest. Nothing kills your company’s culture like layoffs. Nobody has ever been furloughed here, and that is unprecedented in the airline industry. It’s been a huge strength of ours. It’s certainly helped us negotiate our union contracts. One of the union leaders—a Teamsters leader—came in to negotiate one time and he said, “We know we don’t need to talk with you about job security.”

We could have furloughed at various times and been more profitable, but I always thought that was shortsighted. You want to show your people that you value them and you’re not going to hurt them just to get a little more money in the short term. Not furloughing people breeds loyalty. It breeds a sense of security. It breeds a sense of trust. So in bad times you take care of them, and in good times they’re thinking, perhaps, “We’ve never lost our jobs. That’s a pretty good reason to stick around.”

It wasn’t just the other airlines that were contemptuous of what we were doing. The New York financial community was as well. Every time I’d go up there, they’d give me a lecture, and they’d say, “Well, Herb, now that we’re deregulated, you’ve got to be just like the other airlines.” And I said, “No, I don’t think so.”

And after about maybe nine or ten years, [an analyst] with Credit Suisse First Boston got up at an investor seminar and said, “For ten years we’ve been telling Herb Kelleher how to run Southwest Airlines, and for ten years he’s been telling us to bug off. Since they’re the most profitable airline in America, how about if we all bug off?” But nobody believed that it would work, and the other carriers thought that we were just an annoyance, not something permanent.

I was so amused because people in Washington would say, “We understand why United is for this, but you, little bug, why do you support it?” And I said: “Well, I think we’ve demonstrated in Texas that we can compete pretty well against the other airlines, and we’d just like more latitude to do that.” And then I got a letter from a Texas congressman who said, “Herb, I want to tell you something. You’re going to ruin Southwest Airlines if you take it beyond the boundaries of Texas.”

I think it was easier to be an entrepreneur in the thirties than it was in the sixties and seventies, and I think it was easier in the 1890s than it was in the thirties. As society becomes more regulated, it becomes more difficult to launch entrepreneurial ventures.

Well, when I started practicing law, maybe 5 percent of a law firm’s business was dealing with the government [and the rest with clients]. Today, it’s only 50 percent or 60 percent on behalf of clients.

So I would say that it’s harder today—but not impossible. You must be very patient, very persistent. The world isn’t going to shower gold coins on you just because you have a good idea. You’re going to have to work like crazy to bring that idea to the attention of people. They’re not going to buy it unless they know about it.

You’re going to have to have probably five times as much capital as you thought you would. Because if you’re an entrepreneur, you’re optimistic by nature. So you think, in six months, we’re going to be sailing. But that optimism causes you to raise a lot less capital than you need in most cases, and it’s very lonely.

Everybody in Texas would tell me that they thought I was nuts trying to start Southwest Airlines. There probably weren’t ten people in the state who would have given a plug nickel for our chances of making a dollar. So sometimes, you need a little courage, too, just to buck popular opinion.