From the Corner Office: Herb Kelleher

Herb Kelleher battled for Southwest Airlines through years of turbulence: legal challenges, budget crises, fare wars, high fuel prices and terrorism. As co-founder of the airline, 77-year old Kelleher fought to win. So he stacked the deck with his work ethic and extra capital.

Kelleher’s odyssey began in 1960, when he moved his family from his native New Jersey to Texas. A lawyer, he had traveled frequently to the state for business. “Texas was wide-open, rowdy. People were taking big chances, making big bets, taking big risks. It was a fertile ground for entrepreneurs,” Kelleher tells SUCCESS.

An opportunity presented itself for Kelleher in 1966. One of his clients, Rollin King, owned a small commuter air service in San Antonio. King and his banker, John Parker, dreamed up the Southwest Airlines concept as a cheaper, more convenient way to travel between Houston, Dallas and San Antonio—cities more than 200 miles apart. King pitched the idea to Kelleher, and during discussions over drinks, a triangle between those cities—sketched on a cocktail napkin—became the company’s first paperwork.

Kelleher filed Southwest’s incorporation papers in March 1967, and its application to fly the following November. But competing airlines sued and got restraining orders, contending that Southwest’s target market was already served. “In essence, Braniff had a monopoly on [flights between] big cities, and Trans-Texas [Airways] had a monopoly on the small cities.” Kelleher was in court a dozen or more times—he can’t remember exactly—and the budget for legal challenges, which he had doubled to about $500,000, ran out.

Others in the venture considered folding. “I told them, ‘How about if I work for nothing and pay the expenses?’” Kelleher fought on. “I got angry at all the carriers trying to stop us. We wanted to offer better fares—60 percent lower—and it offended me that people were trying to keep us from doing that. When you’re locked in battle, you don’t like to lose.”

Kelleher never considered giving up, despite having a wife and four children at home. Did stress keep him awake nights? No, Kelleher says he was already awake nights, working at his office. “I figured if I was working when they were sleeping, it gave me an edge.” And when he was home, “the iron curtain came down,” walling off the business worries.

Southwest’s first flight was on June 18, 1971, but still it struggled. That fall, hemorrhaging money with inconsistent ridership, Southwest faced laying off employees or selling a plane. “We’ve always taken the approach that employees come first,” Kelleher says. “Happy and pleased employees take care of the customers. And happy customers take care of shareholders by coming back.” So Southwest sold the 737.

Now, down to three planes, the airline had to cut flights or do 10-minute “turns” between reaching the gate, disembarking passengers, boarding new passengers and leaving. Southwest accomplished the feat, helping the company lead the industry in on-time performance—something Kelleher attributes to employees’ can-do attitude.

“Attitude is very important and has to be weighed with experience and skills,” he says. “Someone with a high IQ who is a backbiter is a disaster for your organization. Someone who is outgoing and altruistic and can work convivially” will be a huge asset.

For all its efficiency, Southwest needed more than word-of-mouth from happy passengers. With little money for advertising, decision-makers realized the value of gambits such as flight attendants wearing hot pants. Press reports were equivalent to “$15 million to $20 million in advertising,” Kelleher says, and Southwest made newspapers in Vienna, London and Singapore. “Later, [flight attendants] came to me and said they weren’t comfortable” with the uniforms. So they were mothballed, but the legend lived on. “When we were moving into San Francisco, the headline was ‘Hot-pants airlines coming,’ ” Kelleher says, roaring with laughter, “and we hadn’t had hot pants in 10 years!”

Kelleher loved a good publicity stunt—jumping out of overhead bins, donning leprechaun outfits and Easter Bunny suits, riding a motorcycle given to him by his pilots.

Southwest also capitalized on its underdog status. “The more that the competition picked on us, the more people liked us,” Kelleher says. During a 1973 fare war, Southwest offered to match Braniff’s $13 fare or to throw in a fifth of liquor for passengers who chose to pay the full $26 fare. With many business fliers on expense accounts, three-quarters of customers took the $26 deal, so Southwest prevailed. That same year, Southwest celebrated its first profitable year.

With its application to fly into the Texas Rio Grande Valley in 1973, the airline began a gradual expansion, today flying into more than 60 cities. The airline has consistently led the industry in customer satisfaction. Year-end results for 2007 marked Southwest’s 35th consecutive year of profitability. And Southwest remained true to its early pledge to treat employees well. With escalating jet-fuel prices during the first Gulf War in the early 1990s, employees returned that favor. “Employees took deductions from their wages to buy fuel,” Kelleher says.

In 2001, Southwest was going strong and Kelleher was to wind down his role as executive chairman, taking one day off each week starting Oct. 1. But Sept. 11 scuttled that scenario. “I was one of three people appointed by the secretary of transportation to security-plan for airlines, to thwart terrorists,” he says. “We were working day and night.”  Meantime, the industry went into a tailspin after 9/11, with most carriers cutting staff. Southwest did not and even expanded service with flights to Norfolk, Va., in October.

Coping with spiraling fuel costs today, Southwest has hedged by locking in prices. “The perception is… the price is going to stay high,” Kelleher says. “We have some hedges to 2012. Hedging has been our salvation.”

Earlier this year, Kelleher stepped down as chairman but remains a Southwest employee, tackling special assignments from his successor, chairman Gary Kelly, through 2013. “He’ll find things for me to do, like take on the Wright Amendment.” (Southwest’s war on that legislation—which limited its marketing and routes out of Dallas’ Love Field—has led to a repeal that will be complete in 2014.)

Reflecting on his experience, Kelleher says many entrepreneurs fail because they expect business-sustaining profits too soon and they "underestimate the sweat equity they’ll need.” The key, he says, is to “Do something you’re passionate about and be prepared to sacrifice a lot of your life to it.”

Kelleher has enjoyed an exciting ride. As for regrets, he says, “I don’t look back.”

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