Herb Kelleher on the Record, Part 3

Says Southwest Airline's founder of being an entrepreneur: Sometimes, you need a little courage...to buck popular opinion

What sort of smarts, determination, and ingenuity are required of a world-class entrepreneur -- one who starts an airline against all odds and goes on to build the only consistently profitable carrier in the U.S.?

That's what BusinessWeek Managing Editor Mark Morrison hoped to discover recently when he interviewed Southwest Airlines (LUV ) founder and Chairman Herb Kelleher in front of an audience of business leaders and MBA students at the University of Texas' McCombs School of Business.

In a rollicking session, Kelleher displayed the passion, irreverance, and can-do attitude that has characterized the rise of Southwest from long shot to long-term success in a business that's notorious for its financial turmoil. The airline has grown from serving three cities and with three Boeing 737s in 1971 to 35,000 employees and 375 Boeing 737s that cater to 63 million customers at 59 airports in 30 states as of the end of 2002.

In Part 3 (and last) of this edited interview, Kelleher lays out the strategy and management philosophy that has helped Southwest continue to prosper over the past 31 years. In Part 2, he describes the arduous process of getting Southwest to achieve take off, then devising unique methods of employee compensation to keep it aloft. And in Part 1, Kelleher talked about his early days as an entrepreneur.

Q: The next big thing on your agenda sounds like a move into the Philadelphia market.

A:

Love cheese steaks, Mark. I love cheese steaks!

Q: The major carriers that are entrenched there are going to try to come at you with discount fares and all kinds of things that they don't usually do. What's your gameplan?

A:

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 2 years or 5 years or 10 years -- whatever it takes -- in order to be successful.

But it's not just the low fares. I don't know whether you realize this, but Southwest is celebrated in the Harvard Business School video series on customer service. It's featured in Tom Peters' video Service With Soul.

We have the best customer-satisfaction record, based on Transportation Dept. 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 [laughter] -- 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 85-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 O.K.

That's the kind of devotion I'm talking about.

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.

We have a People Dept. That's what it deals with, so don't call it Human Resources -- that sounds like something from a Stalin five-year plan. You know, how much coal you can mine [laughter].

So one day somebody in our People Dept. 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.

Q: Now, some questions from the audience. Given the financial issues faced by the major U.S. airlines, do you think they should have been bailed out after September 11? Are the major airlines considered too big to fail?

A:

That's a really good question. I went through a little soul searching on that issue because we didn't need help to keep Southwest Airlines going. But it was a national emergency. So I went to Washington and lobbied on behalf of a grant that we didn't need. It was disadvantageous to us, obviously, because some of those airlines would [otherwise] no longer be competing against us. But imagine the effect on the economy and the accessibility of transportation if two or three big airlines had suddenly stopped service.

Q: Here's an interesting subject. As Boeing (BA ) is Southwest's sole supplier of planes, how do you ensure a competitive price for a new plane?

A:

We've been the launch customer for three Boeing models, and we have 385 of them in our fleet now. And Boeing has never forgotten that we were the launch customer. They have never tried to take advantage of the fact that they're a sole supplier of Southwest Airlines. Now, I will tell you that when I negotiated I did call Airbus, and I said: Would you send me some of your Airbus (cigarette) lighters? So when I went in to negotiate with the Boeing people -- oh, excuse me, I dropped something. And the Boeing people leaned over and picked up an Airbus lighter -- I thought the message was delivered.

But they've been very good to us, and we've been very good to them. It is, I guess you'd say, a sweetheart relationship. And General Electric (GE ) has been the same way because they're the sole supplier of our engines. I was apprehensive because I didn't really know them, and I discovered that in the engine division, they're the same kind of people as at Boeing: If they give you their word, they keep it. And they deal with us very fairly and equitably.

So it has been a great relationship. They really like us, and we really like them. They took me to see their engine factory, and they use CAT scans to test parts, and I said: Would you mind taking a shot of my liver? I think it might need some attention [laughter].

Q: Will Southwest Airlines expand internationally? If so, when?

A:

It's a question of priorities. You only have so many airplanes. They're very expensive, and you try to send them where they'll do the most good for our people's job security within the shortest period of time -- and do the most good for the profit sharing.

We went into Raleigh-Durham in North Carolina on one Sunday, and the first day we operated at an 84.3% load factor. There are very few international opportunities that stack up to that. And furthermore, if you're going to be an international service, you have to train all the people across your system on how to handle that. People say to me: Why don't you just fly from San Antonio to Mexico City. And I say: You don't understand. In order to do that, we have to train 35,000 people.

We've got 10% of the domestic market at the present time, and I think that works out to 90% which isn't ours [laughter]. It's just a guess.

Q: Do you think it was easier to be an entrepreneur in the '60s and '70s compared with now?

A:

I think that it was. And I think it was easier to be an entrepreneur in the '30s than it was in the '60s and '70s, and I think it was easier in the 1890s than it was in the '30s. As society becomes more regulated, it becomes more difficult to launch entrepreneurial ventures.

Well, when I started practicing law, maybe 5% of a law firm's business was dealing with the government [and the rest with clients]. Today, it's only 50% or 60% 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 10 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.

Q: You and the University of Texas have created an entrepreneurial center. Is that something you can teach people -- how to be an entrepreneur?

A:

I'm not sure that you can if they don't have a little seed within them that stimulates them to do it. But I think that you can bring that quality out out by exposing them to an entrepreneurial education. All of a sudden they say: Hey, this could really be fun. Furthermore, I think you can be very helpful in enabling them to start off with a lot more knowledge, wisdom, and competence than I had.

Q: Here's a good one. What was your GPA in college [laughter]?

A:

Let me put it this way, Mark. At Love Field, just the other day, when they gave me the B boarding pass, I said: You know what, I'm going to call my mother and tell her I finally got a B [laughter].

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