Online Extra: The Key for Southwest: "Remain Flexible"

Co-founder and Chairman Herb Kelleher on the recent CEO succession, the industry's new dynamics, and the carrier's strategy

As its major rivals continue to rack up record losses, Southwest Airlines (LUV ) has just finished its 30th consecutive year of profitability. Yes, a weak economy and the aftershocks of the terrorist attacks have hurt Southwest, too, but the low-fare leader has proven once again that its business model works in good times and bad.

And Southwest hasn't missed a beat since the June, 2001, shift in leadership -- when James F. Parker became CEO and Colleen C. Barrett became president. Of course, legendary co-founder and Chairman Herbert D. Kelleher is still very much a force at Southwest, as he maintains control of schedule and fleet planning and government affairs. While the irreverent Kelleher is keeping a much lower profile these days and refusing most interviews, he sat down with BusinessWeek's Dallas Bureau Chief Wendy Zellner recently to talk about his successors and his airline. Following are are edited excerpts of their conversation:

Q: Why was Jim Parker chosen as the one to succeed the only "nice genius" to run an airline, as one observer recently remarked?


Succession was something that basically was entertained by a board on and off over a couple of years.... The board decided that the combination of Jim and Colleen [Barrett] was an appropriate way to go. Not only appropriate, but the next stage of evolution at Southwest Airlines.

Q: But why Parker as CEO?


I really can't discuss the basis for Jim's selection because that is, in effect, talking about the deliberations of our board of directors, which I don't do.

Q: But what about your own deliberations?


You know I've never been very deliberate.

Q: Has the transition unfolded the way you thought it would?


September 11 knocked all that into a cocked hat. All of a sudden the airline industry specifically was in grave jeopardy, and in effect, it was a national transportation emergency. I continued with the things I had retained direct responsibility for [government affairs, strategic planning, and schedule and fleet planning]. Jim was, of course, very busy in negotiating a tremendous number of labor contracts.

I had planned to be out of the office a little bit after October 1, 2001 and that, of course, went by the boards with September 11 because of the things that I kept.

Q: Someone suggested that Parker's lack of charisma was a plus in choosing him as CEO, because he couldn't possibly be compared to you. Is that true?


That had nothing to do with it. One of the factors that figured into it, without getting into specific discussions, is the fact that Jim is concerned about the well being of our people. I've always said that's the key to our success -- that the intangibles are more important than the tangibles. That's the hardest thing for our competitors to replicate, the esprit de corps of our people -- because you can't buy that.

Q: Aren't you violating every rule of succession planning by staying on the board and remaining as chairman?


I told the board that I'd be very happy just to depart. It was up to them if they thought I ought to stay on in any capacity. What's a little different is I'm a co-founder of Southwest Airlines. It's not like I was the 17th president who was suddenly going to step down.

Q: Were you worried about reports during recent contract talks [five agreements with labor groups have since been reached] that Southwest's relationship with employees was fraying, that your people were wanting industry-leading pay?


That made the stories better. These things have gone on previously, and people do get a little, perhaps, overheated during contract negotiations. The point is that once it's done, you're not like the Hatfields and the McCoys. It's not a permanent vendetta or a feud that continues on. Our rivals were circulating some of that talk. I caught a couple of them.

Q: As you look at all the restructuring in the airline industry, Southwest is once again everyone's target. Do they all need to become like you?


A lot of people are saying that some of the other carriers are going to have to come up with a new business plan -- restructure themselves and do away with the hubs. When gurus say that, what they're basically saying is "our recommendation is that you destroy yourself."

You couldn't have everybody switching to a point-to-point airline in the U.S. The hubs serve a very valuable purpose from the standpoint of customer service and service to small communities, providing you with twice as many frequencies as you might have to a given destination. They're an entirely different type of operator. They perform essentially different missions from Southwest Airlines.

Q: What does that mean for Southwest going forward? Will they compete differently with you in the future?


I think we've got to keep an eye on everybody, but it's hard for me to visualize somebody putting in 10 roundtrips a day against us in Lubbock-Dallas, for example. A lot of markets just don't lend themselves to that type of competition.

Q: So you have your niche, and they have yours -- and whatever they do doesn't affect you?


We've always had a special niche in the airline industry. We're not killing the [hub-and-spoke carriers]. In some cases you may have some carriers that are using us as a foil, in effect. They're playing off us to try to accomplish something they'd like their own people to do in the way of lowering costs.

Q: But that's not to say they don't need to get their costs down significantly, is it?


Obviously we need to keep our costs low. And I think the other carriers are going to have to get their costs down, and they're working very hard at it. From their standpoint, the big question is: How many of the passengers are going to come back that are still willing to pay five times what the leisure fares are?

Q: As you spread into more and more markets, business passengers don't have to pay five times leisure fares.


To a certain extent that's right. We also produce millions of additional passengers. So a lot more bodies are flying. It may not be at the yields you like particularly. But on the other hand, think about the huge markets in which we don't really compete, like New York. We're on Long Island, but it's not a New York City operation. Or Atlanta. There's just a whole lot of places that we're not in, and in some of those places, we're in the satellite airports, which is a different approach and a different function.

Q: Given what you see coming out of this industry restructuring, do you think Southwest will ultimately grow faster or slower than it might have otherwise?


I think that Southwest should be in the posture of being lean, fit, and opportunistic so that we're ready to go when the time is appropriate to go. We'll continue expanding, don't misunderstand me. [Capacity will grow about 4% this year.] But we can speed up that expansion, or we can reduce that.

We have the flexibility to do either one. Our best policy is to remain flexible and opportunistic as to what we do because there is so much event risk now with respect to the industry.

Q: So why don't you hit the big guys harder when they're down?


People say that, but I don't think that's a very good way to do business. It's a diversion from what you should really be focused on -- that's how you do good regardless of whether anyone else is doing bad or not. Mostly it doesn't work. That's the pragmatist in me. We never have assaulted anybody.

Q: What about rival discount carrier JetBlue, which is now seen as a "better" Southwest? Does that bother you?


I think it's smart marketing on their part. I think they've done a beautiful job of it, saying we're Southwest-plus, in effect.

Q: You have all leather seats on your new 737s, more leg room, and your tickets have fewer restrictions on them than JetBlue's. Do you need TVs in your seatbacks?


I think honestly the TV is probably the biggest advantage they have.... I've joked with David Neeleman [CEO of JetBlue] about it. I've said our passengers are intellectual -- they read.

JetBlue has done a terrific job. I'm kind of proud of their success [since JetBlue in many ways emulated Southwest]. But we'll see. They have all new planes, no maintenance expenses, no unions.

Edited by Patricia O'Connell

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