Herb Kelleher on the Record, Part 1

In the first of a three-part series, he relates Southwest's legal battle against established airlines' business harassment

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 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 1 of this edited interview, Kelleher retraces his steps from his childhood in Haddon Heights, N.J., to his move with his wife to Texas, where he gained entrepreneur Rollin King as a client, and the two drew up a plan on the proverbial napkin for an airline connecting Dallas, San Antonio, and Houston. In Part 2, he'll describe the arduous process of getting Southwest to take off, then devising unique methods of employee compensation to keep it aloft. In Part 3, Kelleher will lay out the strategy and management philosophy that has helped Southwest continue to prosper.

Q: Herb chose James Parker and Colleen Barrett to succeed him as chief executive and president, respectively, in 2001, [and now] stays out of day-to-day affairs. He's now leading Southwest's lobbying in Washington, where airport security and terrorism insurance are on the industry's front burner. And he maintains control of [Southwest's] schedule planning and aircraft acquisitions.

A:

Boeing likes me a lot.

Q: Herb, you have amazing energy and drive. When did you start feeling so motivated?

A:

I was always motivated.... Even the things I wasn't supposed to do, I undertook with great energy, dedication, and perseverance. In grammar school, high school, and college, I stayed up later than anybody else, talking about philosophy, of course [laughter], reading for my honors exams. You hear what I'm saying? I'm a good role model [laughter].

Q: Were there any keys to your getting a good education and then moving on from there? One of your parents?

A:

My father died when I was 12. And one of my brothers was killed in World War II, in January of 1942, and my other brother went into the Navy...despite his heart murmur.

People were very motivated by duty, honor, and country at that time. My sister went to New York to be an expediter for the RCA Co. So [at home] it was my mother and myself. She was extraordinary...a great father and mother. She treated me as an adult, and her interests were wide ranging. We would stay up till three, four, five in the morning, talking about business, politics, ethics. She was a splendid person, and she gave me a wonderful foundation.

Q: What got you interested in law school?

A:

I figured that I could put off working for three more years [laughter]. No, I took an aptitude test in college, and it said there were three things I'd be fairly decent at: Being a journalist, an editor, or a lawyer.

Q: Did you like law?

A:

I enjoyed it greatly. Going to law school and practicing law was 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.

Q: How did you meet the Texan you ended up marrying?

A:

Joan was going to Connecticut College in New London. Our team played the Coast Guard Academy in New London, and she was a blind date. We went to dinner with a friend of mine and his girlfriend, and it turned out that we [men] didn't have any money. So we had to ask our dates to pony up for dinner. We called Joan "JP" after that, for JP Morgan.

Q: After you got married, you got to know Texas a little?

A:

I did. I was working for the New Jersey Supreme Court, which had essentially the same schedule as college -- a couple of weeks off at Christmas and Easter and a month off during the summer. So we would spend all that time in Texas.

Joan never said a word to me about moving. [But] I wanted to be an entrepreneur, and I went home one night and said: Let's move to Texas to see if I can start a law firm or a business. She was standing at the sink, and tears started to roll down her cheeks. And so I came to Texas, and it worked out okay [laughter].

I was going to try cases, so I was constantly practicing [talking like a] Texan. [At the] gas station: "Howdy! You mind filling 'er up?" I knew I had made it when I was at a buffet at the University of Texas, and the fellow behind me said: I know where you're from. And I thought: Oh shit! And he said: West Texas, right?

Q: Let's flash back to the beginning, when you and your client talked about creating Southwest. In those days, the industry was regulated. The only way to create an airline was [to use] a loophole...to fly intrastate.

A:

It was a loophole. PSA [Pacific Southwest Airlines] had started as an intrastate in California. We looked at it as a role model. Trans-Texas was a monopoly carrier in small cities, and Braniff was a monopoly carrier in big cities. They had some of the highest fares in the U.S.

So we decided, as a fellow from Allstate said -- Allstate was originally going to finance us but dropped out after 3 1/2 years of litigation -- he was asked on the stand: Why did you invest in this company? He said: Because we could see that they were striking at the soft underbelly of the commercial airline industry [laughter].

Q: Even though the legal loophole was there, Braniff and the rest of them fought you tooth and nail.

A:

They sure did.

Q: Tell us about that.

A:

It turned into a marathon because the incumbent carriers -- Braniff, Trans-Texas, and Continental -- didn't want any competition.

I was involved in 31 separate administrative and/or judicial proceedings with those carriers over four or five years. I made three trips to the U.S. Supreme Court, and a judge at the District of Columbia Circuit Court of Appeals said: I have sat on this bench for 30 years, and this is the worst case of business harassment I've ever seen.

Q: And there was the controversy over whether you could use [Houston's] Hobby Airport or [Dallas'] Love Field.

A:

Yes, that became a sore point. We didn't want to move to DFW [Dallas-Fort Worth] Airport, and the new Houston Airport, Intercontinental, had opened. And I said: The people we're carrying, they don't want to fly from Conroe [Intercontinental's location] to Grapevine [where DFW is]. They want to fly from Houston to Dallas. So we're going to stay at the downtown airport [applause].

We got sued by Dallas, Fort Worth, and the DFW airport board. That went to the U.S. Supreme Court. Then a DFW carrier sued us in Austin, and we got the Federal District Court for the Northern District of Texas to enjoin that suit. Went off to the U.S. Supreme Court again.

We ran out of money in 1969, and 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.

Q: Back in the early '70s, I was a reporter for the Houston Post, and I remember interviewing Braniff CEO Harding Lawrence. I wanted to talk to him about why he was fighting this Southwest threat so hard, and he basically said: It's a nuisance. It's not going to ever amount to anything. Braniff is no longer around, is it?

A:

Braniff I is no longer around, Braniff II is no longer around, Braniff III is no longer around. But I've got to tell you a story about Harding Lawrence. After we had been battling for probably six or eight years, I was at a reception in Dallas at the Fairmont Hotel, very crowded, and I felt someone jostling me, and it was Harding Lawrence, and there we were, face-to-face, mano-a-mano, and Mary Wells, who was with Harding, says: Now, don't behave like schoolyard bullies!

And so [I said:] Hello, Harding. Nice to see you.

Q: He was very debonair.

A:

Absolutely.

Q: And she was, of course, the famous Mary Wells, who ran one of the biggest advertising agencies and one of the most successful at the time.

A:

That's right.

Q: And one of the highest-profile women executives at the time. Very successful entrepreneur herself.

A:

Well, after Harding and I settled the civil antitrust case that followed the criminal antitrust case, Harding said: I'm going to change the atmosphere between the two companies. I was a little dubious.

But I called Harding one day and said: I flew into San Antonio last night, and the Braniff skycap said that I shouldn't fly Southwest because it's an unsafe carrier. Harding fired him instantly. We had a plane that went off the runway into the dirt during a storm, and Braniff [employees] came running out of their maintenance hangar to help us unstick it and get it into the air.

When deregulation took effect [in 1978] there was a provision that if a carrier had gotten a route from the CAB [Civil Aeronautics Board] but wasn't serving it, another carrier could apply to serve it and get it automatically.

I saw that Harding had Hawaii, San Antonio, Houston, and I wanted San Antonio and Houston. So I just forgot about Hawaii and applied for San Antonio, Houston, and New Orleans. Harding called me and said: I'm glad there's another pirate around here. He said: I saw what you did to get that route -- you just lopped off one segment of it. I said: Harding, don't give me that kind of talk because you had two routes you weren't serving [laughter]

Tomorrow, Part 2: The stock-option airline

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