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Get Four
|  | DECEMBER 23, 2003
Herb Kelleher on the Record, Part 2 In the second of this three-part series, he talks about motivating staff with stock options and by "making work fun" 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 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 2 of this edited interview, Kelleher describes the arduous process of getting Southwest to achieve take off, then devising unique methods of employee compensation to keep it aloft. In Part 1, Kelleher talked about his early days as an entrepreneur. In the third and final installment, he'll lay out the strategy and management philosophy that has helped Southwest continue to prosper. Q: In interviewing airline executives over the years, it always fascinated me that no one [else] tried to take advantage of what you were proving with your point-to-point flying. They were committed to the hub and spoke. A: That's right. Q: You have to be the biggest beneficiary of the hub-and-spoke system because they all stuck to it, and often it just doesn't work. Explain why. A: It wasn't just the other airlines that were contemptuous of what we were doing. The New York financial community was as well. Everytime 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 9 or 10 years, [an analyst] with Credit Suisse First Boston got up at an investor seminar and said, "For 10 years we've been telling Herb Kelleher how to run Southwest Airlines, and for 10 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?" [Laughter] But nobody believed that it would work, and the other carriers thought that we were just an annoyance, not something permanent. There were only two carriers that supported deregulation -- United, which was the biggest, and Southwest, which was the smallest. 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. So I wrote back and said: Congressman I beg to remind you that man, not God, created the boundaries of Texas. And you know what his response was? Dear Herb, are you sure [laughter]? Q: Let's talk about your development as a manager. You basically learned business by doing it, right? A: Learned it by doing it, and I was scared to death when I was summoned off the bench [in 1982] to run Southwest Airlines on a permanent basis. I stayed up all night familiarizing myself with its problems. PATCO (the air-traffic contollers' union) had just pulled 13,000 controllers out of the towers. We had six new airplanes coming in. One of the analysts with Oppenheimer downgraded the stock when I moved in because he said I was a lawyer -- and lawyers couldn't run anything. So I told him: [A top executive] from U.S. Airways is going to be peeved with you. And he said: How come? I said: He's a lawyer. He said: I never knew that. So we chatted for a spell, and then he wrote another piece and said he thought Southwest was going to be O.K. -- despite the fact that it was headed by a lawyer. Q: At some point the industry halfway acknowledged you and Southwest and invited you to an industry conference. I'm told one of the other executives introduced you in a demeaning way. What did you say? A: I'm not sure exactly what I said on that occasion, but that was the environment. I'll tell you what our ultimate response was: We brought in entertainers and satirized all the other airlines. Every year thereafter, we would gig them. Then they started disappearing, and then we felt maybe we shouldn't be gigging the survivors anymore. I've got all the tapes. One of them is Libby Dole, Transportation Secretary, now Senator Dole, singing to [former Continental Airlines CEO] Frank Lorenzo Don't Cry to Me, Frank Lorenzo! [sung to the tune of Don't Cry for Me, Argentina] Q: Once Southwest started to become a really big player, how did you keep this kooky entrepreneurial spirit going? A: I always felt that our people came first. Some of the business schools regarded that as a conundrum. They would say: Which comes first, your people, your customers, or your shareholders? And I would say, it's not a conundrum. Your people come first, and if you treat them right, they'll treat the customers right, and the customers will come back, and that'll make the shareholders happy. There's no difficulty in visualizing that. We've always tried to be sensitive to the needs of our people and recognize the things that are important to them in their personal lives. 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 10 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 [laughter, applause]. 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 [laughter]. 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% cut in pay because they say: We just want to enjoy what we're doing. They've done pretty well with their 401(k) and stock options. But those are variable. People are willing to take that risk and take lower pay because they want to feel fulfilled in the workplace. A ramp agent from Oklahoma wrote me one time and said: Herb, I'm on to what you're doing. He said: You're making work fun -- and home work [laughter].
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