Herb Kelleher, the legendary heart and soul of Southwest Airlines, says he's really going to stay home this time. He's "retired" and "unretired" on a couple of earlier occasions after getting bored doing chores around the house.
This time, he says he's presided over his last Annual Meeting (actually they're "LUV Fests"). He is, after all, 77 years old and has never been bashful about living it up.
When the history of American Business is written, Herb and Southwest will get several chapters. Remember, they've done something no other airline has even come close to doing: always be profitable. And, best of all, they have fun doing it!
On this post's continuation page is the New York Times' story on Herb's curtain call. Don't miss a word of it. While you're reading it, watch this interview with Herb. It will give you more insight into effective leadership than any management textbook. Listen how he blends strategic insights with real warmth and caring. There's no one better at it. Enjoy.
Here's the Link to One More Time with Herb.
The Sinatra of Southwest Feels the Love
The Dallas-Fort Worth area is home to two of the country’s biggest airlines, American and Southwest, and for years, they’ve both held their annual meetings on the same day. This year was no exception: Wednesday was the big day.
The American meeting started first, at 8 a.m. An hour before it began, members of the Association of Professional Flight Attendants and the Allied Pilots Association, which is in the midst of brutal contract negotiations with the company, began picketing. Shareholders were handed antimanagement packets as they walked in.
The meeting itself could not have been more downbeat. “The U.S. airline industry as it is constituted today was not built for $125- or $130-per-barrel oil,” complained Gerard J. Arpey, the chief executive of AMR, American’s parent company. The industry, he added, “will not and cannot continue in its current state.” In response to the current woes, Mr. Arpey told the assembled shareholders, American would cut out money-losing routes, reducing its overall capacity by 12 percent and laying off workers. And, in a move bound to infuriate travelers, it would begin charging fees to check baggage. (That will go over especially well when the luggage is lost.) By the end of the day, AMR’s stock dropped 24 percent, to $6.22.
The Southwest Airlines meeting began a few hours later. Southwest, of course, is the great success story of the airline business — the only company that has been consistently profitable through these tumultuous times, even as many competitors have filed for bankruptcy or gone out of business. In 2007, it earned $645 million. It maintains a healthy balance sheet and has plenty of cash. Its annual meetings tend to be love fests.
This year, though, was the love fest to end all love fests. The company’s beloved co-founder, Herbert D. Kelleher — known to one and all as Herb — was stepping down as chairman after 37 years. So many shareholders showed up that the company had to set up an overflow room to accommodate the crowd.
When Mr. Kelleher, 77, entered the main meeting room, shareholders gave him the kind of standing ovation usually reserved for rock stars. The Southwest pilots union is also in the process of negotiating a new contract with management. But not only did the Southwest pilots not set up a picket line, they took out a full page ad in USA Today thanking Mr. Kelleher for all he had done. “The pilots of Southwest Airlines want to express our sentiment to Herb that it has been an honor and a privilege to be a part of his aviation legacy,” said the union president, Carl Kowitzky, in a statement.
Naturally, Mr. Kelleher smoked Kools during the annual meeting — he may be the only man in America who still smokes and drinks without apology — but nobody minded. It’s one of his trademarks. Seven years ago, when he turned over the reins as chief executive, Mr. Kelleher sat in a Frank Sinatra-like pose for the cover of Fortune, a glass of Wild Turkey in one hand and a cigarette in the other. And of course he spent most of his time on the podium cracking jokes — another trademark. Everyone laughed at his punch lines.
But when he brought up the pilots ad — and when he talked about how much the company’s employees meant to him — he wept. “I’m Lucky Herbie for having all of these years with all of you,” he said. More than a few people in the audience wept right along with him.
No surprise there, either. Over the years, whenever reporters would ask him the secret to Southwest’s success, Mr. Kelleher had a stock response. “You have to treat your employees like customers,” he told Fortune in 2001. “When you treat them right, then they will treat your outside customers right. That has been a powerful competitive weapon for us.” As he stepped away from the company this week, his line didn’t change.
“We’ve never had layoffs,” he told me the day before the annual meeting, sitting on the couch of the single messiest executive office I’ve ever seen. “We could have made more money if we furloughed people. But we don’t do that. And we honor them constantly. Our people know that if they are sick, we will take care of them. If there are occasions or grief or joy, we will be there with them. They know that we value them as people, not just cogs in a machine.”
Can that really be the reason Southwest is still making money while its competitors are bleeding red ink? Can it really be that simple?
Actually, that depends on whom you ask. If you ask Robert Crandall, the curmudgeonly former chief executive of American Airlines — and a man who fought many a battle with Mr. Kelleher — the answer is no. “Herb has done an excellent job of sustaining a high level of employee morale and sticking to their strategy,” he said. But in the next breath, he attributed Southwest’s success to the fact that it was allowed to operate out of Love Field in the heart of Dallas, instead of having to move to Dallas-Fort Worth International Airport, half an hour away, like all the other airlines. “If he hadn’t had the Love Field advantage, the story would have turned out differently,” he grumbled.
Robert W. Mann Jr., the president of R. W. Mann & Company, an airline consulting firm, spoke admiringly of Southwest’s refusal to stray from its core mission of combining low fares with first-rate customer service. “The single focus that has kept Southwest on the road to success is that they always knew who their customers were: they were people who had to make the choice to either fly or drive,” he said.
Even as Southwest’s salaries climbed to parity with the legacy airlines — indeed, one reason the unions loved Mr. Kelleher so much is that he never believed in holding out for every penny during labor negotiations — the company still kept its ticket prices low because its employee productivity was so much higher than its competitors’. Its pilots spent more time flying and less time on the ground. Southwest could turn around an airplane in 20 minutes. Its short hauls were more fuel-efficient than most big airlines’ long hauls. One reason the old-line carriers are in trouble and Southwest isn’t is that they just can’t operate as efficiently as Southwest.
Several analysts I spoke to marveled at Southwest’s remarkable fuel hedges, which have saved it hundreds of millions of dollars in fuel costs — and have probably been the single most important reason the company has remained profitable. For most airlines, fuel now constitutes 40 percent of their costs, up from 10 percent just a few years ago. But not Southwest. Mr. Kelleher told me that right now, 70 percent of the company’s fuel is hedged at $51 a barrel — “which ain’t bad when oil is $126.”
I also wound up thinking that Mr. Kelleher had the good fortune to build his airline during the great bull market of the 1980s and 1990s. Though the company was tiny during its first decade, it grew rapidly during the 1980s, and its stock became a powerhouse. Much of that stock was in the hands of employees, because Mr. Kelleher believed in handing out stock options liberally. The rising share price relieved a lot of pressure when bargaining time came ’round. It meant the unions weren’t scrapping for every penny either.
And yet, when you look at a company like American, with its poisonous employee relations and its glum customer base, and compare it with Southwest, with its happy employees and contented customers, you can’t help thinking that Mr. Kelleher was on to something when he put employees first. “There isn’t any customer satisfaction without employee satisfaction,” said Gordon Bethune, the former chief executive of Continental Airlines, and an old friend of Mr. Kelleher’s. “He recognized that good employee relations would affect the bottom line. He knew that having employees who wanted to do a good job would drive revenue and lower costs.”
In truth, although Mr. Kelleher has been chairman these last few years, he had already largely turned over the reins to Gary Kelly, who was named chief executive in 2004 — and, on Wednesday, became chairman as well. It was Mr. Kelly who made the big fuel hedge bet, and it will be Mr. Kelly who will decide how to best take advantage of Southwest’s rivals’ pain. (It will also be Mr. Kelly’s job to make sure the company doesn’t have any more inspection failures, as it did in 2007, causing the Federal Aviation Administration to fine the company a record $10.2 million.)
Mr. Mann, the airline consultant, pointed out that every time the legacy airlines have run into trouble in the last two decades, Southwest has used the opportunity to steal away market share. Even though its own profits are down this year, it still has plenty of financial powder to make investments its competitors won’t be able to match. And as the old-line airlines try to raise prices to keep pace with fuel price increases, Southwest, with its fuel hedges and productivity advantages, will squeeze them all that much harder. One analyst, Ray Neidl of Calyon Securities, has gone so far as to predict in a report that after the dust settles, Southwest will be, as he put it, “the last man standing.” That may be an overstatement, but it’s not much of one.
As for Mr. Kelleher, he plans to keep coming into the office for as long as he can, where he’ll smoke his cigarettes, tell his jokes, drink his Wild Turkey and walk the halls greeting everybody by name. When our interview was done, he took me on a little tour of those halls. He wanted me to see how the walls were decorated — with photo collages of employees. There was even one section devoted to employees’ pets. Here and there, Mr. Kelleher would stop to talk about an employee — or their pets, which he also knew by name.
As I was preparing to leave, an employee came walking down the hall and saw him. “We’re going to miss you,” she said.
He laughed. “I’m not going anywhere,” he replied. Then she gave him a hug.