How I Built This with Guy Raz - Remembering Herb Kelleher

Episode Date: January 4, 2019

The co-founder and former CEO of Southwest Airlines, Herb Kelleher, has died. He was 87. We are grateful Herb shared his story with us in 2016. We are republishing it as a tribute to his life and career, in which he transformed the US airline industry. More than 50 years ago, competitors sued to keep Herb Kelleher's new airline grounded. After a 3-year court fight, the first plane took off from Dallas. Today Southwest Airlines is the country's largest domestic airline. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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It had tall windows, beautiful old details, and plenty of space for all of us. And being in that home on Airbnb, right in the middle of Vienna, walking distance from so much of the city, made it feel less like a visit and more like we were actually living there. Plus, taking a trip is the perfect time to host your space on Airbnb. Your place with all of its personal touches and its amazing location could make someone else's vacation even better. Your home might be worth more than you think. Find out how much at Airbnb.ca.ca. Hey, it's Guy here. And by now, you may have heard that Herb Kelleher, the co-founder of Southwest Airlines, died on Thursday. Herb was 87. And in honor of Herb, we wanted to re-release this interview I did.

with him back in November of 2016. It is still one of my favorite all-time episodes of how I built this because his story and the way he tells it is delightful and funny and also a truly inspiring account of sticking with an idea when the odds are stacked against you. So here it is. Here's to Herb and enjoy. You were basically introducing these really low fares. Were these Airlines trying to match your prices? Yes, in some cases they were. And we told the public of Texas that you could fly at the lower fare, but if you paid the higher fare, we would give you a free bottle of whiskey.

And so for a couple of months, we became the largest liquor distributor in the state of Texas. From NPR, it's how I built this, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on today's show how an eccentric Texas lawyer turned a crazy idea into Southwest Airlines, now one of the biggest airlines in the world. Could you just start by introducing yourself, Mr. Kelleherher? Make it Herb, if you would. Herb? Please.

Okay, Herb. Can you just say your full name? This is Herb, Kelleher. And you're best known as the founder of Southwest Airlines. Great. How old are you now? 85. Okay, great.

Perfect. Okay. We are very excited to talk to you about your story. Now, I'm just going to jump in here for a sec to mention that before we really started our interview, I had some time to just chit-chat with Herb, and I learned some interesting things about him, like what he eats for breakfast. Normally for breakfast I have cheese crackers. And what he likes to drink? Wild turkey bourbon. And that he's been a smoker for pretty much his entire life. I just enjoy the magical, mystical, mystical aroma and sense.

sight of smoke. So how soon after you wake up do you have a cigarette? Well, it's a nanosecond. Oh, it's that quick, okay. Yeah. With your cheesecrackers. Even before my cheesecrackers. Now, for the story of how Herb launched Southwest Airlines, you have to go back about 50 years, 1966, to be exact. Herb was a young lawyer. He was living in San Antonio in Texas, where he had started his own law firm, helping clients to start companies. And, And one day, one of Herb's clients, a guy named Rollin King, calls him up and he says, hey, I heard about this airline called Pacific Southwest. It flies only in California. And I have an idea.

Let's meet for a drink. And Rollin came to me with the idea of setting up a similar operation in Texas. And how soon after he sort of floated this idea to you saying, yep, let's do it. Let's start a company. It was a very short period of time. Maybe, you know, like a minute. That fast, wow. No, it was longer than that.

I was just joking. But within a very short day's, within days. Within days? Well, at first I was very skeptical. But then I did some research and discovered that PSA was very successful in California, that Texas supplied all the requisites for an intrastate airline, because it was a big state that had large metropolitan areas far enough apart to justify flying. and so Houston, Dallas, and San Antonio were the obvious first targets because they were the three largest cities in Texas.

What did you know about airlines at the time? Well, I knew nothing about airlines, which I think made me eminently qualified to start one. Because what we tried to do at Southwest was get away from the traditional way that airlines had done business. So I started with the tabula rasa blank slate. and I think that was very helpful. So at this point, how old were you, by the way, at that point in your life? I was 35. 35, okay. So you had a family?

Yes, right, four children. Four children, and you've got this successful law from. By the way, was the airline industry profitable at that time? No, it was not notably profitable. As a matter of fact, Warren Buffett reportedly joked about it at one time and said, if a capitalist had shot down the Wright brothers at Kitty Hawk in 1903, the economy would probably be better off. And so it didn't have very great returns. It was constantly in difficulty. So why did you even think that this was a plausible idea?

Well, I think it was the allure of doing something different, doing something that was exciting. I really always have had a great deal of curiosity. And then I thought to myself, well, you know, most of the adults in the United States of America haven't been able to fly because of the cost barrier. It's too expensive. It's too expensive. You know, they just thought it was business people on expense accounts. And so what I'm saying is that in terms of market analysis,

there was a huge untapped market for flying out there. Okay, so you decide with Rollin to start a company? Was that right? Yeah, I actually incorporated it in March of 1967, but of course that was just a piece of paper. And we started to raise seed money to the extent of about $500,000. That was quite a lot of money to raise, I guess. Yeah, it was. At that time, it certainly was. And we were set to go. And what was it competition at the time? Like, were there other airlines that were doing these Texas flights, between Houston and Dallas and these other places?

Oh, yeah, they proved to be our biggest adversaries because they were not exactly warm, welcoming, and hospitable. A bet? Yeah, we didn't get kisses on both cheeks when we announced that we intended to create an intrastate carrier. So Braniff, Continental, and Trans-Texis, later Texas International, really took out after us, and they kept us involved in political fights

and fights in the courts. And they just thought that they would apply their incumbency and their financial strength to bleed Southwest Airlines to death before it could ever fly. So they were they were suing Southwest Airlines? Correct. I mean, what was their argument? Why were they saying you shouldn't operate? Well, you know, the arguments that they made in court were actually all kind of species. And this is one illustration of where people attempt to use to manipulate.

the government to prevent competition. That's what they were up to. So how long did it take you to fight these legal challenges? Well, between the time when I started working on forming Southwest and the time we flew our first flight, it was four and a half years. Wow. It took a little pertinacity. Yeah. And during that time, the company ran out of money. And in 1969, the board of directors had a beating and talked about shutting the airline down, shutting the company down. And I said, well, how about if I litigate for nothing and pay all the court costs out of my own pocket? Huh.

Would you be willing to continue under those circumstances? And they said, oh, sure. So what was it that motivated you to fight for four years to launch this airline? Well, first of all, I was idealistic about it. because I figured if they can prevent Southwest Airlines from introducing what Southwest Airlines proposes to provide to the consumer, then that is a sign that the free enterprise system is failing. And one of the things that motivated me was to, in effect, validate the free enterprise system. And another one was, of course, that it was very hot competition and I like to win.

But what's not like what I don't get is it was such a huge gamble anyway because you could have spent those four and a half years fighting and then winning and then Southwest Airlines might have fizzled out anyway. I'll tell you what, guy, you put your finger on something because if you had taken a poll in the state of Texas after we filed our application, I can assure you that 99.9% of the population of the state of Texas would say, this is. thing will never come to anything. I'm very serious about that. Several people told me, they said, they were glad to see how much to fight, energized me and that I was enjoying it, but Herb, don't kid yourself, it'll never make a dime. Did you ever get sad or depressed? How did you keep your spirits up? Wild turkey helped. It may have provided, hey, guy, it may have provided a little boost. But frankly, my spirits just don't get down. I don't start. I don't. I don't start. I don't stress very easily. I'll give you an example only. They had stress classes at Southwest Airlines

years ago, many years ago, and they invited me to come over and speak, you know, the fellow that was running the classes. And he said to the class, he said, well, you know, Herb undergoes a lot of stress all the time. Herb tell the class how you handle it. And I said, I don't handle it. I like it. That was the last time I was asked back to the class. So you, I mean, you were going going in and out of courtrooms for four years, how are you making a living at that time? Well, I was still practicing law. I mean, I was doing a lot of other things during that time, which led to very long weeks. On one occasion, I was in the law office for two full days, and at the end of those two full days,

I went home, shaved, and went to a fundraising dinner for Southwest Airlines. But that's kind of the perseverance that it demanded to help get Southwest Airlines started while still practicing law and doing many other things. So what happened in the courts with the Southwest case? It went through the United States Supreme Court and through the Texas Supreme Court twice before we could fly. And the Texas Supreme Court handed down an order 19 hours. prior to our first flight. When was that? That was in June of 1971.

We started flying on June 18th, 1971. What was the flight? Where did it go? The first flight went from Dallas to San Antonio. But the one that received all the publicity went from Dallas to Houston. And we were the underdog. It was sort of David versus the Goliass,

you know, not just one but three of them. So there was a lot of news coverage about it, and that's the reason people paid a lot of attention to it's finally getting underway. So were you on that first flight, by the way? No, I wasn't. I was busy working to make sure there was a second flight. Do you remember that day that first flight took off?

And do you remember how you felt did you feel like, finally, this is done? Oh, it was wonderful. And I'll tell you, an experience I had when the first airplane came in, it was over in Fort Worth at Americans Hanger. So I went over there and there's this airplane after four and a half years. And I went up and stuck my head in the back of one of the engines. And a mechanic grabbed me and he pulled me back and he said, do you realize that thrust reverser goes off?

It will decapitate you. And I said, at this moment, I don't give a damn. So at this point, Southwest Airlines, it starts advertising. It starts flying many, what was the, Was it flying more than one route? Was it flying multiple routes? Well, it was Dallas, Houston, Houston, San Antonio, and San Antonio of Dallas. And what was a, what did it cost to go to do one of those legs? Well, on some flights, we had fares as low as $10.

On others, we had fares as low as $15 or $20. We were about 45% lower than the other carriers. So how were you able to do that? How were you able to charge so much, such a lower fare than the? other airlines in Texas? Through enormous productivity. But how? I mean, I'm assuming you just had a few planes at the time. Well, we started out with three, and then we got a fourth one.

We had to get rid of one airplane in order to meet our payroll right after Southwest started flying. And so we decided that we would fly a four airplane schedule with three airplanes. How do you do that? Ten-minute turns at the gate. We bring that airplane in. And 10 minutes after it stopped at the gate, you know, it would be pushing back again. And we had airplanes that, you know, were operating 12 hours a day sometimes.

So each one of those additional flights represented a revenue generation opportunity that the other carriers didn't have. Okay, but even so, I mean, those other carriers like Branf and Texas International, right, I mean, they were charging much, much higher fares. and it couldn't have just been that you turned planes around faster. No, it was a whole conjure thing. You're right about that. I was just giving you an example with a 10-minute turn because it's a vivid one. In addition to that, they were by definition monopolists. They had been under 40 years of federal government supervision through the CAB.

The Civil Aeronautics Board? Yes, right. And during that time, if they had a little financial, problem, the CAB would just give them a fare increase. And so that's how their fares got so high as compared to what we were doing since we weren't regulated by the CAB. Okay, so you weren't regulated in the same way, but were you doing other things like paying your employees less? Well, it depended. Initially, we were paying them less. As the years went on, we were paying them more. Their total compensation was superior to the other carriers. And in addition, when we turned our first very

slim profit in 1973, we set up the first profit-sharing plan in the American airline industry. And I think we made a profit of, I don't know, $100,000 that year or something like that. But that went on, of course, to pour billions into our employees' pockets. And your employees were unionized as well? Yeah, we were the most heavily unionized carrier in the United States. Our low costs were not due to being a non-union carrier since we were more unionized than our competitors were. So you were basically introducing these really low fares. Were these airlines trying to match your prices? Yes, in some cases they were. There's no question about that. As a matter of fact, Braniff at one point put in a lower fare than ours, which they called an introductory. Fair. Of course, they'd been serving Texas, you know, for 40 years by that time. But in any event,

one of the things that came out of that was we maintained our full fares. And we told the public of Texas that if you paid the higher fare, we would give you a free bottle of whiskey. And so for a couple of months, we became the largest liquor distributor in the state of Texas. So, Herb, you know, if I think about flying at that time, like, I'm thinking of, like, mad. man and, you know, tumblers with scotch and like a glamorous experience. But Southwest was competing on price. I mean, you were not doing in-flight cocktails. So, like, what do people think of your service versus the competition?

I got a story to tell you on that. It was Thanksgiving of 1971. Remember, we've been in business since June. Yeah. And my sister-in-law, a delightful lady, called me at my law office. And she said, Herb. She said, I just flew from Houston to San Antonio on Southwest Airlines, and I've traveled most of the world's airlines, which was true.

You know, she was a world traveler. And she said, I know you're going to be a big success. You've got the best in-flight service that I have ever experienced on any airline. Wow. And I said, boy, am I glad to hear that? How many passengers were on the airplane? She said, just me. In just a minute, Southwest goes national, and Herb convinces travelers that airlines do not have to serve in-flight meals.

I'm Guy Raz, and you're listening to How I Built This from NPR. It's How I Built This from NPR. I'm Guy Raz. So throughout the 1970s, Southwest Airlines, they still only fly within the state of Texas. But then, in 1978, something really important happens. Congress decides to completely deregulate the airline industry. And for Southwest Airlines, that means they could now start flying to new cities outside of Texas. You know, at this point, Southwest is expanding and your competitors are no longer just Texas Airlines.

You're competing with like American and Pan Am and TWA, right? Right. The national, major international carriers start to become your competitors. Yeah. So were people skeptical that Southwest were. would be able to compete in, you know, the big leagues? Oh, yes. We were described as a Texas airline that could only be successful in the state of Texas, okay?

Yeah. And then we were described as a sunbelt airline that could not be successful outside the sunbelt. There was a press conference we went into Baltimore where one of the reporters there said, well, you know, Mr. Calhari said, I know you've been very successful. out west, but now you're coming to the east, the most competitive part of the country as far as airline service is concerned. And I said, yeah, it's so competitive that when we start out here, we're reducing your existing fares by 60 percent. How competitive does that sound to you? I mean, was Southwest at that time, were you guys already sort of no frills?

Well, we were no frills. In a sense that we were short haul. And that kind of restricts what you can do. you have relatively short flights. So like peanuts and drinks. Yeah, yeah, exactly. And then pretzels and that sort of thing. But, you know, when we started flying Longer Hall, like from San Antonio to Los Angeles, we had a press conference, you know, to announce a new service. And one of the reporters there said, well, are you going to serve meals on those flights?

And I said, no, we're not. We're going to charge you $400 less per trip, right? And I understand you can get a pretty. good sandwich at Chasins for $400. So when, at what point did you give up your law practice? Actually, that was at the request of the Board of Directors in 1981. So you were still, you still had your own law practice that you were doing other work for throughout the entire 1970s? Oh, yes, yeah.

And I'll tell you the truth. You know, I didn't really hanker to be part of corporate life because, you know, lawyers have a lot more freedom to do their own thing when and where. they want to. But we hired a very excellent fellow named Lamar Mews, who was a real battler, to get the company off the ground and operational. He had substantial airline experience, and he did a wonderful job. And so, you know, finally in 1981, we lost a successor to Lamar, and the board director said to me, you've got to do it. And did you want to do it? Well, I felt I had to do it. And I'll tell you why, because the start of the 1980s, You had unemployment of 10.8%.

You had a double-dip recession. You had the air traffic controller strike. Then Lamar Mews, the guy we hired to get the company off the ground, he launched a competitor against us called Mews Air. Oh, wait. He left Southwest and then launched a competitor. Yeah, three years after he left called Mews Air. How did you feel about that? Well, I thought it was somewhat immodest on this part.

Because he called it Mews Air after himself. Yeah. But were you like, what are you doing? I mean, we work together all these years and now you're, I mean... No, we bought him later. You bought him later? Yeah, when they're on the verge of bankruptcy, yeah, we bought news there. But it was there in 1981.

So I figured I better do what the board asked me to do and come to Southwest Airlines full-time. Was Southwest Airlines making money at the time? Yes. We've been profitable every single year for 43 years, I guess, now. And it must have made the other airlines crazy because they were, a lot of them have had good years and bad years. But it seems like Southwest has just never had a bad year. Well, we've had years when, you know, our earnings were down. But we've never had a loss for a full year since 1972.

And we've never followed an employee at Southwest Airlines when the rest of the United. of the industry during that period up until now, has probably furloughed, I don't know, a million and a half employees throughout the world. Basically, we looked at history and said, this is a very dicey business to be in, the airline business? Yeah. So we may be flamboyant from the marketing standpoint, but we're going to be very conservative from the fiscal standpoint.

And I established a rule of thumb that we're going to pay 80% percent. of the cost of all of our new airplanes from internally generated funds. And actually we wound up paying 100% for most of our airplanes. So we had the largest percentage in our fleet of owned airplanes of any carrier of any size. So what did that mean? Well, I mean, you're not taking on debt, right, when you do that. So when you get into bad times, you're not threatened by the debt payments, which is put carriers into bankruptcy and out of bankruptcy and back in the,

bankruptcy, you know, for 35 years. You know, from the outside, from listening to your stories, the airline industry seems so brutal. Like, is it, do you think it's more savage than other industries? I think that it's more competitive than other industries. And one of the reasons for that is that our principal capital assets, the airplanes, move at 540 miles an hour. Yeah.

And, you know, if you have a shoe factory that fails in Seattle, as an example, you can't within hours transport that shoe factory to Chattanooga, Tennessee, to compete there. But if your Seattle Air Service fails, you can have your airplanes in San Antonio or Chattanooga within a matter of hours. So the very mobility of your capital assets breeds a lot of competition. Did you like that competition? Did you like being an airline CEO and managing all that stuff? Was it fun for you? Well, I had to adapt myself. Yeah, I love being with the people of Southwest Airlines.

That was like a fountain of youth for me. They were so wonderful and entertaining and, you know, great to be with that part of it. But when you're practicing law, you pretty much do your own thing. And it's a swift pace. Well, things didn't move as swiftly at first when I came to Southwest Airlines full-time. And we're moving swiftly compared to the rest of the airline industry, but not compared to my experience. Were you pushing for expansion and growth and all this things during your tenure? Oh, yes. I mean, Southwest Airlines expanded enormously, you know, from a very small base.

But I soon realized it was a speech that I went to hear. where a guru said, if you can improve a corporation 5% in a year, that's a miracle. I said, oh, okay, I was trying to do 25%. Maybe that's why I feel a little frustrated. So it really brought my thinking, you know, more in line. You know, I'm thinking, even if it might have seemed like it was a slow process for you, the fact that Southwest was growing and kind of prevailed in this industry is pretty remarkable. And it's pretty unbelievable, given that, you know, so many of those early competitors don't even exist anymore.

And some of the great iconic airlines, TWA, Pan Am, they're gone. Exactly. Many of them. There are very few left. What mistakes did they make that you seem not to have made? Well, we just did things differently, like market share, you know, a shibboleth, supposedly. And I told anybody if they mentioned market share, I'd. punch them in the nose. Because here are all these big companies fighting over their market share

and losing money and furlowing employees. Yeah. So I said, let's focus on profitability. And if we have 4% of a market and we're profitable, that's better than having 90% of a market and being unprofitable. What's the value of Southwest today, do you know? Overall? Yeah. Oh, probably $20 billion, something like that. So we're talking about one of the biggest airlines in the United States easily. In the world, in terms of passengers carried. It's unbelievable. Yeah, it really is.

It's like I've had too much wild turkey, you know, and fantasizing. By the way, when you started the company, how much did you invest personally? I invested $10,000. Which must be worth quite a bit today, I imagine. Well, it's gone up some since then. But at the company, is what I thought was a requirement of good leadership. I always turned down pay increases, bonus increases, to set a good example, I thought, for all of our people. Of course, the stock that I got rose enormously in value, but that was in lieu of cash compensation.

So you were mainly paid with stock options? Yeah, basically with stock. I got the biggest kickout, just to give an exemplar, when I did a stock option, deal in lieu of pay raises with their pilot, so they get Southwest Airlines stock options in lieu of the pay increase. I took no pay increase along with them. And I'm not trying to single anybody out, but there was the head of an airline that was smaller than Southwest Airlines and on the verge of going out of business whose salary and bonus were three times what mine were at Southwest Airlines, and that's the way I wanted it. By the way, are you for worried that some

you know, some young, you know, Herb Keller-type character is going to come around and put up some upstart airline and knock Southwest off its throne? I'm concerned about it all the time. I wrote a letter to our employees, and it was about my ten foremost concerns for the next decade of Southwest Airlines, okay? Yeah. And number one was us that we ignore competition, that we get complacent, that we get cocky, And I used the line, think small and act small, and we'll get bigger.

Think big and act big, and we'll get smaller. So it could happen one day. Oh, it's possible. You know, I'm a history buff. And if you look at the largest companies in the United States, as the 19th century turned into the 20th, most of them are gone. The central leather company in 1900 or 1901 was the 17th largest company in the United States. but it didn't anticipate what the advent of the Ford automobile was going to mean. You know what it did?

It made buggy whips and saddles and never stopped doing it until it was gone. And if you look at countries or you look at companies, they perish. And if you have any sense of history, you realize that and, you know, try to avoid it. You know, hearing the story of how you made this happen and all the work you put into it, I wonder if you think you're just wired differently to be able to put up with all that stuff for so many years. Well, yeah, I probably am wired a little bit differently from many people and they're probably very happy about that difference themselves. But one of the things is that I never look back. You know, I don't spend a lot of time regretting things that went wrong. And furthermore, I think that I've always had a great deal of fun out of what I was doing.

And, you know, people would say to me, why aren't you burned out? Yeah. You know, I was working 100 hours a week. And I would answer very simply, well, it's easy when you have a passionate joy in what you're doing. You don't burn out. Herb Keller-Hurk co-founded Southwest Airlines 50 years ago, and he served as CEO and then on the board. before retiring in 2008. By the way,

Herb Callagher once resolved a trademark dispute with a rival airline. They were both using the slogan, Plain Smart. He resolved this not in court, but by challenging the other CEO to a public arm wrestling match, which Herb Callagher lost.

And you can see that entire arm wrestling match. Just go to Google and type in The Malice in Dallas.