CEO OF THE YEAR 1999

Peers rule. Chief Executive readers have nominated and a panel of fellow chief executives has determined that Herb Kelleher of [...]

July 1 1999 by Chief Executive


Peers rule. Chief Executive readers have nominated and a panel of fellow chief executives has determined that Herb Kelleher of Southwest Airlines is this year’s Chief Executive of the Year. As readers of this magazine are aware, the qualified competition this year was brutal. Stellar performers, including such finalists as Dell’s Michael Dell, Cisco’s John Chambers, AIG’s Hank Greenberg, and AOL’s Steve Case, had racked up formidable shareholder returns in their respective industries. The selection committee of peers was duly impressed, awed in some respects, but in selecting Kelleher, they were persuaded that long-term performance under increasingly tough industry conditions, coupled with an ability to develop and maintain a high esprit de corps, merited his selection.

As committee member Jim Keyes, CEO of Johnson Controls, put it, “We all live in a competitive environment, but Herb Kelleher has been one of the toughest. He has not only survived, he has created a new model for success.” Pfizer’s Bill Steere added, “Anyone who knows Herb can see why he’s been repeated voted the best CEO in the airline industry.” 

 ”Kellehr is a maverick in the industry and proud of it,” says Dick Huber, CEO of Aetna. “His direct results-oriented approach combined with a down-to-earth leadership style and sense of fun have given Southwest a sustained record of profitability and high marks in customer satisfaction. And you’ve got to love a 68-year old CEO who rides a Harley!” Columbia Business School’s Bob Lear said the so-called “Southwest effect-” -  the US Transportation Department’s term for sudden reduction in prices when Southwest enters a market-has a corollary in business. “His actions have lasting effect and show how others can compete on service, performance, innovation and price.”

“Herb was an easy choice,” said committee member Ivan Seidenberg, CEO of Bell Atlantic. “He stood out because of his longstanding and distinguished accomplishments. His vision and tenacity make the difference between mediocrity and excellence, and his personal commitment is extraordinary.”

Perhaps last year’s winner AlliedSignal’s Larry Bossidy summed it up best: “Herb is an unconventional innovator masterful in breaking all the molds to combine fun, fierce competitiveness, genius, and Elvis impersonations. He has been the creative power source behind the airlines 26 years of unprecedented success and his endless enthusiasm and out-of-the-box approaches have made Southwest an industry icon.”

Chief Executive salutes Herb Kelleher as 1999 Chief Executive of the Year

Low costs; high spirits. This aspect of Southwest Airlines has been well documented. But the company’s true innovation is that its short haul, high frequency, low-fare strategy is aimed not just at other airlines but at sur­face transportation. Southwest occupies the nexus between two market spaces, the flying passenger who doesn’t wish to pay for things that are not important, such as Meals or reserved seating, and people who might otherwise consider driving to their destination. In doing this, the company has forged a unique culture, one that is inseparable from its folkloric CEO, Herb Kelleher, and uses it as a clever competi­tive weapon to establish dominance in a new market.

In their chronicle of Southwest Airlines, Nuts!, Kevin and Jackie Freiberg write: “The idea of corporate culture is too important to the effective functioning of today’s corporations to be dismissed as a fleeting craze. Culture is the glue that holds an organization together.” As he relates in the following interview, Herb Kelleher credits Southwest’s culture for achieving financial results and maintains that it’s the one task on which he works the most.

If Joseph Campbell, author of The Hero with 1,000 Faces and celebrated Princeton scholar of the world’s mythologies, were alive today, no doubt he would find South­west Airlines worthy of closer study. (Heaven knows everyone else has; on “corporate culture” clay held twice a year, the company charges some 150 outsiders 5100 each to attend.) The bedrock values of the company are evident in what Camp­bell would call its foundation myth. After graduating from NYU Law School in 1956, Herb Kelleher clerked for a New Jersey Supreme Court justice for several years before joining a Newark law firm.

Becoming increasingly restless, he was attracted by the opportunities in Texas, from whence his wife hails. Soon the Had­don Heights, NJ, native, whose first paying job was as a branch manager for the Philadelphia Bulletin earning $ 2.50 a week, was working for a Texas law firm. In 1966, a Texas businessman, Rollin King, who was planning to launch an intrastate airline, hired him as an outside counsel. (The business plan was drawn up between the two men on a cocktail nap­kin in a local bar.)

From the outset, the fledgling company was almost shot down by legal challenges from rival carriers Texas International, Braniff, and Continental, which tried to persuade Texas courts that the state could­n’t support another contender. Kelleher, by now a partner in the venture, argued the case all the way to the U.S. Supreme Court and won. Since then the company has always thought of itself as an underdog, its employees wearing that moniker as a badge of pride.

When Southwest finally received permis­sion to operate in 1971, it had four Boeings and less than 70 employees, barely enough to operate. When it could not meet payroll, the company had to make a choice: sell one of its planes or lay off people. It decided to do the former and asked its employees to cut turnaround time at the gate from 55 to 15 minutes. The tradition of Southwest employees, from pilots to ramp agents, pitching in to do what’s necessary in order to help the company was born.

Kelleher himself tries to set an example: A Dallas teacher once wrote to him saying none of her students had ever flown on any airline. He sent the class on a free round trip to Austin and threw in a tour of the capital. When it was pointed out to him that mechanics on the graveyard shift found it difficult to participate in company picnics, he held a 2 A.M. bar-b-q with him­self and the pilots as chefs. At company gatherings he arrives on a motorcycle in jeans and a T-shirt. He sings rap songs with lyrics that make fun of himself.

When Stevens Aviation, a South Carolina charter company, used “plane smart,” a Southwest slogan, in its TV ads, Kelleher contacted Stevens’ CEO Kurt Herwald, and suggested that they settle the dispute, not with lawyers, but with a CEO-to-CEO arm wrestling match. (Southwest got to keep the slogan.)

Halloween is practically a national holi­day at Southwest, with people going to great lengths in costume creation. Last year the women in the communications department dressed up as “Herb’s killer toma­toes.” Yes, it’s true Kelleher once showed up dressed as Elvis, but folklore notwith­standing, he never dressed up as the Easter Bunny. “Hey, I’ve got a corporate image to maintain here,” he jokes.

Part of the fun is reserved for passengers who might find a flight attendant greeting them from the overhead cargo bin or singing the flight safety instruction to a C&W nine. Others find entertainment in watching the frenzied crews turnaround planes in less than 20 minutes, less than half the industry average. (Total operating costs are about half the industry average.)

Passengers also like the low fares. Southwest’s average one-way airfare is $75 with an average trip length of 441 miles. The carrier is among the most generous in the industry in compensation and benefits. Through its profit-sharing plan begun in 1974, the first in the industry, employees now own 13 percent of Southwest’s com­mon stock. (Paradoxically, it is also the most heavily unionized, with 85 percent belonging to organized labor.)

Passengers, who have found themselves victims of random acts of kindness, tell sto­ries that strain credulity in an age when the glamour of flying is on par with bus travel:

  • An elderly woman making a reserva­tion to fly to Phoenix for cancer treatment broke down crying because she had no friends to be at her side. The Phoenix-based agent told her she now had a friend, and came to her aid by driving her around Phoenix for two weeks and was there for the woman when she needed help.
  • On a Southwest flight to Oklahoma City for a court hearing before a military judge, a passenger discovered that he had left his one and only tie in his office. When flight attendant Jennifer Smith asked, “What would you like this evening?” he replied, “I would like a necktie; could I possibly borrow the captain’s?” Ms. Smith said, “I can’t lend you the captain’s tie because it’s part of his uniform, hut I will look into a resolution to your problem.” Minutes later, she returned with a drink and a tie belonging to another customer-along with his address so the needy passenger could mail it back to him.

Under Kelleher’s guidance Southwest has become the fourth-largest U.S. carrier in terms of origi­nating customers hoard­ed. From 1992 through 1996, the company earned the Department of Transportation’s “triple crown” for best on-time performance, best baggage han­dling, and fewest customer complaints among all major carriers. It has cinched the on-time performance record through 1998. Since 1973, it has also reported 26 consecutive annual profits despite two major industry downturns. Today the air­line operates more than 2,400 flights a day with 27,000 employees carrying 52.6 mil­lion passengers, with $4.2 billion in total operating revenue and $433.4 million in profits. From three planes in 1972, it now operates 284 Boeing 737s-having one aircraft type allows for greater efficiency and easier turnarounds. Last year it received 141,710 resumes, but hired only 4,115 people. It received requests for ser­vice from 171 destinations, but operates in only 54 cities in 28 states. The company also has 821 married couples on its pay­roll-that is, 1,642 employees have spouses who work for the company.

Its business strategy of operating direct short-haul routes, eliminating the costs associated with hub routes, has been imi­tated by United, Continental and Delta. In Europe, Southwest wannabes have sprung up in the form of Easyjet in the U.K and Ryanair in Ireland. Virgin Express is another, and Richard Branson would like Congress to allow him to take his act to the U.S.

Imitating the strategy is one thing, but duplicating the culture is quite another. Colleen Barrett, EVP for customers and corporate secretary, is the second-ranking officer in the company, and is often described as Herb’s alter ego. She worked for Kelleher as his legal secretary and through the early years at Southwest inter­preted his vision into day-to-day policy. Birth, deaths, marriages, and promotions are acknowledged with personal notes from Colleen or Herb. Every square inch of wall space in its five-story Love Field headquarters is covered with photos and. mementos of employee gatherings and cel­ebrations. (The “scrapbook” is taken down and rotated every so often to new locations so employees will be exposed to different exhibits.) It’s not for nothing thatmost employees consider Barrett the den mother of Southwest’s culture. “Southwest is a cause, not a career,” she says. “We offer people a chance to be themselves, not to be robots. When you trust people until they show they shouldn’t be trusted, peo­ple respond.”

Barrett, who grew up in Bellows Falls, VT-and is the airline industry’s highest ranking female executiveattributes the South-west style to common sense, the Golden Rule, and something both she and Kelleher had in common – working mid­dle class Irish mothers who insisted that their children treat people with dignity and respect, something Barrett says tends to be omitted at the MBA level.

In every story about the company, its reported that Southwest “hires attitude.” But doesn’t every company? “We look for a sense of humor, a sense of service, and we screen out bad attitude,” says Barrett. “We don’t care if you’re the best pilot in the USAF, but if you condescend to a secre­tary, you won’t get hired.” CFO Gary Kelly also points out that the company tolerates mistakes particularly when the customer is well served. “One can feel the enthusiasm for people,” says Kelly, who was promoted to his current position by Kelleher at the tender age of 34 in 1989. “He had confi­dence that I could do it and coached me through the rough patches.”

Historically, being small gave Southwest a psychological edge. But at $4 billion in annual revenues Southwest is no longer the junkyard dog of the airline industry. Having experimented with daily nonstop flights from Baltimore to Phoenix (the longest scheduled flight in its history), the company is flirting with being transcontinental. Last March, it announced scheduled service to MacArthur Airport in Islip, NY, 40 miles east of Manhattan, allowing people to travel across the country for $299 each way. Two other East coast cities will follow.

Is there still room to grow, without departing from its core strategy? Kelleher is convinced there is. And the 68-year-old chain-smoking chief, who is fond of his Wild Turkey bourbon, doesn’t see himself slowing down or stepping aside anytime soon. Wall Street adores Herb almost as much as his killer tomatoes. Merrill Lynch’s Candace Browning observes that the company’s first quarter operating marlin of 15.5 percent was the highest of any larger car­rier and the highest Southwest has achieved since 1981. CIBC Oppen­heimer’s Julius Maldutis reckons the market has given the stock a 20 to 30 percent premium relative to the S&P S00 owing to Southwest’s predictable growth profile.

Then there’s the question of what becomes of Southwest without the extro­vert-in-chief? “There’s no question Herb’s an institution,” says Jim Parker, Southwest’s general counsel, who lawyered with Kelle­her before the airline was formed, “but we have a whole cadre of leaders here. They may not wear funny hats or drink Wild Turkey, but they’re here just the same.”

J.P. Donlon

FINDING A LASTING ESPRIT DE CORPS

Much of Southwest’s continued success seems to derive from its unusually intimate labor-management relations. What’s your take on why that works and the process you used to sustain this bond over time?

Well, first of all, we don’t talk about labor-management rela­tionships at Southwest Air­lines. We eschew the words “labor” and “management” as much as possible because the very utilization of those words, in my estimation, sets up two different groups within the company with two different labels. So we simply talk about the people at Southwest Airlines. The titles and posi­tions are somewhat incidental to the fact that they are people.

Some years ago, one of our vice presi­dents said, “Herb, it’s easier for a ramp agent, a flight attendant, a pilot, or a mechanic to get in to see you than it is for me.” I said, “Let me explain the reason for that. They’re more important than you are.”

We try to value each person individually at Southwest and to be cognizant of them as human beings – not just people who work for our company. We try to memori­alize and celebrate and sympathize with. and commemorate the things that happen to them in their personal lives. What we’re really trying to say is, “We value you as people apart from the fact that you work here.” That approach has been very help­ful to Southwest. We have not been pre­scriptive as to how people can or should behave when they’re on the job. Funda­mentally, they can behave the way that their basic natures influence them to behave. If they want to tell jokes, they can tell jokes. If they want to play practical jokes, they can play practical jokes, and they can, in effect, he a liberated spirit within a working environment. We’ve never thought that you should have to come to work and assume a mask, be dif­ferent from who you really are, look like you’re a bunch of little lead soldiers stamped out of a mold, and I think it makes people feel good about themselves and good about what they do, and it also gives vent to their creative energies, their imaginations.

I’ve frequency made the statement to our people: The intangibles are more important than the tangibles. Another air­line can go out and get airplanes. They can acquire ticket counter space at the termi­nal. They can buy baggage conveyors and tugs. But the hardest thing for a competitor to imitate-in the customer service busi­ness, at least-is attitude; esprit de corps is the way that you treat customers and the way that you feel about people. And it’s very difficult to emulate that, because you can’t do it mechanically, and you can’t do it programmatically, and you can’t do it according to a formula.

When you and Rollin King first got together, did you set out to do it this way?

Rollin and I worked on getting the airline started, which was basically litigation with the incumbent airlines of that time. After we got started, several of the other carriers tried as hard as they could to put us out of business as quickly as they could. I think there was a root there of a survivalist sort of mentality-one for all or all for one, or together we perish, in effect. And later on, basically starting in the early ’80s, we really started focusing on people as people and identifying that as the appropriate value for Southwest Airlines.

It’s interesting because people would say to me continually, “Herb, this works fine. You have great esprit when you have 200 people; wait till you get to 500.” And we’ve gone through 1,000 and 1,200 and 1,500 and each time people say that, and now we’re up to 27,000 and I think we still have tremendous motivation and esprit de corps. But I’m still asked that question.

Suppose you decided to help start another airline or a semiconductor firm or maybe an investment banking firm, would the culture of that firm be similar to this-or is this a one-of-a-kind phenomenon?

From what I’ve seen, it’s possible to do it in any kind of business, and it doesn’t really matter whether it’s a customer ser­vice business or production or manufactur­ing business.

I would say the majority of our readers would love to understand better how they can cre­ate this kind of motivation or connection to people in their businesses.

Yes. We’re not afraid; we’re not abashed to talk to our people about important philo­sophical things, things that are perhaps inspirational in nature. Our current signa­ture line is that Southwest Airlines is the symbol of Freedom. It’s not just for the out­side world. It’s directed towards telling our people, “Hey, what you’re doing every day is important to millions of people across the U.S. who oth­erwise would not be able to fly. So you’re doing a great amount of good for society.” It’s an uplifting thing.

I analogize it to a story I heard years ago: If a mason is working on a wall and you ask him what he’s doing and he says, “I’m laying bricks,” you’re not going to get the same kind of work as you would if he said, “I’m building a house.” So we want our people to under­stand that they’re in effect building a house, that they’re doing well by doing good for other people. So you need that kind of thing. Another thing is that it’s not as heretical today as it was many years ago when I first announced our hierarchy of rankings. At that time, it was supposed to be a conundrum: who comes first, your employees, your shareholders, or your cus­tomers? And people would ask you that as if it were some great mystery that only Pascal could solve. I just frankly said, “Your employees come first. There’s no question about that. And if your employees are satisfied and happy and dedicated and inspired by what they’re doing, then they make your customers happy and they come back and that makes your shareholders happy.” So it’s not a mystery. Most things are very simple. Ein­stein said that. The simpler it is, the more likely it’s true, in effect. We tell our people, “Don’t worry about profit. Think about customer service.” Profit is a by-product of customer service. It’s not an end, in and of itself. It’s something that’s produced by your efforts and the way that you treat each other and the way you treat the out­side world.

Every anniversary of a Southwest Airlines employee is recognized. All the holidays are recog­nized; all the marriages; all the deaths in the family; that sort of thing, which is very, very personal.

Do you have banners and cakes every month? You must be doing this every day.

We have a lot of celebrations of different things, but I’m talking about personal com­munications in terms of cards, in terms of notes-”sorry to hear about the death of your grandfather”-that sort of thing. And that is a prodigious process for 27,000 peo­ple. But 1 would estimate, and this is just off the top of my head, that everybody at Southwest Airlines-all 27,000-hear from us in one way or another, probably five times a year.

You’ve been quoted as saying, “We hire atti­tude.” That’s nice. But everybody claims that, don’t they?

But they don’t value it. They don’t pay all that much attention to it. They don’t make it a priority. I’ve been with companies where they have an opening, and you know what they consider the function of their personnel department? To plug that hole as quickly as they possibly can. That’s quite different from what we do in many cases. Some years ago our vice president of the people department told me the department had interviewed 34 people for a ramp agent posi­tion in Amarillo, TX, and she was a little embarrassed about the amount of time it was taking and the implied cost of it, and my answer was, “If you have to interview 134 people to get the right attitude on the ramp in Amarillo. TX, do it.”

Can you talk about what the attitude is?

First of all, it’s an attitude of humility, one of modesty. Secondly, it’s an attitude of selflessness, altruism, where perhaps doing things for other people is the way you ennoble yourself instead of doing things for yourself, concentrating on you. We’re trying to find out what people are really like at the center of their being – whether they have a sense of humor, whether they have the servant leadership attitude and mentality, whether they have the