Herb Kelleher changed the world. Before founding Air Southwest Company in 1967, Herb was a young Texas lawyer frustrated with the cost of transportation throughout the state. Kelleher and his co-founder (and law client) Rollin King set out to bring those costs down. The airline almost didn't make it off the ground, facing a bevy of legal challenges as competitors maneuvered to block the young upstart. With Herb personally involved in the legal battle, the company won key cases before both the U.S. Supreme Court and the Texas Supreme Court that saved the airline from a premature demise.
When the renamed Southwest Airlines (NYSE:LUV) began flights in 1971, the company flew to only three Texas airports. Today, Southwest carries more passengers in the U.S. than any other airline. By focusing on making flights affordable and taking care of employees, Herb guided Southwest's growth as executive chairman from 1978 to 2008, and as president and CEO from 1981 to 2001. That legacy lives on today, with Southwest as the only airline that refuses to charge reservation change fees and the only one to allow customers to bring two checked bags for free.
In a statement released following Herb's passing on Jan. 3, American Airlines (NASDAQ:AAL) CEO Doug Parker may have best summarized the power of Herb's ideals, not just for airlines but for all businesses, saying, "His style presents the ultimate case study for airlines or any service company whereby if you take care of your people, they will take care of your customers, which will take care of your shareholders. That simple yet profound way of leading continues to inspire us, and we aspire to honor Herb's example." As we remember Herb's legacy, we hope you'll enjoy this conversation between Herb and Motley Fool CEO Tom Gardner recorded in 2017.
A transcript follows the video.
Tom Gardner: Herb, what happened on March 12th of 1931?
Herb Kelleher: It was a boom day for the entire globe Tom, if I do say so myself because a highly intelligent, really visionary and very handsome baby was born and named Herb.
Tom Gardner: Who is Harry Kelleher?
Herb Kelleher: My father.
Tom Gardner: And what was his work and life?
Herb Kelleher: Well he was the plant superintendent for the Campbell Soup Company in Camden, New Jersey. And then he became the general manager of the Campbell Soup Company and they had only one plant at that time. That was his occupation up until his death.
Tom Gardner: And who was Ruth Moore?
Herb Kelleher: My mother.
Tom Gardner: And what can you tell us about Ruth?
Herb Kelleher: Well, she was working at the Campbell Soup Company, which was where she met my father and after our family was blown apart at the beginning of World War II Tom, one of my brothers was killed early in 1942 and another one off in the service and my father died in early 1943, and my other sister became an expediter for RCA, was involved in war work and suddenly my mother and I were there alone from six to two within a year-and-a-half or two years. And she was just fabulous because she covered everything with me, ethics, the way you should treat people, business, we used to sit up even when I was 10 and 12 and talk until 3:00 or 4:00 in the morning. And she was absolutely fantastic in that respect because she was not only a nurturing mother, but she also fed my mind on a continuing basis. Half my diet was pabulum and the other half was thoughts and ideas.
Tom Gardner: And tell me about your brothers and sister.
Herb Kelleher: Well one of my brothers was killed in the Merchant Marine in 1942.
Tom Gardner: Richard.
Herb Kelleher: Richard, yeah. And then my other brother-
Tom Gardner: So you're 10?
Herb Kelleher: Yeah.
Tom Gardner: At that point.
Herb Kelleher: Yeah, I'm 10. And my other brother, you can tell how things have changed, he was declared 4-F because he had a heart murmur and he went to one of the leading cardiographers or cardio doctors in the United States to get a note saying it would not impede his service, so he could go into the service. He served in the Navy for four years, yeah.
Tom Gardner: What about your sister?
Herb Kelleher: She worked for RCA as an expediter on war projects, get things done faster because we need them fast. And then she married a guy that I really liked, Jack Adams and had two children, and she was a very bright, very bright and she and I occasionally we'd get into arguments and she would smash me to pieces.
Tom Gardner: Were you the youngest?
Herb Kelleher: Yeah, by far, by far.
Tom Gardner: So what was life in Haddon Heights like?
Herb Kelleher: You know, looking back on it, I think it was kind of idyllic because it's a small town. There are numerous other small towns around it, but it had a small town atmosphere and about 5, 000 people I guess. And everybody pretty much knew everybody else and it was kind of a, I guess you might say, a village where everybody looked out for everybody else. You had to be careful because people would beat on you sometimes about your misbehavior, but it was a very wonderful environment in which to grow up. And the teachers were fabulous. One of the reasons for that is that you had so many highly intelligent and competent women at that time and they didn't have opportunities in business, so they went into teaching and they were just fabulous.
Tom Gardner: Who were you as a student at Wesleyan? Like what type of student were you? What was your focus?
Herb Kelleher: Well, I'll tell you-
Tom Gardner: I think you're an English major.
Herb Kelleher: English major and philosophy minor. Yeah, and my focus was really on ideas. It wasn't so much studying in and of itself to learn facts about history, but to learn lessons from what had happened historically with the idea in mind as an example, only how to avoid them in the future.
Tom Gardner: And then you decided to become a lawyer rather than to become a journalist, so what was the-
Herb Kelleher: You know what, you're too well informed Tom.
Tom Gardner: Herb, you're one of my heroes. This is the stalker interview. Why did you choose to go into law?
Herb Kelleher: Well, I laugh about it because I took an aptitude test in my senior year and it said that I probably would fare best as an editor, a reporter or as a lawyer and I figured, "Well, if I go to law school I can avoid working for another three years. So I'm going to law school." But in actuality that's what I wanted to, was to go to law school.
Tom Gardner: And then you met your wife-
Herb Kelleher: Yes.
Tom Gardner: ... and moved to San Antonio. So can you tell us a little bit about her?
Herb Kelleher: Yeah, well, actually, she was going to school at Connecticut College-
Tom Gardner: Connecticut College.
Herb Kelleher: ... yeah, in New London and that's how we met on a blind date. And we got married but I never said anything to her about moving to Texas and she never mentioned it to me, but I was spending a lot of time in Texas because when I was working for the New Jersey Supreme Court, it was kind of like being in college, you had a lot of time off during the summer, a couple of weeks at Christmas, a couple of weeks at Easter. And I would spend all that time in Texas and I became enthralled with Texas. And finally I told her one night, I said, "You know, I'd like to be an entrepreneur. I'd like to start things. I'd like the creativity, the chemistry, the energy of it. And, I think there's a better shot at that in Texas," because Texas was kind of wild and wooly and wide open at that time, thanks mainly to the new prominence and wealth of the energy industry. The oil industry as we called it then and I said, "Let's move to San Antonio." And little tears start coursing down her cheeks. But she never said a word.
Tom Gardner: And your law practice in San Antonio was, maybe not all of it or maybe it was all of it, about helping people start businesses or helping them [crosstalk 00:06:58]-
Herb Kelleher: Well a good bit of it. I had finally fount help in forming my own law firm. Three of us from three different law firms joined together and our focus was to a great extent on helping businesses get started. And one of our clients was funny Tom, because he said, "You know, coming to you guys is kind of like one stop shopping." He said, "I'll walk in, I'm looking for a lawyer, the next thing you know I have a banker, next thing you know, I have a piece of real estate."
Tom Gardner: Then we're going public.
Herb Kelleher: And we're going public. Yeah, exactly. And of course, I loved that. I loved it, really. And I think learned some from it too by watching the pitfalls and some of the mistakes that you know, budding entrepreneurs would make.
Tom Gardner: So I guess you would say in some way that, that work you did there really set you up to create something at Southwest that without seeing one situation after another, yeah, you would have made more of those mistakes in your early years. Like you were getting a great education [crosstalk 00:07:59]-
Herb Kelleher: Yes, I was. I think I was. Exactly. And I did all kinds of things. I mean, I've tried cases. I drew wills, I drew deeds, and there's something that you learn from all of those things. Was involved in politics sort of inadvertently.
Tom Gardner: How?
Herb Kelleher: Well, I moved to Texas and was not entitled to a take the Texas Bar for I think it was six or nine months because New Jersey wouldn't admit lawyers from other states, we're out of the clerkship for six or nine months. There I was and my brother-in-law said, "You know, there's a fella going to run for governor and since you're not doing anything," basically he said, "Why don't you help us in his campaign?" It was John Connolly and when that started out Connolly had four percent name recognition in Texas and he was running against the incumbent governor, the incumbent attorney general, and I was amazed because you had a wider choice in the Democratic Primary than I'd ever seen. You had a member of the Communist Party and a member of the John Burch Society.
Tom Gardner: Oh my gosh.
Herb Kelleher: And three or four others in between and I said, "Wow, this is really wild." Well, Connolly won, and went on to become secretary of the Navy [crosstalk 00:09:25].
Tom Gardner: So you're 1-and-0 really in your one political campaign.
Herb Kelleher: Well, yeah, yeah. And I got involved in others as a byproduct of that.
Tom Gardner: And then what happened at Saint Anthony's Club?
Herb Kelleher: Well, first of all, I never drank anything there except club soda Tom, I want that to be clear on the record without any peradventure of the doubt. But Rollin and I might have discussed the formation of Southwest Airlines at the Saint Anthony Club, possibly.
Tom Gardner: And how did you know Rollin at that point and why did that conversation come up?
Herb Kelleher: Well the conversation came up because Rollin became a client of mine and so I represented his little airline, Twin Beach operating short haul out of San Antonio and he got into a squabble with a partner and I got that straightened out for him and then he became a law client of mine on a regular basis. And his banker was John Parker at the Alamo National Bank and he was talking to John One day and John had just got back from California and John said, "Do you know for eleven-dollars-and-forty-three-cents, I flew from San Diego to San Francisco on Pacific Southwest, later PSA." And he said, "Why don't you think about starting something like that in Texas?" Because Texas had the basis for that. Large state, large metropolitan areas, far enough apart to justify flying. At first, I was kind of skeptical and said to Rollin, "You know, I'm not so sure this is a good idea." But then I spent time researching PSA in California and I said, "Hey, this could really work."
Tom Gardner: What did you learn from PSA?
Herb Kelleher: Well, they were a low-fare, low-cost airline, but they also had a certain, I guess you would say panache with respect to the way that they talk to passengers and made jokes on the airplane and wore hot pants, things of that nature. They served as kind of a role model and they actually came in and said, Lamar Muse was our operating president by that time and said, "We want to sell you our operating manuals." Lamar said it, "I've already stole them."
Tom Gardner: What happened at Pacific Southwest Airlines?
Herb Kelleher: They were bought by US Air.
Tom Gardner: I mean, that ultimately would have been a great merger for the two of you, right? I mean, the airlines-
Herb Kelleher: It would have been, as it turned out, we became big rivals because we went into Phoenix and PSA ran an ad saying, "Southwest Airlines, Phoenix belongs to PSA." And I said, "Let's run an ad saying PSA, we'll meet you at the OK Corral." We were really turned into adversaries, but we saw their cost getting higher and higher, their fares getting higher and higher, and finally decided it was the time to get into California. Within a relative short period of time, we became the largest carrier of passengers and intrastate passengers in California.
Tom Gardner: So I want to talk about cost containment in a second, but before doing that, I want you to tell for the one-thousandth time, the beginning of Southwest. For somebody that's never heard the story of injunctions, litigation, all the effort that had to be put in, that seems almost preposterous today. And maybe even a little bit about the Wright Amendment and the battle for Love Field.
Herb Kelleher: I remember them all, very vividly Tom.
Tom Gardner: You lived them to almost bankruptcy. I mean maybe not bankruptcy for you, but certainly you had no income, right? Southwest was on the verge of bankruptcy, as it was trying to make its way to get really its first plane in the air.
Herb Kelleher: What happened was the incumbent carriers were not exactly warm and welcoming and hospitable, so they could test their application before the Texas Aeronautics Commission, we were an intrastate carrier, not under the CAB as a federal carrier, and that litigation went on for four-and-a-half years before we could fly and I had to go to the Texas Supreme Court.
Tom Gardner: Where did the original money come from to last four-and-a-half years?
Herb Kelleher: We raised it.
Tom Gardner: Okay and we're just going, you were like, "We'll probably be up in a year." And then when you weren't, you went back and raised another round?
Herb Kelleher: Well, we had to raise another round, but at that time we did something different because the board said in '69, "We're going to have to shut down because we've run out of money and we can't afford this litigation anymore." And I said, "Well, how about if I do it for nothing and pay the costs out of my own pocket?"
Tom Gardner: Tough to turn that down.
Herb Kelleher: "And then if we ever get started, you can reimburse me." And they said, "Well, that sounds OK." And then after we got into the air, the other carriers continued their-
Tom Gardner: Suits.
Herb Kelleher: ... energetic, energetic and [crosstalk 00:14:52] activities against Southwest Airlines.
Tom Gardner: And the basic reason they're coming after you is they know you have a great game plan.
Herb Kelleher: Well, that may have been part of it, but we were intent on democratizing the skies, because only a very small percentage of adult Americans had ever been able to afford to fly. What we produced a lot more passengers for us and them, but of course their fare yields went down, excuse me-
Tom Gardner: No problem.
Herb Kelleher: ... because it was the lower prices that accomplished that. And then after we got started, they did all kinds of things to try to put us under and they wound up getting indicted, two of them by the Justice Department.
Tom Gardner: I didn't know that.
Herb Kelleher: Oh yeah, for violation of the federal antitrust laws. And they would try to keep us out of cities that we were interested in serving by calling upon the chamber of commerce and the city council to oppose us, basically with the threat "If Southwest comes in, we'll withdraw." And then we got into a big war with them over the noise act of 1990, where they contended that you could only comply with the new quieter airplane standard by bringing in new airplanes and not getting rid of your old ones. In other words, they were trying to prevent us from expanding was the purport of it. So we got that cured. The Congress came to our rescue and aviation subcommittee said, "That's not what our statute means. You can comply either way, bringing in new airplanes, but not to replace old airplanes, just as long as you get to a fleet level of quietness."
Then they proposed changing the tax laws. Guess what? So the short haul, low fare carriers pay $240-million-dollars more in taxes here. And guess what? The big seven, as we called them then, mirable dictu, Tom. Their taxes were reduced by $240-million-dollars a year.
Tom Gardner: You didn't have your lobbyists.
Herb Kelleher: Amazing isn't it? [crosstalk 00:17:14] amazing. Anyhow, so that war went on for four years.
Tom Gardner: I know you're not going to talk yourself up ever with regard to Southwest Airlines, so I'll even remove you from this question. Do you think it was imperative for Southwest to survive and succeed that one of their founders had legal training?
Herb Kelleher: Yes. Yeah, and it wouldn't necessarily be me, but it was imperative that you have legal training and the political training didn't hurt either because they were constantly attacking us into Texas Legislature and the United States Congress. So it was going on before the administrative agencies, the battle is being waged in the courts. It was being fought in the Congress. It was being waged in the Texas Legislature and I call it the Thirty Years' War. I think that was the Punic War, if I remember correctly. But anyhow, it went on for 30 years.
Tom Gardner: History classes. I'm disappointing my history teacher by not really having information on the Punic War. You did better at Wesleyan than I did.
Herb Kelleher: Gee and one thing I remember.
Tom Gardner: So now you're up flying and would you say that-
Herb Kelleher: Well, let me just sum up all that we've been talking about over a period of four or five years, I was involved in. maybe six years, well they also tried to force us out of Love Field, but three trips to the United States Supreme Court, which is rather unusual, General Motors, US Steel and Ford hadn't been up there that often during that period of time and-
Tom Gardner: And three trips to the Supreme Court and how many planes do you have flying then? Or what's the size of Southwest as you go through those three? Just to get in context for GM and Ford.
Herb Kelleher: We probably had 12, something like that.
Tom Gardner: Yeah, that's incredible.
Herb Kelleher: And then they tried to push us out of Love Field when they opened DFW Airport. So that litigation quite separate, went on for six or eight years, yeah.
Tom Gardner: What is the significance of Love Field today for somebody who's not been to Dallas? I mean, what does it mean to Dallas? Why is it important to have?
Herb Kelleher: It's the close-in airport, which provides a lot more convenience for the people who are located in the city of Dallas and the business community in downtown Dallas. And when they opened a DFW in the Dallas area, as a compromise between the cities of Fort Worth and Dallas, who had fought each other for years over airport location and when they closed Hobby Airport and created Intercontinental-
Herb Kelleher: ... the airport. And greater Intercontinental. I was interviewed by Texas Monthly, and they said, "Why are you doing this?" And I said, "Because people wanna fly from Dallas to Houston and Houston to Dallas. They don't wanna fly from Grapevine to some other outlying city on the Houston end of it."
Tom Gardner: So the early stages of the definition of Southwest's strategy, I do wonder when you talk about your mother and what she taught you around the dinner table or into the wee hours of the morning about respecting other people -
Herb Kelleher: Absolutely.
Tom Gardner: And even the energy of or the dynamic of flying shouldn't just be for people who are wealthy. It should be available to everyone. The egalitarian nature.
Herb Kelleher: Yeah, she was very egalitarian in that respect. She was a great teacher, because she told me that I should not necessarily pay obeisance to position or title, because she said, "Pay attention to the individual. The individual may have a grand position or title but have feet of clay." You know, which I think all of us have to agree can be the case. And she also encouraged me to read very widely and unusually adult books, for someone my age. And she stimulated my curiosity in a whole lot of things that I probably never would have gotten into, and curiosity, I think, is one of the great things that can be very, very helpful to you. Because you're always looking for something different and how it might fit in to what you're doing. So I've never adhered to the philosophy that curiosity killed the cat. I look at it as curiosity informed the cat. So she played a big role in that respect.
And also the political aspects of it. Very helpful having that experience. Fighting these battles in the congress and in the Texas legislature.
Tom Gardner: Why do so many airlines go bankrupt and why has Southwest Airlines never laid off a single employee? I mean those are ... they're so extremely at polar opposites, I mean, really, the industry we know has created very little economic value in aggregate, going back to its inception.
Herb Kelleher: That's very true.
Tom Gardner: And yet Southwest Airlines has created ... has been, well certainly during your time it was the best performing stock on the S&P 500 and since then it's been a wonderful stock as well, all the way through. No layoffs, why? I mean, for a lay person that's sitting out there saying, "I have no idea why this airline's successful and all the other one's continually fail, went through bankruptcy, came back, went bankrupt again, etc."
Herb Kelleher: Some of them three times. Yep.
Well, first of all, and I think this has something to do with history and learning something about history, I was well aware that the airline industry was a very difficult industry. As you pointed out at one point, it had a net loss from its inception, which means it's fairly difficult, fairly scary. And I said, you know, you hear about regression to the mean, and I'm not quarreling with that as a formula, but how long is it going to take to regress? Is it five years? Twenty five years? Thirty eight years? So what we're gonna do is we are always gonna be very, very strong from the balance sheet standpoint, number one. One time for a long time we were the only airline had an investment grade rating from the financial community. We're gonna have lots of liquidity, and my mantra was, "We wanna manage in good times so that we do well in bad times." And there you get into the "No furlough" policy, because if you just hire a bunch of people willy nilly during good times, guess what you're doing? You're firing 'em during bad times.
So we were always well set up to ride through the bad times, and market share was not our focus. I compared market share to elephantiasis, where ...
Tom Gardner: Do you really want the largest ears in the world?
Herb Kelleher: Right, yeah. You saw me just hesitate a little, didn't ya? But my point was, I was trying to say size, in and of itself, is unimportant. I would rather have four percent of the market and be profitable than have 24 percent of the market and lose money. So we're not gonna talk about market share at all. It was verboten.
Tom Gardner: I don't know if you've read Peter Thiel's book, "Zero to One", or know about Peter Thiel -
Herb Kelleher: I do know about him.
Tom Gardner: Yeah, he said basically, from an investor's standpoint, when people pitch companies to him, when they talk about how large their market is and how ... He said, "I wanna know the smallest piece that you're gonna dominate, because I know off of that" -
Herb Kelleher: Yes, exactly.
Tom Gardner: "You have the opportunity to grow."
Herb Kelleher: Exactly.
Tom Gardner: So the other airlines weren't doing that, they were trying to get as many routes and [crosstalk 00:25:27]-
Herb Kelleher: They were at war with each other, who had the most airplanes and who'd get the most routes from the CAB and that sort of thing, and we eschewed all that. And we opened a lot of secondary airports, satellite airports, and people initially said, "Oh, you'll never make a success out of a satellite airport. Well, there's Hobby, there's Love, you know, I can run through about five or six more of them. And of course they were much more efficient to operate from. No backups. They were a lot closer and more convenient for an awful lot of people. So we did things unconventionally that way, and we tried to keep our rules very simple to promote the efficiency of the airline. And kind of operated on the philosophy that airplanes don't make money on the ground, they only make money in the air. Passengers don't pay just to sit in them, they pay to fly. So very high utilization, productivity.
Tom Gardner: What would be a gap in fare between you and a competitor at any point in history. I mean you could name one today or go back 25 years and say, "We flew from point A to point B for X and they did it for 2X", or whatever the gap was [crosstalk 00:26:43] what would be an example -
Herb Kelleher: Oh yeah, some of those contrasts are really amazing. Do you have time for one that's kind of -
Tom Gardner: Please.
Herb Kelleher: It's kind of like a burlesque.
Tom Gardner: Plenty of time.
Herb Kelleher: We went into BWI, right? And US Air was the leading carrier there, and the roundtrip fare to Cleveland from BWI was ... I don't know, $340 or something like that, and we reduced it to $56. You know, that's a considerable drop. And then US Air found out we had a "Friends Fly Free" program, so they went, matched our ... it was $24.50, they matched that, that's right. On a "Friends Fly Free" basis, OK, and then ... We went to $19 between BWI and Cleveland. So that's a pretty big saving. You know, $19 instead of $349. And the traffic increased by one thousand five hundred percent in the first year of service. That's an exaggeration, but most markets we went into increased -
Tom Gardner: Popularity of flight -
Herb Kelleher: Increased enormously. Enormously, I'm talking 100%, 200%, 300%, within a year.
Tom Gardner: So presumably, some of the ways that you hold those costs down for passengers is efficiency, hard work of everyone who's coming to work.
Herb Kelleher: Yes, exactly.
Tom Gardner: Probably not the highest salaries in the industry? I don't know whether that's true or not, you can tell me, but how can you have cost containment and balance sheet management and a great corporate culture. I mean, those things ... We think there's a big tension there and why isn't there at Southwest?
Herb Kelleher: You know what? A friend of mine recently wrote a paper that he sent to me and in it he said, "Corporations are always succumbing to the tyranny of 'No', rather than the genius of 'Yes'". And what he was pointing out is that people sit down and say, "Well, we can either have low costs and lousy customer service" -
Tom Gardner: Everything's a compromise -
Herb Kelleher: Or great customer service and high costs. And we said, "No. You can have low costs and great customer service. And guess what? We're not offering you less for less fare, we're offering you more for less fare". And part of that, of course, was our culture. First of all the warrior spirit of our employees, who pitched in in every battle. Secondly the fun and warmth and hospitality that our people provided to our passengers. And thirdly, the kind of culture that was upbeat. We didn't ask people to change and become robots or automatons, we kept telling them, "Look. We hired you because you're you."
Tom Gardner: Did anyone take that too far?
Herb Kelleher: Well, what happened ... yeah.
Tom Gardner: "I'm me, Herb, I'm not gonna wear clothes to work today."
Herb Kelleher: Well, that ... you put your finger on it, per usual. When we had somebody who did something extraordinary, we didn't put in new rules pertaining to the whole company or one of its departments, we just sat down with them individually and talked to them and said, "You cannot do that." But you know, if every time there's a sort of anecdotal incident -
Tom Gardner: A new policy comes in place -
Herb Kelleher: You put in a new policy, you're gradually strangling yourself with bureaucracy. As a matter of fact when I saw a ticket agent in San Antonio ... after I became CEO ... trying to answer a customer's question by going through these two loose leaf manuals, you know, looking for page 73, capital A, small i, we burn 'em. We burn 'em. And what we said was ... We have a substitute, it's called "Guidelines for Leaders", and the first sentence was " These are just guidelines. Feel free to break them." We were unleashing our people to be themselves with the customer. Colleen Barrett of course played a great role in that, and she called it her "Flexibility Policy". And basically she was saying, "Look, we work like crazy to hire the right people with the right attitudes. Positive, generous, caring -
Tom Gardner: [inaudible 00:31:56]
Herb Kelleher: Yeah, and so just unleash them. Unleash them -
Tom Gardner: I think many people would guess that that works when you have a hundred employees or you have 400 employees. How many people work at Southwest Airlines today and is it still true today that it's "Guidelines and feel free to break them", and "We hire people that know how to thrive in this type of ecosystem"?
Herb Kelleher: Yeah, it's still basically the same, we're much larger, but the key to that is ... And everybody else in the airline industry kept saying that to me, "Oh yeah, it's a little -"
Tom Gardner: "Give 'em time, Herb, this'll never last."
Herb Kelleher: Exactly. "It's a little Camelot now, but wait'll you get 500 employees". And then they'd say, "Wait till you get 5,000 employees." Then they'd say, "Oh, wait till you get 15,000 employees." And my response always was, "If it's job one, if it's the most important thing that you do to maintain that esprit de corps, that culture, then you can do it." Instead of putting it on the back burner. You know, as opposed to a lot of other things that come up as you get bigger. And so basically Southwest Airlines has retained that sort of attitude. Hire for attitude. Train for skills. What kind of person are you? That's what we wanna know about.
Tom Gardner: You mentioned Colleen Barrett. When did you get to know Colleen? What's her journey at Southwest? [crosstalk 00:33:21]
Herb Kelleher: Well her journey at Southwest is ... let's see ... She joined the law office I was in before I helped to start my own firm, in probably 1966 or '67. And then when I started the new firm, she joined it, and within a relatively short period of time without anybody's ever sitting down and discussing it, she was managing the whole firm. And all us palookas are walking around thinking, "Well, things sure are moving well, yes sirree, I had a great idea the other day ..." And Colleen in the meantime was doing it all, and then she got into the cataclysms that we faced, the litigation and so on, and proved to be a very able lobbyist with the legislatures. Really valuable at trials, because she always knew, Tom, who was lying and about what. You know, when I was cross examining. And then of course she came to Southwest Airlines full time and was actually on the payroll here before I was. Yeah, I was still representing Southwest, and on the board and general counsel, but she was actually on the payroll.
So I guess you'd have to say that we've been collaborating on Southwest Airlines for a period of about 50 years now.
Tom Gardner: And how do you work together today?
Herb Kelleher: Well, she tells me where to go, what to do, how to say things, and you know what? I go where she tells me, and I do what she tells me, and I say things the way she tells me to say them. So it's working out beautifully.
Tom Gardner: Now, as one of the best performing CEO's in American history ... you never wanted to be CEO.
Herb Kelleher: No.
Tom Gardner: That's interesting.
Herb Kelleher: No, it was not my ... I love practicing law, and practicing law, you know you have a lot of latitude as to how you live the other parts of your life. I mean, I've worked till two in the morning and then go home, get some sleep, come back at eleven o'clock in the morning, you know, that sort of thing -
Tom Gardner: That's a very Gardner family trait right there, that's our entire family.
Herb Kelleher: Is that right? Well, I was the same way. Working on Southwest Airlines I didn't leave my law office, eat or sleep, for two full days. And then I went home and showered, and went to a fundraiser for Southwest Airlines. And I'm sure I was most engaging.
Tom Gardner: What would you guess is your average number of sleep a night since the founding of Southwest?
Herb Kelleher: Oh, it was four or five.
Tom Gardner: Four or five, all the way through?
Herb Kelleher: Oh yeah, for 35, 40 years.
Tom Gardner: Are you napping in the afternoon, or four or five is fine for you?
Herb Kelleher: No, four or five was fine, yeah.
Tom Gardner: That's pretty incredible. Okay, a few more questions here, why do you love Wild Turkey so much?
Herb Kelleher: I'll tell ya, it's -
Tom Gardner: Why that and not Jägermeister?
Herb Kelleher: Well, Wild Turkey came to my attention before Jägermeister, and I love the mellow taste of it. And then I got to know a wonderful guy, Jimmy Russell, who's been with Wild Turkey for 60 years. And celebrated his 60th anniversary with diamond anniversary Wild Turkey, and he is a splendid person whom I greatly admired and greatly enjoyed. And so from there on out it was partly not just the fact that I liked the whiskey, but I was also very fond of Jimmy personally, and I'm glad to see that Matt McConaughey is -
Tom Gardner: Out there -
Herb Kelleher: Gonna be a spokesman for 'em, because frankly Tom, -
Tom Gardner: You're tired of carrying the mantle.
Herb Kelleher: I'm tired of carrying the brand all by myself.
Tom Gardner: Well, he's the one who's playing you in the movie, too, right? I mean there ... You're an incredibly avid reader. Who are some of the ... What are your favorite topics to read about or a book or two that you love or a writer that is at the top of your list?
Herb Kelleher: Well, I tell ya, I read about everything. Deliberately. I read about science, astrophysics is one of my hobbies. I won't pretend that I understand everything about it but, I did read -
Tom Gardner: I'm just gonna begin saying that too. There's no way to challenge that. 99% of the population's not gonna follow up and see if you really know a damn thing about astrophysics.
Herb Kelleher: Well, I've got a little legitimization, because before they confirmed the existence of Higgs boson, I read probably a 450 page book on it.
Tom Gardner: That's legit.
Herb Kelleher: Called "Massive".
Tom Gardner: And so you didn't have any science training in ... That was not part of your ...
Herb Kelleher: At Wesleyan, one of my greatest classes was "The Philosophy of Science". I wasn't particularly interested in philosophy, but this professor was absolutely fantastic. It was his first year, I later found out, and it was really not formula-y. It was, "What are the great philosophical concepts of science? Where did it start in philosophy? How did it evolve from there?" And it captured my imagination. And I thought, "There's a whole big space here that I haven't done enough in." So that's when I started really getting interested in science, but I read history, I read biography [crosstalk 00:39:05] -
Tom Gardner: How many books do you think you read in a year?
Herb Kelleher: I read science fiction. You know?
Tom Gardner: How many books in a year do you think you ... on average, over the last 20 years?
Herb Kelleher: How many books a year, per year?
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: I would guess probably 40 to 50.
Tom Gardner: Great. A book a week.
Herb Kelleher: Almost. Yeah. But you see I used to ... as I told you, about our respective night time habits. I -
Tom Gardner: When are you reading, Herb?
Herb Kelleher: I get home late, at maybe eleven o'clock from the office, and I just sit down and read something for two, three, four hours.
Tom Gardner: Is that true of you today? You get home from Southwest [crosstalk 00:39:53] -
Herb Kelleher: No, I can't do it anymore. I don't have the stamina that I used to. But that went on for 50, 55 years.
Tom Gardner: Have you ever been afraid a -
Herb Kelleher: 50, 55 years.
Tom Gardner: Hmm.
Herb Kelleher: Yeah.
Tom Gardner: Have you ever been afraid aboard a flight?
Herb Kelleher: Never.
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: Never, Tom. And I understand why you ask that question, but I was in love with airplanes and commercial airplanes before I ever thought about going into the airline business, myself. And I have flown in every kind of airplane that you could think of. Experimental airplanes, you know, where you put your hand up against the fuselage and it starts [crosstalk 00:40:30].
Tom Gardner: What do we think of Harrison Ford out there, now?
Herb Kelleher: Oh, Jesus. [crosstalk 00:40:34]
Tom Gardner: Do we feel good about the fact that he is probably going ... he's taking a lot of experimental flights himself.
Herb Kelleher: I know him, through various aviation functions, and you know, he's really a superb pilot.
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: I don't know what happened on that particular occasion, but I can tell you that it's even happened to commercial airlines. [inaudible 00:40:53] took off on a taxiway at DFW instead of the runway one day.
Tom Gardner: Wow.
Herb Kelleher: But he's the kind of guy ... there was a climber lost in the Teton Mountains up in Wyoming, and he has a home outside Jackson Hole. And he climbs into his helicopter and single handedly goes out and picks the guy off the mountain and rescues him.
Tom Gardner: Wow. Wow.
Herb Kelleher: Yeah.
Tom Gardner: Awesome. How do you invest?
Herb Kelleher: Inartfully.
Tom Gardner: What would be some examples of one or two success stories in your investment career?
Herb Kelleher: Well, Southwest Airlines.
Tom Gardner: That's been pretty good.
Herb Kelleher: That's been pretty good. But Tom, I always turned down what the consultants recommended. I always said no. That's too big, this is too much stock. I really did.
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: You know, one of our directors stood up at shareholder's meeting one day one year and said, "You know, I think Herb just gave up about 50 million dollars worth of compensation."
Tom Gardner: Oh, you're turning down the stock grants that grants that the company was offering you.
Herb Kelleher: Yes. That the consultant-
Tom Gardner: Because you viewed them as too ... like, the compensation consultants that were advising Southwest's board on how to provide compensation to you were suggesting grants that were too large in your opinion and so you turned them down. Even though most of your ... certainly most of your comp, and most of your wealth, has been accumulated through stock options and stock at Southwest.
Herb Kelleher: Yeah, but through stock that had no value based on my contract at the time, and later on became very valuable for everybody.
Tom Gardner: Well, I want to talk a little bit about the profit share plan in a second, but ... so for you, when it came time for the board to accept the consultant's guidance on how much equity you should be granted, you said that's too much. There were occasions where you said that's too much.
Herb Kelleher: Yes. I said the bonus is too big, the salary's too big, and there are too many stock options involved. Long term incentive stock options. And so what I would do basically is, I would look at the consultant's report and I would say, "Well, I'll put myself in the 37th percentile." Okay? Even though we were more profitable than-
Tom Gardner: The others.
Herb Kelleher: Other airlines. And then-
Tom Gardner: 37th percentile of bankrupt airlines.
Herb Kelleher: Yeah, right. I did get a kick one time because somebody pointed out to me that the then chief of another airline, which was teetering on the edge of bankruptcy, was paid three times as much as I was. And I said, "That's the way I want it. That's part of leadership." You know? I want the people to know that I'm for them, I'm not here for me. You know, that sort of thing.
Tom Gardner: Mm-hmm (affirmative). If you had, let's say, two or three leadership principles ... if you had to boil them down to two or three, maybe you just sort of touched on one of them, but I hate to just try and get a little soundbite, but what would be your top two or three principles as a leader?
Herb Kelleher: I would say that, number one, you have to look out for the wellbeing of others more than you do for your own. Number two, that you have to really rejoice in your people and their accomplishments, and praise them and recognize them all the time for what they have achieved. And be humble, I think. Be humble, never think you've done something so great that now you're at the top of the pyramid, because that's when the pyramid starts to collapse, and you slide down on your face. Never be complacent.
Tom Gardner: How about two or three principles of business strategy that might apply more broadly than just the airline industry? For an entrepreneur or CEO that's looking at their game plan, and that maybe has overlooked the responsibility of having a strong balance sheet so that you can be resilient in a down period, or ... so maybe two or three strategic principles.
Herb Kelleher: Well, first of all, if one of your principles is that you're not going to furlough, that in and of itself is an incentive to stay lean. Even when times are really good. You know, it's a discipline, and a valuable one I think. Number two, particularly with respect to young entrepreneurs, including myself, they're optimists, Tom. And I think ... and that optimism is needed to be an entrepreneur. Year one. I ought to be interviewing you. But sometimes you don't realize how long it's going to take, and how much capital it's going to take to bring it to realization. And so you don't raise enough money at the beginning. And sometimes, with the young people I have found ... representing young people who want to start up their own businesses, I've found that they think that just having the idea is all they have to do. And I keep telling them, no, there's a lot of sweat that goes into it. You just don't announce your idea and suddenly golden coins start raining down from heaven like manna on you. And there's a hell of a lot of lonely work to do to make it come to pass and to be successful.
But the thing that I have always emphasized is culture, because I think that is the most powerful competitive weapon that you can have. Because it's intangible. It's spiritual. You can't buy it. Other airlines can buy airplanes, they can lease space, but if they don't have the kind of outgoing, participative, happy, devoted culture that you have, you're going to have the edge on them. I always told our people that the intangibles are more important than the tangibles.
Tom Gardner: Mm-hmm (affirmative). Is there a single story that comes to you right now, and maybe not across all Southwest's history, about the employee or teammate of yours at Southwest Airlines that did something remarkable for somebody else on their team, or for one of the passengers?
Herb Kelleher: Yeah. Well, I'll tell you what, I've got several stories that just jumped into my mind. There are thousands of them, but these will serve as exemplars with respect to what you asked. One of them is that a lady had a flat tire in the parking lot at a terminal, an air terminal, and our station manager stops and says, "Let me change that tire for you." And she said, "Well, I don't think you should, because I didn't fly on Southwest Airlines." He said, "That doesn't make any difference, I just want to help you change your tire, no matter who you flew on." And we honor people for the great things they do outside Southwest Airlines, not just inside, the great things they do in society in general and hold them up as role models.
And another one ... this was really sad, but this father was taking his son on a hunt and had bought him a new shotgun for the occasion. So of course, the teenager was all excited, and we misplaced the shotgun. So our station manager says, "You've got enough time, hold on, I'll be back." Goes home, gets his own shotgun, and brings it back and says, "Use this on your hunt." That kind of thing. And our people do that all the time. They will find somebody out who's kind of been abandoned or neglected in the airport for one reason or another, and they will provide them with lodging, give them money for food, drive them to their homes if they're bereft of any funds. And they just do that continually because of the great people that they are.
You know, Colleen has always said, "It's very simple, just follow the golden rule." You know, and forget everything else. It's been very successful, I think.
Tom Gardner: So when I as an investor look out over the landscape of business, and having been taught by our ... well, both of our parents, but probably our dad a little bit more, about business and investing and the game of business and investing.
Herb Kelleher: Yes.
Tom Gardner: One of the things I've observed, which I think we've talked about in the past, is the incredible performance of public companies, in aggregate. There are obviously failures or there's fraud in some of these cases.
Herb Kelleher: Right.
Tom Gardner: But the incredible performance of businesses where the founder is the CEO.
Herb Kelleher: Yes.
Tom Gardner: Why?
Herb Kelleher: Well, I think, you know, there are some situations where some of the gurus of academia have said in the past, Tom, that founders can't run companies that they found because they don't have the discipline. That's not so. When I took over Southwest Airlines, as an example, two of the analysts, sell side analysts in New York said, "Sell Southwest Airlines stock, because he's a lawyer, and lawyers don't know how to run companies." Well, we did pretty well, despite that, and maybe my not knowing much about it was helpful in some ways.
Tom Gardner: Fresh eyes.
Herb Kelleher: Fresh eyes. Fresh eyes. Exactly. And I don't think that's true, at all. I think founders have the passion, you know, that you need. Now, they have to succumb to some disciplines, I understand that. You know, you can't run it like a one man show when you've got 10 thousand people, but I don't think that should be a general rule. There was one in Texas where it was the rule. In essence, he founded three successful companies, big successful companies, got kicked out of all of them. You know? Because he was a creative genius, but he didn't want to go beyond that, and he just wanted to continue coming up with ideas for new companies.
So I don't think there's any rule. I mean, it's just like people that said when I stepped down as CEO, they said, "Well ..." I was chairman of the board for eight years thereafter, and a lot of the ... a good many [inaudible 00:51:33]said, "No founder, no former CEO, should ever remain at a company after he steps down in effect. And the problem is that he and the incoming CEO [inaudible 00:51:51] struggle for attention." Et cetera, et cetera. "And enter into a competition." Well, I instantly said, " No. Gary, it's yours. Don't pay an attention."
Tom Gardner: A Navy ship.
Herb Kelleher: Don't pay an attention. Right. Navy ship, a beautiful comparison. Don't pay any attention to me, whatsoever. I won't be going out among the people the way I used to. That hurts me more than anything else, emotionally. But it's just total hands off. And I remember when C.R. Smith, founder of American wrote when successor took over, and it was hilarious. It was a letter, which this guy found on his desk after C.R. had stepped down. And he opened it up and it said, "I have five suggestions for you. One, two, three, four." And you know what the fifth was? Never pay any attention to my suggestions.
Tom Gardner: The way to do it.
Herb Kelleher: So Colleen and I immediately took ... low profile. As we should. And you know, if people at Southwest Airlines want to come talk to us or-
Tom Gardner: You're readily available.
Herb Kelleher: ... ask us to come talk to them, we're available. But we never push ourselves on anybody. And Gary's a great friend, and he's been a superb CEO, and I don't think he ever feels any pressure or unease about the two of us being around.
Tom Gardner: My last two questions. These are actually two relatively short, and they're ... One of them is, what was it like on 9/11 at Southwest Airlines?
Herb Kelleher: Oh.
Tom Gardner: What was the experience of running an airline during that, and what did you see emerge at the culture, and ... yeah, what was the day like?
Herb Kelleher: Well-
Tom Gardner: Or the days around it.
Herb Kelleher: It was, of course, a horrible shock when we realized it was a terrorist attack. I immediately got ahold of the board of directors and told them this was a huge emergency, and that we were going to have to take a lot of actions quickly and spontaneously to respond, but I would keep them informed of what we were doing. I just didn't have time to convene board meetings every day. You know? And then we went into an officer's meeting, and I announced that I thought the airline world had just changed. Not just for the day or the week, but for the future. And Gary Kelly said the same thing, and we worked out a plan as to how we were going to keep the company afloat, and we instantaneously set about bringing in all the available money that we had, not knowing whether people were going to allow us to do that or not, but they came through. The banks came through. We immediately had to set about taking care of all of our crews, because they had to land in places we didn't serve. You know, FAA. You've got an hour, you're down.
So there's another example of our spirit, spirit of our people, and how they like to serve. We're trying to get ahold of this captain who's in an offline airport, and we call the hotel and they said, "Well, he's not here right now. He just took all the passengers to a movie." We called another one and said, "Well, we need to talk to you and find out how your passengers are doing." And the guy who was there said, "Well, they're not here, because your pilot bought them all tickets on Amtrak to get home." That kind of volunteer spirit, you know, is absolutely invaluable. And so we always try to encourage that in all of our folks, and it's one thing that really helped the buoy us up and carry us through that disastrous period after 9/11. Because nobody was sure what the aftermath of that was going to be.
Tom Gardner: How long was it before you were flying again?
Herb Kelleher: Let's see ... we came back up on the 14th.
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: And our first flight out of Lovefield ... was out of Lovefield. And the whole general office was out by the fence crying and singing God Bless America as the first flight of ours took off.
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: But it was a very harrowing time, and there were a lot of things to be worked out on an entirely new platform. You know, the new security platform. And I was appointed as one of the point people for the airline industry, along with a fellow from American, and one from Northwest. I must say that working with the FAA, and then the TSA, and then the Department of Homeland Security was a very rewarding experience, because they don't operate things. You know? They don't operate airlines. They don't operate airports. We're the ones that process passengers, and they were very agreeable to suggestions that we had. It was not like, I suggested this and therefore it's sacrosanct. They were very agreeable and very open.
Tom Gardner: Mm-hmm (affirmative).
Herb Kelleher: So it was a great relationship, for the most part. But there were tremendous hurdles that had to be overcome. We had to change our whole technology, because of the new security requirements with respect to processing passengers. That was done very quickly, and very effectively.
Tom Gardner: Last question. You talked about being a founder and the amount of ... number of hours of sleep you got, on average, the decades that you put into it. I know that you don't really have probably any regrets, but why don't you? You've given so much of your life to one organization. Do you have any sense of, "Gosh, I wonder if I had taken five years and gone and done that my life might have had this?" So, how do you view your commitment to a single ship that you've been sailing on for 50 years?
Herb Kelleher: I have no regrets, whatsoever. Because if a father has a daughter or a son, I believe that father is going to commit himself to a single ship for as long as that ship is afloat. And so I've always said I'm so fortunate because my advocation is simultaneously my vocation, so there's no challenge. There's no tension. There's no hostility between the two. I'm doing what I love to do for a company I love and helped to create, and for people that I adore. And what could be more rewarding, more enjoyable, than that? I've referred to our people as my fountain of youth. I said, you know, Ponce Deleon was in the wrong place looking for the fountain of youth in Florida. He should have come to work for Southwest Airlines, that's where you find your fountain of youth. From our people.