CEO Interview: Southwest Co-Founder Herb Kelleher

DALLAS (AP) — Herb Kelleher dressed up as Elvis, wore a paper bag over his head on TV, bragged about drinking Wild Turkey and told bawdy stories. Between the legendary bouts of showmanship he found time to revolutionize the airline industry.

Kelleher was there at the founding of Southwest Airlines Co., fighting the legal battles to get the airline started. As CEO for two decades, he built an airline that now carries more U.S. passengers than any other. Most U.S. airlines lose money more often than they earn it, but Southwest has always posted an annual profit.

Southwest grew by entering new cities with lower fares, forcing rivals to also cut prices — a phenomenon that government researchers dubbed "The Southwest Effect." The airline loved to poke fun at other airlines — and still does, skewering them for charging customers to check one or two bags. Southwest and low-cost imitators such as JetBlue now grab nearly one-third of the U.S. air-travel market.

It's been a decade since Kelleher, now 80, retired as CEO and three years since he stepped down as chairman, but he still shows up at the office most days. He gives advice when the current CEO, Gary Kelly, asks for it. He corresponds with old friends in the airline business, and he leads a committee that advises the president of the Federal Reserve Bank of Dallas.

Recently, Kelleher sat down in his office for an interview with The Associated Press. Excerpts from the wide-ranging talk appear below, edited for length. Kelleher chain-smoked cigarettes and talked about airline mergers and high fuel prices. He worried whether rising airfares could put travel beyond the reach of many Americans. And with a touch of self-deprecating humor, he wondered whether anyone would remember him in 10 years.

Q. People love to hate airlines. Is it fair?

A. I've thought about that a lot. I think flying is kind of an emotional experience. Maybe going to buy a couch in a furniture store is much less emotional you know because the couch just sits there and doesn't say anything to you. It's not worried about being on time and it doesn't take a huge assemblage of people and technology to bring it to pass. It left North Carolina six months ago and it's still sitting there if you come back three days later. Flying involves fundraisers for politicians, family birthdays, anniversary celebrations, this vacation I've saved up for a year. So I think there's a lot more anxiety connected with it.

Q. Tell us what you've been doing for Southwest since you retired.

A. I don't have any day-to-day responsibilities anymore. I basically do things around here that Gary Kelly asks me to do or that some of the other officers consult with me about. In addition, I've got 40 years of connections in the airline industry, and I hear from those folks and have to formulate responses. So an awful lot of it is correspondence and telephone calls. And I'm taking on the outside responsibility of being chair of the board of directors of the Federal Reserve Bank of the 11th District (in Dallas).

Q. Do you give Gary advice?

A. No, not really, unless he solicits it. Mainly they're just subjects that we're both interested in, and it's been a very free, open and unfettered exchange.

Q. Did you talk to him about bag fees? Today it looks like a brilliant decision not to impose those.

A. I did talk to Gary about it on occasion. I thought it was an excellent decision. It was a contrarian decision — it followed my old adage that if it's common it's not wisdom, and if it's wisdom it's not common. When everybody started saying in the analyst community, 'Well gee, you know Southwest carries — I'm making up a figure — 30 million bags a year, and if they charge $20 a bag they could bring in $600 million.' I said, 'You know, we can multiply.' (The decision took) foresight and understanding, not of where things were today but where they could go. I think that's one of the best decisions that's ever been made at Southwest Airlines, and I think the passenger traffic reflects that ... In my opinion, as really a spectator, it enabled Southwest Airlines to continue to hold the low-cost cachet position because I want to tell you, people are really enraged by these bag fees.

Q. From that, can we deduce that you think it's a mistake for other airlines to charge bag fees even though it's bringing them hundreds of millions of dollars?

A. I don't think it was a mistake for them to do it because when you characterize it as a mistake you have to do it in terms of competition with Southwest Airlines, that it was a mistake vis a vis the competition with Southwest. But when you look at it from the standpoint of where those carriers were and how desperately they needed revenues — and revenues that are not subjected to the 7.5 percent excise tax, by the way — I think it was a perfectly legitimate business decision on their part.

Q. What do you think of the AirTran deal? (Southwest bought rival AirTran Airways for $1.4 billion in May.)

A. I was very supportive really because I think the world has changed. If this were the Southwest Airlines of the 1980s and the 1990s, when we were in a different mode of operation and competition was different and the economic settings were different, I probably would not have been too enthusiastic about it. But in the new environment of the 2000s, I think that it was a very opportunistic move.

Q. Consolidation makes sense for the industry. What about consumers? Should they be worried about consolidation?

A. There's been a tremendous amount of consolidation that's gone on in the airline industry since I started out. There are far fewer carriers in terms of carriers that failed and carriers that were acquired. There's no more Pan Am, there's no more Eastern, there's no more Braniff, there's no more Western. Every time that that has happened, people have voiced concerns about diminishing competition adversely affecting fare levels, and it's never happened because the airline industry is still enormously competitive compared to other industries. When your principal capital asset can be moved 1,500 miles in three hours, strike anywhere within that length of time, you have an industry that's enormously competitive.

Q. Most airlines other than Southwest have trouble making money consistently. Is that just because of the rise in marginal costs like fuel?

A. I think it's primarily attributable to that, plus the fact that ... compared to the legacy carriers we're probably still something like 20 to 25 percent more efficient at producing a seat mile (a measure of airline capacity). You have the AirTrans, you have the JetBlues, you have other carriers with low costs and low fares. I'm not disregarding them. But the thing that I did want to point out if I might — and you can yawn and go to sleep any time you'd like to — is that from a cost standpoint we're still extremely competitive against the legacy carriers.

Q. Could the airlines, even Southwest, make money if oil goes to $120, $130 or $150 a barrel?

A. If it goes that high I think everybody will have problems.

Q. In 2008 you said you were worried that fares could rise and make travel less democratic. Do you still worry about that? Fares rose last year and they've gone up even faster this year at Southwest and other airlines.

A. Yes, I do worry about it from the standpoint of the public as a whole and from the standpoint of the societal good that air service does because Southwest Airlines as you know was really the progenitor of low fares in America. When I started working on Southwest Airlines, I kid you not, only people flying on business and very wealthy people ever flew. Even flew once. And then we went into business and all of a sudden you had these first-time fliers taking to the air. I remember a grandmother wrote a letter, (she) said, 'I just saw my grandson graduate from San Diego naval training. Without you, I never would have been able to go to that ceremony because I couldn't have afforded to go.' So it's a big thing, not just in business but also in personal lives and in personal satisfaction and fulfillment, and I would hate to see that turned around and take a lot of people out of the air.

(But if) you look at the fare structure and say it goes up 16 to 17 percent, that doesn't mean the average fare has gone up that much. Airlines are holding sales, allocating more discount seats. I would look at it in terms of what is the average fare in the market, which is a combination of all fares divided by the number of passengers flying in a given market. They haven't gone up as much as would appear to be the case if you just look at those percentages.

Q. If you were coming up today, would you start Southwest again?

A. Well, you wouldn't have the same niche available to you because of what I was talking about earlier generally. The fact that very few people had been able to fly because they had to jump that cost hurdle in order to get on an airplane and that was under federal regulation, which did not exactly stimulate competition. As a matter of fact, a large focus of the CAB (Civil Aeronautics Board) was protecting airlines from competition. So you had that situation where there was a huge untapped market which has now been tapped pretty well.

Q. What's the next big innovation in air travel?

A. I think the next big innovation, hopefully, hopefully, is going to be next-generation air traffic control system. I think it can make a tremendous amount of difference in saving the airlines money ... (and) time that they would otherwise lose in delays, to cancelations, air traffic control holds. ... Another thing that I see on the horizon, and not so far off on the horizon, of course, is substantially more fuel-efficient engines.

Q. How do you want to be remembered?

A. First of all I don't think you ever get much remembrance.

Q. You just had a street named after you. (The road entering Dallas Love Field is now Herb Kelleher Way.)

A. Well that is a real remembrance. That is true. But 10 years from now, how many people are going to be looking at that sign and saying, 'Who the hell is Herb Kelleher?'

I've been asked a number of times what was my proudest accomplishment when I was still very active in the day-to-day affairs of Southwest Airlines. I always said job security for our people ... we've never furloughed one. So I think that would be a nice remembrance if people thought of me that way.

Q. Any regrets?

A. No, I never look back, so it's hard to have regrets.

Q. Do you have any pet peeves about travel?

A. I don't really have any peeves, and I fly other carriers a good bit. My experience has been good in terms of getting on the airplane expeditiously and getting to my destination as need be, on time, with my bags — which I carry on. (Laughs) I've never found much to complain about.

Q. Maybe they see you coming and they say, 'Oh, here comes Herb Kelleher, we better not lose his bag.'

A. I was thinking it could be the other way around. 'Here comes Herb Kelleher, let's poison his food.'

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David Koenig can be reached at https://www.twitter.com/airlinewriter