How I Built This: Herb Kelleher

  • Where did you get the idea to start Southwest Airlines? Before founding Southwest Airlines I had my own law firm. One of my clients wanted me to help him start an airline in Texas.

  • Why Herb thought it could work: I knew nothing about airlines which I think made me eminently qualified to start one. What we tried to do at Southwest was get away from the traditional way airlines had done business.

  • Warren Buffet on the business of airlines: If a capitalist had shot down the Wright Brothers at Kitty Hawk the economy would have been better off.

  • Herb was 35 with 4 kids. Why start something new? The allure of doing something different. Doing something exciting. I was curious. Also, most adults in the US had never flown because it was too expensive. There was a huge untapped market out there.

  • The existing airlines were not warm, welcoming, and hospitable: We did not get kisses on both cheeks. The existing airlines applied their incumbency and their financial strength to bleed Southwest to death before it could ever fly. They were trying to manipulate the government to prevent competition. It took 4.5 years before our first flight.

  • The board wanted to shut down the company: I said what if I litigate for free and pay all the court costs? Would you keep the company going? They said yes.

  • I was idealistic about it: If other airlines could prevent Southwest Airlines from starting then that means the free market system is failing. One of the things that motivated me was to validate the free enterprise system. Another reason was it was very hot competition and I like to win.

  • You undergo a lot of stress all the time. How do you handle it? I don’t handle it. I like it. [Recommended reading on this topic: The Upside of Stress: Why Stress Is Good for You, and How to Get Good at It.]

  • Early customer acquisition: All of the court cases generated a lot of media attention.

  • Profitability through productivity: We operated a four airplane schedule with three airplanes. We turned the planes over in 10 minutes at the gate. Each one of those additional flights represented a revenue generation opportunity that other carriers didn’t have.

  • Great marketing: Our competitor lowered prices and called it an introductory fare They had been in business for 40 years. We kept our prices and told our customers if you pay our higher fare we will give you a free bottle of whiskey. We became the largest liquor distributor in the state of Texas. 

  • We may be flamboyant from a marketing perspective. But we were very conservative from the fiscal standpoint: We paid for 100% of our airplanes from revenue. Which means you aren’t taking on debt. When there are bad times you aren’t threatened by debt payments. Debt payments put other airlines in and out of bankruptcy forever. Southwest Airlines was profitable every single year for 43 years. 

  • Don’t worry about market share. Worry about profit: I told anybody if they’d mention market share I would punch them in the nose. Here are these big companies fighting over market share and they were losing money. They were firing their employees. Let’s focus on profits. If we have 4% of the market and we are profitable that is better than having 90% of the market and being unprofitable.

  • Don’t get complacent and arrogant: If we think small and act small then we will get bigger. If we think big and act big then we will get smaller.

  • Full podcast here.