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THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING
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Herb's way
Chairman's unconventional business strategy has made Southwest Airlines a model for success By Matthew Brelis, Globe Staff, 11/5/2000
Herb Kelleher - the man who helped transform Southwest Airlines from an idea doodled on a cocktail napkin into America's most efficient and profitable major airline - does not have a window. His desk looks like something from a discount warehouse, suitable for a regional sales director, not a titan of the airline industry. Behind the desk is a plain oak bookshelf featuring model Harley-Davidsons and a bottle of special reserve Wild Turkey bourbon, Kelleher's favorite.
He has been known to sit at a hotel bar hours after closing, a bottle of Wild Turkey and some friends as companions. Once, Texas state troopers came in and ordered him to shut down the party. ''They come up to you with those ten-gallon hats and you are wondering, `What have I done in my life that they want to talk to me about?''' he says with a smoker's laugh.
What Kelleher and Southwest have done in an old economy industry offers lessons for dot-com founders and Fortune 500 executives alike. The company has been so deluged with requests from other businesses to learn the secret of the airline's success, it canceled the open houses it used to hold because they were detracting from employees getting their jobs done.
''It could be very difficult to imitate what they do because part of their strength is how well they integrate everything,'' said Douglas T. Hall, an organizational behavior professor at Boston University's School of Management. ''But one of the reasons they have a system where everything fits is they are very clear on what they do, they have their priorities, and as a leader [Kelleher] really keeps the organization running on a simple strategy. And that is something organizations could benefit from - just be clear on what is most important to them and what their values are and build everything around that and be consistent.''
How different is Southwest?
In a business judged in no small part on customer service, Southwest executives say employees come first, customers second. The walls at the airline's headquarters here are virtual photo albums, covered with framed snapshots of employees at company barbecues, chili contests, and Halloween parties. Southwest also spends an inordinate amount of time and money on hiring and promoting, using a system aimed at finding candidates who will fit into the company's culture but retain their individualism.
''Hiring is enormously important,'' says Kelleher. ''We try to allow our people to be themselves and not have to surrender their personality when they arrive at Southwest.''
And then there is Kelleher himself, a quirky, back-slapping transplant from New Jersey. All chief executives set the tone for their companies to some extent, but Kelleher's sunny personality and emphasis on humor to motivate employees and woo customers has seeped through all levels at Southwest, from senior management to flight attendants.
On one recent flight from Houston to Providence, as the plane was about to depart, instead of the banal ''We have been cleared for takeoff, please make sure your seat belt is tightly fastened around your waist,'' Southwest flight attendant Michelle Volner got on the public address system and sang out to the 137 passengers aboard: ''Well, it's one for the money, two for the show, three hang on, 'cause here we go!''
Herb Kelleher, who once appeared as Elvis in a company recruiting ad, would have loved it.
Steady growth
The Southwest story is now a business legend: how the airline began in 1966 with 195 employees and three planes that flew from Dallas's Love Field to Houston and San Antonio; how Kelleher and cofounder Rollin King drew up the business plan on a cocktail napkin; how its profit-sharing plan has made many longtime employees millionaires; how the company has grown to 29,000 employees with a fleet of 332 Boeing 737 planes (290 more are on order) and become a national carrier competing with United, American, and Delta. Indeed, at last month's annual shareholder meeting, Delta chief executive Leo Mullin singled out Southwest as his airline's chief competition.
To analysts, a key to Southwest's success is that Kelleher has stuck to his original vision of running a no-frills airline that minimized expenses and maximized revenues.
''A lot of times the whole idea of success is not making mistakes,'' said Darryl Jenkins, director of the aviation institute at George Washington University. ''What Herb has done better than anyone who has ever been in the industry is avoiding mistakes. He has focused on one thing and that thing only - he is focused on making money, and I mean that as a compliment. He has a game plan and he is never distracted from it.''
Market share has never been a goal in itself at Southwest because airlines can spend millions to win new customers but end up losing money. But by keeping operating costs low, Southwest has been able to offer lower fares - its walk-up fares are frequently two-thirds that of main-line carriers - and that in turn wins market share while maintaining profitability.
The company's ability to enter and dominate new markets has become known as the ''Southwest effect.'' When Southwest came to New England with flights from Providence in 1996 and Manchester, N.H., in 1998, for example, the airports there boomed. In Manchester, passenger counts have gone from 1.1 million in 1997 to an expected 3.5 million this year, and the average one-way fare has dropped from more than $300 to $129.
Southwest is among the industry leaders in on-time performance and fewest number of lost bags and customer complaints. At the same time, it herds passengers on and off planes quickly to achieve its goal of turning around a plane for another flight in 20 minutes, half the time it takes its competitors.
The company is the only major airline to make a profit every year for the last 25 years.
''We are a growth company with a consistent track record to produce healthy profits,'' says Gary Kelly, Southwest's chief financial officer. ''We don't look like other cyclicals so we command a wealthy valuation.'' Southwest's price per earnings ratio (an indication of investor optimism about a company's future prospects) is, for the industry, an eye-popping 27. American Airlines' AMR Corp. and Delta Air Lines are both at 5.
`Hire for attitude,
train for skills'
Kelleher takes little credit for the company's good fortune and consistently deflects praise to his employees. ''I am not all that special,'' he says. ''It is not like we have some formula here like `E equals MC squared.' It is a tremendous mosaic made up of thousands of people.''
There are no windows in Kelleher's office or in vice president Colleen Barrett's, who was his legal secretary in the 1960s, because going without sends the message that the team is important, not the individual. The room at headquarters with the best view? The place where the most employees gather - the cafeteria, which overlooks Runway 13R at Love Field, where Southwest planes take off and land every few minutes.
Southwest goes about hiring with an almost evangelical devotion that focuses on finding the ''right people'' and then giving them the skills to succeed in the company. ''We hire for attitude and train for skills,'' says Barrett, a Vermont native.
In group interviews, company officials have been known to ask individuals to talk about themselves for five minutes at a time. The officials watch what other applicants are doing as the talks begin. Those who work on their own presentations are passed over while applicants who cheer on the speaker tend to get hired.
''Then, we've got to be pretty darn religious watching that person's performance during the probationary period,'' Barrett says. ''That sounds strange for a family-oriented company, but if we see a misfit with teamwork or an attitude, we will counsel once or twice and we will be harsh.''
Southwest's hiring process has helped keep the airline on top, says James L. Heskett, a Harvard Business School professor.
''It is the people; it has always had to do with their selection,'' Heskett says. ''They are selected primarily for attitude, and most people primarily select for skills. They have a particular view for people who will fit into a team-oriented organization and the airline industry is team-oriented. If you have people pointing fingers, you have problems.''
Heskett says Wal-Mart, the discount retailer, with almost a million employees, is a ''second cousin'' to Southwest Airlines.
''While the cultures are not the same, it has the same family feel with a certain degree of fun built in. The ideas on which Southwest are built clearly can fit in a much larger organization.''
If worker productivity can be gauged by the number of passengers served, Southwest is ahead of every major airline. According to 1999 figures from the Air Transport Association, Southwest had an employee-to-passenger ratio of 1 to 2,424, followed by Alaska Airlines at 1,518 and Delta Air Lines at 1,493. Of the domestic majors, United had the lowest ratio: 1 to 938.
About 65 percent of Southwest's employees were hired in the last five years. Instilling a fighting corporate spirit is tricky when the company's biggest battles, against Braniff in the 1970s and Shuttle by United on the West Coast in the 1980s, are ancient history.
''We are not alone in this dilemma,'' Barrett says. ''People taking jobs today are not looking to join a cause. They are looking for a paycheck. They have their list of criteria based on quality of life. They all want to be Michael Dell [the head of Dell Computer] and earn their first million in six months.''
New hires go through training at Southwest's ''University for People,'' the company's training center at Love Field. If they want to leave the classroom for a bathroom break, they must walk down a hallway with a not-too-subtle mural painted on a wall, a graveyard scene with the names of failed airlines - Braniff, Pan Am, Eastern - on the tombstones.
While hiring the right employees is critical, promoting the right surpervisors is even more important, Barrett says.
Herb and Colleen, as they are known throughout the company, meet with all new flight attendant and pilot classes, but as the company grows, motivation cannot come only from them.
''If you can't have effective leadership with the first-line supervisors, then it just won't happen,'' Barrett says.
Southwest eschews organizational hierarchy. Not only do pilots sometimes work with ground crews, employees can go above or around their supervisor to get answers. ''If we find some supervisor criticizing an employee for doing that, we would come down very hard on them,'' Barrett says. ''We didn't even have an organizational chart for years, but other companies just would not accept it so we came up with something.''
One recent training session involved three teams of would-be supervisors. One member of each team was blindfolded and asked to throw a ball into a trashcan. Unknown to the throwers, one team could say nothing, the second was instructed to say only ''good job'' or ''keep trying,'' and the third group could give detailed information about where the bucket was. Not surprisingly, the third group had the most success.
The person who had received the best instructions said: ''I couldn't wait for it to be my turn again.'' ''Wow!'' said facilitator Chris Robbins. ''How does that relate to work? How many agents do you think we have out there who are told nothing or just `good job' instead of people really listening to them?''
Keeping it simple
Southwest also stresses simplicity in its operations. The company operates one type of plane, which reduces training, maintenance, and inventory costs while increasing efficiency in crew and flight scheduling. The operation is nearly ticketless, which reduces cost and back-office accounting. There is no seat assignment, which reduces cost and accelerates the cattle-call boarding some passengers find objectionable.
The airline won't transfer bags to another carrier, and there are no meals or movies on flights.
Another major difference between Southwest and other carriers is it flies point to point, and does not operate from a hub. As a result, operating costs are lower because there are not dozens of gates and thousands of employees needed to handle banks of flights that come in and then disperse within a two-hour window, leaving the hub empty until the next flights a few hours later.
But for passengers wanting to travel from, say, Boston to Los Angeles, there are much more convenient options. A Southwest flight from Providence will involve at least one and as many as three stops on the route and could involve a change of planes.
Still, Kelleher says the airline has no intention of adding direct flights to capture customers who want long-haul nonstops. ''Having a relatively simple value system expedites things,'' says Kelleher. ''If a consultant suggests something, we can just say, `We don't do that,' and not create a committee to study it for three months.''
The airline's streamlined operations have enabled it to move quickly into Chicago, Baltimore, and California when other carriers started pulling service. ''We can move quickly based on our cost structure and esprits de corps,'' Kelleher says. ''We are going to keep costs low through productivity and be ready to move on an instant's notice.''
Life after Herb
Kelleher, 69, underwent radiation last year for prostate cancer and worked right through the treatments at the M.D. Anderson Cancer Center in Houston. He joked at the time, ''I wish it was called the M.D. Anderson Acne Center or the M.D. Anderson Hemorrhoid Center, but it isn't.''
In a recent interview, Kelleher says, ''My health is fine, really fine.'' His contract is up this year, but he has no plans of slipping off quietly. ''I could be fired, but I'm not planning on it,'' he says.
But in a company where co-workers hug each other in the hallways, there is much speculation over what happens after Kelleher leaves. Southwest executives say they are confident the company won't miss a beat. They note that the airline flies to 57 cities in 29 states and is now the largest intrastate carrier in Florida, Texas, California, and Nevada.
Asked how the company will go on once he steps down, Kelleher responds quickly: ''I think it is hopeless.'' Then he laughs.
''The real answer is we have a very strong culture and it has a life of its own that is able to surmount a great deal. If we should, by happenstance, have someone succeed me who is not interested in the culture, I don't think they would last a long time. The place would just rise up.''
In many ways, the lobby of corporate headquarters embodies the spirit of Southwest - people and profits. Upon entering, a visitor is immediately drawn to the white lettering on black elevator glass with a message penned by Herb:
''The people of Southwest Airlines are the creators of what we have become - and what we will be. Our people transformed an idea into a legend. That legend will continue to grow only so long as it is nourished - by our people's indomitable spirit, boundless energy, immense goodwill and burning desire to excel. Our thanks - and our love - to the people of Southwest Airlines for creating a marvelous family and a wondrous airline.''
In much smaller print, near the exit door, is a message board that workers see when they leave the building. On it is the daily ''price of LUV'' - the ticker symbol for Southwest stock. When workers went home Friday the stock was at $28.69, up 80 percent for the year.
This story ran on page F1 of the Boston Globe on 11/5/2000.
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ALLAS - The office is astonishing for its simplicity, given that it belongs to the president, chairman, and chief executive of one of America's most successful companies.