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Published: June 1, 2004

 
 

Herb Kelleher: The Thought Leader Interview

The cofounder and chairman of Southwest Airlines tells why a firm’s people are everything.

Photograph courtesy of Southwest Airlines
The airline industry is a tough place to make a buck: too many competitors, price-sensitive customers, high capital intensity, boom-or-bust cyclicality, powerful suppliers, and often intransigent unions. Nevertheless, Herb Kelleher, the cofounder and chairman of Southwest Airlines, created the sort of value that any company leader would envy.

From its start in 1971, Southwest has grown into the fourth-largest airline in the United States, with 30 consecutive years of profitability, in an industry in which no other company has been profitable for even five straight years. Total shareholder returns during that period were almost double the returns for the S&P 500. Southwest has managed to accrue a market capitalization larger than that of the rest of the American airlines combined. Major competitors have tried to imitate Southwest with clones. Many entrepreneurial startups in the United States and Europe, including JetBlue and Ryanair, cite Southwest as their inspiration.

Southwest’s achievements are widely attributed to its relentless focus. From the start, Southwest’s strategy has been to draw travelers not from other airlines, but from cars, buses, and trains, by providing them the least expensive and fastest service available. To support the strategy, the company determined to fly only one type of airplane, the Boeing 737, and to substitute linear flying for the hub-and-spoke model that has prevailed in the industry. But at the center of Southwest’s success are its culture and employees. “Your spirit,” says Mr. Kelleher, a man fabled for his willingness to party hard with his staff, is “the most powerful thing of all.”

In recognition of the inspiration he provides all who study and practice strategy, for his contributions in redefining how companies think about strategy, and for his achievements in redefining an industry, in November 2003 Mr. Kelleher was granted the Lifetime Achievement Award by the Strategic Management Society (SMS), the prestigious global association of academic and corporate strategists.

At the SMS annual meeting in Baltimore, Md., where Mr. Kelleher accepted the award, strategy+business contributing editor and “Breakthrough Thoughts” co-columnist Chuck Lucier led a spirited public conversation with Mr. Kelleher about Southwest’s success.

S+B: Let’s start with some words from your award. You made an “audacious commitment” to putting employees first, customers second, and shareholders third. How did you get away with that for 20 years?

KELLEHER: When I started out, business school professors liked to pose a conundrum: Which do you put first, your employees, your customers, or your shareholders? As if that were an unanswerable question. My answer was very easy: You put your employees first. If you truly treat your employees that way, they will treat your customers well, your customers will come back, and that’s what makes your shareholders happy. So there is no constituency at war with any other constituency. Ultimately, it’s shareholder value that you’re producing.

S+B: A dollar invested at Southwest’s 1972 initial public offering is worth $1,400 today. Does that come solely from putting your employees first?

KELLEHER: We have been successful because we’ve had a simple strategy. Our people have bought into it. Our people fully understand it. We have had to have extreme discipline in not departing from the strategy.

We basically said to our people, there are three things that we’re interested in. The lowest costs in the industry — that can’t hurt you, having the lowest costs. The best customer service — that’s a very important element of value. We said beyond that we’re interested in intangibles — a spiritual infusion — because they are the hardest things for your competitors to replicate. The tangible things your competitors can go out and buy. But they can’t buy your spirit. So it’s the most powerful thing of all.

 
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