Transcript

#322 Herb Kelleher (Southwest Airlines)

0:00 One plan, no matter how well laid out, couldn't possibly respond to all of these situations. This is why Kelleher does not put much stock. In traditional strategic planning. He explains it this way. Reality is chaotic.

0:15 Planning is ordered and logical. The two don't square well with one another. When US Air pulls out of six cities in California, they don't call me and tell me they're gonna do that. Now if we had established a big strategic plan that is approved by our officers and the board of directors, I would have to go to the officers and the board and tell them that we want to deviate from this plan.

0:35 They would want to know why I want to buy six more airplanes. The problem is we'd analyze it and debate its merits for three months instead of getting the airplanes, taking over the gates, and dominating California. The meticulous nitpicking that goes on in most strategic planning processes. Creates a mental strait jacket. that becomes disabling in an industry where things change radically

0:55 From one day to the next. When a financial analyst Tried killer. About not having a strategic plan. He said

1:04 We do have a plan. It's called doing things. That is an excerpt from one of the two books that I'm going to talk to you about today. That is from Nuts, Southwest Airlines Crazy Recipe for Business and Personal Success. That was written by Kevin. And Jackie Freeberg.

1:20 The other book is called Herbs Heroes and it was written by a pilot that worked at South West for thirty seven years. I have not been able to find a comprehensive biography on Her Kelleher. I think one should exist. I think he's an extro he was an extraordinary person. a gifted entrepreneur who built the most successful airline in history, which we'll get into today. So to make this episode

1:37 I used These two books, uh I reread. This is the second time I read. uh the the nuts book. But I use these two books and I took notes on interviews that Herb did when he was alive. So what I'm gonna do first is I summarized all of my notes from the book Herbs Heroes.

1:51 I just want to go over that outline, which I think will give you a good overview as to the type of person Herb was and why he was that way. So he's born during the Great Depression. His father worked in a soup factory. Herb's older brother Was killed in World War Two. Herb is ten years old. At this time after his brother dies, his father dies unexpectedly. the year after. And then within a few years of that happening.

2:14 Herb's two surviving older siblings. move away for college. So now Herb grows up the second half of his childhood. is just him and his widowed mom. And so her influence and the lessons that his mom taught him, he uses his entire life, including in building his company.

2:29 So they would have late night talks almost every night at the kitchen table, and even when he was a kid. They're staying up till like two in the morning. And she's teaching Herb about life. And one of the most important things that she did was she taught him that adversity is a normal way of life. This is a woman that lost her son.

2:47 lost her husband, and yet there was no self pity whatsoever. She said that stress in difficult times was not dehabilitating, but opportunities to excel and achieve. And so even from a young age, he starts to find problem solving. invigorating. The reason I've always admired her admired Herb. I've tried to consume as much information about him as possible. And the reason it came to the top of my mind to make an episode about him right now

3:11 is because I was reminded Of something that he said during a talk. And this came many years later in his life. He's already been working on South West for multiple decades at the time. And he was asked, You undergo a lot of stress all the time. How do you handle it?

3:24 And his response is perfect. He said, I don't handle it, I like it. And so that's a maximum that I want to repeat to myself. As we're building our companies, difficulties and hard times are inevitable. And I'm just gonna remind myself, I don't handle my stress. I like it. It completely changes your mindset into like this isn't something I have to do, it's something I get to do. Back to his early life. He was a gifted athlete. In high school, he ran track, played basketball and football, and lettered in all three sports.

3:48 Before college, He works. at the very same soup factory that his dad had worked at. And he works there for six years. He did every single job at the factory. This is something he's gonna continue to do at South West, which we'll talk about later. But this is where I'm telling you th this.

4:03 He called his six years working in a soup factory, right? This is a guy that's going to go on to be Two He's g really gifted at everything he does, gifted athletics. He's really good at college, gets a law degree. Clerks for the Supreme Court.

4:15 has a successful law practice and at thirty five with four kids decides hey I'm gonna be an entrepreneur I'm gonna try to run I'm gonna try to start an interstate airline in Texas And so with all that, the fact that he said the six years at the Soup Factory doing every single job. He called it the best education he ever had. And so even when he was younger, and then throughout his entire career, people say the same thing about him over and over again. They describe him as a fierce competitor. And they said he had a hard work ethic. That is a quote, a hard work ethic. He was working a hundred hour weeks at the beginning of Southwest because he still had to practice law to pay the bills.

4:50 It took them four and a half years between the time they raised money for the company, they start the company, and then they're actually allowed to fly their first flight. Another thing about Herb, he was old school. He was hard driving, hard drinking, fast living Texan. He started every day early. regardless of how late he was out the night before drinking. This is gonna come up over and over again. Another crazy thing.

5:11 He smoked five packs of cigarettes a day and drank wild turkey bourbon every day. He said wild turkey and Philip Moore cigarettes are essential to the maintenance of human life. When he was in his sixties, he fought and beat prostate cancer. And then he was asked if he thought his smoking habit contributed to his cancer, and he said I do not smoke. With my prostate. He lived until he was eighty seven.

5:34 He felt he was born to be an entrepreneur. He thought the spirit of an entrepreneur was within him. And he had a great line about this. He says if you're crazy enough to do what you love for a living, then you're bound to create a life that matters. He designed his entire business model. to keep costs at the lowest possible level. He built the most successful airline in history. South West was profitable for forty seven straight years.

5:58 To put in a context about how outrageous that accomplishment is relative to his competitors and peers. He was profitable for forty seven straight years the next uh most successful airline was profitable for five. And when you read about Herb or if you listen to his interviews, like he's hilarious. So and he says, like, I don't take myself too seriously. But I take competition very seriously.

6:17 Unsurprisingly one of Herb's favorite people was Winston Churchill. He'll quote Churchill all the time. He'll use Churchill's ideas. uh in talks and speeches to his employees and to his team. One of his innate talents that jumps out if you read a book about him is the fact that he was able to operate on very little sleep. There's a lot of stories in both books. about the fact that he'll be out drinking till like three in the morning. And then he'll be at the office.

6:38 at like seven AM. He also talks a lot about and repeats The importance of having a business model. That endures. The hard times.

6:45 Talks about most of the airlines are set up. They'll reap a bunch of profits in good times and then yet they give it all back. When the inevitable downturn happens. And so one thing he talks about is like listen, we'll joke around, we'll have a lot of fun, we're very extravagant in our marketing, but we're very fiscal fiscally conservative. We're conservative with debt. They paid for eighty percent of their planes out of earnings. Most other airlines are borrowing that money.

7:06 They own the largest amount of planes outright than any other airline. And the quote that came to mind when I was reading about Herb's financial approach to building his company Is this fantastic quote from Charles De Gaulle, where he said all that matters is to survive. The rest is just words. Herb was also a gifted

7:24 storyteller and he was very persuasive. He was not building a company. He was leading people on a crusade. He was not hiring employees. He was converting missionaries. He says, our indominable dedication is the core of our success. That is the most difficult thing for a competitor to imitate. They can buy all the physical things that we have. The things that you can't buy are dedication Devotion, loyalty. The feeling that you are participating in a crusade.

7:47 And the one thing that Herb was insistent that they do better than anybody else was serve. Listen to what he said. We are a service company. We just happen to fly airplanes. Herb red all the time. Last week on the Working Witch Bezos. episode. I mentioned this text I got a fr from a friend where he noticed He'd raise a bunch of money for his company and notice like every single billionaire that he interacts with.

8:07 uh reads a ton and they usually read a lot of history and biography. Herb was the same thing. You know, he starts off As an attorney, before he dies, he's a billionaire. He read all the time. He did it when he was younger, did it when he was older. History was his favorite subject. He said this is why he said he read history. This is fantastic. He says reading history kept me from making the same mistakes.

8:26 That was inside and outside his own industry. He definitely knew the the history of the airline industry, and he talked about over and over again that you should read the history of of the airline industry as a cautionary tale. That's why we the main thing I'm gonna talk about today is the fact that this guy Very obviously capable of independent thought. His main advantage was the ability to question every single conventional quote unquote conventional wisdom in his industry and ask like does this make sense or not?

8:49 Some of it did make sense of he would do that. But in many cases he realized there was a better way and so he would pursue that regardless of what people around him were doing. And then finally before I jump into the other book. He led from the front. This is one of the most one of the most admirable things about him. On the busiest day of the year, which is Thanksgiving Eve. You would find Herb out on the tarmac.

9:06 Loading and unloading baggage. And he would do so regardless of the weather. There's a great story in the book where somebody walks up to him, they just see this really tall guy in a yellow poncho. Loading and unloading bags is not till you turn around they realize that's the CEO and the founder of the company. Okay. So now I'm gonna pick up the book called Nuts.

9:24 And I'm gonna go right into the founding of Southwest. At the time, remember Herb is thirty five, he's an attorney. In San Antonio, and he's got four kids. South West Airlines was the brainchild of Roland King. A San Antonio entrepreneur who owned a small commuter air service.

9:39 And his banker John Parker. Parker had complained to King that it was inconvenient and inexpensive to travel between Houston, Dallas, and San Antonio, and suggested starting an intra state Airline. And so Herb gets involved because he's Rowland King's attorney. And so Roland King goes to her.

9:57 And he draws this thing called the Golden Triangle, which shows Dallas, Houston, and San Antonio. This it's on a cocktail napkin. That cocktail napkin is still framed inside of South West. Headquarters. This is happening during the late nineteen sixties. This is why they think

10:11 First of all. they use the word interstate airline, which is fascinating. So their the main goal is, okay There's different regulations. You have state regulations if you're only flying within the states, and then obviously federal regulations once you go state to state. Getting approved to fly inside a state is easier than at the federal level at this time in history, although it was still very difficult getting approved. This is just like a four year battle. But the reason what I found fascinating is Roland King had this idea by seeing California already had a successful interstate

10:38 Airline. And he thought there was a lot of similarities between California and Texas. Obviously the size of the states. But the fact that there was hubs of cities were experiencing rapid economic and population growth. But they're also far enough apart to make travel by bus or car very inconvenient.

10:53 And so at the beginning their idea is like, Well, why don't we just take what's obviously working in California? And do the Texas version of this. And in one of his interviews, Herb talks about this time. He's like, Why would you wanna do something, like take this big of a risk when you're thirty five years old, you have four kids, you're married. And he said the allure of doing something different. I wanted to do something exciting. I was curious.

11:11 Also, most adults in the US had never flown because it was too expensive. I believe there was a huge untap market out there. And his assumption that there's a huge untapped market out there was proved correct. He had to go through four and a half years. That's To to prove that assumption, he had the first fight through four and a half years. of a legal battle and unfair trade practices.

11:30 in the state of Texas. So he files South West application. On November twenty seventh, nineteen sixty seven. And he does so with the TAC, which is the Tex Texas Aeronautics Commission. They approve it. They say yes, you could fly between Dallas, Houston, and San Antonio. What he didn't know at that time was that he inadvertently started a war.

11:48 That would last for years and almost drive Southwest Airlines out of business before it put a plane in the air. So He had three main competitors. Branf. Trans Texas. And continental.

12:00 And they immediately sue and they get a temporary restraining order that prohibits the TAC from issuing Southwest a certificate to fly. This case goes to trial. They argue, hey, these markets that South West wants to serve, they're already saturated, there's no room for another carrier. The tr the court that they bring it to agrees.

12:17 This immediately sparks Herbs innate, like competitive. have to win personality. And so he appeals. That appellate court also says no, you cannot do this, so they lose that case too. At this point They had raised so it says the original investors

12:32 Five hundred and forty three thousand dollars. Remember that's a nineteen seventy one, that's a lot of money. Had been eaten up in legal expenses. The corporation's liabilities grossly exceeded its assets. And there was no prospect of raising new capital without the TAC certificate in hand, which two Courts have both denied them.

12:51 And so this is Herb's response. Some members of the board thought it was wise to cut their losses and close down. At this point. Kelleher's street fighting spirit surfaced. Gentlemen. Let's do one more round with them. I will continue to represent the company in court and I'll postpone any legal fees.

13:07 And I will pay every cent of the court costs out of my own pocket. The directors agreed To give it one more shot, and Kelleher argues this case all the way up. to the Texas Supreme Court. And he convinces them to overturn

13:22 The lower appellate courts decision and South West gets its certificate to fly. And so we go back to this idea that Herb framed life and everything he did is this Grand epic, right? We're not building a company, but we're on a crusade together. It's always a mission bigger than himself. And he talks about like He was asked in an interview, like why would you do this? Like why would you be willing to fight?

13:42 For years for free. And he said it's because these other airlines We're trying to offend one of his ideals. He said if other airlines could prevent South West Airlines from starting, then that means the free market system is failing. And one of the things that motivated him was to validate the free enterprise system.

13:58 And the other reason he said was that it was very hot competition and I like to win. So then they're able to raise more money, they buy planes. They wind up start starting to sell tickets two days before their first flight. their competitors wind up getting another injunction and they get another restraining order. This time from a different regulatory body.

14:16 that would prevent Southwest from beginning service. And this was Kelleher's response. He went straight to the law library and worked all night to decide how to proceed. He found a precedent and presented his argument to the court the next morning. The Texas Supreme Court ruled in South West favor again. And ordered the lower court judge not to enforce the injunction. Kelleher then telephoned Meuse, so at the very beginning he was not running.

14:39 South West. He is still gonna for the first few years. Be a founder. And a board member of South West, and he's still running his Law practice.

14:47 It's not until the CO that the founders hired, this guy named Lamar Mus, he's gonna leave. To start a competitor. Against South West. The CO that comes after Muse doesn't work out, and so the board's like Herb, if this is gonna w like you have to do this. And here's an interesting side note for you. Lamar Muse, who I'm about to introduce you to here, winds up when he leaves and starts Muse Airlines.

15:05 many years later when he's about to go bankrupt. Herb buys his airline. But that's many years into the future. Let's go back to this. So the Texas Supreme Court says, Hey, you know, you you cannot enforce this injunction. Kelleher then calls Muse on the Full phone and says

15:19 Put the planes in the air. When Muse confided to Kelleher that he was still concerned about a sheriff showing up to enforce the injunction. Kelleher didn't mince any words. I told him you roll right over that son of a bitch and leave our tire tracks on his uniform if you have to. The very next day, June eighteenth, nineteen seventy one.

15:38 Southwest Airlines was finally off the ground. And so this is the first mention of something that repeats over and over again the fact that Herb was a master at turning things into a cause. So it says the seemingly insurmountable obstacles thrown at Sir Southwest. Or what created Kelleher's passionate love for the airline. They would put twelve or fifteen lawyers on a case.

15:56 And on our side, there was just herb. They almost wore him down to the ground. But the more arrogant they were The more determined Herb got. This airline was gonna go into the air and stay there, he said.

16:09 Herb is a master. At turning things into a cause. It was an affront to my idealism, he said. If you're gonna let these guys get away with this It is a radically different type of country than the one I want to believe in.

16:21 And he wasn't making all this up. His competitors were out to get South West, and they were willing to break the law to do so. Four years later. Both Branif. And Texas International were actually indicted by the US government for conspiring to put Southwest out of business. And for violating the Sherman Anti Trust Act.

16:39 In addition to suing them in every single court, they also would behind the scenes would chase Southwest invest investment bankers. uh out of their underwriting syndicate when they were trying to IPO. they would go to Southwest Ven vendors and uh convince them to boycott and not sell to Southwest. They tried to keep South West from using the fuel hydration at Houston's a airport. And they successfully got Southwest blackball from membership.

17:03 in the airline credit card system. To all of these charges, both companies pleaded no contest. Okay, so once South West is up and running. You'll see that a lot of the innovations were forced upon them. Uh necessity's the mother of all invention kind of thing.

17:17 They're just severely resource constrained. And so if you're severely resource constrained You are forced to innovate and the way they do that is like, Well just question assumptions. And if you keep doing that successfully, you'll lead to finding new markets and new ways to make money. And so remember, one of Herb's initial hypothesis is that there's this huge untapped market out there because most Americans had never been on a plane yet. So it says the company's creative roots go back to its early days. Employees came up with clever ideas for keeping the business alive.

17:42 Because South West had no choice. But to become inventive in order to compete with the established carriers. The company simply did not have the money. to go head to head with the majors. They would have to outthink and outmaneuver.

17:54 And so any time I read that word out think. I always think of Jeff Bezos talking about Zappos in the early days before Amazon bought Zappos. And he discovers he goes to the airport and discovers that after nine eleven you have to t obviously take off your shoes and you put'em into these containers to go through the X mach machine. And Zappos had But

18:13 ads, which I think they were the first company to do this, that bought ads saying, Hey, you can buy shoes on Zappos as people are putting shoes into those containers. And he starts like getting Pissed off at his team and he yells. They are out thinking us. And he was you know, obviously right, so they wind up buying them. The airlines operated as though there were only two market segments, so this is gonna gonna be one of the main

18:34 uh innovations or one of the first innovations that Southwest does. So the airlines operated as though there were only two market segments, those who could afford to fly and those who couldn't. This assumption Member. Severely resource constrained.

18:46 You're forced to innovate, and the way you innovate, you question assumptions in this industry. This assumption guided the operating strategy of the major carriers. Southwest believed that it could stimulate a tremendous amount of new travel With low fares. En superior service. And they were challenging this assumption from day one.

19:05 Remember, Herb designed this entire business model to keep costs at the lowest possible level. Those low costs. Allow them to charge. Less prices. And so they start running this experiment. By flying into the Rio Grande.

19:16 Valley. at cheaper than every single other competitor in this region. This is the result. The year before South West initiated this low cost service. A hundred and twenty three thousand passengers flew into the Rio Grande Valley less than eleven months later. The market expanded to three hundred and twenty five thousand. So

19:34 From one hundred twenty three thousand people, right? At this higher price. They dropped the price'cause they have a low obviously low cost structure. Low work cost structure, I should say. And that expands the market by more than double.

19:44 gives them another two hundred thousand people flying. So the increase was larger than the entire market was before. And they only discover this because they have this commitment to trial and error. This is uh Jeff Bezos speak spoke about this a lot last week. They have this commitment by trial and error, and they just realize we have to be comfortable with innovating through trial and error. That means being comfortable with the error part. There's a bunch of examples in the book where people make mistakes. Sometimes

20:08 cost the company four hundred thousand, five hundred thousand dollars. And Herb refuses to fire them because he's like, that's the point. We have to be comfortable with the error part of trial and error. So they take this they they extend this idea, they're like, Okay. All signs are pointing to the fact that people are price sensitive. That if we keep lowering the price, we'll expand the amount of customers that we have. Is there another way we can continue to segment our existing and then potential customer base?

20:30 And so they come up with something that is going to be copied by every single other airline. It's crazy that no one uses at this point. So they perfect system wide Two tier. peak and off peak airline pricing. They start off knowing their base is the frequent business traveller, the person that

20:44 Is in Houston, but needs to get to San Antonio in a meeting, and then can be back home in time for dinner, right? They are less price sensitive. What they didn't know is how big is the leisure traveler segment of this market because You can't know that because it's too expensive for the leisure traveller. Keep that in mind as we get to this. Like many of its innovation South West two tier fair system was not the outcome Of a sophisticated long range planning retreat. It was a result of good old fashioned trial and error.

21:07 Just five months into operations, one of South West Plains. uh was in Houston but needed to get to Dallas for routine maintenance over the weekend. Normally they would just fly the plane with a crew, but no passengers. And so they're like, let's test this idea. Normally a flight at this time is like let's say twenty six dollars. They're like

21:25 What if we just cut it to like a third? What if we say it's if you fly out on this Friday night flight that has to fly anyways if you're not on the plane or not? It's ten bucks. Worst case scenario we generate some revenue that hopefully helps offset the the cost of faring it a completely empty plane. And immediately it works. Passengers quickly caught on.

21:41 And South West has had to start turning people away only two weeks into the offer. And so this is when they realize wait, there's not one type of traveler. There's really two types of travelers. That South West has to satisfy. So you have the convenience oriented business traveler. This is

21:55 The person that is more time than price sensitive. They want a lot. of business hour flights and The price sensitive leisure traveler who primarily wanted fares and had more flexibility about when to fly. So they immediately have two fair structures. They say, Listen, if you're flying during the weekday

22:12 Up until seven PM, you're likely a business traveller. We're gonna charge you twenty six dollars. If you fly after seven pm, or if you fly on the weekends. It's half that. It's thirteen dollars. And this is the result. Passenger traffic skyrocketed. Southwest had first defined a special market niche.

22:30 Consisting of short haul passengers. And then further segmented those short haul passengers. By need. into time sensitive business travelers. And dollar sensitive.

22:40 Leisure travelers. This idea would become one of the most widely emulated marketing innovations in airline history. system wide peak. And off peak pricing. And so this idea was so successful that their main competitor, Branif

22:55 immediately copied them, right? And this was hilarious because in uh In his inter one of his interviews. He talked about the fact that uh one of his competitors lowered prices and called it an introductory fair, even though they had been in business for forty years and serving the exact same markets. For forty years. And so this is what I mean about being forced like they're just

23:14 Unbelievably creative and open to all kinds of new ideas. So They went up keeping their prices the same and then told customers if you pay a higher fare We'll give you a free bottle of whiskey. And so for a few months they became the largest liquor distributor in the state of Texas. Oh, so and this is the important part.

23:29 They ta they went directly to their customers and explain to them what was going on. The fact that, hey, this bigger existing competitor with a lot more resources, they're trying to put us out of business. This is not gonna be good for you. This uh if you ever study David Ogy, he talks about this over and over again. And Claude Hopkins, uh probably the best copywriter in history, that tell the truth in your hats. Speak one person to another. Tell the

23:50 people why you're doing what you're doing. The truth will resonate with the buying public and they may act in ways that surprise you. Here's an example of that. So says the ad explain how Brandon were trying to put Southwest out of business and then went on to say the South West Would not only match Brannisphere.

24:04 It would also ever offer every passenger a choice. Travelers could choose the thirteen dollar fare, so this is during a week, right? they're taking their off peak price and temporarily putting it during peak, right? So it says, Hey, listen, that's fine. We'll match them. But here's why they're doing what they're doing. Now we also have an idea for you.

24:20 Travelers could choose the thirteen dollar fare or buy a regular twenty six dollar ticket. and receive a complimentary bottle of alcohol. So you can choose from Scotch, whiskey, or vodka. Now why is this going to work? Who is traveling During

24:35 The week. These are business travelers. They are not paying for their own ticket. Business travelers loved it. They could charge a twenty six dollar fare to their expense accounts. And go home with a free bottle of liquor.

24:47 For a few months period, Southwestby was the largest distributor of alcohol in the state of Texas. To Branus' dismay, seventy six percent of South West passengers paid the twenty six dollars and took the gift. Tell the truth in your ads. Communicate person to person. Tell them what you're doing. This is a result.

25:05 Two years later. Brand have terminated its Dallas Houston hobby airport service. This is the the route that they were competing on. Brand thought they were gonna run southwest out of business off this route, and in turn they ran themselves out of business off this route. And so now we go into more principles that Herb built South West with. Versus you h you should know your niche better than anybody else. So

25:25 He starts this with asking And making sure everybody in your company asks and knows. What is your fundamental reason for being? Why does your company exist? When you identify that, make sure everybody else knows it, and then stick to it. And here's why. When you have a vision and someone comes to you with some convoluted idea, you can hold it up to the vision and ask, does it fit?

25:43 If not, don't bother me. South West exercises the discipline not to stray from its strategy. It does not. For example, buy jumbo jets. fly international routes or go head to head with a major carrier. So just talking about the difference in their

25:57 behavior compared with uh every single at this point. Every single other uh competitor that they have. While other carriers have been lured by the temptation to step outside their niche. South West Airlines has maintained the disability to stay focused on its fundamental reason for being. And one thing that Herb repeated from the very beginning is like I don't give a damn

26:14 About market share. I want profits. In fact. Let me put the book down for one second. I want to read some of uh the ideas he has and like why he was thinking about this and this is w when he was a much older man looking back at this time. And so he says we may be flamboyant from a marketing perspective, but we are very conservative from a fiscal standpoint. This is when he talked about paying for the majority of his airplanes out of revenue. And the re this is why. He says, This means that you're not taking on debt. When there are bad times, you aren't threatened by debt payments, and debt payments are what put other airlines in and out of bankruptcy forever. Again.

26:45 study the history of the industry is like Why do you guys keep making the same mistake over and over again? Let me just avoid that. Do not worry about market share, worry about profit. I told every anybody If they mentioned market share, I'd punch them in the nose. Just look at what's going on in the industry. These big industry these big companies are fighting over market share and they're losing money.

27:03 They were firing their employees. Let's focus on profits. If we have four percent of the market. and we are profitable, that is better than having ninety percent of the market and being unprofitable. And that kind of thinking leads us into this. Southwest Airlines is obsessed with keeping costs lows to maximize profitability instead of being concerned with increasing market share.

27:21 Kelleher believes that confusing these two concepts has derailed many other airlines. Market share has nothing to do with profitability, says. Market shares J says We just wanna be big. We don't care if we make money doing it.

27:33 That is what misled much of the airline industry the past fifteen years. In order to get an additional five percent of the market, some of these companies increase their costs by twenty five percent. That is really incongruous if profitability is your purpose. South West is willing to forgo Revenue generating opportunities in markets that would disproportionately increase its costs. And so we're gonna get into a few ideas that helps them keep their costs low.

27:57 Before I get there, th I came across something else that's that I love. That you need to know what you compete with, not just who. From the very beginning, if you go back to the golden triangle, they're like, Hey Driving between these two these three destinations is a pain in the ass. He knew from the jump the fact that most people are not flying

28:15 That ground transportation is his competitor, not other airlines. When Branus price between Dallas and San Antonio was sixty two dollars. Southwest charged fifteen. one of South West shareholders approached Kelleher and asked Don't you think we could raise our prices Just two or three dollars.

28:33 You don't understand, said Kelleher. We're not competing with other airlines. We're competing with ground transportation. At fifteen dollars, you're gonna fly. Maybe at twenty or twenty two or twenty four, which is still way less than sixty two, right? Maybe you don't. The calculus changed. Kelleher had the discipline to know

28:51 what he was competing with, not just who. And so one of their main ideas that differentiated them from uh many of their other competitors is the fact that they refuse to diversify on what kind of plane. They would only fly the Boeing seven thirty seven. Other airlines had multiple different aircrafts.

29:07 And this is why This idea was so valuable to them. I guess before I read this to you. What was fascinating Is If you compare how many employees

29:16 Does South West need for every aircraft that they own. So the rest of the airline industry, this is not just people that work on the plane, obviously, administrators, everybody else in the company, right? The rest of the airline industry. Ranges from a hundred and fifteen to a hundred and sixteen. D.

29:30 So one fifteen to one six zero. employees per aircraft. South West. Had eighty four employees per aircraft at the high end of their industry w a hundred and sixty, that means they're half

29:42 They need half the amount of employees. So it says flying one type of aircraft has a strong impact on the bottom line. Training requirements are simplified. Pilots, flight attendants, mechanics, and provisioners concentrate their time and energy on knowing the 737 inside and out. All South West pilots are qualified to fly.

29:59 All flight attendants are qualified to serve in All maintenance people are qualified to work on And all provisioning crews are qualified to stock Every plane in their fleet. This makes it easy for them to substitute aircraft, reschedule flight crews, or transfer mechanics quickly and efficiently, with only one type of aircraft.

30:17 The company can reduce its parts inventory. and simplify its record keeping, which also results in savings. It also helps the co company negotiate better deals when acquiring new planes because they're only going to buy the Boeing seven thirty seven. And so this commitment to being cost conscious to watching your costs. is preached up and down the organization.

30:37 And so this is it happening in nineteen eighty nine. At this point you actually got like physical receipts, right? Or physical tickets. And so for the last fifteen years of their existence or something like that. They would just issue Your ticket was your receipt.

30:50 So South West issued Cash register receipts as tickets. Now here's the problem. It's growing More people they're getting uh they're spending the market. They're getting more new customers that are unfamiliar

31:01 With the way South West does things. And since no other airline was using the receipt as the ticket, sometimes these customers would throw accidentally throw away their receipt. Therefore accidentally throwing a Their ticket. And so they're having a meeting like Oh, what are we gonna do?

31:14 And again, it's amazing how much The behavior of peer companies is just going to be imitated D in fact There's a great line about this in Warren Buffett's shareholder letters. Let me read it to you real quick. He says the behavior of peer companies, whether they are expanding. Acquiring, setting executive compensation or whatever.

31:33 will be mindlessly imitated. You have to remember that because what happens? They have a problem. Oh man We have peop people are throwing away their their tickets. What's the solution? And so they go around like well, what is everybody else doing? They're using these super expensive multi layered airline ticket systems. We'll just go out and buy one of that. That is our solution. So it says an obvious alternative, we should buy a multi million dollar system that produced the traditional multi-layered

31:56 Airline ticket. In other words, let's mindlessly imitate The behavior of our peer companies. Somebody spoke up in the in in the meeting. They're like, that doesn't make any sense. There has to be a cheaper way to solve the problem than spending two million dollars. And so he said, Why don't we just print This is a ticket in big

32:13 Bold red letters on the receipt. Instead of spending two million dollars to follow the rest of the industry. South West modified its ticket stock. With the caption and it worked. And the people inside and outside your company can come up with this because they all know what they do best. They know their niche, they know the importance of having the lowest cost structure possible.

32:32 And so this is something that Keller will repeat over and over again. The way I think about this is like it uh the maximum I use in my own life is if you go to sleep on a win, you'll wake up with a loss. Kelleher has said on many occasions, a company is never more vulnerable to complacency than when it's at the height of its success. The number one threes us. He would say.

32:51 We must not let success breed complacency. Cockiness, greediness, laziness, indifference, Preoccupation with non essentials. Bureaucracy or hierarchy. We will let our niche define

33:04 How we operate, and this is what he says. We don't care whether we fly to Paris. We don't care whether we have a seven forty seven. У мир фокус on is being profitable and job secure. If people didn't pay much attention to South West Airlines because it appeared to be a much smaller regional carrier

33:19 It was just immaterial to us. We set ourselves up. to go into a specific Niche. And the heading he uses to describe the idea of what he's talking about is Know What You Do Best.

33:32 He elaborates on this idea a few pages later. We never try to be like other airlines, Kellerhurt said. From the very beginning we told our people question it. Challenge it. Remember decades of conventional wisdom. Has led the airline industry into massive losses. So you and I talked at the very beginning, if you looked at how Herb Keller

33:51 ran his company. He was individual opportunity driven to use another line from Buffett. And he said that reality is chaotic and that planning is orderly and logical and the two don't square well with another. And the fact that US Air, you know, if they're gonna go out of business and have six planes for sale and some gates that Southwest can take over, they don't call him

34:11 And tell them beforehand. So Keller has this like fierce hate. uh a dislike for bureaucracy and he prefers flexibility. And maintaining that flexibility is what allows him to to go after these individual opportunities as they appear. And so here's another example of that. The South West team arrived at midnight. They just flown into Chicago from Texas.

34:30 And turn on the televisions in their hotel rooms just in time to hear Midway Airlines announce That it was out of cash and closing its doors. Confirming the rumors that had brought them to Chicago. On this sudden trip. Speed another thing that herb

34:46 Would optimize for. They pounce on deals quickly and they close deals quickly. So that happens the night before. At midnight the night before, the rumor is confirmed. Nine AM the next morning, South West team started negotiating with city officials in Chicago. for the use of the bankrupt airline's gates.

35:02 By two thirty that afternoon, they hammered out a deal. They agree. They'd give them twenty milyen dollars. to have immediate use of the gates. By three PM there's a press conference with the mayor of Chicago to announce the deal with South West.

35:17 There's a great question that happens at this press conference. A reporter asks When Chicago could expect to see some sign of Southwest commitment to the expansion. The reply Go to the airport. You'll see it right now. Southwest had already gone to the gates, started installing their computers, started rebuilding the podiums, and then started putting up their signs right over the top. of the Midway Airlines signs. The company was able to capitalize on this opportunity because Southwest was, in the words of their COO,

35:43 Nimble, quick, and opportunistic. And so this next quote from Bill Gates actually. combines two of these ideas that is a main recurring theme in the life and the career and in this book of Herb Keller. The fact that He wants to be flexible.

35:56 So he can adapt to new opportunities as they arise and he wants to spend time learning from history. So he could avoid their mistakes. And this is what Bill Gates says in this book. When we look back at the last twenty years, it is obvious that a number of large companies were so set in their ways that they did not adapt properly. And lost out as a result.

36:12 Twenty years from now. We'll look back and we'll see the same pattern. And so one practice that helps South West. be opportunistic and be individual opportunity driven. Is they have these meetings that they call future scenario generation.

36:26 And essentially just getting a bunch of people in a room and just asking a bunch of what if questions. And trying to say hey what if this uh hypothetical scenario happens, how would we respond? South West prepares for the future by practicing The art of what if it's a little bit more.

36:38 Future scenario generation is the technical name for this process. They create future scenarios in which the airline could find itself. These situations include a a lot of what if questions. What if we open one or two new cities in the New England area? How will the competition respond? What if Chicago builds a new airport? How many airplanes will we need and where will we get them? How will this affect the business? The result of these discussions is a set of multiple plans that reduces the likelihood that South West will get caught off guard.

37:04 So a love of speed and a bias for action are traits that herb require from everybody working in South West. Sometimes people come in from large companies. and not realize the pace that he wanted to push. And the way to think about this is if you're gonna be small, which they're much smaller than most other airlines at this point. You have to be fast.

37:20 So it says K uh Kelleher illustrates the speed with which South West moves by telling a story About Don Valentine. A former vice president of marketing. Valentine had just joined Southwest from Dr. Pepper when the marketing group met in January. Remember the word January. To discuss a new television campaign.

37:37 Valentine was ready with his timeline for producing these spots for these new T V ads, right? The commercial could be scripted by March. They're in January, for God's sake. So having this meeting in January. He's saying the commercial could be scripted by March. Script approval could be completed in April. Thirty days to approve a script, good God. The casting would happen in June. I don't know what the hell they did for those two months.

37:59 And the company could start shooting in September. What are you doing? When Valentine finished outlining his schedule, Kelleher said, Don, I hate to tell you But we're talking about next Wednesday. The new vice president quickly became accustomed to the sped. with which South West operates this guy came in and thought nine months away was fine

38:20 And Kelly's like no dude, you got six days Nine months is way too slow. And so let's go back to another recurring belief that Herb Keller had, the fact that you should take your competition very seriously. In fact He would imbibe his company directors with a lot of like Winston Churchill. Uh references.

38:37 He talked about wanting a his company to have a battle of Britain kind of mentality. And he was constantly hammering this fact that success must be earned over and over again or it disappears. If you go to sleep on a win. Wake up with a loss. And so they have this giant the biggest airline in the world now taking aim at them.

38:53 And so he writes this letter to all of his employees and he c and he called it commencement of hostilities. And it says these excerpts show the intensity with which he can create a sense of urgency. Now this is Herb talking. United Airlines has become the largest airline in the world. Seven times the size of South West.

39:10 The world's largest airline has recently announced that it will launch its initial direct assault against Southwest. In the western part of our route system. The initial attack will utilize twenty five new planes. An additional hundred airplanes are in reserve to be hurled against us at a later date.

39:28 United has on hand Over a billion dollars in cash. Southwest has nowhere near that at this point. So he says our stock price, our wages, our benefits, our job security, our expansion opportunities. And foremost our pride of accomplishment. As one of the nation's best airlines are all on the line.

39:46 At its beginning, South West routed Branif. Trans Texas And continental. With three airplanes. South West can thwart United's actions against us.

39:57 With our two hundred airplanes. The crucial elements are the vigor, the dedication, the energy. The unity. And the devotion to warm, hospitable, caring, and loving customer service. Of all of our people.

40:09 Winston Churchill stated Success is never final. Indeed, Success must be earned over and over again. Or it disappears. I am betting on your minds.

40:19 Your hearts. Your souls. Your spirits to continue our success. Let's win this one and make aviation history. Again.

40:27 And you see that Keller realizes that it's really important to use memorable language. I'm sure you've read a bunch of letters from the CEO or the founder. That's boring as hell. That there's a lot of things, but it's not boring. So he constantly, over and over again, there's a ton of examples. of herb intentionally using memorable language. And then I just love this story. Really it talks about the benefits of curiosity, the fact that the benefits of curiosity are unpredictable. And if you read a lot.

40:51 Your life will just be more interesting as a result, you'll also be better at your job. And I don't I it's such low hanging fruit. It's amazing. Uh, Kellyher is a voracious reader who digs deeply into issues to understand them thoroughly. It is not unlike him to go on a book buying binge and spend four or five hundred dollars at his favorite bookstore.

41:06 When his son David was studying physics in college, Kelleher started reading up on the subject so the two of them could converse. Kelleher once bought a three hundred page history of Richmond, Virginia And Reddit. Before speaking there. So he's going to speak in an event. What does he do? He reads an entire 300-page history before he goes to this area, and this is the result. He ends up having dinner. at some old line Virginian's home talking about the history of Richmond.

41:28 They go around the city and Herb is pointing out places of historical importance. He didn't do it to show off. He did it because he was going to a new place and he loves history. And on the very same page is a great quote, The illiterate of the future Will not be the person who cannot read. It will be the person who does not know how to learn. And after more than twenty years of running a successful

41:51 profitable company. Keller was asked if he had any advice. For other Chief Executive Officers. His reply. Spend more time with your people and less time with other CEOs.

42:02 Our motto was only the strong survive because our balance sheet was conservative, because our operating costs were low. Because our customer service was legendary and because our people have the hearts of lions, the strength of elephants. And the determination of water buffaloes. We did indeed. Survive.

42:19 And that is where I'll leave it for the full story. You can read both books. I don't think There is a perfect I think there's a gap in the market. There has yet to be and there should be a comprehensive Book on Herb Keller. But if you do want more and you're willing to read a lot to get it, I will leave links for both books down below. If you buy the books using the links,

42:38 In the show notes on your podcast player or at founderspodcast.com, you'll be supporting the podcast at the same time. Another great way to support the podcast. is join my email newsletter. For every book that I read, I send you my top ten highlights. That is the entire email. If you haven't already joined that, that link is down below and available at founderspodcast.com. That is three hundred and twenty two books down.

42:59 One thousand ago. And I'll talk to you again soon.