Hard Landing (55 page)

In a long, skylit corridor of the new building the company created a gallery of mannequins dressed in Southwest flight attendant uniforms as they had evolved through the years. At the end of one hall stood one of the company’s first automatic ticket machines, vintage 1979, displayed in a clear glass case as if it were the Hope diamond. Nearby sat a time capsule to be opened in the distant future, a kind of corporate hope chest filled with employees’ own memorabilia (pass the tissues, please) from those years of struggle dating all the
way back to 1971. Kelleher’s personal contributions included a half-consumed bottle of Wild Turkey.

Many of the people who followed the airline industry—on Wall Street, say, or in the business press, and in some cases within the airlines themselves—did not grasp that Southwest was actually creating a separate airline industry in America. The bifurcation of the industry was a natural and probably inevitable result of a conflict also erupting within the American economy: a conflict between the demand for convenience and the demand for value.

A broad segment of the traveling public—vacationers and expense account passengers alike—had quickly become spoiled by the breadth and scope of the post-deregulation airline markets. The outbreak of hub scheduling made it possible to fly between nearly any two airports in America with one change of planes. It was possible to visit friends or family or conduct a sales call virtually anywhere within a day. Passengers by the late 1980s could fly with one stop between any of
48,860 pairs of cities in America.

For competitive reasons the Big Four airlines, as well as Delta, Continental, and Northwest, were furiously adding all the employees, airplanes, and infrastructure necessary to deliver the maximum number of passengers to the maximum number of destinations. Doing so, however, involved tremendous costs—forcing airplanes to wait for connecting passengers, paying crews to wait for airplanes, paying basic travel agent commissions plus extra “override” commissions, maintaining powerful computer systems, and creating vast management bureaucracies, to say nothing of the cost of buying so many airplanes. Ultimately the expense of establishing and maintaining these networks, however brilliantly managed, was borne by the ticket holder, through fares that regardless of the dollar amount were higher than they would have been otherwise. Anyone could fly through this network at extremely low fares, but only by making reservations far in advance and by complying with the airlines’ restrictions. And all passengers, regardless of the price they were paying, had to endure the hassles and lost time caused by flying through a hub.

This is where Southwest came in. While the major airlines were frantically working to become all things to everyone, Southwest recognized
that a huge number of people in any city would rarely want to fly anywhere except to a few other cities. The cost and complexity of the hub system was worthwhile for the 22 people a day on average who, according to Transportation Department data, flew between Kansas City and Norfolk. But how many people in Kansas City might fly to Oklahoma City two cities linked by common industries, by family connections, by the Big Eight athletic conference, and by geographical proximity? Each day, it turned out, hundreds of people were eager to make that trip when they learned they could do so without changing planes, without making their plans far in advance, without scheduling a Saturday stay, and for a price of, say, $39 each way.

That Southwest operated largely in a market all its own was most evident in its headquarters town of Dallas. Southwest shared its operating center with the fastest growing and most ruthlessly powerful airline in the world, American Airlines. Yet even as both airlines grew, even as the airline industry became more competitive year by year, American and Southwest served increasingly divergent markets from their respective airports and actually became less competitive as time passed. Bob Crandall, who in 1981 had tried to bring down the weight of the local community and the federal government on Southwest’s operation at Love Field, had by 1986 come to consider Kelleher a friend and perhaps even a bit of a role model. The two men collaborated on a video for a local roast, joked about their compulsive smoking habits, and looked for chances to needle and play practical jokes on one another. Kelleher in an astonishingly effective marketing move painted a Southwest 737 to look like Shamu the killer whale when Sea World opened a park in San Antonio. “Just one question,” Crandall asked him. “What are you going to do with all the
whale shit?”

“I’m going to turn it into chocolate mousse and spoon-feed it to Yankees from Rhode Island,” Kelleher answered. The following Monday Crandall received a vat of chocolate pudding with a little Sea World spoon stuck in the middle.

Though Southwest was largely separate and distinct from the rest of the airline industry, there were unavoidably points at which they intersected, sometimes with a pyrotechnic result—never more so than when Bob Crandall unleashed the full power of his pricing
computers with “ultimate super savers” in January 1985. Although American’s principal target was People Express, Southwest was sure to be struck with some of the shrapnel. Analysts began to cut their recommendations on the company’s stock. “Small carriers such as Southwest,”
The New York Times
glumly remarked in March 1986, “will be at a
growing disadvantage in an age of airline giants.” As if beginning to fulfill the prophecy, Southwest’s profits plunged in late 1985, though it did remain profitable.

One evening Kelleher was talking to a business executive at a cocktail reception in Dallas. “I see that
American now has fares as low as yours,” the man said.

“Yes,” Kelleher admitted. But American, he patiently explained, required passengers to buy a ticket 30 days in advance. By contrast, Kelleher said cheerfully, anyone could walk right up to the airport gate and fly at those prices on Southwest.

“No, you can’t.”

“Yes, you can,” Kelleher corrected him.

“You’re full of shit,” the man said.

The man refused to accept that he could avail himself of the lowest fare in the market without enduring a multitude of restrictions. American, Kelleher realized at that moment, had conditioned the flying public to believe that low fares were impossible without restrictions.

Kelleher decided to try playing the game Bob Crandall’s way. Holding its corporate nose, Southwest made certain fares nonrefundable. Just as bad, it adopted advance purchase requirements. It would, alas, force itself to acquire computer technology to step up the sophistication of its pricing. (The annual report devoted barely a full sentence to the new computer system, under a black-and-white photo of a paltry-looking desktop video terminal.)

But Southwest quickly realized that by exposing itself to even the rudiments of yield management, it could take its low fares so much lower that they practically disappeared—while the flights themselves remained profitable. Suddenly a passenger could fly anywhere on Southwest Airlines for $19. After American had beaten People Express at its game, Southwest was beating American at its.

Nineteen dollars was so cheap that yet another new layer of travelers was drawn into the market—major league baseball fans attending
away games for the day, the poor, and college kids on dates. Southwest promoted the new fares with television ads in which animated suitcases and overweight people in bathing suits jubilantly sang and danced to a Beach Boys melody: “And we’ll have fun fun fun flying Southwest on a fun-fare today.” The fun-fare concept quickly reached into the fabric of the company, as employees in planes and behind ticket counters were outfitted in surfer shorts, golf shirts, and tennis shoes. Kelleher wore his “fun uniform” to the
office on Fridays.

Kelleher did harbor a flaw, however, one that was so obvious no one could appreciate it. He had made Southwest Airlines a one-man show.

In big business in America the life of the chief executive is considered a corporate asset. Companies carry insurance policies against the loss of a chief executive. At age 55 Kelleher was still a relatively young CEO, and as he had displayed in his remarkably athletic youth, he was a person of some strength and vigor. “
I’m immortal,” he would joke.

But he also had a family history of heart attacks. The man smoked four packs a day; he ate heartily and swilled Wild Turkey. His complexion was pallid. “I
lost my color because of bourbon,” he told people.

Kelleher certainly had a management team, including some of the sharpest people in the business. Any number of them could run the planes and the schedules and the finances as well or better than Herb—but not the people. For that Herb did not need merely a successor, he needed an understudy, an apprentice, someone who without adopting his shtick or even his style had an instinct for knowing how to make each of nearly 6,000 employees feel like one of the Three Musketeers. No such person existed.

There was one other respect in which Kelleher betrayed a selfish side, and not a trace of humor. Southwest, he declared, would never be anybody’s takeover.

The opposition of top executives to hostile raiders was in the late 1980s so routine as to be an article of management faith. Kelleher, however, was not only management but ownership: he had been the first investor to put money into Southwest Airlines, and a takeover
would put inestimable millions directly into Kelleher’s pockets. But while Kelleher was different from most airline chieftains in owning a significant share of the enterprise he managed, he did not differ from them in his fervor for its independence. Southwest Airlines
was
Herb Kelleher. It was his platform, his podium—his stage. It was part of his psyche, and that was worth much more than mere millions.

While fighting the fun-fare wars against the majors, Kelleher also undertook a few discreet steps to assure that no one took his airline away from him. For the faster the airlines merged, the more conspicuous Herb’s became. Southwest Airlines in 1986 was a sitting duck.

Twenty major airline mergers occurred in the first eight years of deregulation; of these, 11 occurred in 1986 alone. The sudden swell reflected the almost complete lack of antitrust enforcement by the Reagan administration, the surging tide of merger activity throughout American industry, and the economic maelstrom in which the airlines in particular found themselves: the compulsive drive for “critical mass” and the financial pressures brought on by fare wars and intolerable debt burdens. Counting Lorenzo’s empire as one, the entire universe of airline holding companies operating nationally had been reduced to 10: Texas Air, United, American, Delta, Northwest, TWA, Pan Am, USAir, Piedmont, and, at number 10, Southwest Airlines. As a group these airlines controlled about 95 percent of the airline market of the United States. The consolidation had been so furious that one of the industry’s leading technical and analytic services, Airline Economics, Inc., of Washington, D.C., issued a study in 1987 asserting there was nothing major left to merge with, nothing major left to fail. As the opening sentence of the study put it, “The airlines’ intense
battle to position themselves for long-run survival is essentially over.”

Kelleher knew better. He installed a “poison pill” and the other standard takeover defenses of the time, but he also used the jungle drums of Wall Street. When people asked what he would do if a particular takeover artist made a move against Southwest, Kelleher, the funny man, would turn stone-cold serious and reply, “I will
kill him.”

An investment banker from Wall Street happened to visit—a whippersnapper, in Kelleher’s view, the kind of person who brought out the curmudgeon in Kelleher. When the investment banker noted what a tempting takeover target Southwest remained, Kelleher cast
his piercing blue eyes through the fellow’s heart, rose from his seat, and began backing him against the wall.

“
You’re too young to know what scorched earth is,” Kelleher said evenly, trying to control his temper. Stepping closer, he told the young man how the Russians had destroyed their own property rather than leave it in the path of the Nazi onslaught. The investment banker soon had his back against the wall. “Anybody who buys this company is going to have ashes, soot, and cinders!” Kelleher yelled. “Those who build something know best how to
destroy it!”
Kelleher had his hands clasped to the young man’s shoulders.

The investment banker slipped from Kelleher’s grasp. His glasses askew, he raced out of the office past Colleen Barrett, Kelleher’s executive assistant.

“What happened?” she asked.

“I just sent a message to Wall Street,” Kelleher answered.

In January 1987 Kelleher proudly reviewed the text for the company’s soon-to-be-published 1986 annual report to shareholders. It told investors that the company was closing in on $1 billion a year in sales. It reported a record operating profit of $89 million. It enumerated a litany of operating accomplishments: “We breathed new life into Chicago’s Midway Airport.… Nashville became our first foray into the promising Southeastern market.… For the sixth year in a, row, we received the fewest complaints per customer carried of any airline serving the continental U.S.”

As Kelleher studied the draft, he looked with satisfaction at the cover. It was, he thought, the perfect way to
say “up yours” to the people on Wall Street and elsewhere who thought that Southwest had no future as an independent company. In bold yellow type against a black background the cover of the annual report read simply

In 1986
we didn’t
merge.

Even if a kind of gentleman’s agreement existed between them, it did somewhat unnerve Kelleher to see his friend Bob Crandall bringing so many airplanes and employees to Dallas. Crandall, of course,
was temperamentally incapable of putting anyone at ease where his competitive intentions were concerned. But Kelleher knew to a degree that no one else seemed to appreciate that all those planes by themselves didn’t mean a thing. Kelleher once had a visitor in his office while he was planning a skit to present at an industry conference. “Let’s do a
Dr. Ruth spoof!” Kelleher exclaimed. Then he pretended to be the sex therapist on the phone to Crandall.