When asked about the secret to Southwest Airlines' success, Herb Kelleher jokingly replies, "Charismatic leadership." Beyond that, being the only major U.S. airline to make a profit every year since 1972 has come down to three factors: having a contrarian strategy and sticking to it, keeping costs down in good times so the company is prepared for the bad times and - perhaps most important - treating employees well and trusting them to do their jobs.Airlines

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Research Papers in Economics

SouthwestEconomy      8      FEDERAL RESERVE BANK OF DALLAS • NOVEmBER/DEcEmBER 2007        
OnTheRecord
Southwest Airlines executive chairman Herb Kelleher, a member of the Dallas Fed’s board 
of directors, gives a front-line executive’s view of the economy and the changes buffeting 
one of Texas’ most important industries.
When asked about the secret to South-
west  Airlines’  success,  Herb  Kelleher  jok-
ingly  replies, “Charismatic  leadership.”  Be-
yond that, being the only major U.S. airline 
to make a profit every year since 1972 has 
come down to three factors: having a con-
trarian  strategy  and  sticking  to  it,  keeping 
costs down in good times so the company 
is prepared for the bad times and—perhaps 
most  important—treating  employees  well 
and trusting them to do their jobs.
  Kelleher joined with Rollin King to cre-
ate  Southwest  Airlines  in  1967.  After  four 
years of legal challenges from existing car-
riers, the fledgling airline finally began op-
erations in 1971 with a fleet of three Boe-
ing  737s  that  served  Dallas,  Houston  and 
San Antonio. Southwest began to grow by 
emphasizing low fares, friendly service and 
quick ground operations that kept planes in 
the air. With a fleet of more than 500 aircraft, 
Southwest now offers more than 3,300 flights 
a day, serving 63 cities coast to coast.
Q. Some analysts worry that the U.S. economy 
is slowing. What do you see from your vantage 
point?
A. What we have seen is a gradual softening 
that started at the beginning of this year. If 
you look at the consumer confidence read-
ings from the Conference Board or the Uni-
versity of Michigan, you can see there has 
been a downward trend. 
  For  us,  the  trend  wasn’t  totally  mani-
fest until the second quarter, but there’s little 
doubt that many people are getting a little 
more cautious with their discretionary spend-
ing. Consumer demand is looking somewhat 
dicey, and the public seems increasingly skit-
tish about the prospects for the U.S. econo-
my.
 
Q. What about the Eleventh District, consisting 
of Texas and parts of Louisiana and New Mexico? 
How are things faring in our neck of the woods?
A. We had been saying for some time that 
the Eleventh District was a standout, a star 
with respect to airline bookings. But from the 
perspective of passenger traffic, we can no 
longer say that the district is head and shoul-
ders above the rest of the country. Today, it’s 
sort of in the middle of the pack relative to 
the rest of the country and continuing to ex-
hibit a gradual downward trend in demand 
for domestic travel.
Q. Are there areas of the country that remain 
standouts?
A. At this juncture, we’re characterizing “no 
change” from last year’s bookings, on a ca-
pacity-adjusted basis, as doing “pretty well” 
relative to peer districts. On that basis, Cleve-
land and Kansas City appear to be strength-
ening,  and  Boston  and  New York  are  still 
relatively strong.
Q. How is the glum turn in the consumer’s psyche 
impacting the way airlines conduct their day-to-
day domestic business?
A. All major U.S. airlines are now reducing 
domestic seating capacity and/or paring back 
the rate of domestic expansion in response 
to  weakening  absolute  demand  across  the 
nation. That’s part of why load factors right 
now are so great. So much capacity has been 
taken out. The players that had been growing 
fast are slowing down, and we have started 
to see some airlines cancel or delay plans to 
add planes to their domestic fleets.
Q.  How  has  the  recent  run-up  in  oil  prices 
affected the outlook?
A. Thanks to the globalization of business 
and the weakening dollar, the major inter-
national airlines reported good third quarter 
earnings. But I suspect that the increase in jet 
fuel prices will translate into flattish to down 
earnings for the industry as a whole for the 
fourth quarter. It’s also probably impacting 
how passengers view travel. 
  In the past, a big spike in gasoline prices 
would push more travelers to fly. But today, 
because of the pocketbook toll of high gaso-
line prices and the angst about the economy, 
I suspect some people are deciding not to 
take discretionary trips at all.
  There  are  other  possible  responses  to 
the long rise we’ve seen in oil prices. It has 
caused  airlines  to  try  to  persuade  engine 
makers  to  expedite  efforts  to  make  more 
fuel-efficient engines. On this count, we’ve 
made much greater strides in efficiency than 
other industries. In the past 25 to 30 years, 
we’ve decreased fuel use per seat by 50 per-
cent. Of course, we can go only so far. You 
can’t realistically expect to fly an airplane us-
ing wind power or electricity.
Q. Are there other factors impacting the bottom 
line today?
A. It may surprise most Americans to learn 
that the industry is beating itself to death to 
fill airplanes at 1990s fare levels, when we 
take inflation into account. About 70 to 75 
percent of an airline’s costs are fixed. On any 
flight taking off, you’ve already paid for ev-
erything from the crew that’s flying the plane 
to the jet fuel that’s providing the power. So if 
A Conversation with Herb Kelleher
Staying Aloft in Today’s Turbulent Skies“In the broadest sense, it seems to me 
that globalization has for some time 
held down the cost of living in this country.”
FEDERAL RESERVE BANK OF DALLAS • NOVEmBER/DEcEmBER 2007    9    SouthwestEconomy
you have 20 empty seats, it’s best to fill them 
at some price rather than not fill them at all. 
That’s why you hear about a goodly number 
of fare increases but see relatively little in the 
way of higher average fares actually paid.
Q. What are these signals telling us about the 
outlook for the economy?
A. Some analysts regard airline bookings as 
a lagging indicator, but I have always seen 
them  as  somewhat  of  a  leading  indicator. 
Saying that always reminds me of a speech I 
gave in San Antonio back in the 1980s, when 
things were turning down in Texas. At the 
time, bookings in San Antonio were down 15 
percent, which compelled me to inform my 
audience that though they might not know 
it, they were currently in a recession. And it 
soon became evident that they were.
Q. So are we in a recession?
A. I would say “probably,” if I were only look-
ing at the traditional domestic indicators that 
I always have. But we’re not in a recession; 
if we were, things would look much worse 
than they do at the moment. 
  I  have  thought  about  this  a  lot  and 
venture the difference may be globalization 
and diversification, which have strengthened 
our overall economy. Something has indeed 
changed. In the absence of 
globalization and diversifi-
cation, I suspect we would 
be  in  a  recession  right 
now.
  In the broadest sense, 
it seems to me that global-
ization has for some time 
held down the cost of living in this country. 
That’s one reason why I suspect that in the 
absence of globalization, we would be in a 
recession.
Q. How has globalization affected the airline 
industry?
A.  We’ve  seen  a  very  vivid,  concrete  and 
compelling  manifestation  of  the  effects  of 
globalization, a trend that really picked up 
steam three to four years ago and has ac-
celerated ever since. At the time, the United 
States had begun to succeed in pushing for 
“open  skies,”  whereas  opportunities  to  fly 
between two countries had previously been 
much more curtailed. 
  Even where you don’t have open skies, 
you have markets that are liberalizing using 
bilateral agreements. China is a great exam-
ple. There has been an enormous percent-
age expansion with respect to the number of 
flights permitted; the restrictions have been 
loosened.
Q. How has this shift toward a globalized airline 
industry affected U.S. carriers?
A. Our big international carriers have benefited 
from globalization by effectively connecting the 
business world. It’s not only that there is com-
paratively less competition than on domestic 
routes. The weakening dollar is also providing 
a boost to international carriers to the extent 
they  receive  payments  in  foreign  currencies, 
such as the strong euro.
  In essence, globalization has produced a 
prolific source of international passengers at 
higher fare levels. This is a sea change for the 
entire industry. I can think back to a time when 
the international aspects of the industry were 
not so prosperous, but today that has turned 
around.
Q.  Are  there  any  risks  that  accompany  a 
globalizing airline industry?
A. There is something looming out there—
more flights and new competition. As inter-
national restrictions continue to fall away, the 
number of flights and competitors is grow-
ing. Start-up low-fare carriers, for instance, 
are now operating between the United King-
dom and the U.S. I have little doubt that you 
will  see  more  low-cost  incursions  into  the 
global market.
 
Q. Ryanair has been mentioned as a candidate 
for just that and been characterized as Europe’s 
Southwest Airlines.
A. We have just begun to hear talk that Ry-
anair might begin to fly between Europe and 
the U.S. Michael O’Leary is a fabulous and 
charismatic leader for Ryanair, and he’s built 
Europe’s largest low-cost carrier and exhib-
ited a willingness to break molds. In yet an-
other manifestation of how much things are 
changing, Ryanair recently tried to buy Aer 
Lingus, which amounts to a low-cost carrier 
in this country trying to buy one of the small-
er old-line legacy carriers. 
Q. Is there a message for existing international 
carriers?
A. As international flight restrictions continue 
to  disappear,  the  sustained  move  toward 
greater  competition  will  trigger  the  next 
major  transformation  in  the  industry.  If 
there’s  a  message,  I  suppose  it  could  be 
that international travel won’t be an endless 
cornucopia  of  prosperity  for  the  current 
players. But that should come as no surprise. 
In the airline industry, you always have to 
keep a close eye on the future.

On the record: a conversation with Herb Kelleher

http://dallasfed.org/assets/documents/research/swe/2007/swe0706e.pdf

On the record: a conversation with Herb Kelleher

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