29 April 2010

The ever-unorthodox Herb Kelleher
(Southwest Airlines)
In 1986, Southwest Airlines was only the 14th largest airline in the United States and had only 63 aircraft in its fleet. In fact, in terms of passengers carried, Southwest was less than one-tenth the size of United Airlines. But from the passage of the Airline Deregulation Act in 1978, Southwest had not only grown four-fold but had remained consistently profitable during the rocky early years of deregulation. But few Americans at the time had heart of Southwest Airlines as it was still for the most part operating in Texas and the adjacent states. Despite its relative obscurity, though, the business world from academia to other industries took a close look at Southwest trying to divine the secret to its success. Perhaps Robert Crandall, the iconic head of American Airlines, Southwest's main competition in the Dallas/Fort Worth market, said it best when he said "That place runs on Herb Kelleher's bullshit."

The compromise that left Southwest at Dallas Love Field, the Wright Amendment, only applied to Southwest's services from Dallas and limited those services to the adjacent states of New Mexico, Oklahoma, Arkansas, and Louisiana. But there were no such restrictions on Southwest's other services from other cities in its network and when Kelleher ended up running Southwest full time in 1981, he was ready to break out and head west as well as east.

The only problem was that in the wake of the 1981 PATCO strike, the lack of replacement air traffic controllers led to the imposition of slot controls at the major airports in California that Kelleher wanted to start serving. Until staffing levels were restored, traffic would be restricted at these key airports but that a certain portion of the slots created were to be assigned to new entrants. Kelleher's legal background helped him as he read up on the minutiae of the slot assignment rules. Since Southwest had been operating since 1971, it was hardly a new entrant, but the airline did have a subsidiary set up called Midway Southwest that dated back to the airline's earlier days. Midway Southwest was originally set up to start services to Chicago Midway, but the plans back in the airline's nascent days never got off the ground.

So Kelleher applied for the new entrant slots as Midway Southwest, to his surprise got them from the FAA, and then traded them to Southwest Airlines. Someone higher up in the FAA figured out Kelleher's ruse and struck down the slot award- slots, said the FAA, could only be traded by operating airlines. Ever resourceful and not taking no for an answer, Kelleher then sold Midway Southwest to a charter company that owned a single Learjet. The charter company then traded the slots to Southwest and since the rules as written by the FAA for new entrant slot awards didn't specify charter vs. scheduled let alone a minimum fleet size, the FAA was unable to nullify the slot award a second time. Southwest got its slots to Los Angeles International Airport and prepared to inaugurate services to LAX via Phoenix, Arizona.

All was good and well until the FAA Administrator, J. Lynn Helms found out about Kelleher's legal maneuverings to get access to LAX. Helms summoned him to Washington immediately to explain himself. Helms berated Kelleher for making a mockery of the system by using loopholes in the rules to gain slots to LAX. After his tirade, Helms smiled and confessed that he enjoyed Kelleher's legal maneuvers to win the slots. The story as it's been told is that Helms then ordered Kelleher to leave his office and act as if he'd had his heart ripped out.

So along with services to California, Southwest added Las Vegas, Kansas City, and St. Louis (all now key cities in Southwest's network) and in 1985 the airline opened its services east of the Mississippi River to Chicago Midway. And the rest, they say, is history!

Source: Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos by Thomas Petzinger, Jr. Three Rivers Press, 1996, p320-321.

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