Southwest Airlines - how it pioneered the low-cost model

In a recent Key Publishing special magazine on low-cost carriers, Gordon Smith explores Southwest Airlines path to success with special insights from the late Herb Kelleher

Ohio is often called the ‘birthplace of aviation’, being home to Wright Brothers who were the first to successfully build and fly a motor-operated aeroplane. However, North Carolina also claims the title, as it was just a few miles south of Kitty Hawk on its Atlantic coast where Wilbur and Orville’s 1903 ‘Wright Flyer’ took to the air for the first time.

Things are a little more straightforward for fans of low-cost airlines, with few challenging Texas as the birthplace of the modern budget carrier. The Lone Star State has a pair of pioneering figures to thank for putting it on the aviation map. Since its launch in 1971 by Herb Kelleher and Rollin King, Southwest Airlines has grown to become one of the world’s most profitable carriers. In doing so, it has defined the low-cost, low-fare business model copied countless times by operators at home and abroad.

A unique corporate culture, a dollop of dogged determination, and a sprinkling of good fortune has helped the airline to grow from three aircraft on three routes within Texas to the current operation which features hundreds of jets, thousands of flights a day and tens of thousands of employees. By almost every metric, it ranks in the top three or four biggest airlines in the United States, even trumping some of the big legacy names.

From its launch in 1971, Kelleher helped transform Southwest into one of the most profitable airlines in the world. As this image shows, his willingness to have some fun helped the airline stand out from more established competitors
From its launch in 1971, Kelleher helped transform Southwest into one of the most profitable airlines in the world. As this image shows, his willingness to have some fun helped the airline stand out from more established competitors Southwest Airlines

Superlatives aside, a critical question remains: how did it all begin? It might surprise you to learn that Kelleher never planned to start an airline. After law school and working as a trial lawyer, he wanted to try his luck as an entrepreneur, as he explained in a fascinating interview with Key Publishing in 2010: “Starting an airline was not in the plan. I knew nothing about the business. When I was called in to run the airline full time [in 1982], I stayed up all night trying to find out as much as possible about its problems… it’s turned out alright, though.”

The original Southwest Airlines board of directors are pictured meeting at the office of Lamar Muse - the airline’s first president. Kelleher and King are sitting on the right
The original Southwest Airlines board of directors are pictured meeting at the office of Lamar Muse - the airline’s first president. Kelleher and King are sitting on the right Southwest Airlines

Legend has it that Kelleher and one of his law clients, Texas businessman Rollin King, developed the concept that later became Southwest Airlines on a cocktail napkin in a San Antonio restaurant. He explained: “In those days, the industry was regulated. The only way to create an airline was to use a loophole to fly intra-state. Pacific Southwest Airlines [PSA] had started as an intra-state in California. We looked at it as a role model. Trans-Texas was a monopoly carrier in small cities, and Braniff was a monopoly carrier in big cities. They had some of the highest fares in the USA.”

This glimpse into an era before digital ticketing sees a Southwest Airlines gate agent at Houston/Hobby Airport manually count the boarding passes
This glimpse into an era before digital ticketing sees a Southwest Airlines gate agent at Houston/Hobby Airport manually count the boarding passes Southwest Airlines

Competition concerns

Despite Herb and Rollin identifying a potentially lucrative niche, some of the existing players in the market made things rather difficult for the pioneering pair: “We decided to strike at the soft underbelly of the commercial airline industry. Even though the legal loophole was there, the incumbent carriers – Braniff, Trans-Texas, and Continental – didn’t want any competition and fought us tooth and nail. I was involved in 31 separate administrative and judicial proceedings with those carriers over four or five years before we launched in 1971. A US Supreme Court judge said it was the worst case of business harassment he’d ever seen.”

Flight and cabin crews gather to celebrate the unveiling of ‘Freedom One’ - a special liveried aircraft designed as a high-flying tribute to the nation, the US military, and Southwest employees
Flight and cabin crews gather to celebrate the unveiling of ‘Freedom One’ - a special liveried aircraft designed as a high-flying tribute to the nation, the US military, and Southwest employees Southwest Airlines

Despite being granted formal permission to launch operations by the relevant regulatory bodies, the new airline’s difficulties were far from over. A decision to use secondary airports was not well received by city authorities, as Kelleher recalled: “There was controversy over whether we could use Houston Hobby Airport or Dallas Love Field. We didn’t want to move to DFW [Dallas-Fort Worth] airport, and the new Houston airport – ‘Intercontinental’ – had just opened. I said: ‘The people we’re carrying don’t want to fly from Conroe [Houston Intercontinental] to Grapevine [Dallas Fort Worth]. They want to fly from Houston to Dallas.' So, we decided to stay at the downtown airport.

The bright orange uniforms worn by Southwest flight attendants in the 1970s instantly distinguished them from the crowd
The bright orange uniforms worn by Southwest flight attendants in the 1970s instantly distinguished them from the crowd Southwest Airlines

“We got sued by Dallas Fort Worth and the DFW airport board. That went to the US Supreme Court. We ran out of money in 1969, and the board of directors said: ‘Let’s just shut this down.’ And I said: ‘I’ll pay all the costs out of my own pocket and work for nothing to see if we can get this thing going.’ Fortunately, it did.”

Herb Kelleher proudly stands alongside one of the airline’s brand-new Boeing 737-300 jets
Herb Kelleher proudly stands alongside one of the airline’s brand-new Boeing 737-300 jets Southwest Airlines

National expansion

When the US commercial airline sector was deregulated in 1978, the Southwest team decided to expand beyond its traditional Texan homeland. “There was a provision that if a carrier had gotten a route from the CAB [Civil Aeronautics Board], but wasn't serving it, another carrier could apply to serve it and get it automatically. I saw that Braniff had Hawaii-San Antonio-Houston, and I wanted San Antonio and Houston. So, I just forgot about Hawaii and applied for San Antonio, Houston, and New Orleans. Harding [Laurence, then Braniff’s Chairman] called me and said: ‘I saw what you did to get that route – you just lopped off one segment of it.' I said: ‘Harding, don’t give me that: you had two routes you weren’t serving.’

“There were only two carriers that supported deregulation – United, which was the biggest, and Southwest, which was the smallest. I was so amused, because people in Washington would say: ‘We understand why United is for this, but you, little bug, why do you support it?’ And I said: ‘Well, I think we’ve demonstrated in Texas that we can compete pretty well against the other airlines, and we’d just like more latitude to do that.’

“And then I got a letter from a Texas congressman, who said: ‘Herb, I want to tell you something. You’re going to ruin Southwest Airlines if you take it beyond the boundaries of Texas.’ So, I wrote back and said: ‘Congressman, I beg to remind you that man, not God, created the boundaries of Texas.’ And you know what his response was? ‘Dear Herb, are you sure?’”

The original livery displayed on Southwest jets drew on the colours and hues of the airline’s native Texas
The original livery displayed on Southwest jets drew on the colours and hues of the airline’s native Texas Key Collection

Financial fears

Kelleher recounted that representatives from banks and other investment houses  - most of which were based in New York - also struck a sceptical note about Southwest’s unusual approach: “It wasn’t just the other airlines that were contemptuous of what we were doing. The New York financial community was as well. Every time I’d go up there, they’d give me a lecture and say: ‘Well, Herb, now that we’re deregulated, you’ve got to be just like the other airlines.' And I said: ‘No, I don’t think so.’

“After about ten years, an analyst got up at an investor seminar and said: ‘For ten years we’ve been telling Herb Kelleher how to run Southwest Airlines, and for ten years he’s been telling us to bug off. Since they’re the most profitable airline in America, how about if we all bug off?' But nobody believed that it would work, and the other carriers thought that we were just an annoyance, not something permanent.”

This stunning Boeing 737 MAX is named Imua One. According to Southwest, it is a “symbol of gratitude to Southwest employees and the people in Hawaii they serve”
This stunning Boeing 737 MAX is named Imua One. According to Southwest, it is a “symbol of gratitude to Southwest employees and the people in Hawaii they serve” Long Beach Airport

People power

During his time at Southwest, Kelleher’s colourful and charismatic personality spawned a corporate culture that made Southwest employees well known for taking themselves lightly (even singing in-flight announcements to the tune of popular theme songs) but their jobs seriously. “I always felt that our people came first,” he said. “Some of the business schools regarded that as a conundrum. They would say: ‘Which comes first, your people, your customers or your shareholders?' I say it’s not a conundrum. Your people come first and, if you treat them right, they’ll treat the customers right; and the customers will come back, and that’ll make the shareholders happy. We’ve always tried to be sensitive to the needs of our people and recognise the things that are important to them in their personal lives.

Kelleher helped foster a corporate culture that put people at the heart of the business
Kelleher helped foster a corporate culture that put people at the heart of the business Southwest Airlines

“At Southwest Airlines, you can’t have a baby without being recognised. You can’t have a death in your family without hearing from us. If you’re out with a serious illness, we’re in touch with you every two weeks to see how you’re doing. We have people who have been retired for ten years, and we keep in touch with them. We want them to know that we value them as individuals, not just as workers. That’s part of the esprit de corps.

“We put in the first profit-sharing plan in the airline industry. Our people were very cognisant that they were owners. Down in San Antonio, one of our passengers was complaining to one of our customer-service agents and said: ‘Don’t you know I’m a shareholder of Southwest Airlines?' And the customer-service agent looked at her and said: ‘Lady, we all are.’”

As the years progressed, the carrier spread its wings beyond its Texan homeland and entered major new markets such as Las Vegas
As the years progressed, the carrier spread its wings beyond its Texan homeland and entered major new markets such as Las Vegas Southwest Airlines

Beyond cheap tickets

As many low-cost airlines have discovered to their detriment, a keen pricing structure will only go so far in a competitive market. Southwest’s ‘secret sauce’ has been to focus on its passengers, while keeping an eye on the bottom line. “It’s not just the low fares. We have the best customer satisfaction record, based on Transportation Department statistics, of any airline in America; the fewest complaints filed per 100,000 passengers carried,” noted Kelleher.

“We had one complaint that said: ‘Herb, I went through El Paso the other day, and I was sold a ticket by a customer-service agent who just isn’t like Southwest Airlines. There’s something wrong with this agent.' You see the distinction? Not that Southwest Airlines is a bad apple, but this person is a bad apple.”

Herb and Rollin’s dogged determination saw Southwest Airlines succeed despite challenges presented by rival carriers
Herb and Rollin’s dogged determination saw Southwest Airlines succeed despite challenges presented by rival carriers Southwest Airlines

Kelleher distilled what he thought made Southwest stand out from the crowd: “I just tell my employees that we’re in the service business, and it’s incidental that we fly airplanes. We treat our passengers well.”

Famed for his disciplined approach to network expansion, Kelleher appeared cautious when asked in 2010 about the likelihood of Southwest entering international markets: “It’s a question of priorities. You only have so many airplanes. They’re very expensive, and you try to send them where they’ll do the most good for our people’s job security within the shortest period of time – and do the most good for the profit sharing.”

The distinctive engines on the Boeing 737 MAX set the newest type apart from earlier generation models
The distinctive engines on the Boeing 737 MAX set the newest type apart from earlier generation models Southwest Airlines

Despite Herb’s concerns regarding aircraft utilisation and crew optimisation, history tells us that it didn’t take long for Southwest to spread its wings. In 2013, the airline launched its first links to a destination outside the 48 contiguous states with service to Puerto Rico. In July 2014, it officially became an international carrier with first flights to Nassau in the Bahamas; Montego Bay in Jamaica; and Aruba. Fast forward to 2023 and the airline operates a growing roster of routes deep into Central America and the Caribbean, including Belize, Mexico, and Costa Rica.

By the 1990s, Southwest was established as a major player across the United States, taking on the nation’s legacy operators
By the 1990s, Southwest was established as a major player across the United States, taking on the nation’s legacy operators Southwest Airlines

Fleet in focus

Alongside an ambitious CEO, the leveraging of a deregulated market, and a positive corporate culture, the fleet strategy of Southwest has been a vital part of its success. Since the very start, the carrier has adopted an exclusive all-Boeing 737 operating model, with variants of the US narrowbody running throughout its history.

Southwest’s Boeing 737s are configured in a single-class, all-economy setup which reduces complexity for fleet planners
Southwest’s Boeing 737s are configured in a single-class, all-economy setup which reduces complexity for fleet planners Southwest Airlines

Southwest started operations in 1971 with the 737-200, a jet which was the backbone of the fleet in the company's early years. By the 1980s, the Texan carrier transitioned towards the newer 737-300, which offered improved performance and efficiency. Meanwhile, the 737-500 was introduced in the early 1990s (with Southwest as the launch customer) and offered a slightly shorter fuselage compared to the -300. The rollout of the -700 in 1997 was a game-changing moment for the firm, boasting increased passenger capacity (at 143 seats) and longer range. The variant has been pivotal to the airline’s growth, with many -700 examples still in revenue service today.

One of Kelleher’s most notable publicity stunts saw him challenge Kurt Herwald, chairman of Stevens Aviation to an arm-wrestling contest for the rights to use the “Just Plane Smart” slogan in its advertising materials
One of Kelleher’s most notable publicity stunts saw him challenge Kurt Herwald, chairman of Stevens Aviation to an arm-wrestling contest for the rights to use the “Just Plane Smart” slogan in its advertising materials Southwest Airlines

The addition of the 737-800 in March 2012 was part of the airline's efforts to modernise its roster and enhance its operational capabilities. The -800's larger size and extended range make it well-suited for certain longer routes and high-demand markets. The jet can carry up to 175 passengers, representing almost a 30% increase over the fleet configuration on earlier Southwest models.

The latest Southwest livery is dominated by a rich blue, with the company’s signature red and gold still featured towards the tail
The latest Southwest livery is dominated by a rich blue, with the company’s signature red and gold still featured towards the tail Southwest Airlines

The final chapter of the 737 story at Southwest is the Boeing 737 MAX. In December 2011, the carrier announced it would be the launch operator for the type. Today the airline flies the mid-size MAX 8 variant, which in keeping with the -800, also has 175 seats. This allows for greater standardisation across the two types, giving Southwest’s operations team greater flexibility when positioning aircraft.

The introduction of the MAX was not without controversy. On October 1, 2017, the jet began its first scheduled service with the low-cost firm. However, the global grounding of the fleet in 2019-2020 adversely impacted the roll-out of the type with the Dallas company. As of September 2023, the airline has almost 200 of Boeing’s newest narrowbody jet in active service, with the airline enjoying the 14% average fuel savings, compared to the 737-800.

The lucrative model pioneered by Kelleher and his team has been emulated by countless other airlines around the world
The lucrative model pioneered by Kelleher and his team has been emulated by countless other airlines around the world Southwest Airlines

Savvy operator

Asked about Southwest’s allegiance to Boeing aircraft, Kelleher emphasised the shared respect between the two American companies, before revealing an extra trick he had up his sleeve during negotiations: “We’ve been the launch customer for three Boeing models, and Boeing has never forgotten that. It has never tried to take advantage of the fact that it’s a sole supplier of Southwest Airlines. I will tell you that, when I negotiated, I did call Airbus and said: ‘Would you send me some of your Airbus [cigarette] lighters?' So, when I went in to negotiate with Boeing, I said: ‘Oh, excuse me, I dropped something.' And the Boeing people leaned over and picked up an Airbus lighter – I thought the message was delivered. But they’ve been very good to us, and we’ve been very good to them. It is, I guess you’d say, a sweetheart relationship.

Despite taking a step back from day-to-day operations in his later years, Herb was still closely linked to the company and held in exceptionally high regard
Despite taking a step back from day-to-day operations in his later years, Herb was still closely linked to the company and held in exceptionally high regard Southwest Airlines

“General Electric has been the same way because they’re the sole supplier of our engines. They really like us, and we really like them. They took me to see their engine factory: they use CAT scans to test parts, and I said: ‘Would you mind taking a shot of my liver? I think it might need some attention.’”

Since its inception in the early 1970s, the airline has stuck to an all-Boeing 737 fleet. This has allowed the carrier to maximise efficiencies in its operation
Since its inception in the early 1970s, the airline has stuck to an all-Boeing 737 fleet. This has allowed the carrier to maximise efficiencies in its operation Southwest Airlines

As he approached his 80th birthday, his esteemed career in the airline business more than qualified Kelleher to speak with authority about the quirks of running an airline in the 21st century. In some of his closing thoughts during the 2010 interview, he suggested that the key to survival in the aviation sector is not just low fares but also deep pockets. “The airline industry is historically risky and prone to losses… you need staying power. In the early days, Southwest nearly folded. We had to sell our fourth Boeing 737 to meet costs. That taught us a valuable lesson: don’t over-extend yourself. Running an airline is a sprint over a marathon distance.”

Kelleher’s can-do pioneering attitude has become legendary in aviation circles, with many considering him to be the grandfather of the modern low-cost model
Kelleher’s can-do pioneering attitude has become legendary in aviation circles, with many considering him to be the grandfather of the modern low-cost model Southwest Airlines

Herb Kelleher biography

Herbert D Kelleher was born on March 12, 1931, in Camden, New Jersey. The youngest of four brothers, he graduated from Haddon Heights High School in 1949 and studied law at Wesleyan University, Connecticut.

There, he met Joan Negley on a blind date. They later married and the couple had four children. After a period as a lawyer in New Jersey, the Kellehers moved to Texas intending to start a law firm or a business.

From its birth in 1971 – after overcoming several years of legal challenges from competitors who tried to keep it grounded – Southwest has succeeded by daring to be different: offering low fares to its passengers by eliminating unnecessary services and avoiding the “hub-and-spoke” scheduling system used by other airlines in favour of building traffic in secondary airports such as Chicago-Midway (instead of Chicago/O'Hare) and Orange County instead of Los Angeles International.

Kelleher himself added to Southwest’s colourful culture, arriving at the airline’s annual parties on motorbikes and dressed as Elvis among other characters. In one celebrated incident, he challenged the chief executive of a rival aviation firm to an arm-wrestling contest over the use of a particular slogan. A promotional video was made showing Kelleher ‘training’ for the bout. In one sequence he is helped up during a sit-up where a cigarette and glass of whisky was waiting. Kelleher lost the match for Southwest, but the net result was both parties having use of the trademark, $15,000 going to charity and a healthy dose of goodwill publicity for both companies.

Kelleher was inducted into the US Business Hall of Fame in 2004. On July 19, 2007, Southwest Airlines announced that Kelleher would step down from the role of chairman and resign from the board of directors in May 2008, while remaining a full-time employee until May 2013. The Southwest co-founder was ultimately awarded the title of chairman emeritus and remained linked to the airline until his death in January 2019 at the age of 87.

Following Kelleher’s death in January 2019, the airline hosting a special Celebration of Life event in his honour
Following Kelleher’s death in January 2019, the airline hosting a special Celebration of Life event in his honour Stephen M. Keller

Southwest Airlines’ operating statistics:

●                 Net income: $539 million

●                 Revenue passengers carried: 126.6 million

●                 Revenue passenger miles: 123.8 billion

●                 Load factor: 83.4%

●                 Annual record total operating revenues: $23.8 billion

Source: Southwest Airlines (2022)

SOUTHWEST AIRLINES FLEET

As of March 31, 2023, Southwest had 793 Boeing 737 aircraft in its fleet:

Type Number Seats
737-700 419 143
737-800 207 175
737-8 167 175

Source: Southwest Airlines

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