How Herb Kelleher Killed Competition

Most entrepreneurs quit their jobs and go “all in” on their startups. Not the founder of Nike, Phil Knight.

He was an accountant.

Here’s another example of how to keep your day job before you become a billionaire at your own business.

Herb Kelleher is the co-founder of Southwest Airlines.

He spent 25 years as a corporate lawyer before fully transitioning to Southwest.

And he continued his legal practice during the airline’s early years.

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He viewed this legal experience as the key to his later success, not just something that came before it.

This unconventional approach gave him several crucial advantages.

The first advantage of keeping his day job was Financial Independence. He maintained his law practice income. That kept him from being desperate or financially dependent on the airline’s success. This allowed him to make better long-term decisions. He could do it without the pressure of immediate financial survival.

The second advantage of continuing to practice law was Strategic Patience. During Southwest’s founding, Kelleher represented the airline in legal battles. He fought legal battles for 10 years before Southwest flew a single flight. In one six-year period alone, he endured 31 administrative and judicial proceedings. His legal income allowed him to sustain this protracted fight.

The third advantage of being a lawyer for Southwest was Personal Financial Commitment. Southwest faced potential collapse during legal battles. That’s when Kelleher made an extraordinary offer:

Kelleher was born in Camden, New Jersey, in 1931. He worked at the Campbell’s Soup factory. He graduated from Wesleyan University. He earned his law degree from New York University. After that, he moved to Texas. This move increased his dissatisfaction with the status quo of air travel.

Up until the 1970s, airlines used the hub-and-spoke model. It’s an air travel system where airlines use a central airport (the “hub”) as a transfer point. Passengers connect from various smaller cities (the “spokes”) to their final destinations. Airlines didn’t offer nonstop flights between every possible city pair. Instead, airlines fly passengers from their origin city to a main hub. From there, they then transfer onto another flight to their destination.

The hub-and-spoke model consolidate passengers onto fewer flights. They want this to improve efficiency. They’re trying to make it economical to serve more city pairs through connections.

The hub-and-spoke model reduces the number of nonstop routes needed. They want this to lower operational costs. They’re trying to maximize the use of aircraft and airport resources.

The hub-and-spoke model centralizes services, staff, and maintenance at major airports. Which can create economies of scale.

But what the airlines fail to recognize is the unintended consequences. This model often requires passengers to make layovers at the hub. Which increases travel time, causing missed connections or delays.

Many entrepreneurs try to do something original. They try to build something before they have proof of concept.

They want to be pioneers, but pioneers end up with arrows in their back.

For example, there are countless failed startups that tried to be the Uber of toothpaste. Or the AirBnB for car sharing. Or the WeWork for pets.

Instead, do a proven thing but with a moat or differentiation. Improve on it.

Costco is a clone of Price Club. Walmart also evolved from the ideas of Sol Price, the founder of Price Club. Jeff Bezos built Amazon on the ideas of Sam Walton, founder of Walmart (Sol Price inspired him).

Southwest Airlines is a clone of Pacific Southwest Airlines (PSA). PSA was a low-cost airline headquartered in San Diego, California. PSA operated from 1949 to 1988. It was the first substantial scheduled discount airline. PSA called itself “The World’s Friendliest Airline”. They painted a smile on the nose of its airplanes, the PSA Grinningbirds.

Rollin King is a Texas businessman and pilot. He is the co-founder of Southwest Airlines alongside Herb Kelleher. King conceived the idea for a low-cost, intrastate airline connecting Texas’s largest cities. PSA inspired his idea.

He partnered with his lawyer, Herb Kelleher. Kelleher sketched out Southwest's initial route map on a cocktail napkin.

Southwest Airlines rejected the hub-and-spoke model. Instead, they used the point-to-point model. Which focuses on direct nonstop flights between cities. Southwest bypassed the need for a central hub.

Like Phil Knight, the fact that Kelleher kept his day job didn’t exempt him from needing to raise capital. Herb Kelleher and Rollin King raised their initial $543,000 in startup capital. Their investors? A group of local Texas businesspeople and acquaintances in the Dallas area. These investors believed in the vision. Southwest Airlines would provide low-cost, convenient air travel within Texas. The investor group placed enough trust in Kelleher and King’s business model to fund the new airline.

Not everyone was as friendly to the idea. Before getting off the ground, Southwest Airlines faced initial legal battles. Southwest proposed intrastate flights between Texas cities. Established carriers claimed that such flights were unnecessary. There was no room for competition. Especially for a competitor that beat them on price.

They claimed those routes already had sufficient service. Existing airlines included Braniff, Trans-Texas Airways, and Continental Airlines. These competitors challenged Southwest’s right to operate at all within Texas. It was up to the Texas Aeronautics Commission (TAC). That’s who granted Southwest a certificate of public convenience and necessity. Existing airlines argued that the TAC had erred by granting it.

The established airlines also contended that Southwest was actually engaged in interstate commerce. According to them, the federal Civil Aeronautics Board (CAB) should regulate Southwest. The CAB had much stricter controls on route approvals and fares. They sought to block Southwest’s flights. This involved obtaining restraining orders and filing lawsuits to keep the startup grounded.

The CAB controlled pricing, routes, and market entry for airlines. Federal regulations kept fares high, limiting competition. Southwest Airlines got around these regulations. They operated as an intrastate airline within Texas. Which allowed it to avoid some of these federal regulations. As well as price controls that applied to interstate carriers.

This legal fight stretched over several years. It went through Texas state courts until reaching the U.S. Supreme Court. The U.S. Supreme Court sided with Southwest.

Kelleher and King launched their new airline in 1967. They named it Air Southwest Company. It was later renamed Southwest Airlines.

Kelleher spent 25 years in his legal career before Southwest took off. He didn’t become CEO until 1978. That’s 11 years after co-founding the airline.

Southwest made air travel affordable for the average person.

How?

By lowering fares.

But not against other airlines.

Kelleher had the ability to see beyond conventional competitive thinking. He identified the real market opportunity.

Without trying to be a pioneer, that’s what they became. Southwest Airlines opened up a new category of air travel. They pioneered the low-cost carrier (LCC) model.

Kelleher believed that “reality is chaotic” while “planning is ordered and logical.”

And the two don't align well.

Unlike their competitors, Southwest Airlines has been profitable for 47 consecutive fiscal years. From 1973 through 2019 Southwest remained in the black. The airline made its first profit in 1973.

They turned around initial losses in the early years through innovative strategies. Such as low-cost off-peak flights and fast aircraft turnarounds. This remarkable streak ended due to the COVID-19 pandemic in 2020. Southwest returned to profitability afterward and never furloughed employees.

Intangibles are more important than the tangibles. 

Being the low-cost leader, you’d think that’s Southwest’s only moat. It isn’t. Their advantage is the culture of Southwest Airlines.

One last thing. Unlike most CEOs, Herb Kelleher wasn’t bothered with growth. He cared about profitability.

I like you,

– Sean Allen Fenn

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