There is a Difference…

“There is a difference between what features customers say they want and what customers are willing to pay for.” That observation/conclusion/ironclad rule/lesson about human nature was made by Herb Kelleher, the remarkable co-founder and former leader of Southwest Airlines, many years ago. It’s a lesson that countless product managers and CEOs, including this one, have also learned the hard way to their regret. But Kelleher seemed to know it right from the start. Kelleher is a legend in some circles and, although he was no shrinking violet when it came to publicity to advance the cause of his company, he is not very well known outside of business management circles or… Texas.

A lot has been written about Steve Jobs since his unfortunate death in October last year. And it’s true, Jobs was a one-of-a-kind entrepreneur and CEO with a track record that is simply unparalleled in his field. Name one other CEO whose death provoked the kind of reaction that his did; not just from Apple fanatics or the business press but from the man on the street around the globe.

However, another tragedy is that the comparable contributions and innovations of countless other amazing innovators, entrepreneurs and business leaders get relatively less attention than Jobs did during his life and after. One of them is Herb Kelleher.

Starting a business, almost any business, is hard. Those of you who have done it know what I mean. Those who haven’t can only imagine. So imagine then, that if you were an entrepreneur with an idea for a new business, a business that, unlike most small startups, would take millions of dollars to get rolling, that the big established businesses that you planned to compete against would use their influence to have the US Congress pass a law designed to hobble – specifically you – before you even get started [almost all, but not all, of the last of those restrictions will finally be phased out in 2014 – 33 years later!]. That happened to Kelleher. It took him and his co-founders three years and large legal bills to clear the way for them to just begin in a very modest way. Would you buck that kind of pressure? That in itself should get him into the hall of fame. And then a few short years after they finally got started the legal rules changed again and created the most challenging business environment imaginable.

The industry was the airline industry. They didn’t decide to start in hi-tech or cosmetics or any of the other high margin businesses that attract entrepreneurs in droves due to their rich potential. They started an airline. In fact, they started the first airline in the category that became to be known as the “no-frills” airline category. [Yes, it can be said that today all airlines are “no-frills” if you are an economy passenger. But Southwest was the first and maybe… the best.]

The airline business is the valley of death. Since 1978 [when US airline deregulation occurred] there have been 47 airline bankruptcies in the US. These weren’t all little startups, actually most of them weren’t. The list includes icons like Pan American, TWA and Northwest [if you are old enough, you remember its antecedent, Northwest Orient Airlines, the airline that took America to Japan and the rest of Asia]. It also includes today’s five big American ‘mainline’ carriers; Continental [twice], Delta [which took over Northwest], United [which took over Continental], US Air [also twice] and the recent filing by AMR, parent of American Airlines.

Since Southwest Airlines started flying in 1971, airlines in the US and around the world have lost billions and billions and billions of dollars. The airline business works a bit like shorting stock index futures in reverse. In stock index futures most people who short them make slow but steady profits day-by-day over several months and then in a big market move they give it all back in a day or two. In airlines, you make a bit of money one year and then you lose lots and lots for the next several years until you can just manage to get above break-even again for a short period and entice some unsuspecting investors to throw in more money.

So the environment Kelleher and his buddies stepped into was just about the most hostile you can imagine. So how have they done?

Well, today Southwest Airlines:

• Carries more passengers in the US than any other carrier, including the ‘big five’ – now four – that have gone bankrupt;
• Has had the fewest complaints of all US carriers since 1987!!!
• Still does not charge a fee for luggage or to change your ticket [they only charge the difference in airfare];
• Still provides free soft drinks and snacks on domestic flights [almost all their flights are domestic];
• Was ranked by Fortune Magazine as one of the five best companies to work for, for five straight years before it declined to participate anymore in 2000;
• Has steadily ranked as one of the most admired companies and has won numerous other awards for everything from being most friendly ex-military employer, most shareholder friendly, most small business friendly, environmental excellence, etc.
• Has had 39 consecutive years of profits!

Although Herb Kelleher retired as CEO in 2001, the culture he has built, a culture built on excellence and customer service and on taking your business very seriously, but not yourself at all, has continued and some of the CEOs who followed him and who he mentored have been recognized as the top CEOs in their industry.

They say that imitation is the sincerest form of flattery. The Southwest model has been carbon copied by numerous other airlines from their formation, including Ryan Air [sort of, if you can put up with the loud bombast and complete disdain of customers by its CEO, Michael O’Leary – which is very un-Southwest-like] and Easy Jet in Europe, Westjet in Canada and countless others in Asia, South America and Australia.

The discipline required to stick to one’s focus and not fall into the trap of trying to please everyone can be illustrated by a story from the early years of Southwest that I heard somewhere I can’t remember. Whether it’s true or not, I don’t know. [Like many healthy corporate cultures, Southwest’s is built on ‘legendary’ stories like this.] An elderly woman wrote a letter to Herb Kelleher. She had flown on an early Southwest flight in Texas and wasn’t happy. She wrote, “I will never fly again on Southwest until you allow me to reserve a seat” [Southwest flights don’t have reserved seats]. According to legend, Mr. Kelleher wrote her a personal response. It said, “Dear Mrs. —–, we’ll miss you.”

Today Herb Kelleher, Chairman Emeritus of Southwest Airlines, is 81. He has a reputation as a chain-smoker and as a whiskey-drinking occasional Elvis impersonator and… as one of the most accomplished CEOs in history. I wish I was more like Herb Kelleher, except of course for the occasional Elvis impersonator part…

When I sat down to write this post this isn’t at all what I intended to write. I intended to write about how in business it is important to use your own taste and judgment in product decisions, while it is also important to know what customers are thinking; and how important it is for politicians to think past the desires of the public for immediate gratification to make the right decisions. But this isn’t how it turned out. I’ll try and write about that in a future post so don’t get me started on Herb Kelleher again!