November 5, 2025 • 51 mins
It's hard to make money running an airline - but Southwest was profitable every year for nearly five decades. How did it manage it? Business History hosts Jacob Goldstein and Robert Smith explore how a carrier with just four airplanes shuttling across Texas revolutionized flying by offering free whisky, cheap late-night tickets and free-for-all seating allocation.
Southwest developed a winning formula that forced its competitors to change how they did business - but then the Southwest model fell apart. Find out why.
Key books: Hard Landing by Thomas Petzinger Jr; Nuts by Kevin and Jackie Frieberg
Other sources: The Theory of Economic Regulation by George Stigler; Fortune Magazine: The Rapid Descent of Southwest Airlines; Southwest Airlines: When Herb Met Rollin.
See omnystudio.com/listener for privacy information.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:17):
Pushkin too quick. No, it's perfect push kid stup.
Speaker 2 (00:21):
You got it, Robert Smith, I'm gonna give you a
classic business origin story.
Speaker 1 (00:40):
Do be a few of Jacob and just set the scene.
I want atmospherics.
Speaker 2 (00:45):
It's nineteen sixty six San Antonio, Texas and a lawyer
named Herb tellerher is drinking wild turkey bourbon and smoking cigarettes.
Speaker 1 (00:55):
As everyone did in nineteen sixty six at the Sane
Anthony Club, great bar name in Texas.
Speaker 2 (01:01):
And so Herb. He's from New Jersey. His dad died
when he was twelve. He worked at the Campbell soup
factory in high school and college in the summers, grows
up to be a lawyer, eventually moves to Texas, and
on this particular night, he's drinking with a client of
his named Roland King, and Rowin's a Harvard MBA amateur
pilot and in fact, right around this time, Herb is
(01:25):
helping Rolin wind down this failed charter air business he'd
had called Wild Goose Flying Service basically like like flew
rich guys to go hunt in the in Texas, in
the country whatever.
Speaker 1 (01:37):
So far as the most Texas story of ever Verry
Texas and Rollin says to Herb something like, you know, look,
I know you're working on this failed air charter business
that I have, but I think you and me we
should actually start a real airline. And Rollin takes a
cocktail napkin there at the bar, and he draws a triangle.
(01:57):
The top he reads Dallas, the bottom, left, he rights
San Antonio.
Speaker 2 (02:03):
What's he right on the bottom right?
Speaker 1 (02:05):
Houston, Texas, Houston right?
Speaker 2 (02:07):
Good. You know, Rollin says, Look, these cities are hundreds
of miles away from me each other. Takes a long
time to drive from one to the other hours and
you know, at the time you could fly between them,
but basically nobody did. It was inconvenient, It was really expensive.
Speaker 1 (02:22):
Flying is what you did when you need to go
New York.
Speaker 2 (02:24):
To LA on business. Yeah, yeah, exactly. And so Herbs like,
this is a crazy idea, and I want to do it.
Turns out to Nepkin might be apocryphal, but the triangle
is real. Those cities are in fact in a triangle.
And on the strength of the triangle and the bourbon
and the cigarettes, they launched Southwest. And I'm going to
(02:45):
argue in the show today that Southwest is the most
successful airline in the history of America.
Speaker 1 (02:53):
Let's do it. I'm Jacob Goldstein and I'm Robert Smith.
And this is Business History, a show about the history
of business. So it's called Business History.
Speaker 2 (03:02):
Today on the show, we're talking about Southwest, which is scrappy,
which is fun, and which completely changed what it means
to fly in America. Southwest eventually got into trouble, but
it had this decade's long run of incredible consistent profitability.
Speaker 1 (03:17):
That may sound simple, right, A business is profitable, But
in the airline industry, this is amazing. The airline industry
is notoriously one of the worst businesses in the world.
If you think about it. All those great airlines say
their names on buildings have disappeared, right, twa Eastern PanAm
Aloha went to Hawaii, right, And even the big ones
(03:40):
that are still around your Delta's, United's Americans, they've declared
bankruptcy at least once. At least once. It's just a
regular thing. The investor Warren Buffett notoriously said, I.
Speaker 2 (03:52):
Don't say the investor Warren Buffett.
Speaker 1 (03:53):
People know who Warren Buffett is, the singer Beyonce.
Speaker 2 (03:56):
United an airline.
Speaker 1 (04:01):
Warren Buffett always talked about how much he hated investing
in the airline industry, even though he said he was
somewhat addicted to it. He famously said, if a far
sighted capitalist had been President Kitty Hawk for the very
first airplane flight, he would have done his successor is
a huge favor by shooting Orville down.
Speaker 2 (04:19):
It's rough. It's not Uncle Warren's kind of a hardness.
Speaker 1 (04:24):
He's like no airplines.
Speaker 2 (04:25):
Ever, It's okay, let's do the Southwest story, the Triangle,
the Triangle. We're going to start with the Triangle. One
obvious but very important fact about the Triangle. All three
of those cities, Dallas, San Antonio, Houston, they're all in Texas.
And this is really important in nineteen sixty six, the
late sixties when they're coming up with this idea because
(04:45):
at the time, interstate air travel was regulated by the
federal government. Right, if you want to fly from state
to state, the federal government is going to have a
lot to say about it. And so herbin Rolins figure,
you know what, we're not gonna have to deal with that.
We're just gonna stay inside of Texas.
Speaker 1 (05:01):
And they've started in this place that it's actually pretty
rare in the United States to have a big state
with three population centers that far apart.
Speaker 2 (05:09):
It's optimal. Yeah, And the way airline regulation worked at
that time in the late sixties feels wild, feels unimaginable today,
Like the federal government decided which airlines could fly which routes.
And by the way, at this time, they basically kept
saying no when people asked to fly new routes, like no, no,
we're not gonna let you do that. We're not gonna
(05:29):
let any more competition there.
Speaker 1 (05:31):
And again, you're a major airline. You want to fly
from Denver to Seattle and you go to Washington, DC,
and you're like, I think this might be a good route, Like.
Speaker 2 (05:37):
No, we've decided there's enough competition there. We don't think
there should be more. And the airlines who do fly there,
the government tells them down to the penny what they
can charge for a ticket.
Speaker 1 (05:48):
This is amazing to me. It's like they're treading airlines.
And maybe they thought of it this way as a
public utility, like this power company. Yeah, this thing that well,
everybody needs it. It's important to our national security and such,
So we're going to regulate this down to the penny
you can charge.
Speaker 2 (06:05):
And so this regulatory regime had some really striking effects. Right,
So the airlines are not competing on price, the government's
telling them the price, and so they wind up competing
on service. When people talk about how great air travel
used to be, this is the era they're talking about,
you know, and like it does seem like it was cool.
(06:26):
Like American airlines put a piano bar in first class,
Like there was a piano player there on the plane.
Speaker 1 (06:32):
Oh so good, and you could like mingle and like smoke.
You could smoke and have a Martiniz.
Speaker 2 (06:39):
Even in coach. Coach was good. Like pan Am would
roll a cart down the aisle with a with a
roast on it and they'd like carve your slice of
beef for you. Seats were wider, there was more leg room.
But like this came at a price, right, and not
just a metaphorical price, an actual dollars price. So here's
here's one example I found in nineteen seventy a round
(06:59):
trip ticket from New York to La cost two hundred and.
Speaker 1 (07:03):
Eighty four dollars.
Speaker 2 (07:04):
Robert Smith. If you adjust that for inflation, nineteen seventy,
two hundred and eighty four dollars. I got the BLSCPI
inflation calculator right here.
Speaker 1 (07:13):
Nine hundred nine fifty no more.
Speaker 2 (07:16):
Two hundred and eighty four dollars in nineteen seventy is
the same as two thousand, four hundred and thirty four dollars.
Speaker 1 (07:23):
I'm not paying forty five.
Speaker 2 (07:25):
I'm not paying one thousand, four hundred dollars. That's what
it costs a fly around trip New York, LA.
Speaker 1 (07:31):
So it was like first class is today. But this
is like all the tickets.
Speaker 2 (07:35):
Yes, and so to anyone complaining about how much better
air travel used to be, I say, just fly for
his class, because it's exactly the same. It's still rad Yeah,
apparently you walk past it at those big seats do
look cool. So you know, when businesses aren't competing on price,
this is what happens, right, You get very nice things
and they cost a lot of money. Right. This is
(07:57):
the world Herb and Rolin are getting into with Southwest,
and really it ends up being mostly Herb. Herb is
the key figure at the airline for a long time.
He trains his personal savings to launch the airline. He's
still working his day job as a lawyer, you know,
they do still have to get regulatory approval, not from
the federal government but from the state of Texas.
Speaker 1 (08:15):
Freedom loving Texas, Freedom loving Texas.
Speaker 2 (08:17):
They get a certificate saying they can go into business
serve in that triangle, and then the next day, the
very next day, three legacy airlines that flew those triangle
routes already sued to prevent Southwest from flying.
Speaker 1 (08:30):
Saying what we don't want competitors, saying we don't need
more airlines, saying the market does not need more airlines,
and they immediately.
Speaker 2 (08:39):
Got an injunction, even in Texas, even in Texas, Land
of the Free, remember the Almo whatever.
Speaker 1 (08:45):
It's so funny to think of, right, this is the
way I think of the UK or Europe working, Right.
I forget that in the United States of America, you
would just be like, I don't feel like having a
new competitor.
Speaker 2 (08:55):
Yeah, I mean, well, if you think about like mid
century America, right, which this still is, right, Like, you
have this history where in the thirties, if we go
back a few decades, right, you have the depression, and
then you have the New Deal, which is this moment
when the government really steps in to regulate the economy.
Banks were much more highly regulated, trucking was much more
highly regulated.
Speaker 1 (09:15):
Yeah, and there was a distrust of business even at
this point, far from the depression. Yeah.
Speaker 2 (09:19):
So that's the context, and that's why Southwest has to
fight this legal battle just to fly, and it actually
takes a year. For years, Southwest is blocked from flying.
They're spending all their capital on legal fees. And after
a while, the board says this, enough, we're just losing
(09:40):
money in court. We're not a real company. Let's give up.
And Herb says, look, I'll represent the company for free.
There's more legal fees. I'll pay him out of my
own pocket. And he keeps fighting.
Speaker 1 (09:51):
Was he stubborn or was he like this is an
actual business opportunity. I'm one hundred percent convinced of it.
Speaker 2 (09:56):
I think he was stubborn.
Speaker 1 (09:57):
Okay, went through a lot of cigarettes.
Speaker 2 (09:59):
So many cerets that'll lower it up like half of
their startup capital. But he's doing well in court, he's
winning in court. Eventually, by June of nineteen seventy one,
so this is years into it, things are looking good.
Southwest schedules its first flights for June eighteenth and on
the sixteenth, the rival airlines get wait for it, another
(10:21):
injunction to block Southwest, and Herb goes to Austin where
the State Supreme Court is, pulls an all nighter in
the law library, goes before a special session of the
State Supreme Court on the seventeenth and gets the court
to block the injunction. And he picks up the phone
and he calls this guy, Lamar Mews, who he's hired to,
you know, run operations at Southwest. Tell him the good news, says,
(10:43):
you know, we're good to go, and Lamar's like, are
we you know, like I feel like at this point,
surely there's gonna be another injunction and tomorrow we'll be
about to go and the Sheriff's going to show up
and say you can't fly. What do I do if
that happens? And Herb says, if that happens, and this
part's a quote, he says, roll right over the son
(11:05):
of a bitch and leave our tire tracks on his uniform. Oh, Herb,
So the next day come and in fact Southwest does
not have to drive over the sheriff. There were no
more injunctions, and they started flying, offering cheaper fares that
were like twenty percent lower than their competitors, and basically
nobody cared.
Speaker 1 (11:24):
So I know, back in these days, if you were flying,
you were probably a business person and you probably had
your company pay for it, your secretary book the tickets.
You're just like, I gotta get from San Antonio to Houston.
I got to be there by nine to fifteen.
Speaker 2 (11:39):
Yeah, exactly, Like nobody in that universe has an incentive
to save twenty percent to fly on some airline nobody's
ever heard of, Like, why would.
Speaker 3 (11:47):
You do that?
Speaker 2 (11:48):
And so Southwest is doing badly, and there's this amazing
moment a few months later where Herb's sister in law
calls them and is like, Herb, I got to tell
you I just flew on Southwest and it was the
most amazing flight, incredible service. And HER's like, oh, that's
so good to hear, and his sister in law is like, yeah,
on the plane, it was just me, the pilots and
(12:08):
the flight attendants. I was the only passenger.
Speaker 1 (12:11):
It was incredible crushing.
Speaker 2 (12:13):
But the way they turn it around is actually interesting
and delightful. And there's there's really two key things they
figure out. Two key things they do to turn it around.
The first one happens just later that year, and it's
that same guy, Lamar mused, the guy Keller her hired
to run operations. He's thinking about the fact that every
night Southwest flies an empty plane back from San Antonio
(12:36):
to Dallas to get a maintenance that's where their maintenance
center is, and it's like too late for businessmen. Nobody's
gonna fly at that point. They'll just stay in a
hotel on the company dime. Right, But Lamar thinks, like, well,
the plane's flying anyway, we gotta have a pilot on it.
What if we sell tickets really cheap and just see
if anybody buys them. So they offer tickets for ten bucks.
Speaker 1 (12:57):
Oh crazy late night fair.
Speaker 2 (12:58):
Right, although you know, adjusted for inflation, that's like eighty
but at that time, in that regulated expensive world, it
was crazy cheap. It was less than half of what
tickets usually cost. And they do like one radio app
or something. It's just like a cheap experiment. And the
first night they have one of these flights, they are swamped.
(13:19):
People are lined up to get on it, and crucially, crucially,
the people who are there look nothing like the people
who usually fly. Remember this is like the carved roast businessman.
I want to say business person, I'm the reallyest businessman. Sure.
Era of flying flying is you know, refined expensive. The
majority of Americans at this point have never been on
(13:42):
a plane nineteen seventy one. And so with this new
ten dollars late night fair, Southwest is not playing that game, right, Like,
they're not competing with the twenty six dollars midday businessman fair.
It's a whole different product almost.
Speaker 1 (13:57):
It's a whole different customer base. These are people who
maybe they would have driven a few hours, taken the boss,
you know, the greyhound, and they see a price that's
like close ish to what they might have paid anyway,
and they're like, I'm getting on a plane.
Speaker 2 (14:12):
Yeah, it's positive some right, Like they're not cannibalizing some
other fair. They're bringing new people into flying. And so
quickly they're like, oh, this is working. And they create
two fair classes, the regular weekday business person fair and
this cheap nights and weekends fair for the masses, and
(14:34):
it works. They have competitors, right, and because it's Texas,
it's easier for people to change their prices, and so
one of the old school competitors Branif. Remember bran If
really they were an airline. They cut their regular daytime
fare to thirteen dollars, half of what it had been before.
It was money loser for them. But like Classic, they're
(14:54):
a big airline. They can lose money on this little
fair and they figure, you know, Classic, big player move
will just bleed Southwest dry. And so Southwest has this,
I have to say, delightful response. When Branif does that,
they say, okay, we'll give you a choice, public customer.
You can pay thirteen dollars to fly midday, or you
(15:15):
can pay the usual twenty six dollars fare and get
the flight and a fifth of Shivus regal fifth of whiskey.
Speaker 1 (15:21):
Well you just get that when you get on the plane.
Speaker 2 (15:23):
Yes, yes, and a glass to come to the I think,
isn't that when they comes to the little valure pop? Yeah?
Speaker 1 (15:30):
I mean it's only an hour flight. What could go wrong?
Speaker 2 (15:32):
The people buying these tickets, these are the mid day
weekday tickets. They're not paying right, the company is paying,
and so why wouldn't they be like, yeah, I'm paying
twenty six dollars for my ticket, company, please pay me
back and then they get the whiskey.
Speaker 1 (15:50):
Are you telling me they didn't report the whiskey to
their employer. They just took it home. Seems plausible, Yes,
they just took it home. I think it meets the
deminimus exemption. And so there's this moment when Southwest is
the biggest Shivus regal distributor in Texas. So what I
love about this story so far is Southwest And maybe
this is just you know, Herb's craziness really is that
(16:11):
they're really innovating and responding to what's going on. They're
able to change on a dime, really and come up
with these ideas in this staid industry where a sort
of by government definition, they didn't want anything to change.
Speaker 2 (16:26):
Yes, And there's a weird way in which that regulation
is like their friend, right, you know, like the Bezos line,
your margin is my opportunity. It's sort of that vibe. Yeah, yeah, yeah,
So I do want to say one more thing about
sort of the vibe and the shivis regal and the
whole kind of Southwest positioning of itself in the marketplace
on what their brand was. Their brand was like we
(16:48):
are the wild Mavericks, we love whiskey. And there was
another piece of this that has aged less well, which
is the flight attendant uniforms that they came up with,
and they were these like extremely extremely short shorts.
Speaker 1 (17:02):
And you've shown me a picture of this. We've all
seen the short skirts that stewardesses would wear at airlines.
These are way shorter.
Speaker 2 (17:10):
They are way shorter. So this was an era where
there was like rampant sexism toward flight attendants in the
airline industry, and Southwest was definitely a part of that. So, okay,
it's nineteen seventy two, all right. Southwest has been up
and running for about a year. Those off peak fares
are popular, but the company is still losing money. Their
daytime flights are still running largely empty. Businessmen are still
(17:33):
flying Brandish or whatever. And by the spring of nineteen
seventy two, companies, I guess, checking account whatever, their current
account bank account is down to one hundred and forty
three dollars, not one hundred and forty three. One hundred
and forty three dollars. They're about to run out of.
Speaker 1 (17:47):
Money in a warehouse full of whiskey. Don't get me right, whiskey.
Speaker 2 (17:50):
They got the whisks.
Speaker 1 (17:51):
They got the short shorts of the whiskey. But one
hundred and forty three.
Speaker 2 (17:53):
Dollars you don't have to have airplanes. They have four airplanes, right,
that's their big asset. And so they decide they're going
to sell one of the planes. That's the way you
get money, ouch ouch, Right, So it means they're gonna
have to cut back on flights. They're gonna have to
lay people off.
Speaker 1 (18:06):
And this, by the way, is the classic beginning of
a death spiral, when you start to cut essential parts
of your business. Yeah, and that means you make less money,
which means you have to sell another plane. And this
is like the way fewer flights means it's less convenient
to fly them.
Speaker 2 (18:21):
Right. So there's this guy, Bill Franklin, who's in charge
of ground operations, and he says, okay, we just went
from four planes to three. I know a way we
can keep the same number of flights, same staff. We
just have to keep the planes we have in the
air more often. And the way to do that is
spend less time on the ground. And I think it
(18:45):
was actually really hard for me to find this number.
But my sense is that the turnaround time at the
gate for Southwest at this point was something like twenty five.
Speaker 1 (18:55):
Minutes, which is amazing by today's standards. But they were
small planes, right, Yeah, So just.
Speaker 2 (18:59):
To be clear what this means, Right, the plane comes
into the gate, passengers get off, the plane gets cleaned,
other passengers get on, whatever has to happen outside the plane, fuel, luggage, luggage, Yeah,
push back from the gate. All of that twenty five minutes.
And Bill Franklin is like, okay, we can keep our
current schedule with three planes instead of four. We just
(19:20):
have to go from twenty five minutes to ten.
Speaker 1 (19:24):
It does not seem possible. What they said to him.
Speaker 2 (19:26):
That is what they said to Bill Franklin. And here's
Bill Franklin's quote when they said it. He said, we're
gonna do ten minute turns with this airplane, and if
you can't do a ten minute turn, you're gonna get fired,
and we'll bring somebody else in. And if he can't
do a ten minute turn, we'll fire him to and
we'll just keep firing until we can find someone who
can do it.
Speaker 1 (19:44):
I feel like, you know how now they say stay
seated until we're at the gate. I feel like at
this point at Southwest, they're like, as soon as the
plane touches down, they're like, take get up, get up,
get your stuff.
Speaker 2 (19:53):
That is the bot, that is the vibe. So you
have like, you know, people from the from the back
office helping out. You have flight attendants cleaning the plane
from the back as the passengers they're getting off. Is
it a deep clean I am guessing not. I'm guessing
they were not worried about how clean the plane was.
That's not why you were flying Southwest for ten dollars,
you know. Then you have the gate crew like hustle
(20:14):
in the passengers on for the next flight. And then
once everybody's on the plane, just in the door, they
close the door and the pilot pushes back from the gay.
Are they waiting for passengers to sit down? No, they
are not. If they didn't make that rule until the eighties,
I don't know, almost because of Southwest, but maybe by
the way I just want it. There's a very very
(20:35):
interesting thing to talk about right here about the getting
on and everybody standing up. When you fly Southwest. As
you may know, if you have flown spy asked, you
don't reserve a specific seat. You just get on the
plane and you sit in the order that you've arrived. Yes,
the person who gets their first gets to get on first.
Person who gets their last gets to get on last.
There is no seat number, and even when you get there,
(20:57):
they don't give you a seat number. And much like
the subway, you if you see an open seat, you
hustle for it. Well, so let's talk about this, right,
Let's talk about what's the fastest way to get on
a plane. This, on one level, doesn't feel like the fastest.
I feel like I know hundred slowest ways to get
on the plane. Every time I'm lining up, I'm like,
really really parents with yers, I know, and then it's
(21:21):
just like are you going from the back, you're going
from the front, or you're going So people have studied this.
There is a literature of lane boarding back to front,
one of the classics. Quite slow in fact, because there's
a lot of waiting. There's a lot of standing and waiting.
People have come up with other ways, like window middle aisle.
There's actually an astrophysicist who came up with this very
(21:43):
elaborate system of like alternating rows and I think window
middle aisle. But a problem with window middle aisle is
you don't get on with like your spouse or your
kid you're sitting.
Speaker 1 (21:52):
Next to, and you have to explain the whole thing,
and then you're just fighting with someone.
Speaker 2 (21:56):
Ending on the study this get on and sit down
wherever is either the fastest or the fastest among any
reasonable way to get on a plane. It is shockingly fast.
Speaker 1 (22:06):
Well, I have read that when computers look at when
people leave something like leave a sports stadium, it is
remarkably efficient because everyone is optimized for finding the best
way out and the shortest way out. And so you
have sixty thousand people all simultaneously optimizing. And you can
understand that.
Speaker 2 (22:27):
I know, so Southwest didn't need an astrophysicist to figure
out that sit down wherever you are is fast. Right,
there's this sense of like, oh, I'd better sit out.
It's like the musical chairs version of getting out of plane. Right.
They just did it, and it helped them with their
super fast turns. You know, they don't hit ten minutes
every time. It's sort of the dream, but they hit
it sometimes and when they miss, it's still a lot
(22:48):
faster than twenty five minute. Right, And you know, remember
these plays are going back and forth back and forth
on these short hops all day long. So saving a
few minutes on every turn is huge. This means they
have a very large cost advantage relative to the other airlines. Right,
they've just reduced their fleet by twenty five percent. Right,
they've gone from four to three, and they can still
(23:11):
do the same number of flights, right, same amount of revenue,
less capital costs. And the next year, nineteen seventy three,
with all these changes, Southwest turns a profit.
Speaker 1 (23:23):
Sort of amazing from what we know about the nineteen seventies,
I mean, I mean seriously, right, we have an oil
embargo in nineteen seventy three, We've got stagflation, huge inflation
later in the seventies, Like this is not an era
when every company is.
Speaker 2 (23:41):
Probably you don't want to be starting an airline.
Speaker 1 (23:43):
I mean, there is a theory that starting and growing
during hard times makes makes you make better choices.
Speaker 2 (23:50):
Well, it is the case that Southwest from nineteen seventy
three on is going to be profitable every year for
the next forty seven years.
Speaker 1 (24:00):
Stunning Well, because think of the oil prices during this time,
think of the inflation during this time. You know, problems
with unions. You're thinking about financial crashes recessions.
Speaker 3 (24:10):
Yeah.
Speaker 2 (24:10):
Yeah, So we're going to take a break and when
we come back, we're going to do Southwest big expansion, right,
and Southwest is gonna conquer America from.
Speaker 3 (24:20):
Texas to the country.
Speaker 2 (24:47):
All right, Robert, we're back with more Southwest. It's the
mid seventies. Southwest is there in Texas starting to make
a profit. These airlines that are flying cheap and making
a profit are weird outliers, right, because remember any airline
that's flying an interstate route is forbidden by law from
(25:08):
lowering its prices, And like, why would you want to
lower your price? This is right, Like you're a business.
You just want to go to the government and say, hey,
our costs have gone up, can we charge more in
the government's Like yeah, people.
Speaker 1 (25:18):
Talk a lot about the competitive spirit, but like most people,
if you've got a pretty sweet gig and you own
an airline, right, you run an airline, life is good,
nice life.
Speaker 2 (25:29):
Yeah, and you're not like a crazy billionaire, but like
you're rich, you have a pleasant life.
Speaker 1 (25:33):
You get to wear a uniform sometimes whatever, you get
to right wherever you want.
Speaker 2 (25:37):
So that's the way it worked for a long time.
But then around this time things start changing for a
few reasons. One reason is the seven forty seven, the
Boeing seven forty seven, the wide body, and of course
the airlines love it right because it's the big, shiny
new thing. You gotta have the big plane.
Speaker 1 (25:55):
With a little hump on the top. Yeah, I love that,
love that.
Speaker 2 (25:58):
More wild over the top services you can provide. Air
Canada puts a disco in its seven forty seven almost
two on the nose for the seventies airlines.
Speaker 1 (26:08):
So good disco ball, you lower the lights and then
people just gook yah.
Speaker 2 (26:12):
Smoking is what I go to for the seventies. So
the airlines love seven forty sevens, in fact too much.
They buy too many of them. And so now there
is a glot of seats flying around America. Airlines are
flying all these planes largely empty. And then they notice
over there, oh look Southwest. Southwest is making a profit
by selling just cheap tickets, no disco. So the big
(26:33):
national airlines start going to the government asking to do
this unheard of thing, cut prices, and for the first
time in like decades, the government says, well, okay, you
can cut your prices, and surprise when the airlines cut
their prices a lot, they get more customers. Yeah, people
fly more. Those empty seats start to fill up. But
(26:54):
there's another kind of big sweep of history thing happening,
and that is a change in the way people think
about business and government and regulation. And you know, we
talked before about this kind of mid century world where
the government was just much more involved in the economy
in lots of ways and how that worked for people.
(27:16):
But you know, now we're in the seventies, and the
seventies are a bad economic time, right. You have kind
of the rust belt is starting, and inflation is coming,
and the oil crisis is there.
Speaker 1 (27:30):
And a huge distinction because when an economy is growing,
you can actually be a kind of a bad business,
you know, with heavy regulations. And every year, oh you
grow four or five percent. Everybody's happy, the government's happy,
you're happy, your customers are happy. But when an economy
starts to shrink, this is where the problems happened because
you're not used to it, and.
Speaker 2 (27:50):
People start to rethink regulation. It's happening kind of popularly
and academically scholarly, right. So the scholarly piece comes out
of the University of Chicago. Of course, this economist named
George Stigler. In the early seventies, actually right around the
time Southwest is just getting its first flight off the ground,
Stigler publishes a paper called A Theory of Economic Regulation,
(28:14):
winds up being a hugely influential paper helps him get
the Nobel Prize later on, and he lays out the
key idea on the first page he writes this. He writes,
as a rule, regulation is acquired by the industry and
is designed and operated primarily for its benefit.
Speaker 1 (28:31):
So what he's saying is you like to think government
regulation is cracking down on those evil businesses in order
to protect the guys. Yeah, yeah, yeah, But in fact,
what he's saying is that industries, especially incumbent players, want
the regulation to keep out scrappy independence trying to come
up and take your business.
Speaker 2 (28:52):
Yes, he is saying regulation exists for the benefit of
the regulated businesses. And there is an economic term associated
with this. It's regulatory capture, which means the regulators are
captured by the industry they're regulating.
Speaker 1 (29:08):
So the FAA at the time might include people who
worked at all the big airlines, and after you work
at the FAA, where are you going to get a job? Yes, Oh,
I don't know. How about American airlines?
Speaker 2 (29:18):
Yeah, yes, And in Stigler's theory, and I think it's
fair to say, in fact, they were captured by the
airlines they were regulating. And you know, there's a case
that when the airlines were just getting going back in
the thirties, maybe it was reasonable for the government to
regulate them. Right, maybe they would have priced each other
out of business, maybe they would have cut corners in
a way that made it dangerous because of competition. But
(29:41):
forty years later, to still be blocking new airlines on
the grounds that they'd be too cheap, Like, that's regulatory capture.
And it resonated not just as an academic idea, but
as a popular idea. And it's interesting the timing of
this and the politics of this, because you know, the
(30:01):
sort of standard story of this is it happened in
the eighties under Ronald Reagan. Right, Ronald Reagan brought this
Conservative revolution where he and the federal government deregulated the economy.
But that's not true in the case of airlines. This
started in the seventies. Ted Kennedy was a big proponent
of deregulating the airlines, and Jimmy Carter, the Democratic president
(30:22):
in the late seventies, appointed this skeptic of regulation to
run the federal airline regulator. The CAAB was at the
Civilian Aviation Board. I believe that was this board that
did all the pricing and stuff. And in nineteen seventy eight,
Congress passed a law to deregulate the airlines, bipartisan. Carter
signed it into law. So now all of these rules
(30:46):
about who can fly wear and what they can charge
that have guided almost the entire industry but not Southwest,
are gone.
Speaker 1 (30:53):
And remember, at this time, people thought there was something
very broken about America and American capitalism because in the
nineteen seventies we're also seeing this sudden influx of Japanese cars,
which they feel are cheaper and built better, and there
was this overwhelming sense I mean, I guess President Carter
said it as this malaise like we're a country that
(31:13):
doesn't innovate that and part of the problem is the
government at this point.
Speaker 2 (31:17):
Yes, and so now airlines are deregulated, you would think
this would allow for a wave of innovation. Right Southwest
is like prime to You're told.
Speaker 1 (31:28):
The story like it's about to change everything.
Speaker 2 (31:31):
It's really interesting what happens because they can go wild,
but they don't, really, they don't. And I think it
really shows sort of the difference between their kind of
public persona the corporate brand on the one and their
behavior as a company on the other. Like think about it, right,
Like their reputation is the goofy mavericks, you know, the
(31:55):
flight attendants making dad jokes during the safety announcements, and
like there's this famous basically publicity stunt one time where
there was a trademark dispute with some other company plane
Smart pla any Smart, right, and they decide they're going
to settle it by Herbteller her having an arm wrestling
match with the guy from the other company. And they
did this like pro wrestling match, and Herb loses and
(32:18):
gets carried out of the room on a stretcher with
an IV bag of wild turkey, right, and he rides
a Harley Davidson and whatever. This is the brand, but
from a business standpoint, from an efficiency standpoint, Southwest is
nothing like that. They are, in fact, incredibly disciplined, and
so what you see is in the decades after deregulation.
(32:40):
It's the other airlines that are going wild, transforming themselves,
spending tons of money, going bankrupt, and Southwest is the
one that is cautious and disciplined. If they were like
Maverick outliers in any way, it was that it was
by being like cautious and efficient.
Speaker 1 (32:55):
Which is amazing, right, all that cigarettes and whiskey and
the moment, the moment the market goes free. What you
realize is maybe what I was talking about about what
Warren Buffett said, which is in a business like this,
the way you're going to win is to just be
ruthless about your bottom line. Yeah, about your costs. Yeah,
(33:16):
there's no advantage of one airline over another. You can
try all the discos you want, but it's essentially a
commodity product, and in a commodity product, you have to
watch every cent.
Speaker 2 (33:25):
Robert, I've prepared for you a list, a level list.
Five ways in which other airlines went wild and Southwest didn't.
We's still a few years after deregulation. Number five, super
Premium Comfort, economy class plus. So you know, right, so
there was first class, and there was whatever business class
and premium economy comfort plus more leg room, even more
(33:47):
leg room. And you know there is a logic to this, right,
which is, oh, different people will pay different prices. You know,
if people want to pay for more for more, let's
do that. Southwest is like, you know what, we got
one kind of seat. It's just a regular seat. We'll
fly you from one place to another in that seat.
Number four, selling tickets everywhere. Oh so, travel agents were
(34:11):
still big in the eighties, and then you know, in
the nineties, the Internet comes along and you get your
orbits and your expedias coming along, you know, online travel sites.
Speaker 1 (34:21):
I'm a kayak man.
Speaker 2 (34:23):
Southwest didn't care that much about travel agents and was
not even on orbits or Expedia or kayak actually until
like last year forever. Basically, I don't know if you
ever noticed that if you.
Speaker 1 (34:34):
Did a kayacation, they did a d you'd have to
do separate searches for Southwest.
Speaker 2 (34:37):
And so there's a straightforward reason for this. When you
buy a plane ticket through a travel agent or through
Expedia or kayak, the intermediary gets some of that money,
and Southwest wants to get all of that money, and
so they're just like, no, we're not going to sell
through those intermediaries.
Speaker 1 (34:53):
It's so funny, right, airlines are this glamour business, or
they were for decades, And like the airline CEOs at
Delta American, they don't want to be trying to save
what is half a percent one percent.
Speaker 2 (35:07):
They want to sell more tickets that not Southwest okay,
number three hubs hubs. So after deregulation, now remember, airlines
can fly wherever they want. They're not constrained by the government,
and they're like, we're gonna fly everywhere. And the way
we're going to do that is the hub and spoke model, Right,
So we're going to pick a city and tons of
(35:27):
flights are going to go in and out of that city,
and that way people can go wherever they want. They
just got to go through, you know, Atlanta if you're
flying Delta or Dallas if you're flying American Southwest. No, No,
Southwest is like, you know what, We're just going to
fly people from Phoenix to la and we're gonna fly
ten flights a day and it's going to be cheaper
and it's gonna be great. We're not in the business
(35:48):
of flying people wherever they want to go. We're in
the business of flying profitable routes where we can sell cheap,
reliable tickets.
Speaker 1 (35:55):
They've done the research, they know that people are paying
a lot of money. They know that they can undercut
the current fairs and that there will be enough people
to fill the place.
Speaker 2 (36:02):
Yes, and by the way, when they go into a
new city, they typically go into not the main airport.
Speaker 1 (36:09):
Right.
Speaker 2 (36:09):
Have you flown Southwest?
Speaker 1 (36:10):
Oh? Yes, I see a lot of the country in
strange small airports. Yeah.
Speaker 2 (36:15):
I used to fly San Diego to Oakland all the time,
So you know in San Francisco, San Francisco's the big airport.
Speaker 1 (36:20):
The Oakland to Burbank's that's San Francisco to La to
other people, that's to me, it is Oakland.
Speaker 2 (36:29):
And there's there is a reason for this, right, it's
those airports tend to have cheaper gates. Right, airlines have
to pay for gatespace Southwest. You know their passengers are
not flying onto Tokyo or whatever. If your American airlines
you've got to go to JFK or LAX or SFO Southwest.
Is that they're not in that business. And also those
(36:50):
airports tend to be less crowded, which makes it easier
to do a fast turn right, they get jammed up less.
Speaker 1 (36:55):
Oh interesting, right, because you can get right on the
right on the runway number two. Yes, that's where we are.
Speaker 2 (37:00):
Planes. After deregulation airlines like we can fly anywhere. And
for little routes, we're gonna get little planes, and for
medium sized routes, we're gonna get medium planes, and for
big routes, we're gonna get big planes. Southwest does not,
with one very brief exception, they have flown one kind
of plane the whole time. The Boeing seven thirty seven, which,
(37:22):
in keeping with the Southwest vibe, is not a tiny plane.
It's not a giant plane. It's just a plane.
Speaker 1 (37:27):
It's so funny, right, Boring is their competitive advantage.
Speaker 2 (37:32):
Yeah, and like just think about the efficiencies on this one, right,
I mean from the small ones in mgwoes you I
only got to print one seatback card. Yeah.
Speaker 1 (37:39):
The pilots can fly any plane, any plane.
Speaker 2 (37:41):
Yeah yeah, yeah, yeah, Well you need a pilot gets sick,
you know, is this pilot certified on this plane? Yes?
The answer is always yes for Southwest, even you know,
the things like getting the baggage out, all the logistics,
it's always the same if they need to swap in
a new plane, they always got the right plane. It
creates this incredible efficiency of standardization.
Speaker 1 (37:59):
This would be enough for any business. But you're telling
me there's one more. The number one reason.
Speaker 2 (38:04):
Yes, and it's kind of a meadow reason. It's kind
of it kind of flows through all of these. The
number one reason that Southwest was able to stay efficient
and profitable when all the other airlines went wild. They
never tried to be number one. Nice think about this.
I actually think this is really an important one and
useful to think about. Airlines tend to attract big ego CEOs, right,
(38:28):
I mean, most big company CEOs have big egos. But
the airline business, as we've been discussing, is a bad business.
You're not getting into it because you want to be rich.
You're getting into it because, like, you want to fly
the big planes. You want to beat everybody else. You
want to be the most glamorous airline in the sky.
Speaker 1 (38:43):
You're right, and they're kind of obsessed with this in
the same way that broadcast TV used to be. Like
ABC's number one this week, NBC's number one the next week,
and they want to be the number one airline in
the world. In fact, when they are, don't they put
that on their ads, like more people fly so and
so than any other airline.
Speaker 2 (38:57):
And you really see this, like when you read histories
of the period, they're like personally, the CEOs are personally
obsessed with beating their rival, and Southwest is not. There's
this really simple but great quote from Herbteller market share
has nothing to do with profitability.
Speaker 1 (39:18):
Oh no, it's so. It's so true.
Speaker 2 (39:21):
We don't want to fly more people than anybody else.
We just want to make more money than we spend
flying people.
Speaker 1 (39:28):
This is such a This whole story is like an
indictment of the way Americans do business, at least for
a certain period of time. Right that they want the regulations.
They don't want to compete. They want to be number one,
even if it means it costs their investors' money.
Speaker 2 (39:44):
But not Southwest. And this is why I think this
is at the core of Southwest success. Right Like every
other major airline that still exists that was around at
the regulation has gone bankrupt at least once, some more
than once. Southwest has not. They have been profitable every
(40:04):
year for fifty years, with the exception of the pandemic
of twenty twenty. But as we will discuss after the break,
a lot of those things from that list of what
made Southwest great, we're about to cause it some real trouble. Okay,
(40:46):
So we're back with the Southwest story. Southwest has this
amazing run, not just a year after year, but decade
after decade, and by the time Herbkellerer dies in twenty nineteen,
Southwest is carrying more passengers than any US airline, not
that they care, but that's amazing. They're big and successful.
(41:07):
But trouble is coming. They're about to hit this run
of trouble, and a lot of ways the same things
that made them successful for all those years are going
to be key causes of their of their problems. The
first thing that goes wrong, it starts in like late
twenty eighteen early twenty nineteen, when there are two separate
(41:29):
plane crashes. One is in Indonesia, one is in Ethiopia.
They're different airlines, but both are Boeing seven thirty sevens,
so it's a huge news deal. It was a big
deal because it was the newest version of the seven
thirty seven, the seven thirty seven Max, and in March
of twenty nineteen, the FAA grounds all seven thirty seven
(41:51):
Maxes in the US, So these are seven thirty sevens. Remember,
Southwest is the airline that only flies seven thirty sevens,
which has been great until now, but now, unsurprisingly they
have more seven thirty seven Maxes than any other airline
and they get hammered, right like, they now have to
(42:11):
cut back on their service. To be clear, they don't
have to shut down. They're not flying solely seven thirty
seven maxis, some of the older seven thirty sevens, but
they lose something like a billion dollars in revenue because
of this.
Speaker 1 (42:23):
This is the classic trade off between efficiency and resilience. Yeah, yeah, right,
And we saw this a lot in the pandemic with shipping.
You know, you've had a real stuff time delivery, a
really efficient supply chain, you were also the one most
at risk for something going wrong because you didn't have
a lot of other sources for your materials.
Speaker 2 (42:41):
Yes, so in this analogy, Southwest was super efficient, but
they had this huge risk just sitting there. So they
lose a billion revenue. They cost some of that back
from Boeing, but you know it's a blow, not a
not a death blow, but a blow. And then twenty twenty,
of course you get the pandemic all airlines only you're
since seventy three that Southwest didn't turn a profit. Bad,
(43:04):
but again not not devastating. It's after the pandemic that
things keep going wrong and get worse for Southwest. Twenty
twenty two, the big legacy airlines, Delta, United American, they
are doing great.
Speaker 1 (43:18):
There was this rebound travel, right, everybody had saved up
their money and they were like, I'm going to Europe.
I'm taking the big planes, I'm going stimulus checks.
Speaker 2 (43:26):
Government sends you a check, you just sign it over
to Delta and go to Europe. And you know, this
is a moment when a lot of people are feeling rich, right,
Like when you look at people's bank balances at this time,
it's wild like people in fact not richer. Yeah, and
so this is a moment when you will pay for
premium economy comfort plus, right, this is a moment when
you will fly to Europe. And all of those behaviors
(43:49):
are not Southwest behaviors. Right. This is not a simple plane.
This is not Phoenix to la this is not weird
little airports, right, So this is a moment when everybody
else is coming back and Southwest is kind of muddling along.
And then really the big blow. The big blow comes
in December of twenty twenty two, not long before Christmas,
(44:11):
this giant winter storm hits the East Coast and upper Midwest.
Airports shut down, lots of airlines cancel flights, you know,
up and down.
Speaker 1 (44:21):
Luckily, there's not news crews who would like to go
out to the airports and stand there for forty eight
hours straight.
Speaker 2 (44:27):
Luckily it's not Christmas time when there's no news, and
they're so happy to go to the airport with people
sleeping on.
Speaker 1 (44:33):
The ground, I could verify this was a big deal.
Speaker 2 (44:35):
This was a big deal. And for most airlines it's like, yes,
there's a storm, and now a day, two days later,
we're back up and running and everything's fine. But Southwest
at this moment has this epic, epic collapse. They cannot
get things going, and the storm has passed, but Southwest
is still largely grounded. They cancel more than sixteen thousand flights,
(45:00):
They leave something like two million people stranded, and when
they figure out what went wrong, it turns out it
was this one internal software system that was supposed to
reassign Southwest crew members when a flight got canceled or
rescheduled and it just completely failed and they couldn't get
it back up. So think of this, right, like the
(45:21):
company doesn't even know where their flight crews are, and
the crews themselves, like they want to work, they want
to get things going in Yeah, the crews themselves have
to actually like call on the phone like ordinary schmuck
passengers to find out where to go to work. They
have to wait, you know, hours on hold. When they
get through. People don't even know because like some poor
(45:41):
person at headquarters is trying to figure all this out
on a piece of paper or something. It's a disaster
for Southwest?
Speaker 1 (45:47):
Was it because of Southwest's cost cutting? Was this one
of the ways they cheaped out by having like a
nineteen seventies internal system.
Speaker 2 (45:54):
So the CEO, perhaps predictably, said no, no, this was
just like an unfortunate you know actually I think used
the phrase perfect storm. But the union leaders at the company,
the people you know who had been negotiating with the
CEO for years, said no, no, we have been telling
for years that this system is out of date and
it's going to fail, So maybe it was because they
(46:16):
were too cheap. You know what is efficient and what
is too cheap. In any case, this is a disaster
for Southwest right, days and days of news coverage. So
Southwest winds up paying something like seven hundred and fifty
million dollars in reimbursements and penalties. And now things are
bad for the company right. Their profits are stagnant, even
(46:39):
as the industry is coming back. Their stock price falls
by more than fifty percent between twenty twenty one and
twenty twenty three. By twenty twenty four, the stock is
still below where it was before the pandemic.
Speaker 1 (46:52):
I feel like if Herb kellerher were still around, he
would say go with the plan, like this is what
our company does. Stay the course and yes there will
be disasters that happen, but like we have the better
business model. Go go go.
Speaker 2 (47:09):
I mean, it's interesting to think about him having died
like just before Southwest ran into so much trouble. Is
that correlated? I don't know. In any case, that is
basically what Southwest was trying to do, just to keep
being Southwest. But if you're a publicly traded company with
a still a pretty good brand and your stock price
is way down.
Speaker 1 (47:30):
What happens to you You get a call from Wall Street.
Speaker 2 (47:33):
You get a call from Wall Street. Right, And in
this case, it was an activist hedge fund called Elliot
that bought something like ten percent, more than ten percent
of the company's stock. And what Elliott does is this
kind of thing. They buy up stock and try and
turn companies around.
Speaker 1 (47:50):
Yeah, you accumulate until you have to announce how much
you own of the company, and then you write a
strongly worded letter to the.
Speaker 2 (47:56):
Board to the board. So in its letter to the
board in twenty twenty four, Elliott writes, quote, while Southwest
has a proud history, that history is not an argument
for supporting poor leadership and sticking with the strategy that
no longer succeeds in the mid or an airline industry.
Speaker 1 (48:13):
This is what they do, and they're hoping, they're taking
the bat that they can make dramatic changes, maybe not
long term changes, but maybe some short term changes to
increase the value of the company and then get out
of the business.
Speaker 2 (48:25):
And they're saying, like their idea is, Southwest, you should
become more like everybody else. Right, That is the subtext
of a strategy that no longer succeeds in the modern
airline industry. Oh and also they wanted to fire the CEO,
of course, because they always wanted to fire the CEO.
But what's interesting to me is that other part, right,
their strategy no longer succeeds in the modern airline industry
because in a lot of ways, if you think about
(48:47):
Southwest at the time of deregulation and the rest of
the industry or in the eighties when they're all going
wild like, in some ways, it's the rest of the
industry that has become more like Southwest. Right. What made
Southwest different was really cheap prices, right, But now there
are ultra low cost carriers with really cheap prices. They
are also you can fly basic economy on Delta.
Speaker 1 (49:10):
As I do every time. I'm wearing extra sweaters because
I can't fit into my luggage and sitting.
Speaker 2 (49:15):
Across from you in the road just one from the
back of the plane, you pid less close to the bathroom,
you know. Even in terms of vibes, right, think about
vibes when Southwest launch, they were like the friendly hey
where your pal airline and the others are like the
more formal kind of corporate airlines now, like every company
is your pal, right, yes, And when you fly now, right,
when you fly now and you see college students flying
(49:36):
for the weekend, you see ordinary people who are not
business people flying. When you see people flying who aren't rich, frankly,
who aren't you know, upper middle class, like that is Southwest.
Speaker 1 (49:50):
This is fascinating. So I'm right in a way that's
sticking with the plan is the most efficient way to go.
But what I didn't include is that other airlines are
also doing the same plan. Your competitive advantage was that
you were cheaper and more nimble, able to make these
decisions better than other airlines.
Speaker 2 (50:09):
And once everyone does it, what do you got? So, so,
what has Southwest done under this pressure? Well, they didn't
fire the CEO, but they are changing, right, There were
still those things about Southwest that were different. You know,
they still had one kind of seat. You still didn't
get a seat assignment. No longer. Starting on January twenty seventh,
(50:33):
twenty twenty six, Southwest passengers will have the choice of standard,
Preferred or extra legroom.
Speaker 1 (50:39):
I'm a little sad. Yeah, end of an era, I
mean end of an era. Yeah, it was a pain
in the ass era. By end of an era, I
mean it was a good run. It was a great
rout for the airline industry. Like I'd take forty eight
years for.
Speaker 2 (50:53):
The first time in the history of Southwest Everybody's gonna
buy an assigned seat. Not me.
Speaker 1 (51:00):
I'm going Herb Kellerherst style. I'm gonna just walk on
the plane and sit wherever I want to.
Speaker 3 (51:06):
I love it.
Speaker 2 (51:09):
That's the end of the show. We'll put a list
of sources in the show notts. That's the end of
the show.
Speaker 1 (51:14):
Is it show notts in the airline?
Speaker 2 (51:18):
That's the end of the show. We'll put a list
of the sources in the show notes. I do want
to mention one book that I found particularly useful. It's
called Hard Landing. It's by Thomas Petsinger, Junior, and it's
an old book. It's the story of what happened right
around deregulation, kind of before, during, and after, and it's
a very good nonfiction book.
Speaker 1 (51:37):
Our showrunner is Ryan Dilly, our producer is Gabriel Hunter Chang.
Speaker 2 (51:41):
And our engineer is Sarah Bruguier. I'm Jacob Goldstein, I'm
Robert Smith.
Speaker 1 (51:45):
We'll be back next week. With another episode of Business History,
a show about the history of business.
Pushkin too quick. No, it's perfect push kid stup.
Speaker 2 (00:21):
You got it, Robert Smith, I'm gonna give you a
classic business origin story.
Speaker 1 (00:40):
Do be a few of Jacob and just set the scene.
I want atmospherics.
Speaker 2 (00:45):
It's nineteen sixty six San Antonio, Texas and a lawyer
named Herb tellerher is drinking wild turkey bourbon and smoking cigarettes.
Speaker 1 (00:55):
As everyone did in nineteen sixty six at the Sane
Anthony Club, great bar name in Texas.
Speaker 2 (01:01):
And so Herb. He's from New Jersey. His dad died
when he was twelve. He worked at the Campbell soup
factory in high school and college in the summers, grows
up to be a lawyer, eventually moves to Texas, and
on this particular night, he's drinking with a client of
his named Roland King, and Rowin's a Harvard MBA amateur
pilot and in fact, right around this time, Herb is
(01:25):
helping Rolin wind down this failed charter air business he'd
had called Wild Goose Flying Service basically like like flew
rich guys to go hunt in the in Texas, in
the country whatever.
Speaker 1 (01:37):
So far as the most Texas story of ever Verry
Texas and Rollin says to Herb something like, you know, look,
I know you're working on this failed air charter business
that I have, but I think you and me we
should actually start a real airline. And Rollin takes a
cocktail napkin there at the bar, and he draws a triangle.
(01:57):
The top he reads Dallas, the bottom, left, he rights
San Antonio.
Speaker 2 (02:03):
What's he right on the bottom right?
Speaker 1 (02:05):
Houston, Texas, Houston right?
Speaker 2 (02:07):
Good. You know, Rollin says, Look, these cities are hundreds
of miles away from me each other. Takes a long
time to drive from one to the other hours and
you know, at the time you could fly between them,
but basically nobody did. It was inconvenient, It was really expensive.
Speaker 1 (02:22):
Flying is what you did when you need to go
New York.
Speaker 2 (02:24):
To LA on business. Yeah, yeah, exactly. And so Herbs like,
this is a crazy idea, and I want to do it.
Turns out to Nepkin might be apocryphal, but the triangle
is real. Those cities are in fact in a triangle.
And on the strength of the triangle and the bourbon
and the cigarettes, they launched Southwest. And I'm going to
(02:45):
argue in the show today that Southwest is the most
successful airline in the history of America.
Speaker 1 (02:53):
Let's do it. I'm Jacob Goldstein and I'm Robert Smith.
And this is Business History, a show about the history
of business. So it's called Business History.
Speaker 2 (03:02):
Today on the show, we're talking about Southwest, which is scrappy,
which is fun, and which completely changed what it means
to fly in America. Southwest eventually got into trouble, but
it had this decade's long run of incredible consistent profitability.
Speaker 1 (03:17):
That may sound simple, right, A business is profitable, But
in the airline industry, this is amazing. The airline industry
is notoriously one of the worst businesses in the world.
If you think about it. All those great airlines say
their names on buildings have disappeared, right, twa Eastern PanAm
Aloha went to Hawaii, right, And even the big ones
(03:40):
that are still around your Delta's, United's Americans, they've declared
bankruptcy at least once. At least once. It's just a
regular thing. The investor Warren Buffett notoriously said, I.
Speaker 2 (03:52):
Don't say the investor Warren Buffett.
Speaker 1 (03:53):
People know who Warren Buffett is, the singer Beyonce.
Speaker 2 (03:56):
United an airline.
Speaker 1 (04:01):
Warren Buffett always talked about how much he hated investing
in the airline industry, even though he said he was
somewhat addicted to it. He famously said, if a far
sighted capitalist had been President Kitty Hawk for the very
first airplane flight, he would have done his successor is
a huge favor by shooting Orville down.
Speaker 2 (04:19):
It's rough. It's not Uncle Warren's kind of a hardness.
Speaker 1 (04:24):
He's like no airplines.
Speaker 2 (04:25):
Ever, It's okay, let's do the Southwest story, the Triangle,
the Triangle. We're going to start with the Triangle. One
obvious but very important fact about the Triangle. All three
of those cities, Dallas, San Antonio, Houston, they're all in Texas.
And this is really important in nineteen sixty six, the
late sixties when they're coming up with this idea because
(04:45):
at the time, interstate air travel was regulated by the
federal government. Right, if you want to fly from state
to state, the federal government is going to have a
lot to say about it. And so herbin Rolins figure,
you know what, we're not gonna have to deal with that.
We're just gonna stay inside of Texas.
Speaker 1 (05:01):
And they've started in this place that it's actually pretty
rare in the United States to have a big state
with three population centers that far apart.
Speaker 2 (05:09):
It's optimal. Yeah, And the way airline regulation worked at
that time in the late sixties feels wild, feels unimaginable today,
Like the federal government decided which airlines could fly which routes.
And by the way, at this time, they basically kept
saying no when people asked to fly new routes, like no, no,
we're not gonna let you do that. We're not gonna
(05:29):
let any more competition there.
Speaker 1 (05:31):
And again, you're a major airline. You want to fly
from Denver to Seattle and you go to Washington, DC,
and you're like, I think this might be a good route, Like.
Speaker 2 (05:37):
No, we've decided there's enough competition there. We don't think
there should be more. And the airlines who do fly there,
the government tells them down to the penny what they
can charge for a ticket.
Speaker 1 (05:48):
This is amazing to me. It's like they're treading airlines.
And maybe they thought of it this way as a
public utility, like this power company. Yeah, this thing that well,
everybody needs it. It's important to our national security and such,
So we're going to regulate this down to the penny
you can charge.
Speaker 2 (06:05):
And so this regulatory regime had some really striking effects. Right,
So the airlines are not competing on price, the government's
telling them the price, and so they wind up competing
on service. When people talk about how great air travel
used to be, this is the era they're talking about,
you know, and like it does seem like it was cool.
(06:26):
Like American airlines put a piano bar in first class,
Like there was a piano player there on the plane.
Speaker 1 (06:32):
Oh so good, and you could like mingle and like smoke.
You could smoke and have a Martiniz.
Speaker 2 (06:39):
Even in coach. Coach was good. Like pan Am would
roll a cart down the aisle with a with a
roast on it and they'd like carve your slice of
beef for you. Seats were wider, there was more leg room.
But like this came at a price, right, and not
just a metaphorical price, an actual dollars price. So here's
here's one example I found in nineteen seventy a round
(06:59):
trip ticket from New York to La cost two hundred and.
Speaker 1 (07:03):
Eighty four dollars.
Speaker 2 (07:04):
Robert Smith. If you adjust that for inflation, nineteen seventy,
two hundred and eighty four dollars. I got the BLSCPI
inflation calculator right here.
Speaker 1 (07:13):
Nine hundred nine fifty no more.
Speaker 2 (07:16):
Two hundred and eighty four dollars in nineteen seventy is
the same as two thousand, four hundred and thirty four dollars.
Speaker 1 (07:23):
I'm not paying forty five.
Speaker 2 (07:25):
I'm not paying one thousand, four hundred dollars. That's what
it costs a fly around trip New York, LA.
Speaker 1 (07:31):
So it was like first class is today. But this
is like all the tickets.
Speaker 2 (07:35):
Yes, and so to anyone complaining about how much better
air travel used to be, I say, just fly for
his class, because it's exactly the same. It's still rad Yeah,
apparently you walk past it at those big seats do
look cool. So you know, when businesses aren't competing on price,
this is what happens, right, You get very nice things
and they cost a lot of money. Right. This is
(07:57):
the world Herb and Rolin are getting into with Southwest,
and really it ends up being mostly Herb. Herb is
the key figure at the airline for a long time.
He trains his personal savings to launch the airline. He's
still working his day job as a lawyer, you know,
they do still have to get regulatory approval, not from
the federal government but from the state of Texas.
Speaker 1 (08:15):
Freedom loving Texas, Freedom loving Texas.
Speaker 2 (08:17):
They get a certificate saying they can go into business
serve in that triangle, and then the next day, the
very next day, three legacy airlines that flew those triangle
routes already sued to prevent Southwest from flying.
Speaker 1 (08:30):
Saying what we don't want competitors, saying we don't need
more airlines, saying the market does not need more airlines,
and they immediately.
Speaker 2 (08:39):
Got an injunction, even in Texas, even in Texas, Land
of the Free, remember the Almo whatever.
Speaker 1 (08:45):
It's so funny to think of, right, this is the
way I think of the UK or Europe working, Right.
I forget that in the United States of America, you
would just be like, I don't feel like having a
new competitor.
Speaker 2 (08:55):
Yeah, I mean, well, if you think about like mid
century America, right, which this still is, right, Like, you
have this history where in the thirties, if we go
back a few decades, right, you have the depression, and
then you have the New Deal, which is this moment
when the government really steps in to regulate the economy.
Banks were much more highly regulated, trucking was much more
highly regulated.
Speaker 1 (09:15):
Yeah, and there was a distrust of business even at
this point, far from the depression. Yeah.
Speaker 2 (09:19):
So that's the context, and that's why Southwest has to
fight this legal battle just to fly, and it actually
takes a year. For years, Southwest is blocked from flying.
They're spending all their capital on legal fees. And after
a while, the board says this, enough, we're just losing
(09:40):
money in court. We're not a real company. Let's give up.
And Herb says, look, I'll represent the company for free.
There's more legal fees. I'll pay him out of my
own pocket. And he keeps fighting.
Speaker 1 (09:51):
Was he stubborn or was he like this is an
actual business opportunity. I'm one hundred percent convinced of it.
Speaker 2 (09:56):
I think he was stubborn.
Speaker 1 (09:57):
Okay, went through a lot of cigarettes.
Speaker 2 (09:59):
So many cerets that'll lower it up like half of
their startup capital. But he's doing well in court, he's
winning in court. Eventually, by June of nineteen seventy one,
so this is years into it, things are looking good.
Southwest schedules its first flights for June eighteenth and on
the sixteenth, the rival airlines get wait for it, another
(10:21):
injunction to block Southwest, and Herb goes to Austin where
the State Supreme Court is, pulls an all nighter in
the law library, goes before a special session of the
State Supreme Court on the seventeenth and gets the court
to block the injunction. And he picks up the phone
and he calls this guy, Lamar Mews, who he's hired to,
you know, run operations at Southwest. Tell him the good news, says,
(10:43):
you know, we're good to go, and Lamar's like, are
we you know, like I feel like at this point,
surely there's gonna be another injunction and tomorrow we'll be
about to go and the Sheriff's going to show up
and say you can't fly. What do I do if
that happens? And Herb says, if that happens, and this
part's a quote, he says, roll right over the son
(11:05):
of a bitch and leave our tire tracks on his uniform. Oh, Herb,
So the next day come and in fact Southwest does
not have to drive over the sheriff. There were no
more injunctions, and they started flying, offering cheaper fares that
were like twenty percent lower than their competitors, and basically
nobody cared.
Speaker 1 (11:24):
So I know, back in these days, if you were flying,
you were probably a business person and you probably had
your company pay for it, your secretary book the tickets.
You're just like, I gotta get from San Antonio to Houston.
I got to be there by nine to fifteen.
Speaker 2 (11:39):
Yeah, exactly, Like nobody in that universe has an incentive
to save twenty percent to fly on some airline nobody's
ever heard of, Like, why would.
Speaker 3 (11:47):
You do that?
Speaker 2 (11:48):
And so Southwest is doing badly, and there's this amazing
moment a few months later where Herb's sister in law
calls them and is like, Herb, I got to tell
you I just flew on Southwest and it was the
most amazing flight, incredible service. And HER's like, oh, that's
so good to hear, and his sister in law is like, yeah,
on the plane, it was just me, the pilots and
(12:08):
the flight attendants. I was the only passenger.
Speaker 1 (12:11):
It was incredible crushing.
Speaker 2 (12:13):
But the way they turn it around is actually interesting
and delightful. And there's there's really two key things they
figure out. Two key things they do to turn it around.
The first one happens just later that year, and it's
that same guy, Lamar mused, the guy Keller her hired
to run operations. He's thinking about the fact that every
night Southwest flies an empty plane back from San Antonio
(12:36):
to Dallas to get a maintenance that's where their maintenance
center is, and it's like too late for businessmen. Nobody's
gonna fly at that point. They'll just stay in a
hotel on the company dime. Right, But Lamar thinks, like, well,
the plane's flying anyway, we gotta have a pilot on it.
What if we sell tickets really cheap and just see
if anybody buys them. So they offer tickets for ten bucks.
Speaker 1 (12:57):
Oh crazy late night fair.
Speaker 2 (12:58):
Right, although you know, adjusted for inflation, that's like eighty
but at that time, in that regulated expensive world, it
was crazy cheap. It was less than half of what
tickets usually cost. And they do like one radio app
or something. It's just like a cheap experiment. And the
first night they have one of these flights, they are swamped.
(13:19):
People are lined up to get on it, and crucially, crucially,
the people who are there look nothing like the people
who usually fly. Remember this is like the carved roast businessman.
I want to say business person, I'm the reallyest businessman. Sure.
Era of flying flying is you know, refined expensive. The
majority of Americans at this point have never been on
(13:42):
a plane nineteen seventy one. And so with this new
ten dollars late night fair, Southwest is not playing that game, right, Like,
they're not competing with the twenty six dollars midday businessman fair.
It's a whole different product almost.
Speaker 1 (13:57):
It's a whole different customer base. These are people who
maybe they would have driven a few hours, taken the boss,
you know, the greyhound, and they see a price that's
like close ish to what they might have paid anyway,
and they're like, I'm getting on a plane.
Speaker 2 (14:12):
Yeah, it's positive some right, Like they're not cannibalizing some
other fair. They're bringing new people into flying. And so
quickly they're like, oh, this is working. And they create
two fair classes, the regular weekday business person fair and
this cheap nights and weekends fair for the masses, and
(14:34):
it works. They have competitors, right, and because it's Texas,
it's easier for people to change their prices, and so
one of the old school competitors Branif. Remember bran If
really they were an airline. They cut their regular daytime
fare to thirteen dollars, half of what it had been before.
It was money loser for them. But like Classic, they're
(14:54):
a big airline. They can lose money on this little
fair and they figure, you know, Classic, big player move
will just bleed Southwest dry. And so Southwest has this,
I have to say, delightful response. When Branif does that,
they say, okay, we'll give you a choice, public customer.
You can pay thirteen dollars to fly midday, or you
(15:15):
can pay the usual twenty six dollars fare and get
the flight and a fifth of Shivus regal fifth of whiskey.
Speaker 1 (15:21):
Well you just get that when you get on the plane.
Speaker 2 (15:23):
Yes, yes, and a glass to come to the I think,
isn't that when they comes to the little valure pop? Yeah?
Speaker 1 (15:30):
I mean it's only an hour flight. What could go wrong?
Speaker 2 (15:32):
The people buying these tickets, these are the mid day
weekday tickets. They're not paying right, the company is paying,
and so why wouldn't they be like, yeah, I'm paying
twenty six dollars for my ticket, company, please pay me
back and then they get the whiskey.
Speaker 1 (15:50):
Are you telling me they didn't report the whiskey to
their employer. They just took it home. Seems plausible, Yes,
they just took it home. I think it meets the
deminimus exemption. And so there's this moment when Southwest is
the biggest Shivus regal distributor in Texas. So what I
love about this story so far is Southwest And maybe
this is just you know, Herb's craziness really is that
(16:11):
they're really innovating and responding to what's going on. They're
able to change on a dime, really and come up
with these ideas in this staid industry where a sort
of by government definition, they didn't want anything to change.
Speaker 2 (16:26):
Yes, And there's a weird way in which that regulation
is like their friend, right, you know, like the Bezos line,
your margin is my opportunity. It's sort of that vibe. Yeah, yeah, yeah,
So I do want to say one more thing about
sort of the vibe and the shivis regal and the
whole kind of Southwest positioning of itself in the marketplace
on what their brand was. Their brand was like we
(16:48):
are the wild Mavericks, we love whiskey. And there was
another piece of this that has aged less well, which
is the flight attendant uniforms that they came up with,
and they were these like extremely extremely short shorts.
Speaker 1 (17:02):
And you've shown me a picture of this. We've all
seen the short skirts that stewardesses would wear at airlines.
These are way shorter.
Speaker 2 (17:10):
They are way shorter. So this was an era where
there was like rampant sexism toward flight attendants in the
airline industry, and Southwest was definitely a part of that. So, okay,
it's nineteen seventy two, all right. Southwest has been up
and running for about a year. Those off peak fares
are popular, but the company is still losing money. Their
daytime flights are still running largely empty. Businessmen are still
(17:33):
flying Brandish or whatever. And by the spring of nineteen
seventy two, companies, I guess, checking account whatever, their current
account bank account is down to one hundred and forty
three dollars, not one hundred and forty three. One hundred
and forty three dollars. They're about to run out of.
Speaker 1 (17:47):
Money in a warehouse full of whiskey. Don't get me right, whiskey.
Speaker 2 (17:50):
They got the whisks.
Speaker 1 (17:51):
They got the short shorts of the whiskey. But one
hundred and forty three.
Speaker 2 (17:53):
Dollars you don't have to have airplanes. They have four airplanes, right,
that's their big asset. And so they decide they're going
to sell one of the planes. That's the way you
get money, ouch ouch, Right, So it means they're gonna
have to cut back on flights. They're gonna have to
lay people off.
Speaker 1 (18:06):
And this, by the way, is the classic beginning of
a death spiral, when you start to cut essential parts
of your business. Yeah, and that means you make less money,
which means you have to sell another plane. And this
is like the way fewer flights means it's less convenient
to fly them.
Speaker 2 (18:21):
Right. So there's this guy, Bill Franklin, who's in charge
of ground operations, and he says, okay, we just went
from four planes to three. I know a way we
can keep the same number of flights, same staff. We
just have to keep the planes we have in the
air more often. And the way to do that is
spend less time on the ground. And I think it
(18:45):
was actually really hard for me to find this number.
But my sense is that the turnaround time at the
gate for Southwest at this point was something like twenty five.
Speaker 1 (18:55):
Minutes, which is amazing by today's standards. But they were
small planes, right, Yeah, So just.
Speaker 2 (18:59):
To be clear what this means, Right, the plane comes
into the gate, passengers get off, the plane gets cleaned,
other passengers get on, whatever has to happen outside the plane, fuel, luggage, luggage, Yeah,
push back from the gate. All of that twenty five minutes.
And Bill Franklin is like, okay, we can keep our
current schedule with three planes instead of four. We just
(19:20):
have to go from twenty five minutes to ten.
Speaker 1 (19:24):
It does not seem possible. What they said to him.
Speaker 2 (19:26):
That is what they said to Bill Franklin. And here's
Bill Franklin's quote when they said it. He said, we're
gonna do ten minute turns with this airplane, and if
you can't do a ten minute turn, you're gonna get fired,
and we'll bring somebody else in. And if he can't
do a ten minute turn, we'll fire him to and
we'll just keep firing until we can find someone who
can do it.
Speaker 1 (19:44):
I feel like, you know how now they say stay
seated until we're at the gate. I feel like at
this point at Southwest, they're like, as soon as the
plane touches down, they're like, take get up, get up,
get your stuff.
Speaker 2 (19:53):
That is the bot, that is the vibe. So you
have like, you know, people from the from the back
office helping out. You have flight attendants cleaning the plane
from the back as the passengers they're getting off. Is
it a deep clean I am guessing not. I'm guessing
they were not worried about how clean the plane was.
That's not why you were flying Southwest for ten dollars,
you know. Then you have the gate crew like hustle
(20:14):
in the passengers on for the next flight. And then
once everybody's on the plane, just in the door, they
close the door and the pilot pushes back from the gay.
Are they waiting for passengers to sit down? No, they
are not. If they didn't make that rule until the eighties,
I don't know, almost because of Southwest, but maybe by
the way I just want it. There's a very very
(20:35):
interesting thing to talk about right here about the getting
on and everybody standing up. When you fly Southwest. As
you may know, if you have flown spy asked, you
don't reserve a specific seat. You just get on the
plane and you sit in the order that you've arrived. Yes,
the person who gets their first gets to get on first.
Person who gets their last gets to get on last.
There is no seat number, and even when you get there,
(20:57):
they don't give you a seat number. And much like
the subway, you if you see an open seat, you
hustle for it. Well, so let's talk about this, right,
Let's talk about what's the fastest way to get on
a plane. This, on one level, doesn't feel like the fastest.
I feel like I know hundred slowest ways to get
on the plane. Every time I'm lining up, I'm like,
really really parents with yers, I know, and then it's
(21:21):
just like are you going from the back, you're going
from the front, or you're going So people have studied this.
There is a literature of lane boarding back to front,
one of the classics. Quite slow in fact, because there's
a lot of waiting. There's a lot of standing and waiting.
People have come up with other ways, like window middle aisle.
There's actually an astrophysicist who came up with this very
(21:43):
elaborate system of like alternating rows and I think window
middle aisle. But a problem with window middle aisle is
you don't get on with like your spouse or your
kid you're sitting.
Speaker 1 (21:52):
Next to, and you have to explain the whole thing,
and then you're just fighting with someone.
Speaker 2 (21:56):
Ending on the study this get on and sit down
wherever is either the fastest or the fastest among any
reasonable way to get on a plane. It is shockingly fast.
Speaker 1 (22:06):
Well, I have read that when computers look at when
people leave something like leave a sports stadium, it is
remarkably efficient because everyone is optimized for finding the best
way out and the shortest way out. And so you
have sixty thousand people all simultaneously optimizing. And you can
understand that.
Speaker 2 (22:27):
I know, so Southwest didn't need an astrophysicist to figure
out that sit down wherever you are is fast. Right,
there's this sense of like, oh, I'd better sit out.
It's like the musical chairs version of getting out of plane. Right.
They just did it, and it helped them with their
super fast turns. You know, they don't hit ten minutes
every time. It's sort of the dream, but they hit
it sometimes and when they miss, it's still a lot
(22:48):
faster than twenty five minute. Right, And you know, remember
these plays are going back and forth back and forth
on these short hops all day long. So saving a
few minutes on every turn is huge. This means they
have a very large cost advantage relative to the other airlines. Right,
they've just reduced their fleet by twenty five percent. Right,
they've gone from four to three, and they can still
(23:11):
do the same number of flights, right, same amount of revenue,
less capital costs. And the next year, nineteen seventy three,
with all these changes, Southwest turns a profit.
Speaker 1 (23:23):
Sort of amazing from what we know about the nineteen seventies,
I mean, I mean seriously, right, we have an oil
embargo in nineteen seventy three, We've got stagflation, huge inflation
later in the seventies, Like this is not an era
when every company is.
Speaker 2 (23:41):
Probably you don't want to be starting an airline.
Speaker 1 (23:43):
I mean, there is a theory that starting and growing
during hard times makes makes you make better choices.
Speaker 2 (23:50):
Well, it is the case that Southwest from nineteen seventy
three on is going to be profitable every year for
the next forty seven years.
Speaker 1 (24:00):
Stunning Well, because think of the oil prices during this time,
think of the inflation during this time. You know, problems
with unions. You're thinking about financial crashes recessions.
Speaker 3 (24:10):
Yeah.
Speaker 2 (24:10):
Yeah, So we're going to take a break and when
we come back, we're going to do Southwest big expansion, right,
and Southwest is gonna conquer America from.
Speaker 3 (24:20):
Texas to the country.
Speaker 2 (24:47):
All right, Robert, we're back with more Southwest. It's the
mid seventies. Southwest is there in Texas starting to make
a profit. These airlines that are flying cheap and making
a profit are weird outliers, right, because remember any airline
that's flying an interstate route is forbidden by law from
(25:08):
lowering its prices, And like, why would you want to
lower your price? This is right, Like you're a business.
You just want to go to the government and say, hey,
our costs have gone up, can we charge more in
the government's Like yeah, people.
Speaker 1 (25:18):
Talk a lot about the competitive spirit, but like most people,
if you've got a pretty sweet gig and you own
an airline, right, you run an airline, life is good,
nice life.
Speaker 2 (25:29):
Yeah, and you're not like a crazy billionaire, but like
you're rich, you have a pleasant life.
Speaker 1 (25:33):
You get to wear a uniform sometimes whatever, you get
to right wherever you want.
Speaker 2 (25:37):
So that's the way it worked for a long time.
But then around this time things start changing for a
few reasons. One reason is the seven forty seven, the
Boeing seven forty seven, the wide body, and of course
the airlines love it right because it's the big, shiny
new thing. You gotta have the big plane.
Speaker 1 (25:55):
With a little hump on the top. Yeah, I love that,
love that.
Speaker 2 (25:58):
More wild over the top services you can provide. Air
Canada puts a disco in its seven forty seven almost
two on the nose for the seventies airlines.
Speaker 1 (26:08):
So good disco ball, you lower the lights and then
people just gook yah.
Speaker 2 (26:12):
Smoking is what I go to for the seventies. So
the airlines love seven forty sevens, in fact too much.
They buy too many of them. And so now there
is a glot of seats flying around America. Airlines are
flying all these planes largely empty. And then they notice
over there, oh look Southwest. Southwest is making a profit
by selling just cheap tickets, no disco. So the big
(26:33):
national airlines start going to the government asking to do
this unheard of thing, cut prices, and for the first
time in like decades, the government says, well, okay, you
can cut your prices, and surprise when the airlines cut
their prices a lot, they get more customers. Yeah, people
fly more. Those empty seats start to fill up. But
(26:54):
there's another kind of big sweep of history thing happening,
and that is a change in the way people think
about business and government and regulation. And you know, we
talked before about this kind of mid century world where
the government was just much more involved in the economy
in lots of ways and how that worked for people.
(27:16):
But you know, now we're in the seventies, and the
seventies are a bad economic time, right. You have kind
of the rust belt is starting, and inflation is coming,
and the oil crisis is there.
Speaker 1 (27:30):
And a huge distinction because when an economy is growing,
you can actually be a kind of a bad business,
you know, with heavy regulations. And every year, oh you
grow four or five percent. Everybody's happy, the government's happy,
you're happy, your customers are happy. But when an economy
starts to shrink, this is where the problems happened because
you're not used to it, and.
Speaker 2 (27:50):
People start to rethink regulation. It's happening kind of popularly
and academically scholarly, right. So the scholarly piece comes out
of the University of Chicago. Of course, this economist named
George Stigler. In the early seventies, actually right around the
time Southwest is just getting its first flight off the ground,
Stigler publishes a paper called A Theory of Economic Regulation,
(28:14):
winds up being a hugely influential paper helps him get
the Nobel Prize later on, and he lays out the
key idea on the first page he writes this. He writes,
as a rule, regulation is acquired by the industry and
is designed and operated primarily for its benefit.
Speaker 1 (28:31):
So what he's saying is you like to think government
regulation is cracking down on those evil businesses in order
to protect the guys. Yeah, yeah, yeah, But in fact,
what he's saying is that industries, especially incumbent players, want
the regulation to keep out scrappy independence trying to come
up and take your business.
Speaker 2 (28:52):
Yes, he is saying regulation exists for the benefit of
the regulated businesses. And there is an economic term associated
with this. It's regulatory capture, which means the regulators are
captured by the industry they're regulating.
Speaker 1 (29:08):
So the FAA at the time might include people who
worked at all the big airlines, and after you work
at the FAA, where are you going to get a job? Yes, Oh,
I don't know. How about American airlines?
Speaker 2 (29:18):
Yeah, yes, And in Stigler's theory, and I think it's
fair to say, in fact, they were captured by the
airlines they were regulating. And you know, there's a case
that when the airlines were just getting going back in
the thirties, maybe it was reasonable for the government to
regulate them. Right, maybe they would have priced each other
out of business, maybe they would have cut corners in
a way that made it dangerous because of competition. But
(29:41):
forty years later, to still be blocking new airlines on
the grounds that they'd be too cheap, Like, that's regulatory capture.
And it resonated not just as an academic idea, but
as a popular idea. And it's interesting the timing of
this and the politics of this, because you know, the
(30:01):
sort of standard story of this is it happened in
the eighties under Ronald Reagan. Right, Ronald Reagan brought this
Conservative revolution where he and the federal government deregulated the economy.
But that's not true in the case of airlines. This
started in the seventies. Ted Kennedy was a big proponent
of deregulating the airlines, and Jimmy Carter, the Democratic president
(30:22):
in the late seventies, appointed this skeptic of regulation to
run the federal airline regulator. The CAAB was at the
Civilian Aviation Board. I believe that was this board that
did all the pricing and stuff. And in nineteen seventy eight,
Congress passed a law to deregulate the airlines, bipartisan. Carter
signed it into law. So now all of these rules
(30:46):
about who can fly wear and what they can charge
that have guided almost the entire industry but not Southwest,
are gone.
Speaker 1 (30:53):
And remember, at this time, people thought there was something
very broken about America and American capitalism because in the
nineteen seventies we're also seeing this sudden influx of Japanese cars,
which they feel are cheaper and built better, and there
was this overwhelming sense I mean, I guess President Carter
said it as this malaise like we're a country that
(31:13):
doesn't innovate that and part of the problem is the
government at this point.
Speaker 2 (31:17):
Yes, and so now airlines are deregulated, you would think
this would allow for a wave of innovation. Right Southwest
is like prime to You're told.
Speaker 1 (31:28):
The story like it's about to change everything.
Speaker 2 (31:31):
It's really interesting what happens because they can go wild,
but they don't, really, they don't. And I think it
really shows sort of the difference between their kind of
public persona the corporate brand on the one and their
behavior as a company on the other. Like think about it, right,
Like their reputation is the goofy mavericks, you know, the
(31:55):
flight attendants making dad jokes during the safety announcements, and
like there's this famous basically publicity stunt one time where
there was a trademark dispute with some other company plane
Smart pla any Smart, right, and they decide they're going
to settle it by Herbteller her having an arm wrestling
match with the guy from the other company. And they
did this like pro wrestling match, and Herb loses and
(32:18):
gets carried out of the room on a stretcher with
an IV bag of wild turkey, right, and he rides
a Harley Davidson and whatever. This is the brand, but
from a business standpoint, from an efficiency standpoint, Southwest is
nothing like that. They are, in fact, incredibly disciplined, and
so what you see is in the decades after deregulation.
(32:40):
It's the other airlines that are going wild, transforming themselves,
spending tons of money, going bankrupt, and Southwest is the
one that is cautious and disciplined. If they were like
Maverick outliers in any way, it was that it was
by being like cautious and efficient.
Speaker 1 (32:55):
Which is amazing, right, all that cigarettes and whiskey and
the moment, the moment the market goes free. What you
realize is maybe what I was talking about about what
Warren Buffett said, which is in a business like this,
the way you're going to win is to just be
ruthless about your bottom line. Yeah, about your costs. Yeah,
(33:16):
there's no advantage of one airline over another. You can
try all the discos you want, but it's essentially a
commodity product, and in a commodity product, you have to
watch every cent.
Speaker 2 (33:25):
Robert, I've prepared for you a list, a level list.
Five ways in which other airlines went wild and Southwest didn't.
We's still a few years after deregulation. Number five, super
Premium Comfort, economy class plus. So you know, right, so
there was first class, and there was whatever business class
and premium economy comfort plus more leg room, even more
(33:47):
leg room. And you know there is a logic to this, right,
which is, oh, different people will pay different prices. You know,
if people want to pay for more for more, let's
do that. Southwest is like, you know what, we got
one kind of seat. It's just a regular seat. We'll
fly you from one place to another in that seat.
Number four, selling tickets everywhere. Oh so, travel agents were
(34:11):
still big in the eighties, and then you know, in
the nineties, the Internet comes along and you get your
orbits and your expedias coming along, you know, online travel sites.
Speaker 1 (34:21):
I'm a kayak man.
Speaker 2 (34:23):
Southwest didn't care that much about travel agents and was
not even on orbits or Expedia or kayak actually until
like last year forever. Basically, I don't know if you
ever noticed that if you.
Speaker 1 (34:34):
Did a kayacation, they did a d you'd have to
do separate searches for Southwest.
Speaker 2 (34:37):
And so there's a straightforward reason for this. When you
buy a plane ticket through a travel agent or through
Expedia or kayak, the intermediary gets some of that money,
and Southwest wants to get all of that money, and
so they're just like, no, we're not going to sell
through those intermediaries.
Speaker 1 (34:53):
It's so funny, right, airlines are this glamour business, or
they were for decades, And like the airline CEOs at
Delta American, they don't want to be trying to save
what is half a percent one percent.
Speaker 2 (35:07):
They want to sell more tickets that not Southwest okay,
number three hubs hubs. So after deregulation, now remember, airlines
can fly wherever they want. They're not constrained by the government,
and they're like, we're gonna fly everywhere. And the way
we're going to do that is the hub and spoke model, Right,
So we're going to pick a city and tons of
(35:27):
flights are going to go in and out of that city,
and that way people can go wherever they want. They
just got to go through, you know, Atlanta if you're
flying Delta or Dallas if you're flying American Southwest. No, No,
Southwest is like, you know what, We're just going to
fly people from Phoenix to la and we're gonna fly
ten flights a day and it's going to be cheaper
and it's gonna be great. We're not in the business
(35:48):
of flying people wherever they want to go. We're in
the business of flying profitable routes where we can sell cheap,
reliable tickets.
Speaker 1 (35:55):
They've done the research, they know that people are paying
a lot of money. They know that they can undercut
the current fairs and that there will be enough people
to fill the place.
Speaker 2 (36:02):
Yes, and by the way, when they go into a
new city, they typically go into not the main airport.
Speaker 1 (36:09):
Right.
Speaker 2 (36:09):
Have you flown Southwest?
Speaker 1 (36:10):
Oh? Yes, I see a lot of the country in
strange small airports. Yeah.
Speaker 2 (36:15):
I used to fly San Diego to Oakland all the time,
So you know in San Francisco, San Francisco's the big airport.
Speaker 1 (36:20):
The Oakland to Burbank's that's San Francisco to La to
other people, that's to me, it is Oakland.
Speaker 2 (36:29):
And there's there is a reason for this, right, it's
those airports tend to have cheaper gates. Right, airlines have
to pay for gatespace Southwest. You know their passengers are
not flying onto Tokyo or whatever. If your American airlines
you've got to go to JFK or LAX or SFO Southwest.
Is that they're not in that business. And also those
(36:50):
airports tend to be less crowded, which makes it easier
to do a fast turn right, they get jammed up less.
Speaker 1 (36:55):
Oh interesting, right, because you can get right on the
right on the runway number two. Yes, that's where we are.
Speaker 2 (37:00):
Planes. After deregulation airlines like we can fly anywhere. And
for little routes, we're gonna get little planes, and for
medium sized routes, we're gonna get medium planes, and for
big routes, we're gonna get big planes. Southwest does not,
with one very brief exception, they have flown one kind
of plane the whole time. The Boeing seven thirty seven, which,
(37:22):
in keeping with the Southwest vibe, is not a tiny plane.
It's not a giant plane. It's just a plane.
Speaker 1 (37:27):
It's so funny, right, Boring is their competitive advantage.
Speaker 2 (37:32):
Yeah, and like just think about the efficiencies on this one, right,
I mean from the small ones in mgwoes you I
only got to print one seatback card. Yeah.
Speaker 1 (37:39):
The pilots can fly any plane, any plane.
Speaker 2 (37:41):
Yeah yeah, yeah, yeah, Well you need a pilot gets sick,
you know, is this pilot certified on this plane? Yes?
The answer is always yes for Southwest, even you know,
the things like getting the baggage out, all the logistics,
it's always the same if they need to swap in
a new plane, they always got the right plane. It
creates this incredible efficiency of standardization.
Speaker 1 (37:59):
This would be enough for any business. But you're telling
me there's one more. The number one reason.
Speaker 2 (38:04):
Yes, and it's kind of a meadow reason. It's kind
of it kind of flows through all of these. The
number one reason that Southwest was able to stay efficient
and profitable when all the other airlines went wild. They
never tried to be number one. Nice think about this.
I actually think this is really an important one and
useful to think about. Airlines tend to attract big ego CEOs, right,
(38:28):
I mean, most big company CEOs have big egos. But
the airline business, as we've been discussing, is a bad business.
You're not getting into it because you want to be rich.
You're getting into it because, like, you want to fly
the big planes. You want to beat everybody else. You
want to be the most glamorous airline in the sky.
Speaker 1 (38:43):
You're right, and they're kind of obsessed with this in
the same way that broadcast TV used to be. Like
ABC's number one this week, NBC's number one the next week,
and they want to be the number one airline in
the world. In fact, when they are, don't they put
that on their ads, like more people fly so and
so than any other airline.
Speaker 2 (38:57):
And you really see this, like when you read histories
of the period, they're like personally, the CEOs are personally
obsessed with beating their rival, and Southwest is not. There's
this really simple but great quote from Herbteller market share
has nothing to do with profitability.
Speaker 1 (39:18):
Oh no, it's so. It's so true.
Speaker 2 (39:21):
We don't want to fly more people than anybody else.
We just want to make more money than we spend
flying people.
Speaker 1 (39:28):
This is such a This whole story is like an
indictment of the way Americans do business, at least for
a certain period of time. Right that they want the regulations.
They don't want to compete. They want to be number one,
even if it means it costs their investors' money.
Speaker 2 (39:44):
But not Southwest. And this is why I think this
is at the core of Southwest success. Right Like every
other major airline that still exists that was around at
the regulation has gone bankrupt at least once, some more
than once. Southwest has not. They have been profitable every
(40:04):
year for fifty years, with the exception of the pandemic
of twenty twenty. But as we will discuss after the break,
a lot of those things from that list of what
made Southwest great, we're about to cause it some real trouble. Okay,
(40:46):
So we're back with the Southwest story. Southwest has this
amazing run, not just a year after year, but decade
after decade, and by the time Herbkellerer dies in twenty nineteen,
Southwest is carrying more passengers than any US airline, not
that they care, but that's amazing. They're big and successful.
(41:07):
But trouble is coming. They're about to hit this run
of trouble, and a lot of ways the same things
that made them successful for all those years are going
to be key causes of their of their problems. The
first thing that goes wrong, it starts in like late
twenty eighteen early twenty nineteen, when there are two separate
(41:29):
plane crashes. One is in Indonesia, one is in Ethiopia.
They're different airlines, but both are Boeing seven thirty sevens,
so it's a huge news deal. It was a big
deal because it was the newest version of the seven
thirty seven, the seven thirty seven Max, and in March
of twenty nineteen, the FAA grounds all seven thirty seven
(41:51):
Maxes in the US, So these are seven thirty sevens. Remember,
Southwest is the airline that only flies seven thirty sevens,
which has been great until now, but now, unsurprisingly they
have more seven thirty seven Maxes than any other airline
and they get hammered, right like, they now have to
(42:11):
cut back on their service. To be clear, they don't
have to shut down. They're not flying solely seven thirty
seven maxis, some of the older seven thirty sevens, but
they lose something like a billion dollars in revenue because
of this.
Speaker 1 (42:23):
This is the classic trade off between efficiency and resilience. Yeah, yeah, right,
And we saw this a lot in the pandemic with shipping.
You know, you've had a real stuff time delivery, a
really efficient supply chain, you were also the one most
at risk for something going wrong because you didn't have
a lot of other sources for your materials.
Speaker 2 (42:41):
Yes, so in this analogy, Southwest was super efficient, but
they had this huge risk just sitting there. So they
lose a billion revenue. They cost some of that back
from Boeing, but you know it's a blow, not a
not a death blow, but a blow. And then twenty twenty,
of course you get the pandemic all airlines only you're
since seventy three that Southwest didn't turn a profit. Bad,
(43:04):
but again not not devastating. It's after the pandemic that
things keep going wrong and get worse for Southwest. Twenty
twenty two, the big legacy airlines, Delta, United American, they
are doing great.
Speaker 1 (43:18):
There was this rebound travel, right, everybody had saved up
their money and they were like, I'm going to Europe.
I'm taking the big planes, I'm going stimulus checks.
Speaker 2 (43:26):
Government sends you a check, you just sign it over
to Delta and go to Europe. And you know, this
is a moment when a lot of people are feeling rich, right,
Like when you look at people's bank balances at this time,
it's wild like people in fact not richer. Yeah, and
so this is a moment when you will pay for
premium economy comfort plus, right, this is a moment when
you will fly to Europe. And all of those behaviors
(43:49):
are not Southwest behaviors. Right. This is not a simple plane.
This is not Phoenix to la this is not weird
little airports, right, So this is a moment when everybody
else is coming back and Southwest is kind of muddling along.
And then really the big blow. The big blow comes
in December of twenty twenty two, not long before Christmas,
(44:11):
this giant winter storm hits the East Coast and upper Midwest.
Airports shut down, lots of airlines cancel flights, you know,
up and down.
Speaker 1 (44:21):
Luckily, there's not news crews who would like to go
out to the airports and stand there for forty eight
hours straight.
Speaker 2 (44:27):
Luckily it's not Christmas time when there's no news, and
they're so happy to go to the airport with people
sleeping on.
Speaker 1 (44:33):
The ground, I could verify this was a big deal.
Speaker 2 (44:35):
This was a big deal. And for most airlines it's like, yes,
there's a storm, and now a day, two days later,
we're back up and running and everything's fine. But Southwest
at this moment has this epic, epic collapse. They cannot
get things going, and the storm has passed, but Southwest
is still largely grounded. They cancel more than sixteen thousand flights,
(45:00):
They leave something like two million people stranded, and when
they figure out what went wrong, it turns out it
was this one internal software system that was supposed to
reassign Southwest crew members when a flight got canceled or
rescheduled and it just completely failed and they couldn't get
it back up. So think of this, right, like the
(45:21):
company doesn't even know where their flight crews are, and
the crews themselves, like they want to work, they want
to get things going in Yeah, the crews themselves have
to actually like call on the phone like ordinary schmuck
passengers to find out where to go to work. They
have to wait, you know, hours on hold. When they
get through. People don't even know because like some poor
(45:41):
person at headquarters is trying to figure all this out
on a piece of paper or something. It's a disaster
for Southwest?
Speaker 1 (45:47):
Was it because of Southwest's cost cutting? Was this one
of the ways they cheaped out by having like a
nineteen seventies internal system.
Speaker 2 (45:54):
So the CEO, perhaps predictably, said no, no, this was
just like an unfortunate you know actually I think used
the phrase perfect storm. But the union leaders at the company,
the people you know who had been negotiating with the
CEO for years, said no, no, we have been telling
for years that this system is out of date and
it's going to fail, So maybe it was because they
(46:16):
were too cheap. You know what is efficient and what
is too cheap. In any case, this is a disaster
for Southwest right, days and days of news coverage. So
Southwest winds up paying something like seven hundred and fifty
million dollars in reimbursements and penalties. And now things are
bad for the company right. Their profits are stagnant, even
(46:39):
as the industry is coming back. Their stock price falls
by more than fifty percent between twenty twenty one and
twenty twenty three. By twenty twenty four, the stock is
still below where it was before the pandemic.
Speaker 1 (46:52):
I feel like if Herb kellerher were still around, he
would say go with the plan, like this is what
our company does. Stay the course and yes there will
be disasters that happen, but like we have the better
business model. Go go go.
Speaker 2 (47:09):
I mean, it's interesting to think about him having died
like just before Southwest ran into so much trouble. Is
that correlated? I don't know. In any case, that is
basically what Southwest was trying to do, just to keep
being Southwest. But if you're a publicly traded company with
a still a pretty good brand and your stock price
is way down.
Speaker 1 (47:30):
What happens to you You get a call from Wall Street.
Speaker 2 (47:33):
You get a call from Wall Street. Right, And in
this case, it was an activist hedge fund called Elliot
that bought something like ten percent, more than ten percent
of the company's stock. And what Elliott does is this
kind of thing. They buy up stock and try and
turn companies around.
Speaker 1 (47:50):
Yeah, you accumulate until you have to announce how much
you own of the company, and then you write a
strongly worded letter to the.
Speaker 2 (47:56):
Board to the board. So in its letter to the
board in twenty twenty four, Elliott writes, quote, while Southwest
has a proud history, that history is not an argument
for supporting poor leadership and sticking with the strategy that
no longer succeeds in the mid or an airline industry.
Speaker 1 (48:13):
This is what they do, and they're hoping, they're taking
the bat that they can make dramatic changes, maybe not
long term changes, but maybe some short term changes to
increase the value of the company and then get out
of the business.
Speaker 2 (48:25):
And they're saying, like their idea is, Southwest, you should
become more like everybody else. Right, That is the subtext
of a strategy that no longer succeeds in the modern
airline industry. Oh and also they wanted to fire the CEO,
of course, because they always wanted to fire the CEO.
But what's interesting to me is that other part, right,
their strategy no longer succeeds in the modern airline industry
because in a lot of ways, if you think about
(48:47):
Southwest at the time of deregulation and the rest of
the industry or in the eighties when they're all going
wild like, in some ways, it's the rest of the
industry that has become more like Southwest. Right. What made
Southwest different was really cheap prices, right, But now there
are ultra low cost carriers with really cheap prices. They
are also you can fly basic economy on Delta.
Speaker 1 (49:10):
As I do every time. I'm wearing extra sweaters because
I can't fit into my luggage and sitting.
Speaker 2 (49:15):
Across from you in the road just one from the
back of the plane, you pid less close to the bathroom,
you know. Even in terms of vibes, right, think about
vibes when Southwest launch, they were like the friendly hey
where your pal airline and the others are like the
more formal kind of corporate airlines now, like every company
is your pal, right, yes, And when you fly now, right,
when you fly now and you see college students flying
(49:36):
for the weekend, you see ordinary people who are not
business people flying. When you see people flying who aren't rich, frankly,
who aren't you know, upper middle class, like that is Southwest.
Speaker 1 (49:50):
This is fascinating. So I'm right in a way that's
sticking with the plan is the most efficient way to go.
But what I didn't include is that other airlines are
also doing the same plan. Your competitive advantage was that
you were cheaper and more nimble, able to make these
decisions better than other airlines.
Speaker 2 (50:09):
And once everyone does it, what do you got? So, so,
what has Southwest done under this pressure? Well, they didn't
fire the CEO, but they are changing, right, There were
still those things about Southwest that were different. You know,
they still had one kind of seat. You still didn't
get a seat assignment. No longer. Starting on January twenty seventh,
(50:33):
twenty twenty six, Southwest passengers will have the choice of standard,
Preferred or extra legroom.
Speaker 1 (50:39):
I'm a little sad. Yeah, end of an era, I
mean end of an era. Yeah, it was a pain
in the ass era. By end of an era, I
mean it was a good run. It was a great
rout for the airline industry. Like I'd take forty eight
years for.
Speaker 2 (50:53):
The first time in the history of Southwest Everybody's gonna
buy an assigned seat. Not me.
Speaker 1 (51:00):
I'm going Herb Kellerherst style. I'm gonna just walk on
the plane and sit wherever I want to.
Speaker 3 (51:06):
I love it.
Speaker 2 (51:09):
That's the end of the show. We'll put a list
of sources in the show notts. That's the end of
the show.
Speaker 1 (51:14):
Is it show notts in the airline?
Speaker 2 (51:18):
That's the end of the show. We'll put a list
of the sources in the show notes. I do want
to mention one book that I found particularly useful. It's
called Hard Landing. It's by Thomas Petsinger, Junior, and it's
an old book. It's the story of what happened right
around deregulation, kind of before, during, and after, and it's
a very good nonfiction book.
Speaker 1 (51:37):
Our showrunner is Ryan Dilly, our producer is Gabriel Hunter Chang.
Speaker 2 (51:41):
And our engineer is Sarah Bruguier. I'm Jacob Goldstein, I'm
Robert Smith.
Speaker 1 (51:45):
We'll be back next week. With another episode of Business History,
a show about the history of business.
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