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Speaker 1

00:00

So I just have 4 quick things to tell you about before we jump into this episode on 1 of my all-time Favorite founders herb keller her number 1 I do a terrible job of letting you know But I have a personal email list for every book that I read I take somewhere between 50 to maybe 150 different highlights for my email list. I whittle those down and this actually takes a long time to do to my top 10 highlights. So if you are interested in getting my top 10 highlights for every single book that I read and you want me to email those to you, I will leave a link down below. You can also go to founderspodcast.com and put your email on there.

Speaker 1

00:34

And I will email you every single time that I read a new book. Second thing, I was interviewed recently on the Invest Like the Best podcast. I talked with the my friend and the host of invest like the best Patrick on what I've learned for the last year in the last 12 months of doing founders podcasts and reading all these biographies. If you are interested in hearing that long form interview, I think it's about 90 minutes long.

Speaker 1

00:56

You can search for invest like the best in your favorite podcast player. Listen to episode 3 43 in the service of founders. The third thing I want to tell you about is I'm actually doing a live podcast, a live show with Patrick from Invest Like the Best in New York City on October 19th. I think that's a little over 3 weeks from now.

Speaker 1

01:16

If you have not already got your tickets, that link will also be down below. If you live in New York, I think it's a no brainer to come out, but it's also a great excuse to travel to New York City. And the last thing I wanna talk to you about is the presenting sponsor of this episode and a product that a lot of my founder friends are using. And that is Vesto.

Speaker 1

01:34

You can check them out at Vesto.com. And what Vesto is really good at is helping businesses of all sizes invest their cash in U S treasuries. You'd want to do that because when your business owns treasuries, that cash is backed by the U.S. Government and it earns interest while it sits there.

Speaker 1

01:51

I have 1 founder friend who raised a bunch of venture capital money and he uses Vesto as a way to extend his runway. And I have another founder friend who bootstrapped his company and he uses Vesto to get a better rate of return than if that cash was just sitting in his bank account. If this sounds interesting to you, I highly recommend you go to Vesto.com and check out what they have to offer. I know the founder, Ben, actually just saw him again last week.

Speaker 1

02:13

I've spent a bunch of time with him. If you schedule a demo. So if you go to Vesto.com and schedule a demo, you actually speak directly to the founder, Ben. I think he's incredibly impressive.

Speaker 1

02:24

And I think if you speak to him, you'll be impressed to make sure that you tell him that David from Founders sent you. And with that, let's jump into the episode. I actually read 2 books to make this episode. I hope you enjoy it.

Speaker 1

02:37

1 plan, no matter how well laid out, couldn't possibly respond to all of these situations. This is why Kelleher does not put much stock in traditional strategic planning. He explains it this way, reality is chaotic, planning is ordered and logical. The 2 don't square well with 1 another.

Speaker 1

02:56

When US Air pulls out of 6 cities in California, they don't call me and tell me they're going to do that. Now, if we had established a big strategic plan that is approved by our officers and the board of directors, I would have to go to the officers and the board and tell them that we want to deviate from this plan. They would want to know why I want to buy 6 more airplanes. The problem is we'd analyze it and debate its merits for 3 months instead of getting the airplanes, taking over the gates, and dominating California.

Speaker 1

03:22

The meticulous nitpicking that goes on in most strategic planning processes creates a mental straitjacket that becomes disabling in an industry where things change radically from 1 day to the next. When a financial analyst chided Kelleher about not having a strategic plan, he said, we do have a plan. It's called doing things. That is an excerpt from 1 of the 2 books that I'm going to talk to you about today.

Speaker 1

03:48

That is from NUTS, Southwest Airlines Crazy Recipe for Business and Personal Success. That was written by Kevin and Jackie Freeburg. The other book is called Herb's Heroes and was written by a pilot that worked at Southwest for 37 years. I have not been able to find a comprehensive biography on Herb Kelleher.

Speaker 1

04:05

I think 1 should exist. I think he was an extraordinary person, a gifted entrepreneur. He built the most successful airline in history, which we'll get into today. So to make this episode, I used these 2 books.

Speaker 1

04:16

I reread, this is the second time I read the nuts book but I use these 2 books and I took notes on interviews that Herb did when he was alive. So what I'm going to do first is I summarized all of my notes from the book Herb's heroes. I just want to go over that outline which I think will give you a good overview as to the type of person Herb was and why he was that way. So he's born during the Great Depression.

Speaker 1

04:36

His father worked in a soup factory. Herb's older brother was killed in World War II. Herb is 10 years old at this time. After his brother dies, his father dies unexpectedly the year after.

Speaker 1

04:49

And then within a few years of that happening, Herb's 2 surviving older siblings move away for college. So now Herb grows up. The second half of his childhood is just him and his widowed mom. And so her influence and the lessons that his mom taught him he uses his entire life including in building his company so they would have late night talks almost every night at the kitchen table and even when he was a kid they're staying up to like 2 in the morning and she's teaching her about life and 1 of the most important things that she did was she taught him that adversity is a normal way of life.

Speaker 1

05:22

This is a woman that lost her son, lost her husband, and yet there was no self-pity whatsoever. She said that stress in difficult times was not de-habilitating, but opportunities to excel and achieve. And so even from a young age, he starts to find problem solving invigorating. The reason, I've always admired Herb, I've tried to consume as much information about him as possible.

Speaker 1

05:43

And the reason it came to the top of my mind to make an episode about him right now is because I was reminded of something that he said during a talk and this came many years later in his life. He's already been working on Southwest for multiple decades at the time and he was asked you undergo a lot of stress all the time. How do you handle it? And his response is perfect.

Speaker 1

06:02

He said, I don't handle it. I like it. And so that's a maximum that I want to repeat to myself. As we're building our companies, difficulties and hard times are inevitable.

Speaker 1

06:09

And I'm just gonna remind myself, I don't handle my stress. I like it. It completely changes your mindset into like, this isn't something I have to do. It's something I get to do.

Speaker 1

06:17

Back to his early life, he was a gifted athlete. In high school, he ran track, played basketball and football, and lettered in all 3 sports. Before college, he works at the very same soup factory that his dad had worked at, and he worked there for 6 years. He did every single job at the factory.

Speaker 1

06:34

This is something he's gonna continue to do at Southwest, which we'll talk about later. But this is why I'm telling you this. He called his 6 years working in a soup factory, right? This is a guy that's going to go on to, he's really gifted at everything he does, gifted at athletics, he's really good at college, gets a law degree, clerks for the Supreme Court, has a successful law practice, and at 35 with 4 kids decides, hey, I'm gonna be an entrepreneur, I'm gonna try to run, I'm gonna try to start an intrastate airline in Texas.

Speaker 1

07:02

And so with all that, the fact that he said the 6 years at the soup factory doing every single job, he called it the best education he ever had. And so even when he was younger and then throughout his entire career, people say the same thing about him over and over again. They describe him as a fierce competitor and they said he had a hard work ethic that is a quote a hard work ethic he was working a hundred hour weeks at the beginning of Southwest because he still had to practice law to pay the bills it took them 4 and a half years between the time they raised money for the company they start the company and then they're actually allowed to fly their first flight. Another thing about Herb, he was old school.

Speaker 1

07:36

He was a hard driving, hard drinking, fast living Texan. He started every day early, regardless of how late he was out the night before drinking. This is gonna come up over and over again. Another crazy thing.

Speaker 1

07:47

He smoked 5 packs of cigarettes a day and drank wild turkey bourbon every day. He said wild turkey and fill up more cigarettes are essential to the maintenance of human life. When he was in his 60s, He fought and beat prostate cancer. And then he was asked if he thought his smoking habit contributed to his cancer.

Speaker 1

08:05

And he said, I do not smoke with my prostate. He lived until he was 87. He felt he was born to be an entrepreneur. He thought the spirit of an entrepreneur was within him.

Speaker 1

08:15

And he had a great line about this. He says, if you're crazy enough to do what you love for a living, then you're bound to create a life that matters. He designed his entire business model to keep costs at the lowest possible level. He built the most successful airline in history.

Speaker 1

08:30

Southwest was profitable for 47 straight years. To put into context about how outrageous that accomplishment is relative to his competitors and peers, he was profitable for 47 straight years. The next most successful airline was profitable for 5. And when you read about Herb or if you listen to his interviews, like he's hilarious.

Speaker 1

08:48

So and he says, like, I don't take myself too seriously, but I take competition very seriously. Unsurprisingly, 1 of Herb's favorite people was Winston Churchill, who quote Churchill all the time. He'll use Churchill's ideas in talks and speeches to his employees and to his team. 1 of his innate talents that jumps out if you read a book about him is the fact that he was able to operate on very little sleep.

Speaker 1

09:08

There's a lot of stories in both books about the fact that he'll be out drinking till like 3 in the morning and then he'll be at the office at like 7 a.m. He also talks a lot about and repeats the importance of having a business model that endures the hard times. He talks about most of the airlines are set up, they'll reap a bunch of profits in good times and then yet they give it all back when the inevitable downturn happens. And so 1 thing he talks about is like, listen, we'll joke around.

Speaker 1

09:32

We'll have a lot of fun. We're very extravagant in our marketing, but we're very fiscal, fiscally conservative. We're conservative with debt. They paid for 80 percent of their planes out of earnings.

Speaker 1

09:41

Most other airlines are borrowing that money. They own the largest amount of planes outright than any other airline. And the quote that came to mind when I was reading about Herb's financial approach to building his company is this fantastic quote from Charles DeGaulle, where he said, all that matters is to survive. The rest is just words.

Speaker 1

09:59

Herb was also a gifted storyteller, and he was very persuasive. He was not building a company. He was leading people on a crusade. He was not hiring employees.

Speaker 1

10:07

He was converting missionaries. He says, our indomitable dedication is the core of our success. That is the most difficult thing for a competitor to imitate. They can buy all the physical things that we have.

Speaker 1

10:16

The things that you can't buy are dedication, devotion, loyalty, the feeling that you are participating in a crusade. And the 1 thing that Herb was insistent that they do better than anybody else was serve. Listen to what he said. We are a service company.

Speaker 1

10:31

We just happen to fly airplanes. Herb read all the time. Last week on the Working with Jeff Bezos episode, I mentioned this text I got from a friend where he noticed, he'd raised a bunch of money for his company, and noticed like every single billionaire that he interacts with reads a ton, and they usually read a lot of history biography. Herb was the same thing.

Speaker 1

10:49

You know, he starts off as an attorney before he dies as a billionaire. He read all the time. He did it when he was younger, did it when he was older. History was his favorite subject.

Speaker 1

10:56

He said this is why he said he read history. This is fantastic. He says, reading history kept me from making the same mistakes that was inside and outside his own industry. He definitely knew the history of the airline industry, and he talked about over and over again that you should read the history of the airline industry as a cautionary tale.

Speaker 1

11:13

That's why the main thing I want to talk about today is the fact that this guy, very obviously capable of independent thought, his main advantage was the ability to question every single conventional, quote unquote, conventional wisdom in his industry and ask, like, does this make sense or not? Some of it did make sense, so he would do that. But in many cases, he realized there was a better way, and so he would pursue that regardless of what people around him were doing. And then finally, before I jump into the other book, he led from the front.

Speaker 1

11:35

This is 1 of the most, 1 of the most admirable things about him. On the busiest day of the year, which is Thanksgiving Eve, you would find her out on the tarmac loading and unloading baggage. And he would do so regardless of the weather. There's a great story in the book where somebody walks up to him.

Speaker 1

11:51

They just see this really tall guy in a yellow poncho loading and unloading bags. It's not till you turn around. They realize that's the CEO and the founder of the company. Okay, so now I'm going to pick up the book called nuts and I'm going to go right into the founding of Southwest.

Speaker 1

12:03

At the time, remember, Herb is 35. He's an attorney in San Antonio and he's got 4 kids. Southwest Airlines was the brainchild of Roland King, a San Antonio entrepreneur who owned a small commuter air service and his banker, John Parker. Parker had complained to King that it was inconvenient and inexpensive to travel between Houston, Dallas, and San Antonio and suggested starting an intrastate airline.

Speaker 1

12:29

And So Herb gets involved because he's Roland King's attorney. And so Roland King goes to Herb and he draws this thing called the Golden Triangle, which shows Dallas, Houston, and San Antonio. It's on a cocktail napkin. That cocktail napkin is still framed inside of Southwest headquarters.

Speaker 1

12:45

This is happening during the late 1960s. This is why they think there's an opportunity. First of all, they use the word intrastate airline, which is fascinating. So their main goal is, okay, there's different regulations.

Speaker 1

12:54

You have state regulations if you're only flying within the states, and then obviously federal regulations once you go state to state. Getting approved to fly inside a state is easier than at the federal level at this time in history, although it was still very difficult getting approved. This was just like a four-year battle. But the reason what I found fascinating is Roland King had this idea by seeing California already had a successful interstate airline, And he thought there was a lot of similarities between California and Texas, obviously the size of the states, but the fact that there was hubs of cities that were experiencing rapid economic and population growth, but they're also far enough apart to make travel by bus or car very inconvenient.

Speaker 1

13:29

And So at the beginning, their idea is like, well, why don't we just take what's obviously working in California and do the Texas version of this? And in 1 of his interviews, Herb talks about this time. He's like, why would you want to do something like take this big of a risk when you're 35 years old, you have 4 kids, you're married. And he said the allure of doing something different.

Speaker 1

13:45

I wanted to do something exciting. I was curious. Also, most adults in the U.S. Had never flown because it was too expensive.

Speaker 1

13:52

I believe there was a huge untapped market out there. And his assumption that there's a huge untapped market out there was proved correct. He had to go through 4 and a half years. To prove that assumption, he had to first fight through 4 and a half years of a legal battle and unfair trade practices in the state of Texas.

Speaker 1

14:08

So he files Southwest application on November 27th, 1967. And he does so with the TAC, which is the Texas Aeronautics Commission. They approve it. They say, yes, you can fly between Dallas, Houston, and San Antonio.

Speaker 1

14:21

What he didn't know at that time was that he inadvertently started a war that would last for years and almost drive Southwest Airlines out of business before it put a plane in the air. So he had 3 main competitors, Braniff, Trans Texas, and Continental. And they immediately sue, and they get a temporary restraining order that prohibits the TAC from issuing Southwest a certificate to fly. This case goes to trial.

Speaker 1

14:45

They argue, hey, these markets that Southwest wants to serve there are a saturated there's no room for another carrier the truck the court that they bring it to a grease this immediately sparks herbs innate like competitive have to win personality and so he appeals that appellate court also says no you cannot do this. So they lose that case to at this point they had raised. So it says the original investors 543000 dollars. Remember that's in 1971.

Speaker 1

15:13

It's a lot of money had been eaten up in legal expenses. The corporation's liabilities grossly exceeded its assets, and there was no prospect of raising new capital without the TAC certificate in hand, which 2 courts have both denied them. And so this is Herb's response. Some members of the board thought it was wise to cut their losses and close down.

Speaker 1

15:33

At this point, Kelleher's street fighting spirit surfaced. Gentlemen, let's do 1 more round with them. I will continue to represent the company in court and I'll postpone any legal fees and I will pay every cent of the court costs out of my own pocket. The directors agreed to give it 1 more shot and Kelleher argues this case all the way up to the Texas Supreme Court.

Speaker 1

15:56

And he convinces them to overturn the lower appellate court's decision and Southwest gets its certificate to fly. And so we go back to this idea that Herb framed life and everything he did is this grand epic right we're not building a company we're on a crusade together. It's always a mission bigger than himself and he talks about like he was asked in an interview like why would you do this like why would you willing to fight for years for free? And he said it's because these other airlines were trying to offend 1 of his ideals.

Speaker 1

16:25

He said if other airlines could prevent Southwest Airlines from starting, then that means the free market system is failing. And 1 of the things that motivated him was to validate the free enterprise system. And the other reason, he said, was that it was very hot competition and I like to win. So then they're able to raise more money.

Speaker 1

16:41

They buy planes. They wind up starting to sell tickets. 2 days before their first flight, their competitors wind up getting another injunction and they get another restraining order, this time from a different regulatory body, that would prevent Southwest from beginning service. And this was Kelleher's response.

Speaker 1

16:57

He went straight to the law library and worked all night to decide how to proceed. He found a precedent and presented his argument to the court the next morning. The Texas Supreme Court ruled in Southwest's favor again and ordered the lower court judge not to enforce the injunction. Kelleher then telephoned Mews.

Speaker 1

17:13

So at the very beginning, he was not running Southwest. He is still going to for the first years, he's going to be a founder and a board member of Southwest, and he's still running his law practice. It's not until the CEO that the founders hired this guy named Lamar Muse, he's going to leave to start a competitor against Southwest. The CEO that comes after Muse doesn't work out.

Speaker 1

17:32

And so the boards like Herb, if this is going to be like, you have to do this. And here's an interesting side note for you. Lamar Muse, who I'm about to introduce you to here, winds up when he leaves and starts Muse Airlines many years later when he's about to go bankrupt. Herb buys his airline, But that's many years into the future.

Speaker 1

17:47

Let's go back to this. So the Texas Supreme Court says, hey, you know, you cannot enforce this injunction. Kelleher then calls Muse on the phone and says, put the planes in the air. When Muse confided to Kelleher that he was still concerned about a sheriff showing up to enforce the injunction, Kelleher didn't mince any words.

Speaker 1

18:06

I told him, you roll right over that son of a bitch and leave our tire tracks on his uniform if you have to. The very next day, June 18th, 1971, Southwest Airlines was finally off the ground. And so this is the first mention of something that repeats over and over again the fact that Herb was a master at turning things into a cause. So it says, The seemingly insurmountable obstacles thrown at Southwest are what created Kelleher's passionate love for the airline.

Speaker 1

18:30

They would put 12 or 15 lawyers on a case and on our side there was just Herb. They almost wore him down to the ground, but the more arrogant they were, the more determined Herb got. This airline was going to go into the air and stay there, he said. Herb is a master at turning things into a cause.

Speaker 1

18:49

It was an affront to my idealism. He said if you're going to let these guys get away with this, it is a radically different type of country than the 1 I want to believe in. And he wasn't making all this up. His competitors were out to get Southwest and they were willing to break the law to do so.

Speaker 1

19:04

4 years later, both Braniff and Texas International were actually indicted by the US government for conspiring to put Southwest out of business and for violating the Sherman antitrust act. In addition to suing them in every single court, they also would, behind the scenes, would chase Southwest investment bankers out of their underwriting syndicate when they were trying to IPO. They would go to Southwest vendors and convince them to boycott and not sell to Southwest. They tried to keep Southwest from using the fuel hydrant system at Houston's airport and they successfully got Southwest blackballed from membership in the airline credit card system.

Speaker 1

19:42

To all of these charges both companies pleaded no contest. Okay so once Southwest is up and running, you'll see that a lot of the innovations were forced upon them. Necessity is the mother of all invention kind of thing. They're just severely resource constrained.

Speaker 1

19:56

And so if you're severely resource constrained, you are forced to innovate. And the way they do that is like, well, just question assumptions. And if you keep doing that successfully, you'll lead to finding new markets and new ways to make money. And so remember, 1 of Herb's initial hypothesis is that there's this huge untapped market out there because most Americans had never been on a plane yet.

Speaker 1

20:13

So it says the company's creative roots go back to its early days. Employees came up with clever ideas for keeping the business alive because Southwest had no choice but to become inventive in order to compete with the established carriers. The company simply did not have the money to go head to head with the majors. They would have to outthink and outmaneuver.

Speaker 1

20:31

And so anytime I read that word out think, I always think of Jeff Bezos talking about Zappos in the early days before Amazon bought Zappos. And he discovers he goes to the airport and discovers that after 9-11 you have to obviously take off your shoes and you put them into these containers to go through the X-Machine, and Zappos had bought ads, which I think they were the first company to do this, that bought ads saying, hey, you can buy shoes on Zappos as people are putting shoes into those containers. And he starts getting pissed off at his team, and he yells, they're outthinking us. And he was obviously right, so they wound up buying them.

Speaker 1

21:05

The airlines operated as though there were only 2 market segments. So this is going to be 1 of the main innovations or 1 of the first innovations that Southwest does. So the airlines operated as though there were only 2 market segments, those who could afford to fly and those who couldn't. This assumption, remember, severely resource constrained, you're forced to innovate, and the way you innovate, you question assumptions in this industry.

Speaker 1

21:27

This assumption guided the operating strategy of the major carriers. Southwest believed that it could stimulate a tremendous amount of new travel with low fares and superior service and they were challenging this assumption from day 1. Remember Herb designed this entire business model to keep costs at the lowest possible level. Those low costs allowed them to charge less prices.

Speaker 1

21:49

And so they start running this experiment by flying into the Rio Grande Valley at cheaper than every single other competitor in this region. This is the result. The year before Southwest initiated this low cost service, 123,000 passengers flew into the Rio Grande Valley. Less than 11 months later, the market expanded to 325,000.

Speaker 1

22:10

So from 123,000 people, right, at this higher price, they dropped the price because they have a low, obviously, low cost structure, lower cost structure, I should say. And that expands the market by more than double, gives them another 200,000 people flying. So the increase was larger than the entire market was before. And they only discovered this because they have this commitment to trial and error.

Speaker 1

22:32

This is a Jeff Bezos spoke about this a lot last week. They have this commitment by trial and error and they just realized we have to be comfortable with innovating through trial and error. That means being comfortable with the error part. There's a bunch of examples in the book where people make mistakes, sometimes cost the company 400,000, $500,000 And Herb refuses to fire them because he's like, that's the point.

Speaker 1

22:50

We have to be comfortable with the error part of trial and error. So they take this, they extend this idea. They're like, okay, all signs are pointing to the fact that people are price sensitive, that if we keep lowering the price, we'll expand the amount of customers that we have. Is there another way we can continue to segment our existing and then potential customer base?

Speaker 1

23:06

And so they come up with something that is going to be copied by every single other airline. It's crazy that no 1 uses at this point. So they perfect system-wide, two-tier, peak and off-peak airline pricing. They start off knowing their base is the frequent business traveler, the person that is in Houston but needs to get to San Antonio in a meeting and then can be back home in time for dinner, right?

Speaker 1

23:26

They are less price sensitive. What they didn't know is how big is the leisure traveler segment of this market because you can't know that because it's too expensive for the leisure traveler. Keep that in mind as we get to this. Like many of its innovations, Southwest two-tier fare system was not the outcome of a sophisticated long-range planning retreat.

Speaker 1

23:41

It was a result of good old-fashioned trial and error. Just 5 months into operations, 1 of Southwest's planes was in Houston but needed to get to Dallas for routine maintenance over the weekend. Normally they would just fly the plane with a crew but no passengers. And so they're like, let's test this idea.

Speaker 1

23:58

Normally a flight at this time is like, let's say $26. They're like, what if we just cut it to like a third? What if we say it's if you fly out on this Friday night flight that has to fly anyways if you're not on the plane or not, it's $10. Worst case scenario, we generate some revenue that hopefully helps offset the cost of faring in a completely empty plane.

Speaker 1

24:15

And immediately it works. Passengers quickly caught on and Southwest had to start turning people away only 2 weeks into the offer. And so this is when they realized, wait, there's not 1 type of traveler. There's really 2 types of travelers that Southwest has to satisfy.

Speaker 1

24:28

So you have the convenience oriented business traveler. This is the person that is more time than price sensitive. They want a lot of business hour flights and the price sensitive leisure traveler who primarily wanted lower fares and had more flexibility about when to fly. So they immediately have 2 fare structures.

Speaker 1

24:47

They say, listen, if you're flying during the weekday up until 7 p.m., you're likely a business traveler. We're going to charge you $26. If you fly after 7 p.m. Or if you fly on the weekends, it's half that it's $13.

Speaker 1

24:59

And this is the result Passenger traffic skyrocketed. Southwest had first defined a special market niche consisting of short haul passengers and then further segmented those short haul passengers by need into time sensitive business travelers and dollar sensitive leisure travelers. This idea would become 1 of the most widely emulated marketing innovations in airline history, system wide peak and off peak pricing. And so this idea was so successful that their main competitor, Braniff, immediately copied them, right?

Speaker 1

25:33

And this was hilarious, because in 1 of his interviews, he talked about the fact that 1 of his competitors lowered prices and called it an introductory fare, even though they had been in business for 40 years and serving the exact same markets for 40 years. And so this is what I mean about having forced like they're just unbelievably creative and open to all kinds of new ideas. So they went up keeping their prices the same and then told customers if you pay a higher fare we'll give you a free bottle of whiskey. And so for a few months they became the largest liquor distributor in the state of Texas.

Speaker 1

26:04

Oh, so and this is the important part. They went directly to their customers and explained to them what was going on. The fact that, hey, this bigger existing competitor with a lot more resources, they're trying to put us out of business. This is not gonna be good for you.

Speaker 1

26:17

This if you ever study David Ogilvie, he talks about this over and over again, and Claude Hopkins, probably the best copywriter in history that tell the truth in your ads, speak 1 person to another, tell the people why you're doing what you're doing. The truth will resonate with the buying public and they may act in ways that surprise you. Here's an example of that. So it says, the ad explained how Braniff was trying to put Southwest out of business and then went on to say the Southwest would not only match Braniff's fare, it would also offer every passenger a choice.

Speaker 1

26:45

Travelers could choose the $13 fare, So this is during the week, right? They're taking their off-peak price and temporarily putting it during peak, right? So it says, hey, listen, that's fine. We'll match them, but here's why they're doing what they're doing.

Speaker 1

26:55

Now, we also have an idea for you. Travelers could choose the $13 fare or buy a regular $26 ticket and receive a complimentary bottle of alcohol. So you can choose from scotch, whiskey or vodka. Now why is this going to work?

Speaker 1

27:10

Who is traveling during the week? These are business travelers. They are not paying for their own ticket. Business travelers loved it.

Speaker 1

27:17

They could charge a $26 fare to their expense accounts and go home with a free bottle of liquor for a few month period Southwest was the largest distributor of alcohol in the state of Texas to Braniff's dismay 76% of Southwest passengers paid the $26 and took the gift. Tell the truth in your ads communicate person to person tell them what you're doing. This is a result 2 years later brand of terminated. It's Dallas Houston Hobby Airport service.

Speaker 1

27:46

This is the route that they were competing on. Brandon thought they were gonna run Southwest out of business off this route. And in turn, they ran themselves out of business off this route. And so now we go into more principles that Herb built Southwest with.

Speaker 1

27:59

First is You should know your niche better than anybody else. So he starts this with asking and making sure everybody in your company asks and knows, what is your fundamental reason for being? Why does your company exist? When you identify that, make sure everybody else knows it and then stick to it.

Speaker 1

28:12

And here's why. When you have a vision and someone comes to you with some convoluted idea, you can hold it up to the vision and ask, does it fit? If not, don't bother me. Southwest exercises the discipline not to stray from its strategy.

Speaker 1

28:26

It does not, for example, buy jumbo jets, fly international routes, or go head to head with a major carriers. Just talking about the difference in their behavior compared with every single at this point, every single other competitor that they have. While other carriers have been lured by the temptation to step outside their niche, Southwest Airlines has maintained the discipline to stay focused on its fundamental reason for being. And 1 thing that Herb repeated from the very beginning, he's like, I don't give a damn about market share.

Speaker 1

28:52

I want profits. In fact, let me put the book down for 1 second. I want to read some of the ideas he has and why he was thinking about this. And This is when he was a much older man looking back at this time.

Speaker 1

29:02

And so he says, we may be flamboyant from a marketing perspective, but we are very conservative from a fiscal standpoint. This is when he talked about paying for the majority of his airplanes out of revenue. And this is why he says, this means that you're not taking on debt. When there are bad times, you aren't threatened by debt payments and debt payments are what put other airlines in and out of bankruptcy forever.

Speaker 1

29:21

Again, study the history of the industry is like, why do you guys keep making the same mistake over and over again? Let me just avoid that. Do not worry about market share. Worry about profit.

Speaker 1

29:29

I told anybody, if they mentioned market share, I'd punch them in the nose. Just look at what's going on in the industry. These big industry, these big companies are fighting over market share and they are losing money. They were firing their employees.

Speaker 1

29:41

Let's focus on profits. If we have 4 percent of the market and we are profitable, that is better than having 90 percent of the market and being unprofitable. And that kind of thinking leads us into this. Southwest Airlines is obsessed with keeping cost lows to maximize profitability instead of being concerned with increasing market share.

Speaker 1

29:58

Kelleher believes that confusing these 2 concepts has derailed many other airlines. Marketshare has nothing to do with profitability, he says. Marketshare says, we just want to be big. We don't care if we make money doing it.

Speaker 1

30:10

That is what misled much of the airline industry the past 15 years. In order to get an additional 5% of the market, some of these companies increased their costs by 25%. That is really incongruous. If profitability is your purpose, Southwest is willing to forgo revenue generating opportunities in markets that would disproportionately increase its costs And so we're going to get into a few ideas that helps them keep their costs low.

Speaker 1

30:33

Before I get there, I came across something else that I love, that you need to know what you compete with, not just who. From the very beginning, if you go back to the golden triangle, they're like, hey, driving between these 3 destinations is a pain in the ass. He knew from the jump the fact that most people are not flying that ground transportation is his competitor not other airlines. When Brandis price between Dallas and San Antonio was 62 dollars Southwest charged 15.

Speaker 1

31:03

1 of Southwest shareholders approached Kelleher and asked, Don't you think we could raise our prices just 2 or 3 dollars? You don't understand, said Kelleher. We're not competing with other airlines. We're competing with ground transportation.

Speaker 1

31:17

At 15 dollars, you're going to fly maybe at 20 or 22 or 24, which is still way less than 62. Right. Maybe you don't. The calculus changed.

Speaker 1

31:25

Keller had the discipline to know what he was competing with, not just who. And so 1 of their main ideas that differentiated them from many of their other competitors is the fact that they refuse to diversify on what kind of plane. They would only fly the Boeing 737. Other airlines had multiple different aircrafts.

Speaker 1

31:44

And this is why this idea was so valuable to them. I guess before I read this to you, what was fascinating is if you compare how many employees does Southwest need for every aircraft that they own. So the rest of the airline industry This is not just people that work on the plane Obviously the administrators everybody else in the company, right? The rest of the airline industry ranges from 115 to 160.

Speaker 1

32:06

So 115 to 160 employees per aircraft. Southwest had 84 employees per aircraft at the high end of their industry, 160, that means they're half, they need half the amount of employees. So it says flying 1 type of aircraft has a strong impact on the bottom line. Training requirements are simplified.

Speaker 1

32:26

Pilots, flight attendants, mechanics and provisioners concentrate their time and energy on knowing the 737 inside and out. All Southwest pilots are qualified to fly, all flight attendants are qualified to serve in, all maintenance people are qualified to work on, and all provisioning crews are qualified to stock every plane in their fleet. This makes it easy for them to substitute aircraft, reschedule flight crews or transfer mechanics quickly and efficiently. With only 1 type of aircraft, the company can reduce its parts inventory and simplify its record keeping, which also results in savings.

Speaker 1

33:00

It also helps the company negotiate better deals when acquiring new planes because they're only going to buy the Boeing 737. And so this commitment to being cost conscious to watching their costs is preached up and down the organization. And so this is it happening in 1989. At this point, you actually got like physical receipts, right?

Speaker 1

33:19

Our physical tickets. And so for the last 15 years of their existence is only that they were just issue your ticket was your receipt so Southwest issued cash register receipts as tickets now here's a problem it's growing more people they're getting spending the market market They're getting more new customers that are unfamiliar with the way Southwest does things. And since no other airline was using the receipt as the ticket, sometimes these customers would throw accidentally throw away their receipt. Therefore accidentally throwing a their ticket and so they're having a meeting like what we're gonna do and again it's amazing how much the behavior of peer companies is just going to be imitated in fact there's a great line about this in Warren Buffett shareholder letters Let me read it to you real quick.

Speaker 1

34:02

He says, the behavior of peer companies, whether they are expanding, acquiring, setting executive compensation, or whatever, will be mindlessly imitated. You have to remember that because what happens? They have a problem. Oh man, people are throwing away their tickets.

Speaker 1

34:17

What's the solution? And so they go around like, well, what is everybody else doing? They're using these super expensive multi-layered airline ticket systems. We'll just go out and buy 1 of that.