Southwest Airlines chief is staunch defender of ‘bags fly free’

Two years ago, Gary Kelly drew a competitive line in the sand when he decided not to charge passengers for their bags.

The 55-year-old chief executive of Southwest Airlines Co. didn’t want employees to face customer wrath for an issue that would have gone against the essence of Southwest.

“We had our niche for a long time,” Kelly said in his headquarters office at Love Field in Dallas. “We were the low-cost carrier, the low-fare carrier. Nobody paid much attention to us. Well, that ain’t the case anymore.”

Southwest would just have to get better at being Southwest.

He’d shore up morale by giving raises. He’d let attrition trim the workforce. And he wasn’t going to nickel-and-dime customers. He thought he could pick up market share and galvanize the airline’s popularity.

Wall Street analysts nailed him as irresponsible, nuts, naive or all of the above. Kelly harbored worries that they were right.

Today he’s thumbing his nose at them.

Last week Southwest Airlines reported $11 million in earnings for the first quarter, one year after the carrier lost $91 million.

By Kelly’s calculations, Southwest has grabbed nearly $1 billion in annual market share — thanks in large part to people avoiding bag fees.

“We’re beating the pants off everybody in terms of our revenue production,” Kelly said. “We have fewer seats offered every day, and we’re carrying more passengers. We’re defying gravity.”

And he’s defining himself as a leader. Perhaps more than anything he’s done since becoming CEO in 2004, his resolute “bags fly free” stance is allowing Kelly to step out of the shadow of his legendary predecessor, Herb Kelleher.

“How do you follow Genghis Khan? And I mean that positively,” said Michael Boyd, who heads an aviation consulting and research firm in Colorado. “Gary did. You still had Genghis, the guy who’d taken over most of the world, just down the hall — Mr. Kelleher. To fill those shoes is pretty hard to do. Have you seen any problems at Southwest lately? I haven’t.”

What does Kelleher think?

“To be an excellent leader, you have to be a superb follower,” Kelleher said. “Gary has provided great leadership. We transitioned for three years, and then he took over everything that I normally did. I’m very, very pleased and proud of his accomplishments.”

Kelly became an accountant simply because his father was an accountant.

“But once I got into it, I really enjoyed it,” he said. “It’s really not so much about numbers. It’s really more about logic and applying order to transactions.”

He worked at Arthur Young & Co. for nearly seven years before joining a start-up software company as director of marketing.

In 1986, Kelly spotted a newspaper story about the departure of Southwest Airlines’ controller.

His first interview with then-Chief Financial Officer John Denison was in the old headquarters space in Love Field’s east terminal. Denison’s “office” was a desk surrounded by sheets of plastic that were failing miserably at keeping construction dust out.

Kelly was smitten with the sense of things happening.

“John convinced Herb [Kelleher] that he wanted to hire me, and Herb said OK. It was a much smaller company, only 5,000 employees. There was very little bureaucracy. It was boom, boom, boom.”

Kelly’s promotions came quickly: CFO at 34, executive vice president at 46, CEO at 49 and chairman and president at 53.

Kelly is the fifth man to pilot Southwest. The first was Lamar Muse (think flight attendants in hot pants and free whiskey), followed by Howard Putnam (who left to try to save Braniff International) and then Kelleher.

The fourth CEO was Jim Parker, who had the misfortune to take over the controls just before the Sept. 11, 2001, terrorist attacks and a nasty dispute with flight attendants. After three years, Parker had all the fun he could stomach and retired.

Kelly, who was executive vice president at the time, was blunt with Kelleher about being promoted. He wanted to be CEO only if Kelleher was willing to let him be CEO.

“When Herb wants to be hands-on, he dives really deep. Grappling for who’s in charge doesn’t work,” Kelly said. “What’s been amazing to me is knowing that his passion is really getting involved and his hands dirty, [yet] he didn’t.”

Kelleher has tried to keep his promise.

“You have to be sage enough to realize that when you get a new chief executive officer, there’s going to be a change in the way things are done,” Kelleher said. “If you understand that, then you don’t get upset every time something is done a little differently than the way you did it.”

Kelleher disagreed with one ill-fated decision Kelly made but kept his mouth shut.

Things were hopping in 2006 when Kelly leased four more airplanes. He didn’t ask Kelleher whether he could or should — he didn’t have to.

By 2007, Kelly realized his serious mistake. Kelleher let him know that he never liked the idea.

“Herb had the restraint not to impose his will on what I was trying to do six months earlier, and that was remarkable,” Kelly said. “That was just one [disagreement]. There are millions of times where we’re in lock step.”

Kelly is known as a long-term strategist and a bit of a wildcatter. He’s largely responsible for implementing financial maneuvers that hedge against the biggest bugaboo of the airline industry: energy prices.

Detractors disparage Kelly as a numbers guy who added a dose of tough love to the love airline.

“He is,” aviation consultant Boyd said. “That’s exactly why Southwest isn’t broke.”

His company, Boyd Group International, consults with Southwest’s pilots union, and that has given him a “unique respect” for Kelly.

Boyd describes the union’s naturally confrontational relationship as one of “the loyal opposition as opposed to death to the infidel. It’s adversarial to get to a goal, not adversarial to hurt. That’s tough to maintain, and Gary’s done it.”

Thom McDaniel, president of Transport Workers Union Local 556, which represents Southwest’s flight attendants, said his members appreciated Kelly’s attention to the bottom line while trying to preserve the company culture.

“Gary has always said job security is incredibly important to him. As a union leader, it is to me,” McDaniel said. “Without those things that are the hallmarks of Southwest Airlines, we would be in a very bad place.”

Conversely, the analysts say Kelly’s too soft. Carl Kuwitzky, president of Southwest Airlines Pilots’ Assn., has heard them criticize Kelly for letting those bags fly free.

“Although our business traffic is weak, our overall traffic clearly shows that that was a good move,” Kuwitzky said. “The fact that we made money last year when virtually nobody else did is phenomenal.”

Hall writes for the Dallas Morning News / McClatchy.