IS HERB KELLEHER AMERICA'S BEST CEO? Behind his clowning is a people-wise manager who wins where others can't.
By Kenneth Labich REPORTER ASSOCIATE Ani Hadjian

(FORTUNE Magazine) – A low murmur of anticipation filters up from the crowd of 300 thronging the ornate ballroom of a midtown Manhattan hotel. Members of a professional aviation society called the Wings Club are gathered for a speech by Herbert D. Kelleher, the 63-year-old chairman of Southwest Airlines, and many are already chuckling to themselves. Kelleher -- Herb to even his most fleeting acquaintances -- is not just the current darling of U.S. aviation. He is also the airline industry's jokemeister, the High Priest of Ha-Ha, a man who has appeared in public dressed as Elvis and the Easter Bunny, who has carved an antic public persona out of his affection for cigarettes, bourbon, and bawdy stories. A fair percentage of the crowd have been up late swapping lies with Herb a time or two, and now they are waiting for him to say something . . . outrageous. Herb does not disappoint. A lean man just a shade over six feet, with a weathered face and thinning white hair, he glides to the microphone, Merit Ultra Lite in hand, and begins speaking in a honeyed baritone. ''You know,'' he says, ''a fellow introduced me on a podium the other day, and he said that if I were proud of anything I had accomplished that I should probably go ahead and talk about that. Well, I'm here to tell you that I am proud of a couple things.'' He pauses and rocks back and forth -- teasing the faces in the crowd, letting them know the good stuff is coming. ''First,'' he says, ''I am very good at projectile vomiting.'' Another pause as a great hoot of laughter erupts throughout the ballroom. ''Second, I've never had a really serious venereal disease.'' The laughter is sustained this time, and there is scattered applause. Kelleher owns this crowd, as he would any gathering even faintly familiar with the U.S. airline industry. For his Southwest Airlines is a phenomenon, an economic juggernaut that has shaken the domestic air travel business to its fanjets and that grows more powerful by the week. While household-name carriers like American, United, and Delta lost billions over the past four years, only Southwest among the big airlines remained consistently profitable. (''We didn't make much for a while there,'' says Kelleher. ''It was like being the tallest guy in a tribe of dwarfs.'') Now that prosperity is returning to the industry, Kelleher's operation, based on carrying passengers relatively short distances for prices sometimes shockingly low, is likely to step up its rapid growth and become even more of a power. The U.S. Department of Transportation last year concluded that Southwest, based in Dallas, had become the dominant carrier in the nation's busiest air travel markets and was the ''principal driving force for changes occurring in ^ the airline industry.'' A number of Kelleher's chief competitors are flattering him most sincerely by attempting to clone his routing and operations strategies. WALL STREET has taken close notice of Southwest's rise, and investors have driven up the airline's market capitalization to close to $5 billion and its price/earnings multiple to a sky-high 30 or so. Still, growth fund managers, entranced by the airline's history of 25% or more annual earnings increases, continue to gather Southwest shares, and virtually all airline equity analysts rate it a buy. Robert McAdoo and Cynthia Prestil of Prudential Securities, echoing the Transportation Department, call acquiring Southwest their current Single Best Idea because ''its actions are the driving force behind events in the industry, and nothing seems likely to stop it.'' Alone among the big U.S. carriers, Southwest, with a debt to total capitalization rate of 60% or so (vs. American's 83% and United's 96%), offers investment-grade bonds. ''Everything else in the industry is junk,'' says Betsy Snyder, airline bond analyst at Standard & Poor's. Southwest's fleet of 162 planes is one of the industry's most modern, averaging only about seven years old. In terms that amount to the highest praise, analysts repeatedly compare Southwest to Wal-Mart in its potential as an investment. INVARIABLY those Wall Street wizards who have followed Southwest for years credit the airline's success to Kelleher's unorthodox personality and engaging management style. The old-fashioned bond of loyalty between employees and company may have vanished elsewhere in corporate America, but it is stronger than ever at Southwest. ''To an extreme degree, Herb has been able to make working in this business an adventure for his people,'' says Michael Derchin, veteran airline analyst at NatWest Securities. Says Steve Lewins, a Gruntal & Co. analyst who has been monitoring Kelleher's moves almost since Southwest began flying in 1971: ''I think Herb is brilliant, charming, cunning, and tough. He is the sort of manager who will stay out with a mechanic in some bar until four o'clock in the morning to find out what is going on. And then he will fix whatever is wrong.''

Kelleher has become closely identified with the freewheeling entrepreneurial style of the Dallas-Fort Worth area; he likes to refer to himself, with a wolfish grin, as the Metternich of the Metroplex. But he is in fact a transplant from the Northeast, born and raised in the environs of Camden, New Jersey. His father was general manager of Campbell Soup Co., and Kelleher credits some of his egalitarian notions to the six summers he spent working on the company's factory floor. ''It was like getting a Ph.D. in industrial management -- squared,'' he says. He was a star athlete and the student body president at suburban Haddon Heights High School and Wesleyan University in Connecticut, where he studied English literature and entertained thoughts of becoming a journalist. But ultimately he was pushed toward the practice of law by Arthur T. Vanderbilt, a distinguished legal scholar and Wesleyan trustee who took a liking to the gregarious young college student. ''Despite all the things he was involved in, all the great scholarship and the important cases, he always made time for me,'' recalls Kelleher. ''I guess maybe I was comic relief.'' KELLEHER entered New York University Law School, excelling both at his studies -- making law review -- and at the Greenwich Village social scene. Says he: ''I had a little apartment on Washington Square, and you could just open your door and entertaining people would walk in and you would have an instant party.'' After law school he clerked for a New Jersey Supreme Court justice for two years before joining a law firm in Newark, New Jersey. Thanks in large measure to Vanderbilt's patronage, Kelleher prospered, but he was growing restless. He had married a Texas woman he had met during college and was increasingly intrigued by the wide-open business scene he had surveyed during family visits to her San Antonio home. One evening after dinner he broke the news that he wanted to pull up stakes, ''and my wife stood there with tears of happiness rolling down her cheeks.'' By the mid-1960s, Kelleher was happily practicing law in San Antonio but on the lookout for startup opportunities. The fateful day came in 1966 when a banker client named Rollin King, recently returned from a trip to California, walked into Kelleher's office and declared that Texas could benefit from a short-haul commuter airline similar to PSA, then a major player in the California market. (''I often tell people the whole thing took place in a bar because so many of the good things in life do happen there,'' he says.) The two men proceeded to map out the basic plan, a low-cost carrier that would serve Houston and San Antonio from a Dallas base. Kelleher took out some loans and kicked in some seed money. His 1.8% share of Southwest plus exercisable stock options were recently worth $86 million. The two main intra-Texas carriers of the time, Braniff and Texas International, were less than thrilled by the prospect of a new competitor and were able to tie up Kelleher's dream in litigation for five long years. Kelleher brought in a handful of airline veterans, and Southwest finally got aloft in 1971, operating out of ramshackle old Love Field, near downtown Dallas. The airline broke into the black within two years and has remained profitable every year since -- a record unmatched in the U.S. airline industry. Kelleher is transparently proud of that record, but he takes pains to point out that Southwest, essentially a short-haul niche player with a thoroughly unique take on the business, is a far different animal from the industry's international megacarriers. Different is putting it mildly: A Harvard business school case study of Southwest written last year said the airline had succeeded in ''differentiating itself through its focus on service, operations, cost control, marketing, its people, and its corporate culture.'' A key difference is Southwest's distribution system. While most airlines rely on independent travel agents to write up to 90% of their tickets, Southwest has steadfastly refused to link up with the computer reservation systems the agents use. Agents who wish to book a Southwest flight have to pick up the phone like anyone else, and many try to persuade customers to pick another carrier or make the call themselves. The result is that nearly half of all Southwest tickets are sold directly to passengers, with an annual savings to the airline of about $30 million. SOUTHWEST also eschews the hub-and-spoke systems favored by other big carriers, preferring to fly frequently between pairs of cities not too far apart. The average Southwest flight is a mere 375 miles, the average fare a puny $58. The airline favors uncongested secondary airports such as Love Field, Chicago's Midway, and Detroit City Airport. Los Angeles International Airport is one of the few highly congested facilities that Southwest uses. The airline flies only one type of aircraft, the 737, which leads to millions more in savings because flight-crew training and plane maintenance are vastly simplified. Southwest passengers learn to do without assigned seating and onboard food except for peanuts or crackers -- the average flight takes only an hour. They also must recheck their baggage if they are proceeding to a further ! destination, even on Southwest. But the payoff from these relatively minor privations is that Southwest ground crews can usually turn around an aircraft at the gate in 15 or 20 minutes, vs. nearly an hour on average at other carriers. Southwest planes make about ten flights a day, more than twice the industry average, and this ultra-efficient use of major capital assets brings down unit costs all across the system. Fierce cost controls are close to the heart of Southwest's profitability. Kelleher personally approves every expenditure over $1,000 -- ''not because I don't trust our people, but because I know if they know I'm watching, they'll be just that much more careful'' -- and he constantly monitors the key industry standard, cost per available seat mile, to make sure he stays a penny or two below the pack. Labor costs are crucial at any airline, amounting to 30% or more of total expenses, and Southwest maintains a signal advantage there as well -- even though more than 80% of employees belong to labor unions. The edge is not much in pay; wages at Southwest in 1992, the last year for which figures are available, averaged $44,035, vs. $45,801 at American and $54,380 at United. Southwest also offers generous profit sharing, with about 15% of net profits returned to workers, and it will match up to 100% of employee contributions to 401(k) plans, depending on union contract provisions. But Southwest employees are far more productive than those at other carriers, allowing Kelleher to fly more planes and serve more passengers with fewer workers than his rivals (see table). NONE of the airline's achievements would be possible without its unusually good labor-management relations, a direct result of Kelleher's hands-on efforts. A Wall Street analyst recalls having lunch one day in the company cafeteria when Kelleher, seated at a table across the room with several female employees, suddenly leapt to his feet, kissed one of the women with gusto, and began leading the entire crowd in a series of cheers. When the analyst asked what was going on, one of the executives at his table explained that Kelleher had at that moment negotiated a new contract with Southwest's flight attendants. Southwest has gone through only one strike, a six-day walkout a decade ago by the machinists, and has never had a layoff. Says Michael E. Levine, former dean of Yale's School of Organization and Management and now executive vice president for marketing at Northwest Airlines: ''Herb really is | an extremely gifted labor-relations talent, especially when you consider he has somehow managed to get union people to identify personally with this company.'' Unlike workers at most other carriers, Southwest employees are willing to pitch in wherever needed, to walk -- or fly -- the extra mile. Pilots might man the boarding gate if things are running slow; ticket agents might find themselves schlepping luggage. Not long ago a Southwest reservations clerk in Dallas took a call from a harried fellow who was putting his 88-year-old mother aboard a flight to St. Louis. The elderly woman was quite frail, the fellow explained, and he wasn't sure she could handle the change of planes at Tulsa. No sweat, replied the clerk, ''I'll fly with her as far as Tulsa and make sure she gets safely aboard the St. Louis flight.'' When Southwest acquired tiny Morris Air last year, hundreds of Southwest employees spontaneously began sending cards, candy, and company T-shirts to Morris employees as a way of welcoming them into the fold. FROM THE BEGINNING, Kelleher has tried to instill in employees what he calls ''an insouciance, an effervescence.'' Levine characterizes the prevailing ethic as ''a kind of hoo-hah brio.'' One result is that Southwest workers often go out of their way to amuse, surprise, or somehow entertain passengers. During delays at the gate, ticket agents will award prizes to the passenger with the largest hole in his or her sock. Flight attendants have been known to hide in the overhead luggage bins and then pop out when passengers start filing onboard. Veteran Southwest fliers looking for a few yuks have learned to listen up to announcements over the intercom. A recent effort: ''Good morning, ladies and gentlemen. Those of you who wish to smoke will please file out to our lounge on the wing, where you can enjoy our feature film, Gone With the Wind.'' On that same flight, an attendant later made this announcement: ''Please pass all plastic cups to the center aisle so we can wash them out and use them for the next group of passengers.'' Clearly, not everyone is cut out to be a Southwest employee. ''What we are looking for, first and foremost, is a sense of humor,'' says Kelleher. ''Then we are looking for people who have to excel to satisfy themselves and who work well in a collegial environment. We don't care that much about education and expertise, because we can train people to do whatever they have to do. We hire attitudes.'' There is much talk about the Southwest ''family'' around the airline's headquarters, the sort of talk that makes corporate cynics snicker. But the halls are littered with converts to the cause. Says David Ridley, who arrived at Southwest six years ago to direct marketing and sales after working at two more traditional FORTUNE 500 companies: ''I was pretty dubious at first, having been at places where everyone but two or three top people were considered commodities. But I have come to appreciate a place where kindness and the human spirit are nurtured.'' Says Alan S. Boyd, retired chairman of Airbus North America and a longtime observer of the U.S. airline scene: ''At other places, managers say that people are their most important resource, but nobody acts on it. At Southwest, they have never lost sight of the fact.'' So powerful is the bond between the company and many of its workers that observers, only half-jokingly, have likened Southwest to some sort of religious cult. Kelleher proclaims he is not the least offended by such comparisons, contending that his operation has always retained ''a patina of spirituality.'' Says he: ''I feel that you have to be with your employees through all their difficulties, that you have to be interested in them personally. They may be disappointed in their country. Even their family might not be working out the way they wish it would. But I want them to know that Southwest will always be there for them.'' If life at Southwest has cultish aspects, no one doubts who holds the title of Maximum Leader. Kelleher reigns over his band of 12,000 loyalists like some sort of manic father figure. He is often at the center of the festivities that break out frequently on the headquarters party deck overlooking the flat Texas countryside. Whatever the occasion -- a holiday, someone's retirement, Friday -- Kelleher can be found in the middle of a worshipful crowd, drink and cigarette ever at hand. The Southwest chief works his way through about five packs of smokes a day, and only after he lost his voice a while back did the doctors persuade him to move to the lower-tar variety. Kelleher on his cigarette habit: ''I am determined to keep on doing it, and I don't much care what society thinks about it.'' He is equally unrepentant about his fondness for adult beverages, particularly bourbon. ''I love Wild Turkey,'' he says. ''I met the president of the company that makes the stuff down in Louisville not long ago, and I told him that he may be just a man to most people -- but to me he is a god.'' Kelleher is particularly proud of the large stuffed turkey someone sent him in honor of his favorite brand. A chamber inside holds a half-gallon jug; you pull up on the tail feathers and the booze comes out the beak. KELLEHER will celebrate his 40th wedding anniversary next year. His four children are grown, the youngest just completing college, and he is a doting grandfather. He spends much of whatever free time he can manage reading; he was recently reading a new biography of Winston Churchill, a personal hero. He likes to hunt and fish and is a regular at Conquistadores del Cielo, the rural Wyoming retreat that is a sort of Bohemian Grove for top airline chiefs. Says an aviation executive who has been a guest at the encampment: ''There is an unwritten rule that, if you don't want to stay up all night drinking and talking, then you stay the hell away from Herb.'' Such escapes have been harder to come by lately for Kelleher. Southwest's extraordinary success in recent years has shoved him into the role of industry spokesman. When President Clinton named a panel to plot the future of U.S. airlines last year, Kelleher was the only major airline boss onboard. Media attention has become constant, and he has to choose carefully among hundreds of speaking requests. Kelleher still has the stamina to deal with his hectic public life; he is the sort of fellow who can barely contain his excess energy. During a recent hour-and-a-half conversation with FORTUNE, he jumped up from his chair at least a dozen times to act out his point or simply prowl around his office. But he has come to resent the distractions from his obsession: the future of Southwest Airlines. That subject holds more than enough imponderables to occupy his time. For all their affection for Southwest, some Wall Street types question whether Kelleher can maintain the airline's frenetic recent earnings growth. Helping him do so: His operation is far less dependent than are other carriers on the health of the air travel market. Because Southwest fares are so low and average trips so short, the airline greatly expands new markets it enters by attracting lots of customers who might otherwise have taken a bus or driven their cars. SOMEWHERE around 8,000 people used to fly between Louisville and Chicago weekly; since Southwest entered the market last year, about 26,000 do. Similarly explosive growth took place after Kelleher introduced a $49 fare on a St. Louis-Kansas City route that TWA had been flying for $250. ''It was cheaper to take a cab,'' says Southwest revenue manager Keith Taylor. Southwest will probably get a near-term boost from its $129 million acquisition of Morris Air last year. Acquired carriers are often difficult to swallow, especially by an airline with a distinct corporate culture like Southwest, but tiny Morris, based in Salt Lake City, looks like an ideal buy. Its operations, based on flying 737s on short-haul, point-to-point routes with few frills and low fares, were designed to copy Southwest's. Morris had begun scheduled service only in 1992, so employees had not yet formed a rigid culture. Most important, the smaller airline served markets in the Northwest and the Upper Plains that Southwest had yet to penetrate. With a stroke, Kelleher added 14 cities to his route map. Characteristically, he also intervened when Morris pilots got edgy about losing seniority after the acquisition, a common flap when airlines merge. To keep the peace, Kelleher agreed to provide the new pilots temporary cash bonuses until they advance enough in seniority to recapture their former pay and status. Not all signs point to glory in Southwest's future. Southwest's home-base growth has long been hampered by the so-called Wright Amendment, a piece of legislation crafted by former U.S. Representative James Wright when Kelleher first sought to venture outside Texas in the mid-1970s. The law, ostensibly enacted to ensure ample business for then-new Dallas-Fort Worth International Airport, prohibits any carrier using Love Field from flying routes out of Dallas to destinations beyond the four states contiguous to Texas. Kelleher, still able to serve such popular destinations as New Orleans, Albuquerque, and Little Rock, grudgingly accepted the deal but has groused about it pretty much ever since. Similar legislation has survived court challenges around the U.S., so he figures he will just have to live with the restrictions. Says he: ''The Wright Amendment is a pain in the ass, but not every pain in the ass is a constitutional infringement.'' Kelleher's most serious challenge will come from elsewhere in the airline industry. After watching Southwest soar year after year while they were diving, several rival carriers -- United, USAir, Continental, and Delta -- hope to launch low-cost, short-haul clones of Kelleher's operation. But to steal a chunk of Southwest's business, the clones would have to reproduce Kelleher's operation with some precision. Veteran airline analysts think that unlikely. No other carrier has demonstrated the operating skills and cultural cohesiveness needed to approach Southwest's standards of service and reliability on a broad scale. Turning around a few planes in 20 minutes is one thing, but Kelleher's enterprise has for the past two years won the Department of Transportation's Service Triple Crown -- most on-time flights, best baggage handling, highest customer satisfaction. Says Derchin of NatWest Securities: ''The real difference is in the effort Herb gets out of the people who work for him. That is very, very hard to duplicate.'' Kelleher seems to relish the possibility of an old-fashioned dogfight with other carriers. He freely declares that he will respond vigorously if they attempt to take him on directly, and he notes pointedly that much of his current fleet is equipped to fly 1,400 miles nonstop -- and that over the next few years he will be bringing on 737-700s capable of transcontinental flights. If planners at, say, Houston-based Continental decide to go head-to-head against Kelleher on short trips in Texas or elsewhere, they just might find themselves facing a violent fare war with Southwest on one of their longer, extremely lucrative routes like Houston-Newark. If United invades Southwest's turf directly, Kelleher could launch punitively low-cost service from New York to San Francisco. Says Kelleher: ''I have told people that I would retaliate if I became very, very angry, but now I think I will revise that. Let's just say that if I become peckish, I will attack.'' The greatest obstacle to long-term prosperity at Southwest may be Kelleher's mortality. He obviously retains the vigor of a man much younger than his 63 years, and he figures to be on the job for a good while yet. But he has had periodic health problems, and his hell-raising and punishing work schedule have got to take a toll sometime. Already his eyes are a bit rheumy when you get up close, and his ruddy complexion seems due in equal parts to Texas sunshine and Kentucky bourbon. The Wall Street crowd believes Kelleher has assembled a top-rank team of potential successors. They argue as well that the airline's crucial operating systems and financial controls have become institutional. Yet nobody inside the company, or outside for that matter, could likely fill the many roles he plays for his employees -- inspirational leader, kindly uncle, cheerleader, clown. It may cost his company someday, but in the dictionary beneath the words ''one of a kind,'' there should be a picture of Herb Kelleher, grinning.