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Ohio Employee Ownership Center
18th Annual Conference
April 16, 2004
Jim Parker=s Keynote Speech
Thank you everyone, I am very honored to be here today. It is humbling to see all the great
employee-owned companies that are represented here. Before I start, let me ask you a question. How
many of you have flown on Southwest Airlines? WOW! So you=ve heard of us? Thank you. Usually
when I go some place I have to tell them we=re an airline.
We actually began as an idea on a cocktail napkin in 1967 when one of our cofounders, Rollin
King, went to the law office of another of our cofounders, Herb Kelleher, and said he had this crazy idea
of starting an airline, flying within Texas, that would offer people low fares and take them where they
wanted to go and make flying fun. Legend has it that they went across the street to the bar at the St.
Anthony Hotel where Rollin got out a cocktail napkin and a pen and drew what came to be known as the
famous Texas Triangle--from Dallas to Houston to San Antonio. That is what our route map looked like.
After a couple cocktails, Herb finally said "Rollin you=re crazy, let=s do it." They changed the history of
the airline industry.
It was a more radical idea than it might seem today. At that time the airline industry was still
subject to a strict and comprehensive scheme of federal regulation. The Civil Aeronautics Board, an
agency of the Federal Government, told airlines where they could fly, when they could fly, and how
much they could charge. As often happens in heavily regulated industries, prices were high, service was
lousy, and efficiency was nil. It was a radical idea that an airline would start up and charge low fares and
actually introduce competition into this heavily regulated industry. Fortunately, Herb and Rollin knew
about a loophole in the federal law: If you operated as an intrastate airline you would not be subject to the
regulations that apply to interstate airlines. It was actually a model that had been tried in California by a
little airline called PSA, which some of you have heard of, and Texas was one of the few states where the
geography and the dispersed population would lend itself to such a business operation. So they
incorporated in 1967 and planned to start flying airplanes in 1968.
Somehow the entrenched airlines considered the idea of competition to be un-American and
launched a barrage of litigation that went through every court in Texas and all the way to the U.S.
Supreme Court and actually delayed our start up until 1971. But just to show how things sometimes
work out for the best: Rollin and Herb had initially planned to fly Lockheed Electra aircraft in 1968,
however while we were involved in litigation, the wings started falling off Electras and it quickly became
an obsolete airplane. Then the airline industry went into a downturn leaving Boeing with a bunch of what
were called “Black Tail” 737's sitting on the tarmac at Boeing Field in Seattle. Rollin and Herb went up
and looked at them and decided to start with Boeing 737's instead. The Boeing 737 is now the most
widely sold and most widely used airplane in America, largely because of the success that Southwest
Airline has had with it.
The litigation went on until finally on June 17, 1971 our humble lawyer Herb Kelleher convinced
the Texas Supreme Court to issue an Extraordinary Writ of Mandamus. Those of you who are lawyers in
the audience and I know there a few of you anyway, know what I’m talking about. I’m a lawyer by trade,
as I told some of you at the CEO’s conference yesterday. I actually spent most of my career introducing
myself and saying, “I’m a lawyer; I’m sorry.” I got this new job title and now I have to go around saying,
“I’m a CEO; I’m sorry.” But anyway, Herb got the court to issue the Writ of Mandamus which was an
order to the lower courts to issue no more injunctions preventing Southwest Airlines from flying. Herb
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called our then president, Lamar Muse, and gave him the good news and said, "Lamar, tomorrow
we=re finally flying, you=re gonna push back that first flight. You=re gonna take off from Dallas Love
Field." To which Lamar was understandably skeptical and said, "Well Herb, what do I do if the sheriff
shows up with another writ in his hand?" Herb said, "Lamar, leave your tire tracks on his shirt."
Thus was born what I call "The Indomitable Spirit of the People of Southwest Airlines." We have
always viewed ourselves as underdogs, as having a mission of "Giving America the Freedom to Fly."
We continued to fly within Texas throughout the 1970's. Even so, our very survival was in jeopardy due
to anti-competitive campaigns of our entrenched competitors who did not want Southwest to succeed
after their years of litigation failed. They initiated anti-competitive business tactics that actually resulted
in their becoming the first commercial airlines ever to be indicted and convicted of federal criminal
antitrust violations for their attempts to run Southwest Airlines out of business.
It got to the point where our bank account was down to a few hundred dollars and our
management actually had to sell one of our four airplanes to make payroll. Our employees came together
and came up with the idea that if we could reduce our turnaround time by 10 minutes, we could fly the
same number of flights with three airplanes that we had been flying with four. The "10-minute
Turnaround" enhanced our aircraft productivity to the point where we started to turn the corner.
We had one profitable route, Dallas-Houston. We had lowered the fares to $26 on that route and
did make a little bit of money. Braniff didn=t want us to make a little bit of money, so Braniff launched a
$13 fare between Dallas and Houston. We couldn=t make any money at $13. So, the next day we put a
full-page ad in every newspaper in Dallas-Houston and San Antonio. The people of Texas knew what
Southwest had done for them; we had lowered fares, offered great service, and made flying fun again, but
we couldn’t make money at $13. The ad said Nobody is going to shoot Southwest out of the sky for a
lousy $13. If you think $13 is the right amount to pay, pay us $13 and we=ll fly you between Dallas and
Houston and Dallas and San Antonio. If you think $26 is a fair price to pay, pay us $26 and as a token of
our appreciation when you get off the airplane we=ll give you a free bottle of whiskey. For some time
Southwest Airlines was the number one liquor distributor in Texas.
This marked our turning point. We made our first profit in 1973. It wasn=t a big profit, about
$171,000. After that first year of profits was when our Board of Directors decided to create the very first
employee profit sharing plan in the airline industry, to make our employees owners of the company and
to give them the opportunity to participate in the growth of our company. Every year since that time we
have been very fortunate; we have been profitable for 31 consecutive years. We have dedicated 15% of
our pre-tax operating profit every year to our employee profit-sharing plan. Today, as a consequence, our
employees, just through the profit sharing plan alone, are our largest single shareholder.
We continued to fly through the 1970’s within the state of Texas and didn=t fly our first interstate
flight until Congress noticed what was happening in Texas and realized the consumer benefits that could
be derived from deregulating the airline industry. Congress passed the Airline Deregulation Act citing
Southwest Airlines as the primary example of the economic benefits that could be produced from
deregulating the airline industry. We flew our first interstate route in 1979. We flew our first interstate
route to New Orleans, creating a whole new round of litigation with those airlines who didn=t want us to
fly interstate, but we won that. We did end up being limited as to where we could fly out of Love Field
because there was a unique Act of Congress passed to protect Dallas-Fort Worth Airport and the carriers
serving DFW. If you want to fly to Love Field, which is our airport in Dallas, you are going to have a
hard time doing this from Cleveland.
We have managed to grow and be profitable through the 1980's. We focused our growth in the
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west. We went to Phoenix and then to California. We started flying intrastate within California
around 1989. We went to California with the advertising theme of "Happy Days are Here Again." We
reminded the California traveling public of what it was like when they had PSA and AirCal. We let them
know that Southwest Airlines was here and we were here to stay. Today, I=m proud to tell you that we are
true to our roots as an intrastate airline. We carry about 68% of the intrastate passengers within
California. We carry about 74% of the intrastate passengers within the state of Texas. We are the number
one intrastate airline within Florida.
But, of course, we have become much more than that as we are an interstate airline also. I guess it
was just a bit more than ten years ago, in 1993, when the U.S. Department of Transportation
commissioned a study on the state of airline competition. They shocked the world when the study came
back and it was entitled "The Southwest Advantage." The Department of Transportation concluded that
Southwest Airlines was the primary driving force behind fundamental changes that were occurring in the
United States airline industry. We have continued to grow to the point where, in May of 2003, the
Department of Transportation again shocked the world by announcing that Southwest Airlines actually
carried more domestic passengers than any other airline in America. We have, to our own shock, become
the largest airline in America in terms of domestic passengers carried, not in terms of revenue, we don=t
fly internationally.
I guess I shouldn=t have been shocked, although I was, by the number of people here who have
flown Southwest, so I=ll just say thank you for your support and creating that degree of success. Our
philosophy, our basic business model is very simple. We are a low fare airline providing a high quality
of service. In order to do that we have to have a low cost structure. We do not achieve that low cost
structure by paying minimum wage to our employees. We pay very competitive, and in many cases,
industry leading pay rates to our employees. We achieve those advantages through operating efficiencies
that we achieve by operating one aircraft type, for example, only 737's. If you want to fly on Southwest,
you don=t have to go through a hub in Cincinnati, or Atlanta, or Chicago, or Salt Lake City. We try to fly
directly where you want to go as often as we can. Our people work very hard. They are very productive.
They fly more hours than our competitors. They know this is a competitive world that we live in. They
know that this is their airline.
In 1994, we were on the tail end of a major depression in the airline industry, it wasn=t just a
recession, it was a depression-- it was a depression that took the lives of a number of fabled names in the
airline industry: Eastern, Midway, PanAm and others that ceased to exist. Our employees knew that we
had financial challenges as well. Our pilots negotiated
a collective bargaining agreement with us that was unprecedented in the history of the airline industry.
Our pilots are unionized, and we are actually the most heavily unionized airline in America and we have
been for many years. We negotiated an agreement with our pilot=s union whereby they took a five-year
pay freeze. We didn=t ask for concessions, we asked for a pay freeze, in return for a significant number of
stock options in the company. This was the first time, at least in the airline industry, that stock options
had been used on a widely dispersed basis
and certainly in the context of a collective bargaining agreement. People thought we were crazy when we
talked about the idea. Nobody had ever heard of such a thing. We authorized and issued to our pilots
stock options for what was the equivalent of about 10% ownership of the company.
It has worked out very well. It helped us to create a cost structure that has helped us to survive
and continue to be profitable. It has worked out very well for our pilots as our company has grown.
They have done very well with their stock options. Subsequently, virtually every other collective
bargaining group within the company has come to us and asked us to negotiate a contract that involves
stock options. Consequently, every collective bargaining group, we have about eleven unionized groups
within our company, has stock option agreements in place, except for one that is still under negotiation.
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We have a widely dispersed stock option plan. Our employee participation and employee
ownership plans, there are really several, we have the employee profit-sharing plan that in and of itself
presently has value of about $1.2 billion worth of Southwest stock alone.
Our employees are not required to invest that profit sharing money in Southwest stock. There are
a number of funds in that profit-sharing plan that they can invest in. Historically they have chosen to
invest about 70% of their profit-sharing money in Southwest stock and that is why they are the number
one shareholder, just through that plan alone. We have an employee stock purchase plan, which allows
our employees to purchase our stock at a 10% discount off of the market price and we have our widely
dispersed stock option plans. I really feel that employee ownership is a very important part of the culture
and success of Southwest Airlines and it is a very important part of our employees understanding and
supporting the totality of our business model.
We have historically sought to grow on a consistent basis every year, but to do so in a cautious
and prudent way. It has been summed up in the phrase that was coined by our co-founder and longtime
CEO, Herb Kelleher, when he cautioned our employees that we must manage our business in good times
in such a way that we would be able to survive in bad times. The last three years have been the worst of
times in the airline industry, since 9/11. Of course, as you all know, more than 100,000 airline employees
have lost their jobs through furloughs and downsizing. At Southwest we have furloughed nobody. Major
airlines have all negotiated concessions and pay cuts from all of their employees. At Southwest we have
not asked anybody to take a pay cut, except for, I don=t mean to personalize this, Colleen Barrett, our
president, and myself. We were the only president and CEO of a major airline who took a pay cut in
2002 and we were the only employees of Southwest Airlines who took a pay cut in 2002. We continue to
give our employees pay raises while the other airlines were imposing pay cuts. We have a very strong
balance sheet. We are known for having the strongest credit rating, really the only credit rating in the
airline industry, and a strong cash position. It was really, as a consequence of that strong balance sheet
and a strong cash position, that we were able to do the right thing after 9/11. If we had been in an over
leveraged position, if we had not had the cash to fall back on, we might well have been forced to do some
things that we didn=t want to do. One of our employees said something to me last year, I was talking
about this and it really stuck with me, she said, "It=s kind of like my daddy used to tell me, the answer is
decided before the question is asked" and really, the answer was decided. Our company, our employees,
had worked hard, productively, cautiously, and profitably for 30 years before 9/11. That put us in a
position to be able to assure our employees job security, continue to make profits, continue to grow and
continue to make profit sharing payments. One of which we made in the amount of $179 million, three
days after 9/11.
We have a company mission statement that all of our employees are expected to know and live
by. I kind of sum it up by saying that at Southwest Airlines we talk about something called the Golden
Rule. We are not trying to preach it as a religious principle, we=re not trying to convert anybody to any
particular religion. We have many people of many beliefs working at Southwest Airlines, but it is really
one of the leading principles of every major religion and philosophy of the world. It=s simple and easy to
remember, just treat other people the way you like to be treated. It is a pretty good rule for running
businesses, a pretty good rule for dealing with customers, it=s a pretty good rule dealing with shareholders
and with fellow employees.
As a large publicly traded company we face some of the same challenges as you do and some
different challenges. At the CEO conference yesterday, I was struck by the fact that many of you face the
same challenges we do and that we feel very strongly about in terms of the importance of communication
and creating a shared vision, a culture, within your workforce. As the example of United Airlines would
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show, the mere fact of employee ownership does not assure success, it does not assure a shared
vision, it does not assure a culture of cooperation. We spend a lot of effort at Southwest Airlines on
communicating, both ways, back and forth with our employees. All new hire employees come to Dallas
and have an opportunity to go through an orientation class to learn a little bit about the history of our
company. They know the history that I have talked with you about today. They know our roots, they
know our history, they know how hard we fought to get to where we our today. We have all kinds of
newsletters; we have departmental newsletters and company newsletters. I mentioned yesterday that one
of the best things I think we have done, and maybe something we should do for our other workers, is
what we have done for our pilots. When we bring our new pilots in to Dallas, for their initial training, we
bring their spouses. This way the pilot=s spouse has a little bit of a history lesson of Southwest Airlines,
gets to know our culture, gets to know our company. I think this is important because we are going to be
asking a lot of those pilots. The pilots are going to be on the road a lot and away from home and I think
it=s important that their family knows they are out there doing something important.
We try to bring all of our employees together. We try to create a shared vision. We celebrate a
lot of things. Every employee gets a birthday card on their birthday, every employee gets a card
celebrating their anniversary with the company. We send out thousands and thousands of gifts to our
employees when they have a baby, or they get married, or they have some personal event. I don=t even
want to know how much money we spend on all that. But really, the most important thing, in my view, is
to have leaders of our company at every location, on every shift who understand the values of our
company, who understand the mission of our company. Those who understand how we want to treat
each other, who understand what we mean when we are talking about the Golden Rule. It doesn=t mean
that everyone is going to get everything they want, certainly we can=t do that. I=d love to pay all of our
people $1 million a year, but they would never get their $1 million, because we would never get through
the first year. It doesn=t mean that you give everybody everything they want, but it does mean treating
everyone with respect and understanding. The challenge of being a big company is we have to be sure
that we have leaders in every location, on every shift who understand that.
The primary place where relationships break down in the work environment is, I believe, at the
front line of supervision. There may be people in Dallas who are spouting these high sounding opinions,
but if they don=t see it in their front line supervisor, who’s there deciding what=s going to happen in their
life, they’re going to think it=s a bunch of bull and that we don=t really believe what we are saying. We
have extensive training programs for our supervisors; we=ve invested a lot of money in trying to improve
the training of our leaders. At the top level we have a manager-in-training program. We try to identify
future leaders; it is very competitive to get into that program. At the front line level, I think the biggest
mistake that companies make when they get into a financial bind, well of course their biggest mistake is
trimming their travel budget, but the second thing they do is to cut out training programs and, especially,
leadership training programs. They think these are secondary and unimportant. I can assure you, in my
view, it is not unimportant. It will really help to define the future of your company.
Another thing that we do is to go around every year to give a message that=s called "A Message to
the Field" where I go and talk to our employees. We do it in five locations and people come in from all
over the system and hear what we have to say. This year, I started off by talking to them about a movie I
saw recently. It=s kind of a joke in my family; Pat and my daughter Jennifer are always joking about how
I never go to see a movie. It=s a big deal if I see one that isn=t more than five years old, but this year I saw
a movie, it was called Miracle. I thought it was a great movie and had some great lessons in it. It was
about the 1980 U.S. Olympic Hockey Team that went to the Olympics and defeated the mighty Soviet
Hockey Team. This was in an era before professional athletes could participate in the Olympics, at least
in the United States. The Soviet Union had the best hockey team in the world; it was widely considered
to be the most dominate sports team, in any sport, anywhere in the world. They defeated teams from all
over the world, every country in the world, they just demolished them. They came to this country and
they played the best professional athletes in North America. They played the NHL All-Star Team and
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beat them 10 to 0. For those of you who are not hockey fans that is like a score of 70 to 0 in
football. Against this backdrop, Coach Herb Brooks, from the University of Minnesota, was assigned the
task of putting together a team of amateur hockey players from the United States who could go to the
Olympics and compete with the mighty Soviet Hockey Team. The Olympic Committee put together
tryouts and called together college hockey players from all over the country for a three-day tryout. Coach
Herb Brooks picked his team in about an hour on the first day. When the Olympic hockey official asked
him, "Herb, what am I going to tell everybody, we have three days of tryouts?" He said, "Tell them I
have my team. Here=s the list." The Olympic hockey official looked at the list and said, "Herb, you don=t
even have some of the best players on this list." To which Coach Brooks said, "I=m not looking for the
best players, I=m looking for the right players."
I tell our people that at Southwest Airlines we have lived a miracle for 33 years because we have the right
players on our team. We are more than just a collection of the best pilots, the best flight attendants, the
best mechanics, the best dispatchers, the best customer service agents, reservation agents, aircraft
assurance technicians, stock clerks, simulator technicians, and all the other people that it takes to run a
great airline. We are more than just a collection of people that pits owners against management. We are
more than just a collection of people that pits owners against workers. At Southwest Airlines we are all
owners and we are all workers.
I tell them that our future really will be decided by ourselves. In that respect we are not so
different from you. We hold our own future in our hands. At Southwest Airlines we are very fortunate
that we have a good, strong competitive position. We have a strong balance sheet, we have a low cost
structure, and we have very loyal customers who enjoy flying on Southwest Airlines. Our future will be
decided by ourselves. Are we going to have a shared vision and a culture of cooperation, or are we going
to allow ourselves to devolve into merely all-stars, as opposed to being a team? Are we going to have a
culture of cooperation or a culture of conflict that they had at United Airlines? As a public company we
have been subject to a lot of new rule making in the last few months in the fallout of the Enron,
WorldCom scandals. Somebody asked me awhile back whether we had any of those off balance sheet
deals like they had at Enron or at WorldCom and I told them that we are just very simple people, we=re
not even smart enough to think of those things. My rule of thumb is if you cannot understand it in a
common sense way you really shouldn=t do it because it is probably not a good thing.
We have been subject to a lot of rule making, a lot of new rules, regulations on what we can do,
what we have to do. In my view, it has really become the triumph of form over substance. I wouldn=t
normally look to a philosophy professor for business advice but I did recently run across an article by
Professor Paul Woodruff, from the University of Texas, who is a professor of philosophy and ethics. He
gave a speech at the Business School, which is actually where I met him. I was invited to go talk to the
Business School at the University of Texas and it was a little daunting; it was a Friday afternoon, at 4:30.
I said "What in the hell is happening? When I was in college at 4:30 on a Friday afternoon, we were out
drinking beer. What are you doing here listening to me?" But, they were all eager and excited and
wanted to know what to do to become a CEO. I told them that when I went to school there, other than
economics, which isn=t even in the Business School anymore, I never even took a course at the Business
School. I was a Liberal Arts major, so I don=t really have any good advice for you except to do whatever
it is your passion is. But anyway, Professor Woodruff came over and heard me; he also was invited to
the Business School to give a speech on business ethics. I found his words interesting. He said, "Modern
ethical theory is mainly about rules. Rules do not stop sleaze. Anyone with brains and a business degree
can work out a way to make good rules serve a sleazy purpose. Good rules are no use without good
people to apply them at all levels. Virtues are motivational habits; you have a virtue when you generally
feel like doing the right thing. Virtues are habits of the heart, they are inherently motivating." We use
the word culture a lot at Southwest Airlines. Every business, every workplace, every shift has its own
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culture. Professor Woodruff said, "Virtues are learned, practiced and sustained in communities.
Humans always have cultures in communities, but communities can fail. Through virtue ethics we
learned a vital importance of sustaining communities through the mutual respect that grows from shared
ideas."
In closing, I hope you will allow me to share with you an excerpt from an article that I recently
ran across in the Albuquerque Tribune. It is written by somebody named, Mr. J.B. Bollington, whom I do
not know. It involves a random act of kindness by an unknown employee at Southwest Airlines, at an
airport we don=t even serve anymore. This occurred many years ago, yet, it so moved Mr. Bollington that
he chose to write a column about it almost twenty years later and I think it says a lot about the character
of the people at Southwest Airlines. He writes, in part:
Southwest Airlines is now the world=s most profitable and most admired airline. Its stock is worth more
than all the other big airlines combined and delivers the highest margins in the industry, by far. Experts
say Southwest got there by tempering opportunism with fiscal conservatism. Being the leader in
increased productivity and having the lowest operating costs per mile in the industry. Southwest is the
only major carrier to remain profitable in every quarter since 9/11. Its six biggest rivals have laid-off
more than 70,000 people, (it has grown since he wrote this article). Southwest has never laid-off a soul.
(He goes on with some stuff about how our president, Colleen Barrett, doesn=t know how to use email
and how I have a beer keg in my office for after-hours parties.) You reference all the management guru
jive you want, but I have my own thoughts about why Southwest is number one. I worked for Ozark
Airlines in Denver at Stapleton Airport in the mid 1980's. Ozark owned gates at Stapleton and, because
of that, when Southwest flew into Denver, Southwest used Ozark=s gates and Ozark=s employees to load
and unload bags. One night while I was in the belly of one of Southwest=s 737's, packing and stacking
bags in the rear bin, one of my co-workers handed me a bucket with some tape criss-crossed over the top
of it. "What the hell is this?" I said, "Its somebody=s bag, pack it." We laughed at it, we made fun of it,
we mocked it. But, somewhere in time, during the infancy of Southwest Airlines, the company developed
the culture of customer service that instinctively led a Southwest gate agent, on a cold winter night in
Denver, to show compassion for a poor struggling passenger who was trying to make his way home. He
didn=t have luggage, he had a bucket of personal belongings. A Southwest employee took responsibility
for it, checked it, and carried it out to the ramp and packed it. I may never see a greater or humbling
example of compassionate customer service in my life. While other airlines wallow, trying to figure out
how to define the Peter Pan Principle, Southwest flies high because its culture is all about YOU, YOU,
YOU. Not ME, ME, ME. This may win the award as the most gratuitous column, I don=t care. Southwest
Airlines deserves it. That company has had the same philosophy sine 1971. Get people where they want
to go for the lowest fare possible, with the best customer service in the industry. Southwest takes care of
people, both employees and customers, and people take care of the company. It=s just that simple.
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