Publish date:

Southwest Airlines in Good Hands

Herb Kelleher can leave because he believes Gary Kelly will take the carrier to the next level.
Author:

As he approaches the end of a four-decade run as a top executive at

Southwest Airlines

(LUV) - Get Southwest Airlines Co. Report

, Herb Kelleher finds himself in an unfamiliar position -- he isn't needed any more.

The 76-year-old industry icon, long viewed as the face of the country's most successful airline, said last month that he will resign as chairman in 2008. The move comes with Southwest at a crossroads and underscores Kelleher's confidence that Gary Kelly, CEO since 2004, can preside over its transformation.

During Kelleher's time on the board, Southwest grew from an iconoclastic intra-Texas carrier with three airplanes to a 500-airplane goliath. As it grew, Southwest accumulated many of the same problems that other airlines face.

Now, its costs are rising as its workforce ages. Its wildly successful fuel hedging program is coming to an end. And its competitors' costs have fallen as the overall industry restructured.

The trends are squeezing Southwest's plain Jane travel experience, which is fine when it's cheaper than the alternative, but less compelling when competitors provide more amenities at equal or lower prices.

To his credit, Kelly has gotten out ahead of the problems. In this case, it is the CEO, rather than Wall Street or the media, who has been the primary advocate for shaking things up at the company.

"We have been very conservative over the last 36 years. We may need to run a few new plays," Kelly declared in April, after Southwest reported a 48% drop in first-quarter net income. Since then, he has spoken repeatedly of the need to upgrade the product with assigned seating, onboard entertainment and expansion into international markets.

Consultant Mike Boyd says Kelly is the man for the job. "When you have a problem and you don't recognize it, you're doomed," he added. "But Gary Kelly recognizes it. He can move Southwest to the next step."

TheStreet Recommends

It's interesting to compare Southwest in 2007 with

Delta

(DAL) - Get Delta Air Lines, Inc. Report

in 2003.

Back then, Delta had a 71-year-old chairman and a 60-year-old year CEO who had fallen behind in his efforts to fix the airline's problems and to inspire employees. As a result Jerry Grinstein, a 17-year board member, was drafted to replace CEO Leo Mullin, whom he had backed for the job in 1997.

Grinstein spent three crisis-filled years at Delta's helm. He faced tough negotiations with pilots. He tried and failed to avoid bankruptcy. He fought off a hostile takeover bid.

At one time, conventional wisdom had it that Delta would cease to be. Instead, it remade itself, with Grinstein presiding. No doubt the experience was rewarding, but it was hardly relaxing.

Only now, at 74, is Grinstein preparing to depart. "I've got grandchildren to play with and watch grow,

and there's a lot of art to see and music to listen," he said, in a recent interview. "I'm looking forward to all of that."

It is not hard to imagine that if Southwest were faltering badly today, the call would go out to "Bring Back Herb," and the veteran chairman might yield to the pressure, just as Grinstein once did.

On a recent conference call with reporters, Kelleher recalled that in 2001, he wanted to slow down and he stepped aside as CEO. But then came the Sept. 11 terrorist attacks, and he was called upon to lead the industry's efforts to develop new security regulations. "I had intended to take it a little easier," he said.

This time, it appears, Herb will get that chance.