Filling the Shoes of a Legend at Southwest Airlines
from
September/October 2002
by Constance Loizos
Meet
just plain Jim. Jim Parker, the man the Southwest Airlines board chose
to replace Herb Kelleher as CEO, seems like a shrinking violet compared
with his famously convivial predecessor. Parker knows it, too. He
insists that he has "no desire to become a Herb clone," and says he was
just kidding when he promised last year that he and Southwest president
Colleen Barrett would fill Kelleher's shoes one legendary vice at a
time. "I said I would handle the drinking and Colleen would handle the
smoking," he recalls.
It's good that he has a sense of humor. Not only has Parker, 55, taken the controls from the man who transformed the plucky Dallas-based airline into a company with $5.5 billion in annual revenues, he's now piloting an outfit whose business plan is headed into thick cloud. Owing to a stinging economic downturn abruptly worsened by last year's terrorist attacks, Southwest's profit in the first quarter of 2002 dived to $21.4 million, down $100 million from the same period last year. A recent 10-cent-a-gallon increase in jet-fuel prices will cost roughly $25 million per quarter, the company says. Meanwhile, competition is growing. Established carriers that cut back their flight schedules after September 11 have begun beefing them up again, unwilling to relinquish market share, while start-ups such as JetBlue Airways are threatening to follow Southwest's own illustrious path from obscure airline to industry powerhouse.
So far the Southwest board seems happy with the guy in the pilot's seat. "Everyone knows that Herb is one of a kind. Not everyone has his strengths," says director June Morris, whose airline, Morris Air, was acquired by Kelleher in 1993. "But while Jim isn't as flamboyant, he's taking care of business and doing what's right for the company." Fellow board member William Cunningham, a former chancellor of the University of Texas system, is just as happy. "Jim is a proven, capable executive with a great deal of experience in the airline industry," he says. Cunningham also describes last year's Kelleher-Parker transition as "virtually seamless."
Parker knows that Southwest's 10-person board wants him to follow the course set by Kelleher. "Our directors would never suggest a change to the business in an attempt to make us something we're not," he says. "They've always believed that consistency and patience pay off, and that we should manage our business in good times so that we can survive and prosper even in the bad times." In fact, he adds, "the foundation of the company's success was really laid when we continued to exercise financial restraint during the boom times."
Were it not for Kelleher's 1999 announcement that he has prostate cancer, he'd probably still be at the controls today, even at 71. Although Southwest's directors declined to discuss their reaction to that news, it did bring the succession issue to center stage. Kelleher, typically, made light of it. "When people questioned him about his continued smoking, Herb just said, 'I never use my prostate to smoke,'" recalls Southwest spokesman Ed Stewart.
It took another two years for Kelleher to step down formally as CEO (he's staying on as chairman until 2004) and name Parker as his successor. But there seems to have been little suspense about who would get the job. Since 1986, Parker has been Southwest's vice president of general counsel, in other words its top lawyer—a role that put him at the forefront of the company's most sensitive dealings, including negotiations with its various labor groups. Says Morris: "Jim has been with the company since it was small. He knows what has made it what it is today as well as Herb does. That's important to all of us, because if someone new had come in, they might have made a lot of changes, and no one wanted that. The company works so well the way it is."
One testament to Parker's skills is a contract he authored in 1994, the implications of which are still being felt. He drew up a 10-year labor agreement with Southwest's pilots, asking them to accept stock options in lieu of pay increases until 1999, with 3% pay increases until 2004. The pilots have enjoyed the approximately 216% increase in Southwest's share price over the past decade, but their cash pay, some $148,000, is among the industry's lowest. A big reason for that is that the airline uses only Boeing 737's, a relatively small plane. Pilots of larger aircraft are paid much more.
The real savings for the company, however, came from productivity, not the dollars and cents of the contract. Says industry analyst Ray Neidl: "Southwest has no wasteful work rules written into the pilots' contracts." Unlike their counterparts at some other airlines, Southwest's pilots aren't paid for time spent waiting between flights at airports or for the hours on the ground they have to put in at destination cities. "Southwest gets about 75 hours' stick time a month from its pilots, whereas most major carriers get only 48 to 52 hours," says Neidl. "It makes a huge difference." Helane Becker, who covers the industry for Buckingham Research Group, thinks Parker's success with the pilot contracts "made him heir apparent a long time ago."
Former CEOs who stick around aren't most people's idea of good governance. But at least Kelleher stays out of town. Morris says that Kelleher spends most of his time in Washington these days, educating lawmakers on how to get the airline industry back on its feet after September 11. And when he is around, according to Becker, he keeps his distance. "I don't see Kelleher being an issue," she says. "He's been hands-off for quite a while."
Much of Parker's time is spent on what he sees as his primary function: bridging the gap between Southwest's board and executive suite and the rest of the company, including the pilots. His namesake Jim Parker, an analyst at the investment bank Raymond James who has been covering the airline industry for years (and who has little patience for doppelgänger jokes), explains it this way: "Jim is reserved. He's solid. Labor just feels very comfortable around him."
That's crucial, because Southwest's unyielding focus on keeping its employees happy is one of Kelleher's most important, and lasting, legacies. As aviation analyst Michael Linenberg of Merrill Lynch points out, "One of Southwest's more notable achievements is its never having laid off anyone due to an economic hardship. That's a highly rare occurrence at any company, let alone at an airline."
After the terrorist attacks, as the major carriers slashed capacity and laid off more than 100,000 workers, Parker announced that the jobs of Southwest's 31,600 full-time employees were all safe. He says they "were comforted early on by the knowledge that we were working very hard to get the airline in the air again, and not at the expense of our wonderful people. People are the edge that we have in this business. We don't view them as expendable resources."
Keeping that promise required difficult belt-tightening. Not only did the company defer the delivery of some aircraft and lower travel-agency commission rates, it has also looked for reductions in the smallest corners, cuts that haven't been easy to find. District marketing manager Mona Hernandez, a 19-year veteran at the company, says that with an operating budget that has always been minimal at best, she was forced to get rid of even the most basic amenities at her six-person office in Alameda, California. Among the things to go: the water cooler.
Southwest staffers have also been asked to help out on the front lines. Hernandez says that once a week her marketing staff drives to the Oakland airport to help ticket agents and security personnel.
The readiness to pitch in is a large part of Southwest's culture, of course, like the obsession with frugality and the rejection of such trimmings as seat assignments. The all-737 fleet not only holds down pilot pay but minimizes maintenance expenses. It also ensures that every pilot can operate every plane owned by the company.
Last year was rough for most U.S. carriers, which together lost around $7 billion. Southwest, in contrast, enjoyed its 29th consecutive year of profitability, earning $511 million on revenues of $5.5 billion. In 2000, it made $625 million on revenues that were about the same.
Still, the future remains uncertain. Southwest's planes are flying a third empty—the load factors, which measure occupied seats, averaged 62.9% in the first quarter. JetBlue, by contrast, logged 80.8% over the same period, and Delta 68.9%. While it's a measure of Southwest's superb cost control that the company can make money with so few people in the seats, it's still not good business. The mix between business and leisure travelers isn't good either; few corporate travelers are willing to trade price for all that egalitarianism.
Southwest's response to the poor environment is to grow. The company recently inaugurated coast-to-coast flights between Baltimore/Washington International Airport and Los Angeles. The established carriers are sure to fight back, however—and just as certain to target business travelers.
Wall Street has been sitting on the Southwest fence, and most investment banks now have a neutral rating on the stock, which traded at around $14 in mid-July. "It would be a shock," says Becker, if Southwest's second quarter wasn't better than the first. "They've already weathered the worst two quarters in their history, and they still managed to remain profitable."
Parker may not have Kelleher's inimitable charisma, but so far this
hasn't hurt the airline. Just plain Jim's true test will come if and
when he sets a new course—and persuades Southwest's pilots, other
employees, and directors to come along for the ride.
