'Bags Fly Free' has helped define Southwest CEO

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

Kelly, the 55-year-old CEO of Southwest Airlines Co., did not 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.

Kelly would shore up morale by giving raises. He would let attrition trim the work force. And he was not 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 is thumbing his nose at them.

By his 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," he said. "We have fewer seats offered every day, and we're carrying more passengers. We're defying gravity."

And Kelly is defining himself as a leader.

Perhaps more than anything he has done since becoming CEO in 2004, his "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 leads 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."

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... pleased and proud of his accomplishments."

Kelly mostly wears sports shirts, jeans and boots, and he likes to be out in the field with employees or in a room thrashing out solutions than reading memos in his office. He enjoys being a mentor.

"I've got officers who I hired as young people," he said. "It's not such a stretch to feel that you've helped raise these people. They helped raise me, for that matter."

Kelly became an accountant because his father was one.

"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."

In 1986, he saw a newspaper story about the departure of Southwest's controller. He went after the job and got it.

Southwest back then was "a much smaller company, only 5,000 employees," he said. "There was very little bureaucracy. It was boom, boom, boom."

Kelly's promotions came quickly: chief financial officer at 34, executive vice president at 46, CEO at 49, chairman and president at 53.

Kelly didn't actually directly follow Kelleher as CEO. That job fell to Jim Parker, who had the misfortune to take over just before Sept. 11, 2001, and a nasty dispute with flight attendants. After three years, Parker had all the fun he could stomach and retired.

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

Detractors disparage Kelly as a numbers guy. But Boyd, the analyst, 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 described 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 appreciate 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."

Carl Kuwitzky, president of the Southwest Airlines Pilots' Association, isn't fazed by analysts who 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."

When Kelly was asked whether Southwest would maintain its string of consecutive quarters of profitability when it reported first-quarter numbers, he simply smiled.

A few days later, Southwest reported a first-quarter profit — the only big airline to do so.