Herb Kelleher and the Free-Market Fight for Southwest
It is manifestly contrary to the interest of the consumers to prevent the most efficient entrepreneurs from expanding the sphere of their activities up to the limit to which the public approves of their conduct of business by buying their products.
~Ludwig von Mises
This month, Southwest Airlines lost one of their founders, the legendary Herb Kelleher. Thanks to Mr. Kelleher’s brilliance and tenacity, this idea for a small, intrastate Texas airline survived the first four years of legal battles to become one of the dominant airlines in the US and the world. While I am thankful for all the travel I’ve been able to complete due to their low-cost fares, what I’m particularly grateful for is Mr. Kelleher’s determination and fortitude to continue to push through all the legal blockades his competition forced through the courts — particular in the early years that kept Southwest Airlines from being allowed to fly.
In order to more accurately frame those legal battles, let’s first start with a brief history of the founding of Southwest. The idea for Southwest came from a business model that had already proven to be effective and profitable in California. Due to the airline regulations at the time, one way to start a lucrative new airline was have it solely based in one state with cities large enough to support airline traffic and far enough apart to justify flying versus driving. By limiting their airlines to just one state, they would not fall under the regulations and pricing of the now defunct Civil Aeronautics Board (CAB).
The founders of Southwest, Mr. Kelleher and Mr. Rollin King, decided the idea would work in Texas so they incorporated the company (then known as Air Southwest Co) on March 15, 1967. For the next eight months, they raised almost $500,000 to start their airline. On November 27, 1967, Mr. Kelleher filed an application with the Texas Aeronautics Commission (TAC) for a license to fly commuter flights between Houston, Dallas, and San Antonio. The following March TAC voted unanimously to grant Air Southwest a certificate of public convenience and necessity. Immediately the following day, the two large carriers who currently dominated that market, Braniff and Trans Texas (later Texas International) obtained a temporary restraining order from Travis County District Court prohibiting TAC from allowing Southwest to operate.1 Thus began four and a half years of legal battles for Mr. Kelleher and Southwest before they would be allowed to start operations on June 18, 1971.
The start-up airline did not have enough money to fight these airline giants, so in 1969 Mr. Kelleher (who was a lawyer) told the Southwest board that he would take the case for free and pay court costs. Not only was he already working full-time as a lawyer but he also had four children and a wife at home. When asked why he continued to fight for Southwest, he responded:
I was idealistic about it because I figured if they can prevent Southwest Airlines from introducing what Southwest Airlines proposes to provide to the consumer, then that is a sign that the free enterprise system is failing. And one of the things that motivated me was to, in effect, validate the free enterprise system.
When asked about these airlines’ reasoning for the legal action, Mr. Kelleher said that they wanted to “apply their incumbency and their financial strength to bleed Southwest Airlines to death before it could ever fly.” These legacy carriers had no public safety or public benefit reasons for keeping Southwest grounded, but only their desire to maintain their government-sanctioned monopoly and their high prices. Mr Kelleher goes on to say that: “the arguments that they made in court were actually all kind of specious. This is one illustration of where people attempt to use, to manipulate the government to prevent competition.” So instead of the government or the courts protecting the rights of Southwest to exist, they allowed these airlines to try to prohibit Southwest from ever becoming a competitor.
Southwest did take flight in 1971, and all Mr. Kelleher’s dedication and perseverance paid off as Southwest continued to grow despite all the legal battles competitors continued to jab them with. His desire to “validate the free market” by providing an airlines that customers wanted was fulfilled. What about those airline giants that tried to keep Southwest grounded? The Airline Deregulation Act in 1978 started the downfall of the two main legal agitators (Braniff and Texas International), who ceased operations in 1982. Unlike its legal challengers, the deregulation allowed Southwest to expand out of Texas and it has since become one of the largest airlines in the world.
Southwest grew due to its innovations and cost savings methods as well as the airline deregulation. Both of which have disrupted the airline industry and transformed how people fly. Since its first flight in 1971 consumers have continued to benefit from the work of Mr. Kelleher in his fight for his airline's right to exist. Mr. Kelleher is a great example of an entrepreneur who would not let anything but the demands of the consumers dictate the direction of his company. Luckily for him and for Southwest, he had the professional skills and the abundant energy to continue struggling in the trenches for those four years. This was no small feat, since, as Murray Rothbard noted in Making Economic Sense, markets and consumers can be unpredictable, and competition fierce:
One fascinating aspect of deregulation was the failure of experts to predict the actual operations of the free market. No transportation economist predicted the swift rise of the hub-and-spoke system. But the general workings of the market conformed to the insights of free-market economics: competition intensified, fares declined, the number of customers increased, and a variety of almost bewildering discounts and deals pervaded the airline market. Almost weekly, new airlines entered the field, old and inefficient lines went bankrupt, and mergers occurred as the airline market moved swiftly toward efficient service of consumer needs after decades of stultifying government cartelization.
While Mr. Kelleher’s story is one of a successful breakthrough of a startup against the entrenched companies, it is interesting to consider all the other companies and innovations that could be in the marketplace but don’t exist due to competition using governmental monopolies and crony capitalism as a barrier to entry. These barriers to entry will continue to exist as long as the government has the regulatory power to manipulate the market. However, the story of Southwest and the airline deregulation is a wonderful example of how the free market provides the most efficient product for the consumers and not a governmental organization.
Stories like Mr. Kelleher’s and Southwest’s inspire other entrepreneurs to continue to fight to bring their business ideas to the market despite the often unfair struggles they may have, and demonstrate the power of the market in providing the best products and services to consumers.
- 1. Some sources list Continental Airlines (now United Airlines) has another airline that tried to block Southwest.