Introducing Business History: How Free Whisky, Hot Pants and Low Fares Led to Southwest's Success

Summary

Podcast Summary

Revisionist History Presents: Business History — How Free Whisky, Hot Pants and Low Fares Led to Southwest’s Success

Release Date: November 19, 2025
Hosts: Jacob Goldstein and Robert Smith (with intro from Malcolm Gladwell)
Podcast: Revisionist History / Business History

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Episode Overview

This episode, curated by Malcolm Gladwell from Revisionist History, introduces Pushkin Industries' new podcast, "Business History." The selected episode follows the remarkable story of Southwest Airlines—a scrappy Texan airline that upset the U.S. air travel industry with bold ideas: cheap fares, audacious branding (hot pants, free whisky), and relentless cost discipline. Jacob Goldstein and Robert Smith chart Southwest’s unlikely rise, its pivotal strategies that forced an industry-wide reckoning, and the recent troubles that tested its once-unassailable business model.

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Main Discussion Points & Insights

1. The Humble Beginnings: Southwest’s “Triangle” Plan (04:12–08:36)

• Setting the Scene (1966, San Antonio): Lawyer Herb Kelleher and client Rollin King, fueled by bourbon and Texas bravado, sketched out a simple triangle—Dallas, Houston, San Antonio—on a cocktail napkin.
• Core Insight: Intra-Texas routes allowed Southwest to initially sidestep federal regulation, a crucial loophole at a time of heavy government control over air travel.
• Industry Context: Federal authorities decided who could fly what routes and capped prices. Airlines competed on service (luxurious meals, piano bars), not on price.
• Quote — On Past Luxury:

  “Pan Am would roll a cart down the aisle with a roast on it and they'd carve your slice of beef for you. Seats were wider, there was more legroom... This came at a price. $2,434 round trip NY to LA in today’s dollars.”
  — Jacob Goldstein (10:14–10:59)

• Regulatory Headwinds: It took years, several lawsuits, and Herb Kelleher’s stubborn resolve (and his own money) to break into the market.
  • Kelleher’s Legendary Grit:

  “If that happens, roll right over the son of a bitch and leave our tire tracks on his uniform.”
  — Herb Kelleher, via Jacob Goldstein (14:19–14:44)

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2. Breaking the Mold: Cheap Fares, Free Whisky, and Hot Pants (15:47–21:29)

• Early Struggles: Even once allowed to fly, few cared—business travelers stuck to established airlines; Southwest planes sometimes flew nearly empty.
• Key Turnaround – Disruptive Pricing: Selling late-night tickets for $10 (about $80 today) drew crowds of non-traditional fliers—folks who’d otherwise take the bus or drive.
  • Dual Fare System: Regular business fares and cheap nights/weekends fares for the masses.
  • Competitor Warfare – The Whisky Gambit: When Braniff slashed prices to $13, Southwest’s countermove offered customers either a $13 ticket or, for $26, a bottle of Chivas Regal whisky.
  • Quote — On Pricing Stunts:

    “There’s this moment when Southwest is the biggest Chivas Regal distributor in Texas.”
    — Jacob Goldstein (19:30–19:39)

• Brand Persona: Southwest embraced a wild, fun, irreverent image—rebellious vibes, free whisky, and notably, flight attendant uniforms featuring “extremely short shorts,” emblematic of the era’s sexism.

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3. Operational Innovation: The Art of the Fast Turn (21:29–26:58)

• Crisis and Innovation: Running out of cash, Southwest had to sell a plane—yet ground staffer Bill Franklin suggested, “If you can’t do a 10 minute turn, you’re gonna get fired... and we’ll just keep firing until we can find someone who can do it.” (23:02–23:19)
  • Fast Turnarounds: Reduced gate time from 25 to 10 minutes, enabling the airline to run the same schedule with fewer planes and staff.
  • Boarding Without Assigned Seats: “Sit anywhere” became standard—one of the fastest methods for plane loading, studies confirmed.
• Outcome: By 1973, Southwest was profitable—a streak interrupted only by the 2020 pandemic.

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4. Deregulation, Culture Shock, and Southwest’s Simple Formula (31:07–46:03)

• Deregulation Context (late 1970s): U.S. government ended strict fare/route controls. Academic George Stigler’s influential theory of “regulatory capture” reframed regulation—from protective to a mechanism favoring incumbents.
  • Quote — On Regulation:

    “Regulation is acquired by the industry and is designed and operated primarily for its benefit.”
    — George Stigler, via Jacob Goldstein (34:51–35:11)

• Industry Reaction: Major carriers pursued expansion, comfort, and amenities (747 disco lounges!), while Southwest doubled down on what worked—simplicity and discipline.
• Post-Deregulation Moves:
  Goldstein’s “Top Five” Ways Southwest Stayed Disciplined:
  1. One seat type, no premium classes.
  2. No travel agency (or later, online agent) sales—tickets only direct.
  3. No hub-and-spoke system—point-to-point only.
  4. One plane model (Boeing 737), maximizing efficiency.
  5. Relentless cost focus, never chasing #1 market share (“Market share has nothing to do with profitability.” — Herb Kelleher, 45:16–45:37).
• Quote — On Ruthless Simplicity:

  “We don’t want to fly more people than anybody else. We just want to make more money than we spend flying people.”
  — Herb Kelleher, via Jacob Goldstein (45:40–45:47)

• Result: While legacy airlines embraced complexity then went bankrupt (often multiple times), Southwest remained profitable year after year.

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5. When Strength Turns to Weakness: Crisis Years (49:12–57:44)

• 2019-2023: Series of Blows
  • 737 MAX Grounding: Southwest, flying only Boeing 737s, was hit hardest when the MAX was grounded after crashes. They lost $1 billion in revenue.
    • Quote — On Efficiency vs. Resilience:

      “This is the classic tradeoff between efficiency and resilience.”
      — Robert Smith (50:49–50:53)

  • Pandemic Loss: 2020 marked Southwest’s first annual loss since 1973.
  • Software Collapse, 2022: A massive scheduling system failure after a winter storm wrecked operations, stranding 2 million people. Union leaders had long warned the system was outdated.
• Pressure Mounts: With stagnating profits and a falling stock price, hedge fund Elliott Management initiated a campaign to force change:
  • Quote — On the Pressure to Change:

    “While Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with a strategy that no longer succeeds in the modern airline industry.”
    — Elliott’s letter, read by Jacob Goldstein (56:24–56:39)

  • Irony: What made Southwest unique (cheap fares, simplicity) is now industry standard. Their competitive edge is gone.

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6. The End of an Era (58:40–59:25)

• 2026 and Beyond:
  • Beginning January 2026, Southwest will abandon its “one seat, no assignment” policy for tiered seating and assigned seats—the first change of its kind in decades.
  • Hosts’ Reflection:

    “I’m a little sad... end of an era.”
    — Robert Smith (59:05–59:07)

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Notable Quotes & Memorable Moments

• Herb Kelleher’s color and drive:

  “If that happens, roll right over the son of a bitch and leave our tire tracks on his uniform.” (14:19–14:44)

• On regulatory absurdity:

  “They immediately got an injunction. Even in Texas. Even in Texas. Land of the free. Remember the Alamo? Whatever.” — Jacob Goldstein (12:07–12:20)

• On the shift in air travel:

  “The majority of Americans at this point have never been on a plane. 1971.” — Jacob Goldstein (16:34–16:39)

• On frugality:

  “Market share has nothing to do with profitability.” — Herb Kelleher (45:16–45:40)

• On the collapse:

  “The company doesn't even know where their flight crews are... they have to actually call on the phone like ordinary schmuck passengers.” — Jacob Goldstein (53:01–54:03)

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Key Segments & Timestamps

| Topic | Timestamp | |----------------------------------------------|------------------| | Southwest’s origin story, the Triangle | 04:12–08:36 | | Regulatory obstacles and Texas loophole | 08:36–12:55 | | The whisky/price war, wild uniforms | 15:47–21:29 | | 10-minute turns, seatless boarding revolution| 21:29–26:58 | | Deregulation, Stigler, industry shakeup | 31:07–46:03 | | The “Five Ways” Southwest stayed simple | 39:46–46:03 | | Crisis: 737 MAX, pandemic, software collapse | 49:12–57:44 | | The end of Southwest’s old model | 58:40–59:25 |

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Tone & Style

The discussion is conversational, irreverent, and often humorous—never shying from lovingly poking fun at the quirkiness of both 1970s business culture and the airline industry’s foibles. Herb Kelleher is painted as both wild visionary and shrewd strategist. The hosts’ chemistry lightens the deep business analysis, and pop culture references abound.

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Summary Takeaway

Southwest Airlines’ radical, iconoclastic formula—fast, cheap, simple, and fun—let it thrive for nearly 50 years against an industry known for losses and bankruptcy. Ironically, its recipe for success became so effective that it was copied, robbing the airline of its uniqueness and leaving it vulnerable to modern challenges. With the era of free whisky, hot pants, and unruly efficiency fading, Southwest faces its toughest reinvention yet.

Transcript

[Podcast Announcer]

This is an iHeart podcast.

[Carter]

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[Malcolm]

A travel month for me. I'll be in California, Florida, all over the place. I love exploring, walking up and down random side streets, sitting in cafes and.

[Carter]

Taking it all in.

[Malcolm]

It's how I found some of my favorite spots. And if you're planning a trip soon, consider hosting your home on Airbnb while you're away. It's an easy and simple way to make some extra money that can go towards your next vacation. Your home might be worth more than you think. Find out how [e-mail] host. Bushkin hey listeners, Malcolm here. Today we're doing things a little differently and sharing a new podcast from Pushkin Industries that we think you'll enjoy. It's called Business History. Our very own Jacob Goldstein and former Planet Money host Robert Smith examine the surprising stories of businesses big and small, bringing to life the greatest innovations, the boldest entrepreneurs, and the craziest mavericks in the in the archives of commerce and finance, you already know that. Here on Revisionist History, we re evaluate the most interesting and compelling stories you think you've heard through a new lens. Business History does the same thing, but focusing on how companies and founders of the past have led us to this current moment. Business history shares why some company stocks soar while other business ideas crash, and what the businesses of the past can teach us about commerce today. And speaking of soaring, the episode you're about to hear is all about how Southwest Airlines developed a winning formula involving hot pants and whiskey that forced its competitors to change how they did business. Southwest revolutionized flying and was profitable every year for nearly five decades until their model fell apart. Okay, enjoy the episode. And if you want to know more about the business beneath the business, find business history on YouTube, Apple, Spotify, or wherever you get podcasts to hear episodes ad free. And to get early access to special series, subscribe to Pushkin. Sign up on the Business History show page on Apple Podcasts or at Pushkin FM plus.

[Jacob Goldstein]

Robert Smith. I'm gonna give you a classic business origin story.

[Robert Smith]

Do me a favor, Jacob, and just set the scene. I want atmospherics.

[Jacob Goldstein]

It's 1966, San Antonio, Texas, and a lawyer named Herb Kelleher is drinking Wild Turkey bourbon and smoking cigarettes, as everyone.

[Robert Smith]

Did in 1966 at the St. Anthony Club.

[Jacob Goldstein]

Great bar name in Texas. And so Herb, he's from New Jersey. His dad died when he was 12. He worked at the Campbell Soup factory, High school and college in the summers, grows up to be a lawyer, eventually moves to Texas, and on this particular night, he's drinking with a client of his named Rollin King. And Rollin's a Harvard mba, amateur pilot. And in fact, right around this time, Herb is helping Rollin wind down this failed charter air business he'd had called Wild Goose Flying Service. Basically flew rich guys to go hunt in the. In Texas, in the country, whatever.

[Robert Smith]

So far, this is the most Texas story I've ever heard.

[Jacob Goldstein]

Very Texas. And Rollins says to Herb something like, you know, look, I know you're working on this failed air charter business that I have, but I think you and me, we should actually start a real airline. And Roland takes a cocktail napkin there at the bar, and he draws a triangle. The top he writes Dallas. The bottom left, he writes San Antonio. What's he write on the bottom right?

[Robert Smith]

Houston, Texas.

[Jacob Goldstein]

Houston, right. Good. You know, Rollin says, look, these cities are hundreds of miles away from each other. Takes a long time to drive from one to the other hours. And, you know, at the time, you could fly between them, but basically nobody did. It was inconvenient. It was really expensive.

[Robert Smith]

Flying is what you did when you needed to go New York to La on business.

[Jacob Goldstein]

Yeah, exactly. And so Herb's like, this is a crazy idea and I want to do it. Turns out the Nepkin might be apocryphal, but the triangle is real. Those cities are in fact, in a triangle. And on the strength of the triangle and the bourbon and the cigarettes, they launched Southwest. And I'm going to argue in the show today that Southwest is the most successful airline in the history of America.

[Robert Smith]

Jacob. Let's do it.

[Jacob Goldstein]

I'm Jacob Goldstein.

[Robert Smith]

And I'm Robert Smith. And this is Business History, a show about the history of business.

[Jacob Goldstein]

That's why it's called Business History. Today on the show, we're talking about Southwest, which is scrappy, which is fun, and which completely changed what it means to fly in America. Southwest eventually got into trouble, but it had this decades long run of incredible consistent profitability.

[Robert Smith]

That may sound simple, right? A business is profitable, but. But in the airline industry, this is amazing. The airline industry is notoriously one of the worst businesses in the world. If you think about it, all those great airlines, they had their names on buildings have disappeared, right? Twa, Eastern, Pan Am, Aloha went to Hawaii, right? And even the big ones that are still around, your Deltas, Uniteds, Americans, they have declared bankruptcy at least once. At least once. It's just a regular thing. The investor Warren Buffett notoriously said.

[Jacob Goldstein]

Don't say the investor Warren Buffett. People know who Warren Buffett is.

[Robert Smith]

The singer, Beyonce, United.

[Jacob Goldstein]

An airline.

[Robert Smith]

Warren Buffett always talked about how much he hated investing in the airline industry, even though he said he was somewhat addicted to it. He famously said if a farsighted capitalist had been President Kitty Hawk for the very first airplane flight, he would have done his successors a huge favorite by shooting Orville down.

[Jacob Goldstein]

It's rough. Uncle Warren's kind of a hardass.

[Robert Smith]

He's like, no airplanes ever.

[Jacob Goldstein]

So, okay, let's do the Southwest story.

[Robert Smith]

The triangle.

[Jacob Goldstein]

The triangle. We're going to start with the triangle. One obvious but very important fact about the triangle, all three of those cities, Dallas, San Antonio, Houston, they're all in Texas. And this is really important in 1966, the late 60s, when they're coming up with this idea, because at the time, interstate air travel was regulated by the federal government, right? If you want to fly from state to state, the federal government is going to have a lot to say about it. And so Herb and Rollin figure, you know what? We're not going to have to deal with that. We're just going to stay inside of.

[Robert Smith]

Texas and they've started in this place that it's actually pretty rare in the United States to have a big state with three population centers that far apart.

[Jacob Goldstein]

It's optimal. Yeah. And the way airline regulation worked at that time in the late 60s feels wild, feels unimaginable today. Like the federal government decided which airlines could fly which routes. And by the way, at this time, they basically kept saying no when people asked to fly new routes. Like, no, no, we're not going to let you do that. We're not going to let any more competition there.

[Robert Smith]

And again, you're a major airline. You want to fly from Denver to Seattle and you go to Washington D.C. and you're like, I think this might be a good route.

[Jacob Goldstein]

No, we've decided there's enough competition there. We don't think there should be more and more. The airlines who do fly there, the government tells them down to the penny what they can charge for a ticket.

[Robert Smith]

This is amazing to me. It's like they're treating airlines and maybe they thought of it this way as a public utility.

[Jacob Goldstein]

Yeah. Like the power company.

[Robert Smith]

Yeah. This thing that, well, everybody needs it. It's important to our national security and such. So we are going to regulate this down to the penny you can charge.

[Jacob Goldstein]

And so this regulatory regime had some really striking effects. Right. So the airlines are not competing on price. The government's telling them the price and so they wind up competing on service. When people talk about how great air travel used to be, this is the era they're talking about, you know, and like, it does seem like it was cool. Like American Airlines put a piano bar in first class. Like there was a piano player there on the plane.

[Robert Smith]

Oh, so good. And you could like mingle and like smoke. You could smoke on the airlines. Have a martini. Sure.

[Jacob Goldstein]

Even in coach. Coach was good. Like Pan Am would roll a cart down the aisle with a roast on it and they'd like carve your slice of beef for you. Seats were wider, there was more leg room. But like, this came at a price. Right. And not just a metaphorical price, an actual dollars price. So here's one example I found. In 1970, a round trip ticket from New York to LA cost $284. Robert Smith. If you adjust that for inflation, 1970, terrible. $284. I got the BLS CPI inflation calculator right here.

[Robert Smith]

900. 950. No more.

[Jacob Goldstein]

$284 in 1970 is the same as $2,434.

[Robert Smith]

I'm not paying it. I'm not paying it.

[Jacob Goldstein]

$2,400. That's what it cost to fly around. Trip New York, la.

[Robert Smith]

So it was like first classes today. But this is like all the tickets. Yes.

[Jacob Goldstein]

And so to anyone complaining about how much better air travel used to be, I say just fly first class, because.

[Robert Smith]

That'S exactly the same.

[Jacob Goldstein]

It's still rad.

[Robert Smith]

Yeah.

[Jacob Goldstein]

Apparently you walk past it and those big seats do look cool. So, you know, when businesses aren't competing on price, this is what happens. Right. You get very nice things and they cost a lot of money. Right. This is the world Herb and Rollin are getting into with Southwest. And really, it ends up being mostly Herb. Herb is the key figure at the airline for a long time. He drains his personal savings to launch the airline. He's still working his day job as a lawyer. You know, they do still have to get regulatory approval, not from the federal government, but from the state of Texas.

[Robert Smith]

Freedom loving Texas.

[Jacob Goldstein]

Freedom loving Texas. They get a certificate saying they can go into business, serve in that triangle. And then the next day, the very next day, three legacy airlines that flew those triangle routes already sued to prevent Southwest from flying, saying what?

[Robert Smith]

We don't want competitors saying we don't.

[Jacob Goldstein]

Need more airlines, saying the market does not need more airlines. And they immediately got an injunction. Even in Texas. Even in Texas. Land of the free. Remember the Alamo? Whatever.

[Robert Smith]

It's so funny to think of. Right. This is the way I think of the UK or Europe working. Right. I forget that in the United States of America, you would just be like, I don't feel like having a new competitor.

[Carter]

Yeah.

[Jacob Goldstein]

I mean, well, if you think about, like, mid century America. Right. Which this still is. Right. Like, you have this history where in the 30s, if we go back a few decades. Right. You have the Depression and then you have the New Deal, which is this moment when the government really steps in to regulate the economy. Banks were much more highly regulated. Trucking was much more highly regulated.

[Robert Smith]

Yeah. And there was a distrust of business even at this point, far from the Depression. Yeah.

[Roy]

So.

[Jacob Goldstein]

So that's the context. And that's why Southwest has to fight this legal battle just to fly. And it actually takes years. For years, Southwest is blocked from flying. They're spending all their capital on legal fees. And after a while, the board says, that's enough. We're just losing money in court. We're not a real company. Let's give up. And Herb says, look, I'll represent the company for free. There's more legal fees. I'll pay him out of My own pocket. And he keeps fighting.

[Robert Smith]

Was he stubborn or was he like, this is an actual business opportunity. I'm 100% convinced of it.

[Jacob Goldstein]

I think he was stubborn.

[Robert Smith]

Okay. Went through a lot of cigarettes.

[Jacob Goldstein]

So many cigarettes. That alone ate up like half of their startup capital. But he's doing well in court. He's winning in court eventually, by June of 1971. So this is years into it. Things are looking good. Southwest schedules its first flights for June 18th. And on the 16th, the rival airlines get, wait for it, another injunction to block Southwest. And Herb goes to Austin, where the state supreme court is, pulls an all nighter in the law library, goes before a special session of the state supreme court on the 17th, and gets the court to block the injunction. And he picks up the phone and he calls this guy, Lamar Muse, who he's hired to, you know, run operations at Southwest. Tell him the good news, says, you.

[FedEx Advertiser]

Know, we're good to go.

[Jacob Goldstein]

And Lamar's like, are we? You know, like, I feel like at this point, surely there's going to be another injunction and, and tomorrow we'll be about to go and the sheriff's gonna show up and say, you can't fly. What do I do if that happens? And Herb says, if that happens, and this part's a quote, he says, roll right over the son of a bitch and leave our tire tracks on his uniform.

[Malcolm]

Oh, Herb.

[Jacob Goldstein]

So the next day comes, and in fact, Southwest does not have to drive over the sheriff. There were no more injunctions, and they started flying, offering cheaper fares that were like 20% lower than their competitors and basically nobody cared.

[Robert Smith]

So I know back in these days, if you were flying, you were probably a business person and you probably had your company pay for it. Your secretary booked the tickets. You're just like, I gotta get from San Antonio to Houston. I gotta be there by 9:15.

[Jacob Goldstein]

Yeah, exactly. Like, nobody in that universe has an incentive to save 20% to fly on some airline nobody's ever heard of. Like, why would you do that? And so Southwest is doing badly. And there's this amazing moment a few months later where Herb's sister in law calls him and is like, herb, I gotta tell you, I just flew on Southwest and it was the most amazing flight, incredible service. And Herb's like, ugh, that's so good to hear. And his sister in law is like, yeah, on the plane, it was just me, the pilots and the flight attendants. I was the only passenger.

[Robert Smith]

It was incredible, crushing.

[Jacob Goldstein]

But the way they turn it around is actually interesting and delightful. And there's really two key things they figure out. Two key things they do to turn it around. The first one happens just later that year. It's that same guy, Lamar Muse, the guy Kelleher hired to run operations. He's thinking about the fact that every night Southwest flies an empty plane back from San Antonio to Dallas to get maintenance. That's where their maintenance center is. And it's like too late for businessmen. Nobody's going to fly at that point. They'll just stay in a hotel on the company dime, right? But Lamar thinks like, well, the plane's flying anyway. We got to have a pilot on it. What if we sell tickets really cheap and just see if anybody buys them? So they offer tickets for 10 bucks.

[Robert Smith]

Oh, crazy late night fare, right?

[Jacob Goldstein]

Although, you know, adjusted for inflation, that's like 80. But at that time, in that regulated, expensive world, it was crazy cheap. It was less than half of what tickets usually cost. And they do like one radio ad or something. It's just like a cheap experiment. And the first night they have one of these flights, they are swamped. People are lined up to get on it. And crucially, crucially, the people who are there look nothing like the people who usually fly. Remember, this is like the carved roast businessman. I want to say business person. Aurelius businessman. Era of flying. Flying is, you know, refined, expensive. The majority of Americans at this point have never been on a plane. 1971. And so with this new $10 late night fare, Southwest is not playing that game, right? Like, they're not competing with the $26 midday businessman fare. It's a whole different product almost.

[Robert Smith]

It's a whole different customer base. These are people who maybe they would have driven a few hours, taken the bus, you know, the Greyhound. And they see a price that's like close ish to what they might have paid anyway. And they're like, I'm getting on a plane.

[Jacob Goldstein]

Yeah, it's positive sum, right? Like they're not. They're not cannibalizing some other fare. They're bringing new people into flying. And so quickly they're like, oh, this is working. And they create two fair classes. The regular weekday business person fair and this cheap nights and weekends fare for the masses. And it works. They have competitors, right? And because it's Texas, it's easier for people to change their prices. And so one of the old school competitors, Braniff. Remember Braniff?

[Robert Smith]

Not really.

[Jacob Goldstein]

They were in airline. They cut their regular daytime fare to $13, half of what it had been before. It was a money loser. For them. But, like, classic. They're a big airline. They can lose money on this little fare, and they figure, you know, classic big player move will just bleed Southwest dry. And so Southwest has this, I have to say, delightful response when Braniff does that. They say, okay, we'll give you a choice. Public customer. You can pay $13 to fly midday, or you can pay the usual $26 fare and get the flight and a fifth of Chivas Regal. Fifth of whiskey.

[Robert Smith]

What, you just get that when you.

[Jacob Goldstein]

Get on the plane? I get that, yes.

[Robert Smith]

Yes. And a glass.

[Jacob Goldstein]

I think it comes with a glass, I think. Isn't that the one that comes with the little velour purple bag?

[Carter]

Yeah, yeah, yeah.

[Robert Smith]

I mean, it's only an hour flight. What could go wrong?

[Jacob Goldstein]

The people buying these tickets, These are the midday weekday tickets. They're not paying, right? The company is paying. And so why wouldn't they be like, yeah, I'm paying $26 for my ticket company. Please pay me back. And then they get the whiskey.

[Robert Smith]

Are you telling me they didn't report the whiskey to their employer? They just took it home?

[Jacob Goldstein]

Seems plausible, yes.

[Robert Smith]

They just took it home.

[Jacob Goldstein]

I think it meets the de minimis exemption. And so there's this moment when Southwest is the biggest Chivas Regal distributor in Texas.

[Robert Smith]

So what I love about this story so far is Southwest. And maybe this is just, you know, Herb's craziness, really, is that they're really innovating and responding to what's going on. They're able to change on a dime, really, and come up with these. These ideas in this staid industry where sort of, by government definition, they didn't want anything to change.

[Jacob Goldstein]

Yes. And there's a weird way in which that regulation is like, their friend. Right. You know, like the Bezos line. Your margin is my opportunity. It's sort of that vibe, right?

[Robert Smith]

Yeah, yeah, yeah.

[Jacob Goldstein]

So I do want to say one more thing about sort of the vibe and the Chivas Regal and the whole kind of Southwest positioning of itself in the marketplace and what their brand was. Their brand was like, we are the wild mavericks. We love whiskey. And there was another piece of this that has aged less well, which is the flight attendant uniforms that they came up with. And they were these, like, extremely, extremely short shorts.

[Robert Smith]

And you've shown me a picture of this. We've all seen the short skirts that stewardesses would wear at airlines. These are way shorter.

[Jacob Goldstein]

They are way shorter. So this was an era where there was, like, rampant sexism toward flight attendants in the airline industry. And Southwest was definitely a part of that. So, okay, it's 1972. Right. Southwest has been up and running for about a year. Those off peak fares are popular, but the company is still losing money. Their daytime flights are still running largely empty. Businessmen are still flying Branish or whatever. And by the spring of 1972, the company's, I guess, checking account, whatever, their current account, bank account, is down to $143, not $143,143. They're about to run out of money.

[Robert Smith]

And a warehouse full of whiskey. Don't get me wrong, they got the whiskey.

[Jacob Goldstein]

They got the whiskey.

[Robert Smith]

They got the short shorts and the whiskey. But $143.

[Jacob Goldstein]

You know what else they have? They have airplanes. They have four airplanes, right? That's their big asset.

[Robert Smith]

Yeah.

[Jacob Goldstein]

And so they decide they're going to sell one of the planes. That's the way you get money.

[Robert Smith]

Ouch.

[Jacob Goldstein]

Ouch.

[Roy]

Right.

[Jacob Goldstein]

So it means they're going to have to cut back on flights. They're going to have to lay people off.

[Robert Smith]

And this, by the way, is the classic beginning of a death spiral. When you start to cut essential parts of your business, and that means you make less money, which means you have to sell another plane. And this is like the way fewer.

[Jacob Goldstein]

Flights, it's less convenient to fly them. Right? So there's this guy, Bill Franklin, who's in charge of ground operations, and he says, okay, we just went from four planes to three. I know a way we can keep the same number of flights, same staff. We just have to keep the planes we have in the air more often. And the way to do that is spend less time on the ground. And I think it was actually weirdly hard for me to find this number. But my sense is that the turnaround time at the gate for Southwest at this point was something like 25 minutes.

[Robert Smith]

Which is amazing by today's standards. But they were small planes.

[Jacob Goldstein]

Right. So just to be clear what this means, Right. The plane comes into the gate, passengers get off, plane gets cleaned, other passengers get on. Whatever has to happen outside the plane, fuel, luggage. Luggage.

[Robert Smith]

Luggage, yeah.

[Jacob Goldstein]

Push back from the gate, all of that 25 minutes. And Bill Franklin is like, okay, we can keep our current schedule with three planes instead of four. We just have to go from 25 minutes to 10.

[Robert Smith]

It does not seem possible. That's what they said to him.

[Jacob Goldstein]

That is what they said to Bill Franklin. And here's Bill Franklin's quote when they said it. He said, we're gonna do 10 minute turns with this airplane. And if you can't do a 10 minute turn, you're gonna get fired. And we'll bring somebody else in. And if he can't do a 10 minute turn, we'll fire him too. And. And we'll just keep firing until we can find someone who can do it.

[Robert Smith]

I feel like, you know how now they say stay seated until we're at the gate? I feel like at this point at Southwest, they're like, as soon as the plane touches down, they're like, get up, get your stuff.

[Jacob Goldstein]

That is the vibe. That is the vibe. So you have, like, you know, people from the, from the back office helping out. You have flight attendants cleaning the plane from the back as the passengers are getting off. Is it a deep clean? I am guessing not. I am guessing they were not worried about how clean the plane was. That's not why you were flying southwest for $10. Right? You know, then you have the gate crew, like, hustling the passengers on for the next flight. And then once everybody's on the plane, just in the door, they close the door and the pilot pushes back from the gate. Are they waiting for passengers to sit down? No, they are not. The FAA didn't make that rule until the 80s. I don't know if it was because of Southwest, but maybe. By the way, I just wanted. There's a very, very interesting thing to talk about right here about the getting on and everybody standing up. When you fly Southwest, as you may know, if you have flown Southwest, I have. You don't reserve a specific seat. You just get on the plane and.

[Robert Smith]

You sit down in the order that you've arrived.

[Jacob Goldstein]

Yes. The person who gets there first gets to get on first. The person who gets there last gets to get on last. There is no seat number. And even when you get there, they don't give you a seat number.

[Robert Smith]

And much like the subway, if you see an open seat, you hustle for it.

[Jacob Goldstein]

Well, so let's talk about this, right? Let's talk about what's the fastest way to get on a plane. This on one level, doesn't feel like the fastest.

[Robert Smith]

I feel like I know a hundred slowest ways to get on the plane. Every time I'm lining up, I'm like, really? Really?

[Jacob Goldstein]

Parents with kids, teenagers.

[Robert Smith]

I know. And then it's just like, are you going from the back? Are you going from the front? Are you going from the window?

[Jacob Goldstein]

So people have studied this. There is a literature of plane boarding back to front. One of the classics. Quite slow, in fact, because there's a lot of waiting. There's a lot of standing and waiting. People have come up with other ways, like window, middle aisle. There's actually an astrophysicist who came up with this very elaborate system of like alternating rows and I think window, middle aisle. But a problem with window, middle aisle is you don't get on with like your spouse or your kid or you're.

[Robert Smith]

Sitting next to and you have to explain the whole thing and then you're just fighting with someone.

[Jacob Goldstein]

Depending on the study, this get on and sit down wherever is either the fastest or the fastest among any reasonable way to get on a plane. It is shockingly fast.

[Robert Smith]

Well, I have read that when computers look at when people leave something like leave a sports stadium, it is remarkably efficient because everyone is optimized for finding the best way out and the shortest way out. And so you have 60,000 people all simultaneously optimizing and you can. I know.

[Jacob Goldstein]

So Southwest didn't need an astrophysicist to figure out that sit down, wherever you are, is fast. Right. There is this sense of like, oh, I'd better sit down. It's like the musical chairs version of get on a plane. Right. They just did it and it helped them with their super fast turns. You know, they don't hit 10 minutes every time. It's sort of the dream. But they hit it sometimes and when they miss, it's still a lot faster than 25 minute. Right. And you know, remember, these planes are going back and forth, back and forth on these short hops all day long. So saving a few minutes on every turn is huge. This means they have a very large cost advantage relative to the other airlines. Right. They've just reduced their fleet by 25%. Right. They've gone from four to three. And they can still do the same number of flights.

[Robert Smith]

Right.

[Jacob Goldstein]

Same amount of revenue, less capital costs. And the next year, 1973, with all these changes, Southwest turns a profit.

[Robert Smith]

Sort of amazing from what we know about the 1970s. Right. I mean, I mean, seriously, right. We have an oil embargo in. In 1973. We've got stagflation, huge inflation later in the 70s. Like, this is not an era when every company is profitable.

[Jacob Goldstein]

When you want to be starting an airline.

[Robert Smith]

I mean, there is a theory that starting and growing during hard times makes. Makes you make better choices.

[Jacob Goldstein]

Well, it is the case that Southwest from 1973 on is going to be profitable every year for the next 47 years.

[Robert Smith]

Stunning. Well, because think of the oil prices during this time. Think of the inflation during this time. You know, problems with unions. You're thinking about financial crashes, recessions. Yeah, yeah.

[Jacob Goldstein]

So we're going to take a break and when we come back, we're going to do Southwest, big expansion. Right. And Southwest is going to conquer America.

[Robert Smith]

From Texas to the country.

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[Jacob Goldstein]

All right, Robert, we're back with more southwest. It's the mid-70s. Southwest is there in Texas starting to Make a profit. These airlines that are flying cheap and making a profit are weird outliers, right? Because remember, any airline that's flying an interstate route is forbidden by law from lowering its prices. And like, why would you want to lower your prices, right? Like you're a business. You just want to go to the government and say, hey, our costs have gone up. Can we charge more? And the government's like, yeah.

[Robert Smith]

People talk a lot about the competitive spirit. But like most people, if you've got a pretty sweet gig and you own an airline, right? You run an airline, life is good.

[Jacob Goldstein]

It's a nice life. Yeah. And you're not like a crazy billionaire, but like, you're rich, you have a.

[Robert Smith]

Pleasant life, you get to wear uniforms sometimes, whatever.

[Jacob Goldstein]

You get to fly wherever you want. So that's the way it worked for a long time. But then around this time, things start changing for a few reasons. One reason is the 747, the Boeing 747, the widebody. And of course the airlines love it, right? Cause it's the big shiny new thing. You gotta have the big plane with.

[Robert Smith]

The little hump on the top.

[Jacob Goldstein]

Yeah, love that bump.

[Robert Smith]

I love that. I know.

[Jacob Goldstein]

More wild over the top services you can provide. Air Canada puts a Disco in its 747. Almost two on the nose for the 70s.

[Robert Smith]

Airlines so good disco ball, you lower the lights and then people just go to town.

[Jacob Goldstein]

Smoking is what I go to for the 70s. So the airlines love 747s. In fact, too much, they buy too many of them. And so now there is a glut of seats flying around. America Airlines are flying all these planes largely empty. And then they notice over there, oh, look, Southwest, Southwest is making a profit by selling just cheap tickets, no disco. So the big national airlines start going to the government, asking to do this unheard of thing, cut prices. And for the first time in like decades, the government says, well, okay, you can cut your prices. And surprise, when the airlines cut their prices a lot, they get more customers, people fly more, those empty seats start to fill up. But there's another kind of big sweep of history thing happening. And that is a change in the way people think about business and government and regulation. And you know, we talked before about this kind of mid century world where the government was just much more involved in the economy in lots of ways and how that worked for people. But you know, now we're in the 70s and the 70s are a bad economic time, right? You have kind of the Rust belt is starting and Inflation is coming, and the oil crisis is there.

[Robert Smith]

And a huge distinction, because when an economy is growing, you can actually be a kind of a bad business, you know, with heavy regulations. And every year, oh, you grow 4 or 5%. Everybody's happy. The government's happy, you're happy, your customers are happy. But when an economy starts to shrink, this is where the problems happen, because you're not used to it, and people.

[Jacob Goldstein]

Start to rethink regulation. It's happening kind of popularly and academically. Scholarly, right? So the scholarly piece comes out of the University of Chicago, of course, this economist named George Stigler. In the early 70s, actually, right around the time Southwest is just getting its first flight off the ground. Stigler publishes a paper called A Theory of Economic Regulation. Winds up being a hugely influential paper. Helps him get the Nobel Prize later on. And he lays out the key idea on. On the first page. He writes this. He writes, as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.

[Robert Smith]

So what he's saying is you like to think government regulation is cracking down on those evil businesses in order to protect. Yeah, yeah, yeah. But in fact, what he's saying is that industries, especially incumbent players, want the regulation to keep out scrappy independents trying to come up and take your business.

[Jacob Goldstein]

Yes. He is saying regulation exists for the benefit of the regulated businesses. And there is an economic term associated with this. It's regulatory capture, which means the regulators are captured by the industry they're regulating.

[Robert Smith]

So the FAA at the time might include people who worked at all the big airlines. And after you work at the faa, where are you going to get a job?

[Jacob Goldstein]

Yes.

[Robert Smith]

Oh, I don't know. How about American Airlines? Yeah.

[Jacob Goldstein]

Yes. And in Stigler's theory, and I think it's fair to say, in fact, yes, they were captured by the airlines they were regulating. And, you know, there's a case that when the airlines were just getting going back in the 30s, maybe it was reasonable for the government to regulate them. Right. Maybe they would have priced each other out of business. Maybe they would have cut corners in a way that made it dangerous because of competition, but 40 years later, to still be blocking new airlines on the grounds that they'd be too cheap, like, that's regulatory capture. And it. It resonated not just as an academic idea, but as a popular idea. And it's interesting, the timing of this and the politics of this, because, you know, the sort of standard story of this is it happened in the 80s under Ronald Reagan. Right, Ronald Reagan. Brought this conservative revolution where and the federal government deregulated the economy. But that's not true in the case of airlines. This started in the 70s. Ted Kennedy was a big proponent of deregulating the airlines. And Jimmy Carter, the Democratic president in the late 70s, appointed this skeptic of regulation to run the federal airline regulator, the cab. Was it the Civilian Aviation Board, I believe that was. That was this board that did all the pricing and stuff. And in 1978, Congress passed a law to deregulate the airlines. Bipartisan. Carter signed it into law. So now all of these rules about who can fly where and what they can charge, that have guided almost the entire industry, but not Southwest, are gone.

[Robert Smith]

And remember, at this time, people thought there was something very broken about America and American capitalism. Because in the 1970s, we're also seeing this sudden influx of Japanese cars which they feel are cheaper and built better. And there was this overwhelming sense. I mean, I guess President Carter said it as this malaise that, like, we're a country that doesn't innovate. That. And part of the problem is the government at this point.

[Jacob Goldstein]

Yes. And so now airlines are deregulated. You would think this would allow for a wave of innovation. Right. Southwest is like prime to.

[Robert Smith]

You're told the story like it's about to change everything.

[Jacob Goldstein]

It's really interesting what happens because they can go wild, but they don't really. They don't. And I think it really shows sort of the difference between their kind of public Persona, the corporate brand on the one hand, and their behavior as a company on the other. Think about it, right? Like their reputation is the goofy mavericks, you know, the flight attendants making dad jokes during the safety announcements. And like there was this famous, basically publicity stunt one time where there was a trademark dispute with some other company. Plane smart, P L A N E Smart. Right. And they decide they're going to settle it by Herb Telliher having an arm wrestling match with the guy from the other company. And they do this, like, pro wrestling match, and Herb loses and gets carried out of the room on a stretcher with an IV bag of Wild Turkey.

[Robert Smith]

Right.

[Jacob Goldstein]

And he rides a Harley Davidson and whatever. This is the brand.

[Robert Smith]

Yeah.

[Jacob Goldstein]

But from a business standpoint, from an efficiency standpoint, Southwest is nothing like that. They are, in fact, incredibly disciplined. And so what you see is in the decades after deregulation, it's the other airlines that are going wild, transforming themselves, spending tons of money, going bankrupt. And Southwest is the one that is cautious and disciplined. If they were like Maverick outliers in any way. It was that. It was by being, like, cautious and.

[Robert Smith]

Efficient, which is amazing.

[Jacob Goldstein]

Right.

[Robert Smith]

All that cigarettes and whiskey. And the moment. The moment the market goes free, what you realize is maybe what I was talking about, what Warren Buffett said, which is, in a business like this, the way you're going to win is to just be ruthless about your bottom line. Yeah. About your costs.

[Jacob Goldstein]

Yeah.

[Robert Smith]

There's no advantage of one airline over another. You can try all the discos you want, but it's essentially a commodity product. And in a commodity product, you have to watch every cent.

[Jacob Goldstein]

Robert, I've prepared for you a list.

[Robert Smith]

Love a list.

[Jacob Goldstein]

Five ways in which other airlines went wild and Southwest didn't.

[Robert Smith]

Let's do it.

[Jacob Goldstein]

Years after deregulation. Number five, super premium comfort, economy class plus.

[Robert Smith]

Yes.

[Jacob Goldstein]

So, you know. Right. So there was first class and there was whatever. Business class and premium economy comfort plus more legroom. Even more legroom. And, you know, there is a logic to this. Right. Which is. Oh, different people will pay different prices. You know, if people want to pay for more, for more, let's do that. Southwest is like, you know what? We got one kind of seat. It's just a regular seat. We'll fly you from one place to another in that seat. Number four, Selling tickets everywhere. Oh, interesting. Travel agents were still big in the 80s, and then, you know, in the 90s, the Internet comes along and you get your orbits and your Expedias coming along, you know, online travel sites.

[Robert Smith]

I'm a kayak man.

[Jacob Goldstein]

Southwest didn't care that much about travel agents and was not even on Orbitz or Expedia or Kayak actually until like, last year. For forever, basically. I don't know if you ever noticed that if you did a kayak search. They didn't.

[Robert Smith]

I did. You'd have to do separate searches for Southwest.

[Jacob Goldstein]

And so there's a straightforward reason for this. When you buy a plane ticket through a travel agent or through Expedia or a kayak, the intermediary gets some of that money, and Southwest wants to get all of that money. And so they're just like, no, we're not going to sell through those intermediaries.

[Robert Smith]

So funny, right? Airlines are this glamour business, or they were for decades. And like the airline CEOs at Delta and American, they don't want to be trying to save. What is a half a percent, 1%.

[Jacob Goldstein]

They want to sell more tickets. That. Not Southwest. Okay. Number three, Hubs. Hubs. So after deregulation, now, remember, airlines can fly wherever they want. They're not constrained by the government. And they're like, we're going to fly everywhere. And the way we're going to do that is the hub and spoke model, right? So we're going to pick a city and tons of flights are going to go in and out of that city. And that way people can go wherever they want. They just got to go through, you know, Atlanta if you're flying Delta or Dallas if you're flying American. Southwest. No, no, Southwest is like, you know what, we're just going to fly people from Phoenix to LA and we're going to fly 10 flights a day and it's going to be cheaper and it's going to be great. We are not in the business of flying people wherever they want to go. We're in the business of flying profitable routes where we can sell cheap, reliable tickets.

[Robert Smith]

They've done the research. They know that people are paying a lot of money. They know that they can undercut the current fares and that there'll be enough people to fill the planes.

[Jacob Goldstein]

Yes. And, and by the way, when they go into a new city, they typically go into not the main airport.

[Malcolm]

Right.

[Jacob Goldstein]

Have you flown Southwest?

[Robert Smith]

Oh, yes. I've seen a lot of the country in strange small airports.

[Jacob Goldstein]

Yeah, I used to fly San Diego to Oakland all the time. So, you know, in San Francisco, San Francisco is the big airport.

[Robert Smith]

I've been Oakland to Burbank, that's, that's San Francisco to LA to other people. But to me it is Oakland to Burbank.

[Jacob Goldstein]

And there's, there is a reason for this, Right. It's those airports tend to have cheaper gates, Right. Airlines have to pay for gate space. Southwest, you know, their passengers are not flying onto Tokyo or whatever. If you're American Airlines, you got to go to JFK or LAX or sfo. Southwest is that they're not in that business. And also those airports tend to be less crowded, which makes it easier to do a fast turn. Right. They get jammed up less.

[Robert Smith]

Oh, interesting. Right, because you can get right on the, right on the Runway number two. Yes. That's where we are.

[Jacob Goldstein]

Planes. After deregulation, airlines like, we can fly anywhere. And for little routes, we're going to get little planes. And for medium sized routes, we're going to get medium planes. And for big routes, we're going to get big planes. Southwest does not, with one very brief exception, they have flown one kind of plane the whole time, the Boeing 737, which, in keeping with the Southwest vibe, is not a tiny plane, it's not a giant plane. It's just a plane.

[Robert Smith]

It's so funny, Right? Boring is their competitive advantage.

[Jacob Goldstein]

Yeah. And like, just think about the efficiencies on this one. Right? I mean, from small ones and big ones, you only gotta print one seat back card.

[Robert Smith]

Yeah. The pilots can fly any plane you have to move.

[Jacob Goldstein]

Yeah, yeah, yeah, yeah. Well, you need a pilot gets sick, you know, Is this pilot certified on this plane? Yes. The answer is always yes. For Southwest, even, you know, the things like getting the baggage in, all the logistics, it's always the same. If they need to swap in a new plane, they always got the right plane. It creates this incredible efficiency of standardization.

[Robert Smith]

This would be enough for any business. But you're telling me there's one more. The number one reason.

[Jacob Goldstein]

Yes. And it's kind of a meta reason. It's kind of. It kind of flows through all of these. The number one reason that Southwest was able to stay efficient and profitable when all the other airlines went wild, they never tried to be number one. Nice. Think about this. I actually think this is really an important one and useful to think about. Airlines tend to attract big ego CEOs, right? I mean, most big company CEOs have big egos. But the airline business, as we've been discussing, is a bad business. You're not getting into it because you want to be rich. You're getting into it because, like, you want to fly the big planes. You want to beat everybody else. You want to be the most glamorous airline in the sky.

[Robert Smith]

You're right. And they're kind of obsessed with this in the same way that broadcast TV used to be like ABC's number one this week, NBC is number one the next week. And they want to be the number one airline in the world. In fact, when they are, don't they put that on their ads, like, oh, more people fly so and so than any other airline.

[Jacob Goldstein]

And you really see this, like, when you read histories of the period, they're like, personally, the CEOs are personally obsessed with beating their rival, and Southwest is not. There's this really simple but great quote from. From Herb Kelleher. Market share has nothing to do with profitability.

[Robert Smith]

Oh, no. It's so. It's so true.

[Jacob Goldstein]

We don't want to fly more people than anybody else. We just want to make more money than we spend flying people.

[Robert Smith]

This is such a. This whole story is like an indictment of the way Americans do business, at least for a certain period of time.

[Malcolm]

Right.

[Robert Smith]

That they want the regulations. They don't want to compete. They want to be number one, even if it means it costs their investors money.

[Jacob Goldstein]

But not Southwest. And this is why I think this is at the core of Southwest success, right? Like every other major airline that still exists that was around at deregulation has gone bankrupt at least once. Some more than once. Southwest has not. They have been profitable every year for 50 years, with the exception of the pandemic of 2020. But as we will discuss after the break, a lot of those things from that list of what made Southwest great are about to cause it some real trouble. And Doug, here we have the Limu Emu in its natural habitat, helping people customize their car insurance and save hundreds with Liberty Mutual. Fascinating. It's accompanied by his natural ally, Doug.

[Carter]

Uh, Limu is that guy with the binoculars watching us.

[Jacob Goldstein]

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[Carter]

In today's super competitive business environment, the edge goes to those who push harder, move faster, and level up every tool in their arsenal. T Mobile knows all about that. They're now the best network according to the experts at an OOKLA speed test. And they're using that network to launch Super Mobile, the first and only business plan to combine intelligent performance, built in security and seamless satellite coverage. With Supermobile, your performance, security and coverage are supercharged. With a network that adapts in real time, your business stays operating at peak capacity even in times of high demand. With built in security on the first nationwide 5G advanced network, you keep private data private for you, your team, your clients. And with seamless coverage from the world's largest satellite to mobile constellation, your whole team can text and stay updated even when they're off the grid. That's your business. Supercharged. Learn [e-mail] Seamless coverage with compatible devices in most outdoor areas in the US where you can see the sky. Best business plan based on a combination of advanced network performance, coverage layers and security features. Best network based on analysis by Ookla of Speedtest Intelligence Data 1H2025 this holiday.

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[Jacob Goldstein]

Okay, so we're back with the Southwest story. Southwest has this amazing run not just year after year, but decade after decade. And by the time Herb kelleher dies in 2019, Southwest is carrying more passengers than any US airline. Not that they care, but that's amazing. They're big and successful, but trouble is coming. They're about to hit this run of trouble. And in a lot of ways, the same things that made them successful for all those years are going to be key causes of their, of their problems. The first thing that goes wrong, it starts in like late 2018, early 2019, when there are two separate plane crashes. One is in Indonesia, one is in Ethiopia. There are different airlines, but Both are Boeing 737s.

[Robert Smith]

So this is a huge news deal.

[Jacob Goldstein]

It was a big deal because it was the newest version of the 737, the 737 Max. And in March of 2019, the FAA grounds all 737 Maxs in the U.S. so these are 737s. Remember, Southwest is the airline that only flies 737s, which has been great until now, but now, unsurprisingly, they have more 737 maxs than any other airline. And they get hammered.

[Robert Smith]

Right.

[Jacob Goldstein]

Like they now have to cut back on their service. To be clear, they don't have to shut down. They're not flying solely 737 Maxs, some of the older 737s, but they lose something like a billion dollars in revenue because of this.

[Robert Smith]

This is the classic trade off between efficiency and resilience.

[Jacob Goldstein]

Yeah, yeah, right.

[Robert Smith]

And we saw this a lot in the pandemic with, with shipping, you know.

[Jacob Goldstein]

You had a really supply chain stuff.

[Robert Smith]

And just in time delivery, a really efficient supply chain. You were also the one most at risk for something going wrong because you just, you didn't have a lot of other sources for your materials.

[Malcolm]

Yeah.

[Jacob Goldstein]

So in this analogy, Southwest was super efficient, but they had this huge risk just sitting there. So they lose a billion in revenue. They cost some of that back from Boeing. But, you know, it's a blow. Not a, not a death blow, but a blow. And then 2020, of course, you get the pandemic. Terrible for all airlines. Only year since 73 that Southwest didn't turn a profit. Bad, but again, not, not devastating. It's after the pandemic that things keep going wrong and get worse for Southwest. 2022, the big legacy airlines, Delta, United, American, they are doing great.

[Robert Smith]

There was this rebound travel. Right? Everybody had saved up their money and they were like, I'm going to Europe. I'm taking the big planes. I'm going.

[Jacob Goldstein]

Stimulus checks. Government sends you a check, you just sign it over to Delta. And go to Europe. And, you know, this is a moment when a lot of people are feeling. Feeling rich, right? Like, when you look at people's bank balances at this time, it's wild. Like, people, in fact, got richer. And so this is a moment when you will pay for premium economy comfort plus, right? This is a moment when you all fly to Europe and all of those behaviors are not Southwest behaviors, right? This is not a simple plane. This is not Phoenix to la. This is not weird little airports, right? So this is a moment when everybody else is coming back and Southwest is kind of muddling along. And then really, the big blow. The big blow comes in December of 2022, not long before Christmas, this giant winter storm hits the east coast and upper Midwest. Airports shut down. Lots of airlines cancel flights, you know, up and down.

[Robert Smith]

Luckily, there's not news crews who would, like, go out to the airports and stand there for 48 hours straight.

[Jacob Goldstein]

Luckily, it's not Christmas time when there's no news that they're so happy to go to the airport with people sleeping on the ground.

[Robert Smith]

I could verify this was a big deal.

[Jacob Goldstein]

This was a big deal. And for most airlines, it's like, yes, there's a storm. And now a day, two days later, we're back up and running and everything's fine. But Southwest at this moment has this epic, epic collapse. They cannot get things going, and the storm has passed, but Southwest is still largely grounded. They cancel More than 16,000 flights. They leave something like 2 million people stranded. And when they figure out what went wrong, it turns out it was this one internal software system that was supposed to reassign Southwest crew members when a flight got canceled or rescheduled and it just completely failed, and they couldn't get it back up. So. So think of this, right? Like, the company doesn't even know where their flight crews are. And the crews themselves, like, they want to work, they want to get things going in. The crews themselves have to actually, like, call on the phone like. Like ordinary schmuck passengers to find out where to go to work. They have to wait, you know, hours on hold. When they get through, people don't even know because, like, some poor person at headquarters is trying to figure all this out on a piece of paper or something. It's a. It's a disaster for Southwest.

[Robert Smith]

Was it because of Southwest's cost cutting? Was this one of the ways they cheaped out by having, like, a 1970s internal system?

[Jacob Goldstein]

So. So the CEO, perhaps predictably, said, no, no, this was just like an unfortunate, you Know, he actually, I think, used the phrase perfect storm. But the union leaders at the company, the people, you know, who had been negotiating with the CEO for years, said, no, no, we have been telling you for years that this system is out of date and it's going to fail. So maybe it was because they were too cheap. You know, what is efficient and what is too cheap. In any case, this is a disaster for Southwest. Right? Days and days of news coverage. So Southwest winds up paying something like $750 million in reimbursements and penalties. And now things are bad for the company. Right. Their profits are stagnant even as the industry is coming back. Their stock price falls by more than 50% between 2021 and 2023. By 2024, the stock is still below where it was before the pandemic.

[Robert Smith]

I feel like if Herb Kelleher were still around, he would say, go with the plan. Like, this is what our company does. Stay the course. And yes, there will be disasters that happen, but, like, we have the better business model. Go, go, go.

[Jacob Goldstein]

I mean, it's interesting to think about him having died, like, just before Southwest ran into so much trouble. Is that correlated? I don't know. In any case, that is basically what Southwest was trying to do. Just keep being Southwest. But if you're a publicly traded company with a still a pretty good brand and your stock price is way down, what happens to you?

[Robert Smith]

You get a call from Wall Street.

[Jacob Goldstein]

You get a call from Wall street, right? And in this case, it was an activist hedge fund called Elliot that bought something like 10%, more than 10% of the company's stock. And what Elliot does is this kind of thing. They buy up stock and try and turn companies around.

[Robert Smith]

Yeah, you accumulate until you have to announce how much you own of the company, and then you write a strongly worded letter to the board. To the board.

[Jacob Goldstein]

So in its letter to the board in 2024, Elliot writes, quote, while Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with the strategy that no longer succeeds in the modern airline industry.

[Robert Smith]

This is, this is what they do. And they're hoping, they're taking the bet that they can make dramatic changes, maybe not long term changes, but maybe some short term changes to increase the value of the company and then get out of the business.

[Jacob Goldstein]

And they are saying, like, their idea is Southwest, you should become more like everybody else. Right. That is the subtext of a strategy that no longer succeeds in the modern airline industry. Oh, and also they wanted to fire the CEO, of course, because they always wanted to fire the CEO. But what's interesting to me is that other part. Right. Their strategy no longer succeeds in the modern airline industry. Because in a lot of ways, if you think about Southwest at the time of deregulation and the rest of the industry or in the 80s, when they're all going wild, in some ways, it's the rest of the industry that has become more like Southwest. Right. What made Southwest different was really cheap prices, Right? But now there are ultra low cost carriers with really cheap prices. There are also. You can fly basic economy on Delta, as I do.

[Robert Smith]

Every time I'm wearing extra sweaters because I can't fit it in my luggage.

[Jacob Goldstein]

Sitting across from you in the row, just one from the back of the.

[Robert Smith]

Plane, you paid less close to the.

[Jacob Goldstein]

Bathroom, you know, even in terms of vibes, Right? Think about vibes. When Southwest launched, they were like the friendly, hey, we're your pal airline. And the others were like the more formal kind of corporate airline. Now, like, every company is your pal. Right.

[Robert Smith]

Tell the jokes. Yes.

[Jacob Goldstein]

And when you fly now, right. When you fly now and you see college students flying for the weekend, you see ordinary people who are not business people flying. When you see people flying who aren't rich, frankly, who aren't, you know, upper middle class, like that is Southwest.

[Robert Smith]

This is fascinating. So I'm right in a way that sticking with the plan is the most efficient way to go. But what I didn't include is that other airlines are also doing the same plan. Your competitive advantage was that you were cheaper, more nimble, able to make these decisions better than other airlines. And once everyone does it, what do you got?

[Jacob Goldstein]

So what has Southwest done under this pressure? Well, they didn't fire the CEO, but they are changing. Right. There were still those things about Southwest that were different. They still had one kind of seat. You still didn't get a seat assignment. No longer. Starting on January 27, 2026, Southwest passengers will have the choice of standard preferred or extra legroom.

[Robert Smith]

I'm a little sad.

[Carter]

Yeah.

[Robert Smith]

End of an era. I mean, yeah, end of an era. Yeah, it was a pain in the ass era, but end of an era.

[Jacob Goldstein]

I mean, it was a good run.

[Robert Smith]

It was a great run for the airline industry. Like, I'd take 48 years.

[Jacob Goldstein]

For the first time in the history of Southwest, everybody's gonna buy an assigned seat.

[Robert Smith]

Not me. I'm going Herb Kelleher style. I'm gonna just walk on the plane and sit wherever I want to.

[Jacob Goldstein]

I love it. That's the end of the show. We'll put a list of sources in the show Notes. That's the end of the show.

[Robert Smith]

You said show notes. Cause you're in the airline.

[Jacob Goldstein]

That's the end of the show. We'll put a list of the sources in the show. Notes. I do wanna mention one book that I found particularly useful. It's called Hard Landing. It's by Thomas Petzinger Jr. And it's an old book. It's the story of what right around deregulation, kind of before, during, and after. And it's a very good nonfiction book.

[Robert Smith]

Our showrunner is Ryan Dilley. Our producer is Gabriel Hunter Chang, and.

[Jacob Goldstein]

Our engineer is Sarah Bruguerre. I'm Jacob Goldstein.

[Robert Smith]

I'm Robert Smith. We'll be back next week with another episode of Business History, a show about.

[Jacob Goldstein]

The history of business.

[Podcast Announcer]

This is an iHeart podcast.