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On this show, we're always talking about new ideas, what's happening right now, how are people grappling with the present, but what about diving into the past? Listeners, we're breaking the format for today's episode to bring you something special, an interview with reporter Jacob Goldstein, co-host of the Business History Podcast. In each episode of the show, Jacob asks, What lessons can we learn from breaking down the unexpected history of some of our most recognizable businesses? The answers may surprise you. I'm Madhu Bakanola. This is TED Business, a podcast from TED. Today, Jacob joins the show to tell us all about the history of Southwest Airlines. Airlines are one of the most notoriously fickle industries. Just look at recent headlines about Spirit Airlines shutting down for good. Time and time again, we see that to thrive in this industry, you have to be willing to change, adapt, grow. And these are things we can all learn from. Now, for a time, Southwest was one of the most successful airlines in the business. They did things their own way, the Texas way, and that was working well until it wasn't. In this conversation, Jacob and I tackle the question, how do you know when it's time to change? And what happens if you don't? But first, a quick break.

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And now, my interview with Business History's Jacob Goldstein. Okay, well, here we go. So tell me, there is a lively origin story that relates to Southwest, and it's very Texan, very Texan. Can you tell us a little bit about this legendary CEO?

I'm kind of a sucker for a business origin story. It takes place in Texas, as you said. It's 1966. And there's two guys at a bar smoking cigarettes, drinking. One of the guys, the guy who's going to be really key in the story, is a lawyer named Herb Kelleher. and he's drinking with a client of his named Rollin King. In fact, Herb is actually helping at this time, helping Rollin King wind down this failed charter airline that like, I don't know, took rich people in Texas out to the country to go hunting or something. Rollin says to Herb, okay, this one didn't work. This airline didn't work, but let me try something else out on you. And according to the legend, and this part is probably not true, but it's great. So we're going to say this part. The rest is true. Rollin takes out a napkin and draws a triangle on the napkin and writes the names of three Texas cities, Dallas, San Antonio and Houston and says we should start an airline, a real airline.

to fly among each of these cities because they're hundreds of miles apart, takes forever to drive, and plane tickets are super expensive, so people don't fly very much. And Herb says to Roland, that's a crazy idea, and I'm in. Let's do it. And I think that's basically how it happened, except for the napkin part. But they love the napkin, and they have like a plaque of the napkin at the headquarters. And at that time, the airline industry was incredibly heavily regulated by the federal government. which regulated interstate travel. So if you're going to go from one state to another on an airplane, the federal government is going to have a lot to say about it. The government also regulated the prices, which meant the airlines were not competing with each other on price. They weren't even competing that much on routes. And so what did that mean? Well, for one thing, it meant flying was wildly expensive. So when people talk about how awesome it used to be to fly. And it was awesome. It's because it was super expensive. So this is the world that Southwest was creating its airline in. And because they are only flying within Texas, they don't have to play that game. And that's going to end up being central to their whole story. And when they launch, they're cheaper, but not wildly cheaper. They're like 20% cheaper or something like that. And they're just not very popular because most of the people flying are business people. They're not the ones paying, right? So they don't really care if it's 20% less. So Southwest isn't doing very well. And they wind up doing a couple initial things to turn it around. Part of the reason startup stories are so fun is you get these desperation moments when they're like, well, I don't know, nothing's working. Why don't we try this? And so there's two of those early on. One of them is because of the way their schedule is, late at night, they're flying their planes back empty from San Antonio to their maintenance center in Dallas. And it's too late for businessmen. It's just like an empty flight. And this guy they've brought in to run operations thinks like, well, look, the plane's flying anyways. What if we sell tickets cheap? So they sell them for 10 bucks, which it's 80 today. It's not as cheap as it sounds. But for that time, in that era of extremely expensive plane tickets, it was cheap. So they try it. And the first time they try it, they're swamped. People are lined up to pay their 10 bucks at the counter and buy a ticket. And a big interesting idea slash lesson here is the people who are taking that flight look nothing like the people on most flights in the United States at that time. They're not businessmen. They're people who probably would have driven.

And so what's happening here in a really interesting way is Southwest is expanding the market for flying on a plane. They're not competing with other airlines because other airlines are not selling tickets to the people who are flying on this plane. Those people are taking the bus. And I love it when the pie gets bigger. Like my favorite thing in economics is when things are positive sum. And this is a nice positive sum moment. And so I like it.

There are a couple of other things that really stand out to me when you talked about the regulation at the time, the value of having expertise or legal expertise, which was something that the founders had. We can't forget that part of the story, too. Do you want to talk a little bit more about other aspects that you felt helped it to launch in a powerful way?

Yeah, I mean, that is an excellent point. So Herb Kelleher, the co-founder and really the key figure in the life of the company, was a lawyer. And there was actually a moment when they're fighting these injunctions, these lawsuits filed by other Texas airlines, where the board wants to just give up and be like, this is a bad idea. Let's stop wasting our money. We're never going to be a company. And Herb Kelleher actually says like, well, I'm a lawyer. I'll just fight it in court, essentially out of my own pocket. And he wins and allows them to launch. So that is a great point. And it is the case that being in a regulated industry, it's like a different kind of business. And Southwest is sort of straddling the regulated and less regulated eras of flying, which makes them such an interesting business story. There is one other thing they do in 72 or so right after they launch. And it is also delightful and interesting and illuminating. And that is this. So they're going to run out of money. They're still not getting enough people. They're not that heavily capitalized. The airline business is a terrible capital-intensive business. And at some point they have, I believe it is $143 in their checking account. Some very small three-digit figure, yeah. Even in 1972 dollars, that is not a lot.

lot of money. And so their only assets really are their planes. And they have four planes. And they're going to sell one of them to stay alive. But that is like classic death spiral, right? And the guy in charge of ground operations for the airline says, look, we can sell a plane and keep the same number of flights if we turn the planes around faster at the gate. But it has to be a lot faster. That's the trick. So beforehand, they were turning them in something like 25 minutes, which already is fast. Plane gets to the gate. Everybody gets off. They clean it to some extent. Everybody gets on and they pull back. That's 25 minutes. The guy says, we can keep doing the same number of flights if we do it in 10 minutes. It's insane. That's what they said to him. They said, we can't do it. And he said, if you can't do it in 10, I'm going to fire you and I'm going to hire somebody else. And if they can't do it in 10, I'm going to fire them. Probably not the way people would say it today. I might not like that at work, but it worked. So it's very 70s somehow to me. There was not a rule at the time that everybody had to be sitting down before you push back from the gate. So everybody get off. Everybody get on. They're on the plane. People aren't even sitting down yet. Close the door. Back up. No flight attendants

yelling at you to sit down and buckle your seatbelt and walking through the aisles and

doing all the things. I think just get on. I think they're just yelling, get on, which I would have thought, frankly, would make it slower to get on a plane. I would have thought it would be more chaotic, essentially. But people have studied this. There is a academic literature of how to board a plane. And it turns out that unassigned seats is actually quite fast, faster than the way most planes board, which maybe makes sense. It's kind of like emergent order, or maybe if the flight attendants are just yelling at you to sit down. I don't know. So that was, in fact, a defining feature of Southwest, the no assigned seats. The kind of the marketing side of it was this very Texas, hard drinking, wild, not buttoned down, right? Very much differentiated in a brand sense from at that time, the kind of roast beef businessman, buttoned down airline. Quite

different in terms of vibes. Come on as you are. Sit wherever you want as you are. Yeah.

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at the university.

Chicago. And just right around the time Southwest was launching, early 70s, he publishes an economic paper called The Theory of Economic Regulation. It's interesting for me because it cuts against the typical kind of political framework we have for regulation. Like usually, we think of people who are pro-business and pro-market are anti-regulation. But Stigler had a different idea. He said, if you really look at the way regulation works in a lot of industries, It actually exists to protect the companies in those industries. It doesn't exist to protect consumers or the little guy. There's this phrase, and he didn't invent this phrase, but regulatory capture, which is the idea that regulators and regulations are captured by the industries they're supposed to be regulating. So we heard a lot about that in finance after the financial crisis of 2008, that the regulators had been captured by the banks. Right. Which seems compelling, which seems plausibly true. And when you take this framework and look at the airline industry in the 70s, it also seems true, right? I don't think that people were being well served. The public was being well served by paying $2,000 in contemporary money to fly from New York to L.A. The people who were being well served by it were the airlines. You know, the story of deregulation in America that I had always heard was that it was basically Ronald Reagan and the Republicans in the 80s. But in the case of the airlines, that's not true. And in the 70s, after Stigler's paper comes out, more broadly, people are thinking about this. And Ted Kennedy, the Democratic senator from Massachusetts, who was quite liberal, started having hearings about the airlines and the regulatory regime. And it was Jimmy Carter, the Democratic president in the late 70s, who wound up deregulating the airline industry, wound up getting rid of these rules where the government decided who could fly, where they could fly and what the price would be.

Got it. Got it. Got it. Now, so there's no more regulation, an interesting business model where people can have low flights costs and get on and get in any seat. What role does the 737 have to do with this?

It's super interesting because Southwest's kind of brand, the face that they present to the world is we're the we're the wild maverick where, you know, drinking whiskey and flying in the middle of the night for cheap. But as a business, they are the opposite of that. They are cautious. They are looking for efficiencies. And it's actually the other airlines that have a very buttoned up kind of brand that are going wild after deregulation. So the other airlines are buying all different kinds of planes. You know, they're flying all the routes they can now. They're buying big planes for the big routes and little planes for the short routes and medium planes for the medium routes. Southwest only buys one kind of plane, basically ever. There's this very brief exception, but basically for the whole life of Southwest, they bought one kind of plane, the Boeing 737. And it is emblematic of their moderation. And really, you know, there's this key line from Herb Kelleher around this time, which is, market share has nothing to do with profitability. And what he's saying is really compelling in the context of the airline industry, which is very much an ego-driven industry. What Kelleher was saying is, I don't want to be number one. I don't want to have the most market share. I want to make more money than we spend. I want to be profitable. That's sort of why Southwest didn't go bankrupt and all the others did. And lots of lots of things they did sort of fall from that idea. The 737 is one. And if you think of all the efficiencies you get from just having one plane, like small and large, right? Small, you know, whatever. You only have to print one seat back safety sheet. But more meaningfully, the luggage loads are the same. Or if a plane breaks and you need to swap in a new one, you always have the right plane. Or if you need to fly in a new pilot, they are always certified for that plane. And so you get these really elegant efficiencies from it. And similarly, because Southwest isn't trying to win, they don't go to this hub-and-spoke model that other airlines do because they're trying to serve everybody and fly everywhere. And they fly all these weird airports. The airports are less crowded, so there tend to be fewer delays. And also the gates, airlines have to pay for the gates. And so, A, if you don't have a big ego about it, and B, if your travelers are not connecting on to Tokyo or London or whatever, you don't.

You don't have to fly into the JFK or the San Francisco or the LAX. I mean, a lot of times things that seem like reasonable business objectives are actually just ego trips dressed in disguise.

Ego trips dressed in disguise. But also, I mean, I think this idea of we always hear that we should diversify our portfolio. So having just the 737s feels like it's not aligned with what typical business practices would be. But for efficiency's sake, it makes sense. And I know they've hit some bumps in the road. So can you tell me a little bit more about some of the bumps in the road that they've hit more recently that has maybe questioned some aspects of this business model?

The first real problem, it does concern the 737. What happens right around then, it's like 2018, 2019, there are two plane crashes, neither in the United States, neither Southwest, but both are Boeing 737s. And specifically, both of those plane crashes are the newest version of the 737. It's called the 737 MAX. In March of 2019, the FAA in the U.S. grounded all 737 MAXs. They said, those planes just cannot fly until we figure out what's going on.

I remember.

And so because Southwest flew only 737s, they were super screwed. They lost something like a billion dollars in revenue as a result of that. It goes back to what you were talking about before, right, which is it is very efficient to rely on one kind of plane. But this reveals also that that kind of concentration creates a risk, right? It makes you less resilient. So that's problem number one. Not totally devastating. The next thing that happened was the pandemic. Very bad for the world, bad for the airline industry. Only year since 1973, the Southwest lost money. But still, they're a strong company, a strong brand. They keep going. The real blow actually comes a few years later when people start flying again after the pandemic. People were feeling flush, remember, like all the stimulus checks. And so a lot of the people flying wanted to fly Economy Plus or instead of flying to Texas, maybe they were going to splurge and fly to Paris. All things that Southwest did not offer. And so Southwest sort of missed the post-pandemic rebound in the airline industry. So that's another problem.

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And then the final one comes in December of 2022. This is another one you probably remember. There was this big storm on the East Coast a few days before Christmas. Airports shut down. Airlines canceled flights. But for most airlines, it was like a normal...

normal storm. A day or two later, they're back up and running. But not Southwest. Southwest had this just epic collapse. And what happened was their computer system shut down and like they couldn't reboot it, which I'm always like, just turn it off and turn it back on again. But I guess they did that and it didn't work. Southwest had to cancel more than 16,000 flights. Something like 2 million people were stranded. And of course, it's the holidays. So it's like a huge news story. They wound up paying something like $750 million in refunds and penalties. Profits are stagnating. The stock is way down. And they wind up being the target of an activist hedge fund called Elliott Investment Management. In 2024, Elliott said it had bought up more than 10 percent of the company's stock. And, you know, classic activist hedge fund, what they do is they take big stakes in companies whose stock price is down and they try and get the company to change. Their investing thesis is this is a company that is fundamentally sound and its stock price is down because it's not keeping up with the times. They wrote this sort of public letter to the board and they accused Southwest of sticking with a strategy that no longer succeeds in the modern airline industry. Up until this point, or up until a few years before this point, Southwest's maverick style, all these things that they do differently, no assigned seats, only one kind of seat, you never had to pay to check bags was another, bags fly free was like their motto, had been the secret to its success. And now this hedge fund is saying, now it's the open secret to your failure, which I feel like part of it is that the airline industry became more like Southwest, certainly on the kind of branding vibes level. You know, now everybody wants to be your buddy. And if you want a cheap flight, you can buy basic economy. And I do feel like today when you go fly and you see college kids flying and people flying in sweats and you see just ordinary people who are not well-off business people flying. Like, that is Southwest. That is the legacy of Southwest. But also, it's every airline, so it's no longer a competitive advantage. And so Southwest has basically done what the hedge fund suggested. And of course, they're like, yeah, maybe we were going to do it anyways, but whatever. Whatever they were going to do, they have really changed. And just in the last few months, some of the core things that differentiated them have gone away. Just starting this year, just at the beginning of 2026, for the first time, Southwest offered standard seats and preferred and I think extra legroom, multiple kinds of seats is the key point, not just one kind of seat.

Here we go.

And if you can believe it, assigned seats.

Yeah.

Assigned seats. No, sacrilege. Come on. Come on. Sit where you want.

How could you do this? It kind of reminds me, like, when is it time to come up with a different story and a different narrative? And when are you way committed to your stick and need to change things? These are hard questions to answer. And hopefully we can think about these questions more often rather than being forced to by activist investors. I'm curious to know what made you want to tell this story? What was it that you found so compelling? And what do you think it says

about the history of business. I love a scrappy company. Part of it is they're just delightful and scrappy. And I love a scrappy underdog. And they kept that vibe for a long time. And I'm a

sucker for it. Jacob, you've covered many businesses and highlighted their histories. Are there any patterns you've noticed or themes that you feel are really important for people to

know and understand? The idea is not that big of a deal, which is maybe surprising to me because I'm like, you know, I tell stories and so what I want is like the big idea. But in fact, coming up with the idea is like kind of whatever. The hard part is scaling it, is making it a business. And like this idea of kind of the inventor versus the entrepreneur. Interviewed a lot of founders, especially of kind of hard tech companies. And pretty much all of them say, if I'd known at the beginning how hard it was going to be, I wouldn't have done it. It's kind of a cliche from founders. And so I do think there's sort of a big ego thing to just get you going. And so I guess it is interesting to think about how do you have that, but also have the humility to focus on profitability rather than market share, or to know when what you've been doing is wrong. And that seems quite hard.

Enough to believe in yourself to know what can be done.

but also enough to check yourself. And that's where I think having the right team around you is critical. Because, yeah, you might have a great vision and idea, but if you can't execute it, it doesn't matter. And so I think that's so aligned and so important for people to remember, to have the business side of things in addition to the ideas. What is something new that you have taken away from this story, whether it's about business, history, or even about yourself?

Everything changes, right? Like, that is fundamentally what is going on in this story. Like, Southwest comes along, and they are a different kind of airline, and then they effectively change the airline industry. You kind of always have to change. And just remembering, there is no truly durable competitive advantage. That's the business version of it. Everything changes.

It has been a joy to talk to you today. So thank you so much for your time. And I look forward to hearing about more businesses that you cover. And I'm sure our listeners on Ted Business feel the same.

Thank you so much. I really enjoyed it. And I hope I can come back.

That was Jacob Goldstein, co-host of Business History in Conversation with me. You can find more episodes of Business History wherever you get your podcasts. And P.S., Jacob says they are always looking for new ideas to cover on their show. Know of an organization's interesting history? Email them at businesshistory at pushkin.fm. That's it for today. TED Business is part of the TED Audio Collective. This episode was produced by Hannah Kingsley Ma, edited by Alejandra Salazar, and fact-checked by Julia Dickerson. Special thanks to Maria Ladias, Farah DeGrange, Daniela Ballarezzo, Tonsika Sagmanibah, and Roxanne Heilash. I'm Madupa Akinola. Thanks for listening.

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