Herb Kelleher And The Free-Market Fight For Southwest

It is manifestly contrary to the interest of the consumers to prevent the most efficient entrepreneurs from expanding the sphere of their activities up to the limit to which the public approves of their conduct of business by buying their products.  ~Ludwig von Mises

This month, Southwest Airlines (LUV) lost one of their founders, the legendary Herb Kelleher. Thanks to Mr. Kelleher’s brilliance and tenacity, this idea for a small, intrastate Texas airline survived the first four years of legal battles to become one of the dominant airlines in the US and the world. While I am thankful for all the travel I’ve been able to complete due to their low-cost fares, what I’m particularly grateful for is Mr. Kelleher’s determination and fortitude to continue to push through all the legal blockades his competition forced through the courts — particular in the early years that kept Southwest Airlines from being allowed to fly.

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In order to more accurately frame those legal battles, let’s first start with a brief history of the founding of Southwest. The idea for Southwest came from a business model that had already proven to be effective and profitable in California. Due to the airline regulations at the time, one way to start a lucrative new airline was have it solely based in one state with cities large enough to support airline traffic and far enough apart to justify flying versus driving. By limiting their airlines to just one state, they would not fall under the regulations and pricing of the now-defunct Civil Aeronautics Board (CAB).

The founders of Southwest, Mr. Kelleher and Mr. Rollin King, decided the idea would work in Texas so they incorporated the company (then known as Air Southwest Co) on March 15, 1967. For the next eight months, they raised almost $500,000 to start their airline. On November 27, 1967, Mr. Kelleher filed an application with the Texas Aeronautics Commission (TAC) for a license to fly commuter flights between Houston, Dallas, and San Antonio. The following March TAC voted unanimously to grant Air Southwest a certificate of public convenience and necessity. Immediately the following day, the two large carriers who currently dominated that market, Braniff and Trans Texas (later Texas International) obtained a temporary restraining order from Travis County District Court prohibiting TAC from allowing Southwest to operate.1 Thus began four and a half years of legal battles for Mr. Kelleher and Southwest before they would be allowed to start operations on June 18, 1971.

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