The world lost a visionary entrepreneur recently with the death of Herb Kelleher.   Herb Kelleher was the co-founder of Southwest Airlines. The brilliance of Herb Kelleher was his ability to look at a mature industry with robust competition and identify an entrepreneurial opportunity.  This occurred in the Southwest Airlines story at a bar in San Antonio, Texas in 1967 where along with partner, Rollin King, a plan for a low-cost airline was sketched out on a cocktail napkin which would start with the three destination cities of Dallas, Houston, and San Antonio.  The basic plan, one implemented in later years by Michael O’Leary at Ryanair in Europe, involved using one type of plane, operating with smaller staffs, and getting more flights out of an aircraft in a day by employing half hour turnaround times. This vision ultimately changed the airline industry by making air travel affordable for the masses and greatly increasing access to smaller cities for travelers.  The year Southwest Airlines started, 1971, approximately 332 million people traveled by air worldwide. The figure in 2018 exceeded 4 billion. Investment icon, Warren Buffet, endorsed Mr. Kelleher’s business model. Today, Mr. Buffet’s company, Berkshire Hathaway, owns approximately 10% of Southwest Airlines. There is no greater validation of business acumen for an entrepreneur than outside investment.

What can Herb Kelleher’s business legacy teach entrepreneurs?  It can teach the following:

1. Opportunity Exists in Mature Markets – The airline industry was a mature industry with established players requiring significant capital investment when Herb Kelleher & Rollin King eyed it as entrepreneurs over fifty years ago.  Most entrepreneurs would avoid competing in a game with those components. However, history has shown that people with vision and strong execution often achieve great things as entrepreneurs in mature industries that are ripe for innovation & evolution.  IBA frequently represents these parties in the sale of their businesses, as many of them desire a liquidity creating exit transaction when business operations evolve from a small dedicated group of people with unity of mission to a larger group requiring enhanced human resource and CFO activities to satisfy employees and/or investors.  

One example of an innovative local company in a mature industry sold by IBA was Natural Pet Pantry.   Rolf & Randi Astrom took a vision of providing healthier pet food to animal owners and built Natural Pet Pantry into a significant Seattle metropolitan area provider of raw pet food from multiple retail locations and by delivery.  Historically, companies like Hill’s, Purina, and Iams dominated the pet food market. Today boutique wholistic pet food suppliers are changing the pet food industry creating expectations and demand for healthier food products for our four-legged family members while benefiting financially as visionary entrepreneurs.

2. Efficient, Effective Purchasing Enhances the Bottom Line for Companies – The business model for Southwest Airlines involved flying exclusively one aircraft.  Why was this a good business practice that enhanced profitability? It was a good business practice for three reasons.  First, exclusively flying one aircraft allowed the airline to negotiate and purchase or lease aircraft in quantity at favorable pricing.  Second, it allowed the maintenance crews of Southwest Airlines to have increased familiarity and efficiency when servicing aircraft. Third, it facilitated maintaining a lower value and more efficient inventory of parts & components for service and repair of the aircraft.  Opportunities often exist to improve purchasing activity following the acquisition of businesses. One entrepreneur who bought a company from IBA in 2018 estimates a significant five figure increase in profitability in 2019 from increasing controls & supervision on a manufacturing company he purchased with antiquated job costing and supervision procedures.

3. Labor Assessment for Maximum Efficiency & Productivity Enhances the Bottom Line for Companies – Inefficiencies in the staffing model for airlines were identified by Herb Kelleher.  His business model for Southwest Airlines allowed his staff to achieve similar results with less people.  Profitable flight routes led to footprint expansion for Southwest Airlines increasing the size of the staff of the company.  Proper staffing levels is good business. Incorrect staffing levels can result in financial difficulty for a business. This is not good for the long-term health of a business.  Business acquisition is a good time to assess staffing & productivity of employees. It is common for prior ownership to assess employees based on prior performance and company loyalty/history.  Employees should be assessed on present performance by an entrepreneur desiring to provide superior customer service and productivity to their customer base. The period following business acquisition is a great time for this to occur.

4. Equipment Utilization = Increased Profitability –  Airplanes are expensive equipment to purchase which earn no money when they are parked at the terminal.  An extra flight or two a day utilizes the equipment to its maximum productivity. Southwest Airlines recognized this in their business plan and created flight schedules with quicker than normal turnarounds of aircraft.  These practices are standard operating procedures for low cost airlines today. Increased utilization of equipment can be a pathway to increased profitability. IBA commonly sees equipment productivity assessments by business buyers in the manufacturing sector.  The last thing a business owner wants to see is a high priced piece of equipment sitting idle.

Herb Kelleher is in the entrepreneur hall of fame.  His business acumen and practices provide a road map for success for the visionary entrepreneurs of the 21st century preparing to offer a new and innovative business model in mature industry sectors.  

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.