Southwest Airlines was founded in 1966 by Herbert Kelleher and Rollin King, and incorporated as Air Southwest Co. in 1967. The company planned to operate as an intrastate airline, flying a Texas Triangle network between Dallas, Houston, and San Antonio. By flying only within the state of Texas Southwest would be exempt from regulation by the federal Civil Aeronautics Board, allowing it to undercut the prices of competitors. Three other airlines (Braniff, Trans-Texas, and Continental) sued to prevent the company from starting up. The lawsuits were resolved in 1970, and in 1971 the airline changed its name to Southwest Airlines. In 1975, Southwest began flying to other cities in Texas, and in 1979, after passage of the Airline Deregulation Act, it began flying to adjacent states. It started service to the East and the Southeast in the 1990s, and Denver in 2006, which is now its most popular destination. Southwest Airlines was profitable for 47 consecutive fiscal years, from 1973 through 2019.

Southwest Airlines encountered significant operational and financial difficulties in the 2020s, notably during the holiday meltdown in 2022 when it canceled over 15,000 flights. This event, caused by severe weather and outdated scheduling systems, led to a record $140 million fine from the U.S. Department of Transportation, and losses exceeding $1.1 billion. Elliott Investment Management, an activist hedge fund, capitalized on Southwest's vulnerabilities by acquiring more than 10% of the company's shares, advocating for leadership and operational changes to improve profitability. A settlement between Southwest and Elliott in October 2024 resulted in former CEO Gary Kelly stepping down as executive chairman and five Elliott-backed directors joining the board; however, CEO Bob Jordan remained despite Elliot's efforts to oust him. Under new oversight, Southwest initiated major changes, including its first-ever layoffs affecting approximately 15% of employees, ending its popular two free checked bags policy on May 28, 2025, transitioning to assigned seating beginning in 2026, introducing premium seating and basic fare options, adding red-eye flights, limiting flight credit validity to one year, listing flights on third-party platforms like Expedia and Google Flights, and establishing a codeshare partnership with Icelandair.

Early history Concept, legal challenges & certification

Southwest Airlines began with the March 15, 1967, incorporation of Air Southwest Co. in San Antonio by Rollin King and Herb Kelleher as a Texas intrastate airline. The idea was King's, with Kelleher as his lawyer.

By flying within a single state and taking other measures to not participate in interstate commerce (such as not selling tickets outside their home state), intrastate carriers could sidestep the then-tight federal airline regulations, allowing them more flexibility to enter routes and set prices and frequencies. The most successful such company was Pacific Southwest Airlines (PSA), a California intrastate airline that, according to some sources, inspired modern airlines like Southwest Airlines.

A Texas intrastate carrier had to be economically certified by the Texas Aeronautics Commission (TAC). Southwest applied to the commission in November 1967. The TAC awarded Southwest a certificate of "public convenience and necessity" on February 20, 1968. An injunction against the award was filed the next day by three competitors (Braniff, Trans-Texas Airlines, and Continental Airlines) in a Texas district court in Austin, marking the start of a legal process that would last over two years. In May 1970, the Texas Supreme Court finally ruled in favor of Southwest, and in December, the US Supreme Court refused to hear the case. The basis for the challenge was that further air service was not needed in Texas and the TAC had erred in making the award. The challenge cost Southwest $530,000 to defend, leaving the company short of money.Texas Aeronautics Com'n v. Braniff Airways, Inc. 454 S.W.2d 199 (1970) Texas Supreme CourtSouthwest Airlines 1971 Annual Report

Early shareholders and board members included some of the Texas elite, such as Robert S. Strauss, John D. Murchison (a son of Texas oilman Clint Murchison Sr. and brother of Dallas Cowboys founder and owner Clint Murchison Jr.) and Texas rancher, oilman and industrialist Wesley West. King himself came from old money, albeit from Ohio. Kelleher, though from New Jersey, had married into one of the foremost families in San Antonio, the Negleys. A Boy and His Airline, Texas Monthly, April 1989

Startup

Lamar Muse was elected president and chief executive officer of the company in Jan. 1971. Muse, a Texas native, was a veteran airline executive, having been employed at five different carriers since starting his industry career in 1948, including being the CEO of Central Airlines and CEO and president of Universal Airlines. At the company, King was executive vice president for operations, Kelleher was secretary, with Muse, King, and Kelleher all on the board.

Muse immediately changed the name of the airline to Southwest Airlines, moved its headquarters to Dallas, and raised $1.25 million (of which $750,000 was from Wesley West) to replenish cash reserves depleted by Southwest's legal battles. The airline was able to begin flights by June 18 by purchasing three (plus one option) whitetail (aircraft that had been manufactured but failed to be delivered to a buyer) 737-200 aircraft from Boeing at attractive prices and with seller financing; hiring the pilot corps of the newly defunct Purdue Airlines, along with some other operating personnel; and copying operating manuals from PSA. Submitting such operating manuals to the Federal Aviation Administration (FAA) was an important prerequisite for obtaining the necessary operating authority from the FAA. PSA helped Muse and others during this period to better understand their business model, providing Southwest with a copy of their operating manuals. The other major California intrastate airline, Air California, like Southwest a 737 operator, also played a role, training Southwest's flight attendants in April 1971.

Finances were bolstered by a $7 million initial public offering in early June, with many purchases made by California residents familiar with PSA. Southwest was open about its admiration for PSA, Muse saying "We don't mind being copycats of an operation like that."The Skies of Texas New York Times, July 18, 1971 Another idea taken from PSA was an emphasis on attractive flight attendants, a reflection of the mores of the time and Southwest's initial focus on the then heavily-male business market. Southwest advertised in the form of an open letter to Raquel Welch, acknowledging that the actress probably had better things to do, but asking for applications from women who were like her. 1200 applied. The first flight attendants included one of Muse's daughters.Hot Pants, Love Potions, and the Go-go Genesis of Southwest Airlines, Texas Monthly, June 3, 2021

Scheduled passenger service began on two routes: Dallas Love Field to/from Houston Intercontinental Airport and Dallas to/from San Antonio, with 12 and 6 flights a week respectively.

Unable to stop Southwest from receiving a TAC certificate, Braniff and Trans-Texas (now Texas International) argued Southwest was engaged in interstate commerce and should instead be regulated by the US Civil Aeronautics Board (CAB). When the CAB disagreed, the two competitors sued in federal court and appealed when they lost, but the appeals court said in 1972 that the competitors were disputing settled law and that "this litigation should have been terminated long ago; its undue prolongation approaches harassment."Texas International Airlines, Inc., Petitioner, v. Civil Aeronautics Board, Respondent, Southwest Airlines Company, Intervenor. Braniff Airways, Inc., Petitioner, v. Civil Aeronautics Board, Respondent, Southwest Airlines Company, Intervenor, 473 F.2d 1150 (D.C. Cir. 1972) US Court of Appeals for the District of Columbia Circuit Texas International and Braniff took every legal measure and some illegal measures to block Southwest. Braniff ultimately plead nolo contendere and Texas International plead guilty to federal anti-trust charges stemming from actions the carriers took to block Southwest service.Braniff pays $100,000 fine, New York Times, February 24, 1979 The persistent, long-running viciousness of the reaction by Texas International and Braniff to Southwest attracted widespread attention.The Great Airline War: Flying the Not So Friendly Skies of Texas, Texas Monthly, December 1975

Achieving profitability

Southwest experienced significant losses almost immediately. The company focused on business travelers, a relatively inelastic market; its fares were lower than those of the Federally-regulated carriers, but that failed to stimulate demand. In October 1971 it took delivery of the fourth white tail 737 in order to offer hourly service on the Dallas to Houston route, increasing the financial burden further. A number of measures helped turn this around: Low-cost off-peak flights. Southwest had a Friday evening aircraft repositioning flight and sold it cheaply to defray the expense. The popularity of this flight grew despite no advertising, leading the company to offer low-cost off-peak (night and weekend) flights which proved extremely popular, expanding the market and aircraft utilization, driving down costs. Off-peak and Peak fares were known as "Pleasure" and "Executive" respectively—the only two fares available. A vicious fare war in early 1973 further stimulated travel. Southwest was now tapping the elastic part of the market, personal travel, and loads started to increase. Offloading the fourth 737 in May 1972, making a small gain on sale. This was the origin of Southwest's ten-minute aircraft turnarounds. Southwest originally allocated 25 minutes to turnaround aircraft at airports, per PSA's recommendation. To continue to offer hourly service on Dallas to Houston with three aircraft required 10 minute turnarounds. Southwest's operations personnel met this challenge, substantially increasing aircraft utilization, materially reducing costs. Fast turnarounds and high aircraft utilization were critical to Southwest's success for decades thereafter.A Turning Point: The Birth of the 10-Minute Turn Southwest 50th anniversary website Moving Houston service to Hobby Airport. All Houston airline service moved to Houston Intercontinental in 1969, but Hobby was closer to downtown, and thus more convenient for Dallas originating passengers, which at that point accounted for more than half of customers. Southwest reopened the Hobby terminal, disturbing bats in the process. Initially Southwest moved half its flights there, then all of them. While competitors made a half-hearted attempt to match Hobby service, the airline's presence at Hobby proved an enduring competitive advantage.

In 1971, Southwest lost $3.8 million. In 1972 it lost $1.6 million.Southwest Airlines 1972 Annual Report In 1973, it made a profit of $175,000.Southwest Airlines 1973 Annual Report From 1972 to 1973, passengers per trip (+75%) and revenue per trip (+53%) increased substantially on essentially a flat number of trips from one year to the next. Revenue per passenger was down 13% year over year, but operating cost per passenger was down far more, by 37%. Operating leverage was now working for Southwest. By the end of 1973, Southwest ordered another aircraft. Southwest would not make another annual loss until the COVID-19 pandemic ripped through the airline industry in 2020.Southwest Airlines posts first annual loss since 1972 on virus woes, Reuters Jan 28, 2021

Fighting to stay in Love Field