Southwest CEO on Airline's Safety

March 12, 2008— -- This is a tale of Southwest Airlines. Actually, it's two tales of Southwest Airlines -- two stories that may pull your image of the company in opposite directions.

One story has caused high anxiety these last few days. Southwest Airlines CEO Gary Kelly said Tuesday that three employees will be placed on administrative leave as part of the airline's response to an internal investigation into claims it violated Federal Aviation Administration regulations regarding airline inspections on 46 Boeing 737s in 2007.

The FAA is fining Southwest $10.2 million, the biggest fine ever slapped on any U.S. airline. Southwest has 30 days to decide if it will challenge the FAA's findings or penalty.

As part of its internal investigation, Southwest is also inspecting 44 jets. Southwest spokeswoman Linda Rutherford told ABC News in a statement that "out of an abundance of caution, we began re-inspecting 44 aircraft last night ... and we are returning the aircraft to service as the inspections are complete."

These inspections are separate from those involved in the FAA dispute, and Rutherford said the airline disclosed the groundings to the FAA last night.

"We are taking the strictest approach on this," she said.

"We have been a safe company," Southwest CEO Gary Kelly said in a statement today. "I believe we are a safe company. I am committed to making sure we become safer still."

"Nightline" set out to tell another story about Southwest, the all-too-rare story of a U.S. airline that has been so successful, so profitable, so relentlessly cheery that practically no one who works at the airline ever quits.

An annual employees meeting, officially called Message to the Field, had overtones of a revival meeting or love-in. In fact, L-U-V is Southwest's stock symbol.

Watch the story tonight on "Nightline" at 11:35 p.m. ET

All Is Well?

Kelly is the deliverer of the Message to the Field, and he is a man so unflappably, understatedly self-confident and so dedicated to Southwest's spirit of fun that to amuse his workers this past Halloween he came to work dressed in … a dress.

"You know, I've lived 52 years without cross-dressing and then, you know, I finally succumbed to that," Kelly said when we visited Southwest's corporate headquarters in Dallas. "It was a lot of fun. I tell you what. I was a giant woman, my hair up to here. And so it was an interesting experience."

The next day Kelly was back to being himself, with a little less hair.

"I did shave my legs," he said. "And so everything wasn't quite back to the way I was before, but months later, all is well."

"I do sort of feel like the mother of the 34,000 kids," said Colleen Barrett, the company's president. "And I love it when I get letters or testaments, testimonials to this effect constantly. I will hear from mothers that will say I believe that Southwest Airlines turned my son into a man. I believe without Southwest Airlines my daughter wouldn't be working anywhere, let alone at an airline."

That was earlier this week, and we said thanks and packed up and brought home this story of the airline that seems to do everything right.

Two days later, the story changed, and Gary Kelly, he of the Halloween costume, suddenly looked like a leader in need of armor in light of the FAA allegations and their impact.

'It Will Hurt a Lot'

We hurried back to Dallas to ask this leader of America's happiest airline -- one incidentally, with a stellar safety record and not a single catastrophic accident in 37 years -- the obvious question: What happened?

"There was a gap in our records for inspecting a very small part of the aircraft," Kelly said.

The airline, at specific intervals, is supposed to check some very small but specific areas of every 737 exterior looking for cracks. Southwest's records show they didn't do it.

Forty-seven Southwest "aircraft were not in an airworthy condition," the FAA wrote, and yet, even after Southwest realized the mistake and reported it to the FAA, it went ahead and "operated 46 aircraft on 1,451 cycles."

A cycle is a flight. Southwest flew more than 1,400 flights with planes whose inspections were recorded as incomplete.

That's what drew the $10 million fine, which Kelly said "will hurt a lot."

"We worked through with the FAA on how we would remedy that problem and were given the go ahead to continue to fly, so within eight days all of the inspections were done -- they were pretty easy and pretty quick to complete," Kelly said.

On our first visit to Southwest, we'd seen Kelly talk about how tough the airline business is, with no room for mistakes.

"Its higher costs, especially higher fuel costs, and … more and more low-cost, low-fare competition," Kelly told the employees assembled for the Message to the Field. "And unless we confront these challenges and change, they represent very serious threats to our future and to our jobs and to our financial security."

"It's a rough business," he told us later. "We are definitely susceptible to swings in the economy."

Southwest has so far succeeded in that rough business. Lauded as a great manager by the business press and admired by his employees, Kelly made a decision several years ago that some hail as brilliant. He bought fuel hedges, essentially an insurance policy against the price of jet fuel going up.

The move has netted the company hundreds of millions of dollars that his competitors are paying at the pump, like the rest of us.

Championing the Culture

In our first interview, Kelly said that one of the biggest keys to the company's success was a phrase he and others use a lot -- "the culture." The culture of Southwest.

"You can't have great people unless it's a great place to work and where you can keep them," he said. "And we tell them every day that we love them, and that's the true test, if you do whatever you have to do to take care of your people and that's what I feel like we've done for 37 years."

Indeed, workforce morale at Southwest is at a level most businesses would envy.

Even at that huge meeting, when a woman from a reservation center stood up to share her concerns that her office may be shut down to save money, her tears were not snickered at. Instead the next speaker, a flight attendant, urged her to switch to his department, and that's actually an option the company is offering.

In general, staffers talked about liking how Southwest leaves them alone to do their jobs well. Barrett said the company will forgive mistakes when someone is learning, except when it comes to safety and honesty.

"We're very forgiving if someone's a little slow in learning a procedure or process," she said. "But we are not forgiving if someone is disrespectful. We don't give second or third chances for lying, cheating or not having integrity."

Now Southwest is being questioned for its honesty about safety. But Kelly insists -- and the record shows this is accurate -- that the FAA inspector assigned to Southwest knew about and signed off on the decision to keep flying those 46 planes with incomplete inspections.

"I think that is simply to say that there was a judgment made by the professionals involved that it was not a safety issue, and that has since been confirmed by the Boeing Co. and another outside expert," he said.

The FAA did confirm to the Dallas Morning News and The Associated Press that one of its maintenance inspectors permitted Southwest to continue flying the Boeing 737s that the FAA now says should have been grounded.

Another question raised is whether FAA inspectors had grown too cozy with Southwest staff. In a report by a special counsel, two FAA whistleblowers allege that "cronyism has infected the inspection process…"

The report also quotes an investigation that concluded that Southwest "has a relaxed culture in maintaining … data."

A congressional hearing led by Rep. Jim Oberstar has been scheduled for April 3 to investigate the charges that the airlines are too close with FAA regulators.

Ironically, it's the relaxed culture -- in a completely different sense of the phrase -- that so many say has made Southwest such an airline success story. Before the fine, we asked Kelly how long the good feeling at Southwest would last if something went wrong.

"We're winners at Southwest, and our employees know that and they cherish it," he said. "If we become losers, however, you want to define that, that would absolutely have an impact on the culture."

So now here's a real test, for the culture and for the bottom line. Southwest took pride in its record for safety. But $10 million? That's a lot more than a slap on the wrist.

ABCNews.com producer Katie Escherich contributed to this report.