updated 7/19/2007 7:12:51 PM ET 2007-07-19T23:12:51

Herb Kelleher, the joke-cracking, charismatic leader of Southwest Airlines Co., will serve one more year as chairman of the airline he helped create and then resign next May, the company said Thursday.

Southwest also extended the contract of Chief Executive Gary C. Kelly into 2011, and said President Colleen Barrett would step down next July.

Kelleher, 76, and Barrett, 62, will remain Southwest employees for five years after leaving their executive jobs, working full time at Dallas headquarters, the company said.

Kelleher said he and Barrett had wanted to step away from the executive grind and were not pushed out. Kelleher said the departures were part of a succession plan launched in 2001, when he resigned as CEO.

The transition to a new CEO proved rocky. Kelleher’s successor, James F. Parker, fought with Southwest’s unions and resigned after just three years, citing personal reasons.

Under Kelly, Southwest faces different challenges, including higher fuel costs and the growth of other low-cost carriers that imitate Southwest’s model. This week, the company reported that second-quarter profits fell 17 percent.

Kelleher, however, said Kelly “has the company going in exactly the right way.” For example, he endorsed Kelly’s plans to sell international travel through partnerships with other airlines. But Kelleher declined to endorse anyone for chairman.

Kelleher, who lowered his profile with reporters and analysts after leaving the CEO’s office in 2001, added that Southwest won’t miss a beat without him as chairman.

“I have not been the face of Southwest Airlines for the last six years,” he said. “Colleen and Gary have, and they’ve been most successful at that.”

Southwest’s stock was already trading higher on Thursday, and it rose again after news of the management changes. Shares closed up 68 cents, or 4.3 percent, at $16.40.

Kelleher said the stock fell when he was named CEO back in 1982, so “fate is evenhanded if you wait long enough.”

As chairman, Kelleher has often operated behind the scenes. He was deeply involved in negotiations with rival American Airlines and Congress over relaxing limits on flights at Southwest’s home, Dallas Love Field — a change that has added tens of millions in new revenue to Southwest. He also worked on aviation security issues.

One of Kelleher’s last remaining public duties has been to preside over annual shareholder meetings, lit cigarette in hand.

Kelleher was a lawyer in San Antonio when one of his clients, Rollin King, approached him about starting an airline to offer low-cost service between Texas cities. They had to fend off lawsuits by other carriers to begin flying.

Southwest began flying in 1971 and turned a profit in 1973. It has remained profitable ever since, an unmatched feat in the airline industry.

Kelleher became chairman in 1978 and chief executive in 1982 and helped foster a fun-loving image for Southwest with stunts such as showing up at corporate events dressed as Elvis Presley and by professing a fondness for Wild Turkey bourbon whiskey.

Questions about a successor grew in 1999, when Kelleher was diagnosed with prostate cancer.

Jody Hoffer Gittell, a Brandeis University professor who wrote a book about the company’s management style, “The Southwest Airlines Way,” said Kelleher and Barrett were wise to step aside and let a new generation of leaders take over.

“Together they’ve had a lasting impact on Southwest Airlines, and their legacy seems guaranteed,” Gittell said. She said Kelleher and Barrett succeeded by building respect for employees, which she said “is unfortunately not widespread in today’s business culture.”

With a fleet of more than 500 jets — all of them Boeing 737s; one of the company’s many cost-saving ploys — Southwest is far different from the three-plane operation that began flying in 1971. Kelleher said the company has tried to stay true to its model of offering low fares and cheerful service.

“We’re a big airline that’s still acting like a small airline.” he said. “We’ve changed, but you have to change ... to counter competition, to deal with spikes in fuel prices.”

For most of its history, Southwest has enjoyed lower costs than other carriers. But now it feels more pressure than ever to control its own costs.

This week, Southwest announced it was seeking to replace some higher-paid workers with newer, less-expensive ones by offering buyouts to 8,700 employees.

“Now it’s down to 8,698,” Kelleher said with a chuckle.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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