When Herb Kelleher started Southwest Airlines in 1967, he was a pariah, a chain-smoking, Wild Turkey-swilling lawyer-entrepreneur who tried to undercut his established competitors. The airline was in legal limbo for four years because of disputes over flight routes before its first plane was allowed to take off. Four decades later, Kelleher’s upstart airline is now the country’s largest in terms of market capitalization and has posted a profit for 35 straight years. It’s the only major U.S. carrier making money right now, even as smaller airlines fold at a rate of about one a month and legacy carriers, stuck with record-setting fuel prices, stagger toward bankruptcy.

This spring, at age 77, Kelleher retired as Southwest’s chairman and scaled back his responsibilities to an advisory role, a position he’ll hold for five years. It’s a good time for him to ease up. The airline business is going through a difficult period, and Southwest was recently hit with a $10.2 million fine because it had flown planes after their required inspection dates. But Kelleher leaves Southwest in excellent shape compared with its peers. With a $10 billion market cap and ample cash reserves, it’s poised to solidify its ­position as the low-fare airline.

Condé Nast Portfolio reporter Matthew Malone met Kelleher at Southwest’s Dallas headquarters, where the executive, a longtime three-pack-a-day smoker, elbowed up to a silver ashtray the size of a turkey platter. Kelleher has never cared much about appearances, and he’s certainly not changing now. During the 90-minute interview, he smoked four Merits, kissed a Southwest intern on the cheek, and jokingly picked his nose. He also talked about the foolishness of mergers, the state of the Federal Aviation Administration, and why February is the worst damn month of the year.

Between the lackluster economy and soaring fuel prices, some say that things are downright apocalyptic for airlines these days. Is the business model simply one that doesn’t work anymore?

It’s very difficult to make it work when oil is at $130, $135 a barrel. Southwest has been protected from many of the difficulties of this time: Our fuel hedges saved us $727 million last year alone. But our revenues are down as a consequence of higher fuel costs, and I think our principal advantage at Southwest and in this milieu is the fact that we’re so strong financially. We have the lowest cost in the industry per available seat mile, the strongest balance sheet, the most equity of any carrier, so we’ve always been fit for whatever exigency confronted us. We’ve always been very conservative and made sure that we’re ready for the bad times, because they always come.

The last major round of restructurings, after 9/11, allowed the legacy carriers to cut into Southwest’s cost advantage. More restructurings and bankruptcies are on the way. Will that make the company more vulnerable?

No. As a matter of fact, I think our competitive advantage is widening. The other carriers are increasing fares and adding fees so quickly that I think that we’re regaining our low-cost-fare advantage. There’s another factor: I refer to Chapter 11 as the washateria—you go to the washateria, and you wash out all your sins and get a fresh start. Once you’ve been through it, your opportunities are narrowly constricted with respect to restructuring, because you’ve already terminated your benefit pension plans, you’ve got a reduced lease rate on your airplanes, you’ve gotten better financial terms from your lenders, and it’s very hard to come up with substantial savings the next time around.