The airline industry faces unprecedented turmoil these days as oil and labor costs soar, competition rages and passengers pinch pennies. Collectively, the carriers lost an estimated $10 billion last year. But one carrier, Southwest Airlines, the Texas-based discount giant, has been making money for 3 1/2 decades. When Gary C. Kelly was named chief executive officer in 2004, he inherited the hefty burden of maintaining the streak. He also inherited 31,000 workers and 70 million passengers a year to please.
Since taking over the airline three years after charismatic founder Herb D. Kelleher retired, Kelly has led development of a more aggressive airline, adding airports, challenging traditional carriers on their turf and forming a partnership with ATA Airlines that could give it an opening into the international market.
Kelly, 50, an accountant by trade and company bean counter since 1986, says he tries to keep it fun at an airline known for playfulness. But he earned praise for his quick, personal response to Southwest's first crash fatality when a plane skidded off a Chicago runway in a December snowstorm and killed a boy in a car.
In his slight Southern drawl, Kelly says he'll take it as it comes in the uncertain industry. The two things he's sure of: Southwest planes will keep flying, and you still can't get an assigned seat.
The industry faces considerable and ongoing woes. What keeps you up at night?
Our biggest issue right now is higher fuel prices. We're well protected for the time being with a great fuel [contract] that saved us almost $900 million last year, when our net income was $489 million. The other thing we face is brutal competition. Passengers aren't stingy, but they want low fares, and the industry is recognizing that is the future. Clearly, the airline industry is a financial disaster and there is an imperative for all airlines to get costs down.
At what point can you not squeeze more productively out of your workers?
We've been able to improve our productivity over the last three, four, five years dramatically. We had 90 employees per aircraft in 1991 and 1992, and today we have close to 70. I think we have a number of opportunities that we've identified that we can continue to pursue to improve efficiency. Simple things like operating on time. It's more cost-effective to be on time than late.
But you're a big airline now, with big airline troubles. Don't your employees want more money?
Our people have had pay increases every year of our history. In terms of our people, I think they are very happy to be at Southwest, where we've never had a furlough.
Bigger isn't always better. The big airlines are losing the most money. Are you hesitant to grow?
No, you don't stand still. You grow or you shrink. There is no in-between. Growth has to be carefully managed. After 35 years, we're still the low-cost producer. If growth had caused us to become a middle-of-the-road cost producer, or a high-cost producer, then I would accept that we shouldn't grow, but that hasn't happened.
So, are more fare increases coming?
More fuel cost increases are coming, I'm afraid. So, we'll do our best to keep our overall cost structure low and share the savings with our customers. But over time if the cost of providing air transportation increases, we'll have to find a way to offset that. Now, fuel is about 20 percent of our costs. Some years, average fares decline, like in 2002 and 2003.
Since you took over, other airlines don't just think you're aggressive on fares, they think you're plain aggressive: US Airways watched you move into its turf in Philadelphia, Pittsburgh and Baltimore; AirTran Airways lost a battle for gates in Chicago to you; and American Airlines saw you chip away at long-time federal limits on your flights from Dallas. Is this your stamp or what the environment calls for?
Hard work and the notion of being a fierce competitor, that is part of our culture. That's our hallmark. It would be unfair to say we weren't aggressive before and now all of a sudden we are. In contrast, the industry was in such tough shape with such an uncertain outlook right after Sept. 11. Compared to 2002 and 2003, yes, we're absolutely more aggressive, but that's only because we got ourselves stabilized and confident that we could grow more aggressively and more profitably.
What cities are untapped?
I'm not sure we'll add another new city this year. There are a lot we'd like to add over time. We haven't made any decisions. We're in this enviable position that we have more opportunities than airplanes right now. And rebuilding New Orleans right now is our top priority. We had 57 flights before Katrina and now we have 13. I don't see us getting back to 57 anytime soon. We have five more flights coming March 17. We're also off to a fast start in Denver, and we're trying to get more gates in Philly.
At Baltimore-Washington International Thurgood Marshall Airport you have a new terminal with room to grow. But BWI recently was bumped down to your fourth-largest hub behind Las Vegas, Phoenix and Chicago. Is BWI off your radar because it's doing well and you need to focus elsewhere?
Baltimore is doing very well, with 168 departures daily. It's in the top four. And there is the top four, and then there is a pretty big gap until the next set of cities. Baltimore was our first entree into the East Coast and has been a tremendous success for Southwest Airlines. We'll be adding nonstop service to Denver March 4. There are no more announced plans, but stay tuned. As the rest of the route system grows there will be more opportunities.
Will you add another code share, or partnership, like the one you have with ATA Airlines that enabled you to expand into Chicago? Is there room for another partner?
There is in theory. We're still enough of a niche carrier that it doesn't come naturally for us. Integrated into the deal with ATA was the acquisition of gates at Midway [Airport]. They are a very small airline relative to the size of Southwest, meaning we work well from a customer service perspective. They are allowing us to drive customer service procedures, and that's very important to us. It makes the idea of code sharing with another carrier that might not be willing to work with us much more difficult to contemplate. It's likely we might have some other custom code share. But nothing is planned for this year.
Is culture the big problem with mergers, even though experts say more airlines are considering them?
That's at the top of the list. You've got different union contracts, different work rules, different pay scales, a whole set of different expectations that you have to try and change very radically and merge people's jobs together. That always creates resentment on both sides. It's the odd scenario where everyone is unhappy. Ours is a complicated business, with complicated logistics. We have one aircraft type, and we can t find another airline that's compatible with that, so right off the bat there is a complication. And look at the fourth quarter and name me another airline that makes money. There are none. So, you take your profits and reduce them. That was never a serious consideration over the last several years and isn't one going forward.
What about partnering with another airline, like ATA, to enter the international market?
We promised ATA after its deal closes and it gets financing and emerges from bankruptcy, we'd support international itineraries. ... It'll probably be years away, which begs the question: Why don't we do it now? We don't have international capabilities. We are constructing that within our reservation system right now. There are different taxes, different languages, different currencies. On the ground, you deal with customs. It will be our first foray into international flights with ATA, most likely. They serve Mexico and the Caribbean.
When you enter new cities, are you stealing business or creating a new market?
That's been our model from the beginning. We are creating a new market of people who were not traveling, or traveling by automobile. On the longer distances there is less stimulation to the market.
Some airlines are cutting short flights and shifting to longer and overseas flights. Is there still too much domestic capacity or too many empty seats on airplanes?
Probably. That doesn't mean we're standing still. Airlines like Southwest are adding airplanes and flights. One of the problems in our industry, you make commitments to add planes months and years in advance. We're committing to bring in airplanes in 2008. And we don't know what fuel prices are going to be and what the economy will be like and what competition will be like. It's really tough to manage that growth.
Will Southwest add longer flights? Do customers want more?
We've done well with our longer haul flights, and we'll continue to look at those opportunities. Our bread and butter is still short haul - about 75 percent of our daily round trips. Customers don't think that narrowly. They don't think, "Oh, I'll fly 300 miles on Southwest and 1,500 miles on Brand X." They want to take Southwest as many places as we'll take them. As we add more destinations to our route maps, we create more opportunities to connect dots. We are evolving our route system over time to be less and less short haul.
Will you finally begin assigning seats, at least on the long flights?
We've said that it's something we need to invest in, in terms of having the capacity to assign seats. We should only assign seats if it adds value to the customer. Customers generally want low fares and won't pay more for an assigned seat. So, if we can assign seats and become more efficient, it would be an attractive alternative for us. But we have no plans to assign seats in 2006.
Can you afford to do anything new when you just got a $24 million bill from the Transportation Security Administration for screening costs?
We're gonna challenge it. We don't think it's appropriate. We don't think it's in compliance with statute. We don't think it's fair. Name it, and we don't like it. And it was a total surprise to boot. It's not only a charge for 2005, but a charge for every year. Starting in 2006, we'll be over our operating budget because of it. It's big money. And something we're gonna fight hard. I can't give any odds on how successful we'll be.
You do know how to count money because you're an accountant by trade. But you work for an airline that considers itself fun. Has it made you more fun or have you made it more serious?
Probably both. I don't know how serious I am. I was [Kiss frontman] Gene Simmons for Halloween, and I've been at Southwest long enough that I've exhausted my repertoire. I do have a different leadership style than my predecessor. We all have to follow our own leadership compass. But I don't think I'd be at Southwest Airlines unless I fit into the culture. My philosophy in a nutshell is to be very people-centric. If we can take care of them, they will take care of our customers.
What's your philosophy on beer or whiskey?
I don't like to be pigeonholed. I'm open to all of it. [Founder] Herb Kelleher was a famous bourbon drinker, but I'm probably more adventuresome in that regard. I just can't keep up with him.
Can you keep up in your red Porsche?
I'm fiscally responsible. It's used, a 1998, and nearing the 100,000 [mile] mark. I haven't quite convinced my wife I need to get into the next century. Still a lot of fun, though.