Keeping it fun, with eye on bottom line

Q&A -- Gary C. Kelly

Players

In an uncertain industry, CEO knows Southwest will keep flying, and you still can't get an assigned seat

February 26, 2006|By MEREDITH COHN | MEREDITH COHN,SUN REPORTER

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.

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