"CNBC Interview: Southwest Airlines - Chairman & CEO Gary Kelly"

Friday, August 6, 2004

Southwest Airlines - Chairman & CEO
Reporter: Maria Bartiromo
CNBC/Dow Jones


MARIA BARTIROMO, CNBC ANCHOR: Joining me now from our midtown Manhattan
location is Gary Kelly. He`s the Chairman and CEO of Southwest Airlines.

Mr. Kelly are you with us?

GARY KELLY, CHAIRMAN & CEO, SOUTHWEST AIRLINES: Hi Maria, great to be
with you.

BARTIMORO: Great, thanks so much for joining us today. When did you
first learn of the terrorism alert, and what was your first order of
business?

KELLY: It was yesterday as well. And, you know, so far it`s business as
usual. The airline industry hasn`t had a change in its status which is
still under the Yellow alert.

BARTIROMO: And as far as business is concerned, have you seen any letup
of the pressure?

KELLY: No. No, we`ve still got, you know we released our July business
today, and it was very strong. Bookings for August, September look very
strong. So it`s business as usual for us.

BARTIROMO: Business as usual being high oil prices, being, you know,
challenges as far as higher expenses on the security front. Give us a
sense of how tough things have been.

KELLY: It`s been a rough three years. You know, we`re very grateful to
have been profitable throughout. We`ve been able to avoid any furloughs.

We`ve been able to give wage rate increases. So we`ve survived. What we
want to do now is prosper. And to do that we`re going to need to keep
our costs under control and continue to turn out the great service that
we do.

BARTIROMO: How do you keep your costs under control when you have so
many fixed costs and they are in place for years? That is the contracts
of employees, in addition to all of the new expenses, as far as
terrorism is concerned? And I do want to get into a bit of how you have
implemented new changes in the face of these new threats?

KELLY: Well the biggest cost problem we have of course are rising energy
prices. We`re very well hedged for 2004, 2005 and even beyond. But even
with that we`re still about 100 million over budget with fuel cost this
year. Except for that we really feel like we`ve got a good handle on the
cost structure and the key with the high fixed cost business of course
is high productivity. Southwest is famous for being the most productive
airline in the world we`ve got lots of opportunities to get even better.

BARTIROMO: Of course you would know having come from the CFO job. How
have things been under your watch? You`re new to the CEO position at
Southwest.

What has been the biggest challenge for you?

KELLY: Well it`s, it was an unexpected change. But nonetheless I`m
thrilled to be in the position. It`s not even quite three weeks yet.
It`s been very smooth. We`ve, I`ve been with Southwest Airlines for 18
years.

And a lot of the things we had on our plate we`re just continuing to
press forward on. So, so far it`s been real smooth.

BARTIROMO: As far as the labor situation, you said one of the biggest
costs of course is higher energy prices. What can you tell us about the
pilots and the labor situations that are perhaps outstanding and are in
the middle of being closed? Your contracts?

KELLY: First off we`re delighted our flight attendants ratified their
contract on Friday. It`s a great contract for them. It`s a great
contract for the company. And so, at this point we don`t have any active
negotiations with any employee group. Our pilots and our mechanics
contracts become amendable next year. So, we`re in real good shape on
that front.

BARTIROMO: But of course, you`re in good shape having closed the deal
with the flight attendants. But that is not without a higher cost,
right? They did demand a pay increase?

KELLY: Well Southwest is great company. We`re very successful. And we`ve
always had wage rate increases. We`ve never set out to get our low costs
by having low wages. So yes, we indeed have wage rate increases for
flight attendants. They earned it and we were glad to give it to them.

BARTIROMO: Let me ask about some of the competitors out there. Do you
think UAL is going to make it?

KELLY: I don`t know. As you can imagine, Southwest Airlines occupies my
mind and my time full-time. So, the entire airline industry is in
distress.

We`ve been able to remain profitable throughout this very, very
difficult time period. But the rest of the industry certainly the legacy
carriers are losing lots of money. So with very high energy prices and a
real soft revenue environment there is just no end in sight to that.

BARTIROMO: Would it be better for the remaining characters, if in fact
you take some capacity out of the air, if in fact UAL did not make it.
Would that be a positive for its competitors?

KELLY: The problem in the industry, except for carriers like Southwest
Airlines is, cost. The operating costs are too high. So you certainly
can`t continue to fly capacity at that high cost. Customers just aren`t
going to pay for it. So in certain routes there is definitely too much
capacity.

It`s amazing as difficult as it is to turn a profit in this business
there is never a lack of competition. We definitely don`t lack for
capacity; but certainly, in certain routes there is definitely too much
capacity.

BARTIROMO: Very quickly, Mr. Kelly talking about the point in the
calendar that we are, that is the summer travel season, what should
consumers expect when they go to the airport and when they`re taking a
flight on your airline as far as increased security and changes that
you`ve implemented since September 11th, or over the last year?

KELLY: Well, over the last three years we`ve been able to deploy a lot
of technology. Of course the TSA has come into existence since 9/11 and
the security at the airport is much improved. It is quite efficient at
most times. At least since yesterday, there haven`t been any changes to
the security profile at the airport. We`re still, as I said, on Yellow
alert.

It`s a peak travel season. There are lots of passengers out there, so
you just need to plan ahead and make sure that you get to your flights
on time.

BARTIROMO: What`s the busiest season that you`re expecting? Would that
be the holidays?

KELLY: Summertime is definitely the peak season for us. We just released
our July traffic, and we had an all-time record load factor. So business
is good at Southwest we had 79.4% load factor. Things will begin to fall
off a bit as we near beginning of school in August. We still have good
bookings out there for August and September.

BARTIROMO: Mr. Kelly good to talk to you. Thanks so much for stopping
by, we appreciate it.

KELLY: You bet Maria. Thanks for having us.

BARTIROMO: Gary Kelly, the new CEO at Southwest Airlines today coming to
us live in New York.


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