"Southwest CEO reflects on first 3 months"

Tuesday, October 19, 2004

Southwest CEO reflects on first 3 months
By Trebor Banstetter
The Fort Worth (TX) Star-Telegram


DALLAS - During the past three months, Gary Kelly has met hundreds of
Southwest Airlines employees and customers, plotted his airline's growth in
the Northeast and presided over a stronger-than-expected third quarter.

It's no wonder that the new CEO of the Dallas-based discount carrier hasn't
had enough time to indulge in one of his passions.

"It would be great to have some real time to work on my playing," said
Kelly, 49, who strums a vintage-style Martin Dreadnought acoustic guitar
when he can catch a break from running the world's largest discount airline.

The Star-Telegram posed a series of questions to Kelly:

Q: How have you spent your first three months at the airline?

A: One of my first priorities has been to get out and get to know our
employees and customers. I feel like if you're going to be a leader of
30,000 people, they have to know who you are, what you stand for and where
you're headed.

So once a week I get out in the field and spend a lot of time talking and
listening to people. I hope to keep doing that as long as I can.

Q: The airline posted better-than-expected results for the third quarter.
How is the fourth quarter shaping up so far?

A: We're on track on the cost side. On the revenue side, I don't know. I'm
concerned about that.

Q: How so?

A: Well, we've seen a shift by our [major airline] competitors where they
are adding a lot of seats, wisely or unwisely. That's having an effect on
us. That's a real challenge for Southwest.

But we know that we can charge low fares and be profitable, and we know
that's just not their game. So we feel like we're ready to compete.

Q: There has been some speculation recently that as Delta Air Lines closes
its hub at D/FW Airport, Southwest may be considering adding service to the
airport. What's the situation regarding D/FW?

A: We've always held the position that we don't want to serve D/FW, and that
remains true. It's a big airport, which means we'd have less effective
turnaround times there, longer taxi times. There's a lot of congestion
there, which doesn't fit in well with what we do.

Now, with Delta leaving, that is a big change for the D/FW market, so it's a
thing we've got to think through and keep an eye on what develops. The
Dallas-Fort Worth Metroplex is very important to us, we've invested 130
flights a day here [at Dallas Love Field], and it's our headquarters city.

But the fact is, D/FW doesn't meet the definition of the underserved and
overpriced airports that we normally look at. In fact, it's overserved,
because it's an American Airlines hub and they have so many flights there.

Our priority right now is in developing our route system in the eastern
region of the country.

Q: Southwest is battling US Airways in Philadelphia, your newest city. What
would it mean for your airline if US Airways goes out of business, which has
become a real possibility?

A: It would be huge. The opportunity in Philadelphia is very different than
D/FW; it's larger, but the number of flights is actually smaller. We'd love
to have as many as 25 gates in that scenario. (Southwest currently has four
gates there.)

Beyond that, we're working with the city to secure more gates right now,
regardless.

Q: Several airlines, including Southwest, have made some minor fare
increases recently. Do you think fares will continue to rise as the airlines
struggle with high fuel costs?

A: I'd describe those increases as tweaks, and not serious, across-the-board
increases by any stretch. This is not an environment where fares will go
higher by any significant amount.

Q: Why not?

A: There are fundamental economics at work. Customers are demanding lots of
service and low fares, and that's what we're going to give to them.

In addition, right now, there are too many seats out there anyway. It's
extraordinary to find that in this awful operating environment, with two
major airlines in bankruptcy and another very close, we're still seeing more
and more seats being added.

Q: Southwest has studied in-flight entertainment, such as the seat-back
satellite television that's been so popular on JetBlue Airways. Have you
made any decisions on whether to add these types of perks?

A: At this point, it's an amenity and a frill, but it doesn't rank very high
with our customers in surveys and focus groups. It's not something the
majority of customers are willing to pay for. I don't see it as a lasting
competitive advantage on other airlines. So we don't have any plans to
undertake anything like that in 2005.

Q: Southwest's famously good labor relations have taken some hits recently,
especially with the difficult contract negotiations with flight attendants.
Are you doing anything to address worker morale?

A: I think spirits are high, but there's no question that the contract
negotiation was long and contentious. We've been through a very difficult
three-year period, not just the contract but a whole host of things.

So we're looking to sort of revitalize our work force. We're focusing on
communications, and on the basics, so we can work together to deliver a
better product and in a more spirited way.

Q: Southwest has a lot of growth planned, with 29 new airplanes being added
next year. How do you keep costs in check as you expand?

A: If you manage the growth right, you actually have an opportunity to drive
your unit costs down. So in a sense, growth can be a very healthy way to
keep costs down and grow into the infrastructure that you're building.

The problem comes when you grow too fast, and that's when you risk getting
your costs out of control. But we've been able to go from 4 to 5 percent
annual growth to 10 percent this year without missing a beat.

Attached Photo:

Gary Kelly

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