Southwest's CEO sees acquisitions on horizon in a rough airline atmosphere
[SIZE=-1]12:00 AM CST on Thursday, December 20, 2007
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[SIZE=-1]By TERRY MAXON and SUZANNE MARTA / The Dallas Morning News
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Southwest Airlines Co. chief executive Gary Kelly doesn't have any offers out to buy another airline, but he expects Southwest to jump in when the consolidation fun begins.
NATALIE CAUDILL/DMN
Southwest Airlines CEO Gary Kelly expects 'an interesting 2008' for carriers.
"At some point, I think we'll probably acquire somebody," Mr. Kelly said in a recent discussion with Dallas Morning News business editors and reporters. "There's bound to be a scenario that we would say, 'That scenario out of these 10, yep, that one would work for us.' We'd want to be prepared for that opportunity that presents itself."
Southwest's investment in bankrupt ATA Airlines Inc. in 2004 offers a good example of being ready, he said. Of course, the airline is well aware of the pitfalls of acquiring another carrier, a strategy it followed in 1993 when it acquired Morris Air and in 1986 when it bought Muse Air.
It was also in 1986 that Mr. Kelly joined Southwest as its controller. He has worked for Southwest for more than 21 of its 37 years, moving up to chief financial officer in 1989 and being named chief executive in 2004.
For all that time, he's worked with Southwest co-founder and longtime chairman Herbert D. Kelleher and president Colleen Barrett. Those veterans will step down from their executive jobs next year and become "ordinary" employees.
Here are some of Mr. Kelly's comments:
What is the state of the airline industry?
Very tenuous. I think the business cycle this decade has been very difficult for our industry. You know, finally in 2006 and 2007, you were seeing some profit reports by various airlines. Two emerged from bankruptcy in 2007. It looks like those profits may be short-lived. ...
I think the industry is very unprepared for a slowdown in the economy, especially given the high energy prices. The industry is not well-hedged, and the balance sheets are in terrible shape. The cost structures, for the most part, are still very high, even after bankruptcy. So it'll be an interesting 2008.
What shape is Southwest in going into a possible slow period and the high fuel prices?
I feel that we're as prepared now as we ever have been. We've got a great fuel hedge this year. It's not quite as good next year, but it's still very good and certainly provides us tremendous protection.
We're 70 percent hedged next year at about $50 a barrel. And this year, it was over 90 percent at $50 a barrel. So we just don't have the same amount of coverage, but it's still very, very good, and it will still save us hundreds of millions of dollars.
The balance sheet is in great shape. You know, our leverage is well below 50 percent. We're under 40 percent total debt – that's including all of our aircraft leases.
We've slowed down our growth to be prepared for a more difficult economic environment next year, so we won't be adding to the risk profile aggressively. We'll be growing next year about, oh, 4 to 5 percent, I think. In terms of the fleet, that will be a net of between five to 10 airplanes. So, we'll be slowing our capital spending as well. ...
The signs in the economy are so inconsistent. But there's plenty of reasons to believe that things could be pretty tough next year, so we'll be prepared for that.
You've been at Southwest since 1986, and the stock was pretty much on an upward slope for much of that time. This decade, the stock price has flattened out. That has to concern the board and the executive staff.
Well, those are all undeniable facts. The '80s was actually a fairly similar decade. When I got here in 1986, the stock was flat until about 1991 or so. What it was before that, I don't recollect. But we've had these periods in time. It's a tough industry. It's a tough business. It's been by far the toughest decade the industry has ever faced.
For us to have gotten through this period as well as we have, I feel like, has been an accomplishment. The stock [prices] compared to the earnings are consistent. The stock is a reflection that the earnings haven't performed this decade. That is also a fact. It's something that our employees are very aware of, also.
It is a matter of concern. We want this to be a great place to work. That's aspiration No. 1. But aspiration No. 5 is we need to make money, too. That's the one we're not living up to, in my opinion, that needs some work.
We need to control our costs, which we've done a pretty good job of doing, absent the pressure from energy prices. Then we need to move from the old Southwest to the new Southwest in terms of revenue-generating capability. It's coupled with improving the customer experience. So all of this should fit together very nicely.
But, yeah, our goal is to boost our revenue production over a billion dollars a year. We're a $10 billion company, so that's a 10 percent boost. That doesn't seem outrageous, but it's not a slam-dunk. We want to grow our unit revenues organically as best we can by a modest boost to the load factor, modest fare increases on a year-to-year basis. But on top of that, we're looking for a billion dollars' worth of new sources of revenue.
Business Select [premium-priced tickets that are fully refundable and include a free drink, extra frequent-flier credits and priority seating] is a modest component of that. And then Southwest.com, Rapid Rewards, code-sharing are the three major themes that are truly new for us, at least. I feel very comfortable that there's a portfolio of ideas there worth $1 billion.
Executing them is a different challenge, of course. But the opportunities are there, and I don't think that Wall Street is going to buy into that until we show them the money. I have no problem with that. I think we need to execute, and we've got to perform.
How do you adjust and keep Southwest "Southwest?" The moves you're making seem to be making you more like the legacy carriers.
Well, that's the tightrope. I don't want to be like other airlines. We want to be Southwest. But we're a business, so we also have to be profitable and prosperous in the way that we offer this. So I think that is the trick.
I think as long as we can stay true to those aspirations, those other things are simply features and tactics. I don't think that really defines who we are.
We want to be low fares. We want to have great personal customer service. We are not going in a direction like some of our European counterparts who, they don't capitalize "C" in customer, I assure you. It's just a very different approach. It's a desire to be cheap at all costs. And that's not who we are or where we're coming from.
But, you know, we also have to find ways to beat our competitors and win customers. In some ways, that may give the appearance like we're acting like other airlines, but if you put everything we do today together as a whole, we still, I think, are very different.
And our low cost is, as you all know – in addition to our people and that advantage that we enjoy – the low cost is the sustainable competitive advantage that allows us to offer low fares.
And in that way, we're still remarkably different than virtually any other airline. AirTran [Airways] is the about the only airline that comes close to our cost structure.
What do you say to an analyst or hedge fund manager who says, "Gary, why don't you eliminate your closest competitor by acquiring AirTran?"
We can't let investors guide the company. That's not to say that investors aren't smart and don't have good ideas, because they do. They just have different motives. We've got to stay true to who we are as a company and build for the long term. ...
At some point, I think we'll probably acquire somebody. That's just a reflection of my view that the industry is weak and that there'll be players up for sale, probably in a fire-sale mode, and we'll want to at least be thoughtful about that. We'll still have all the considerations – the fleet, the labor contracts, the seniority issues, the cost implications of it, the cultural aspects of trying to bring two work groups together and on and on and on. We would be concerned about that and always have been.
2008 is going to be a personally different year for you. You've been chief executive officer since 2004, but you've worked with Herb and Colleen for two decades. As of midyear, it's just going to be Gary. You must be having mixed feelings about that.
Very mixed feelings about that. ... From a personal perspective, it's almost like I have the best of both worlds. They both will maintain offices a hundred yards from where I sit, ostensibly for five years. What they will do after they step down from their board and officer positions obviously is unclear at this point, but both want to continue to be involved.
I've got very strong personal relationships with each one of them that will continue. Even with them off the board, I'll continue to consult with them. I think that they'll probably have some role in our employees' eyes after they retire from those positions.
But all of that is a little fuzzy, and we'll all have to adjust to having a new chairman and a new president, and each one of those has not been named yet. But I think we're prepared for it. ... I'm looking forward to that challenge. I think our employees are as well. Sometimes it's tough to say goodbye. But they've both toiled at this for 40 years, and I think we kind of owe it to them. If they want to step back a bit, hopefully they've taught us to carry on
[SIZE=-1]12:00 AM CST on Thursday, December 20, 2007
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[SIZE=-1]By TERRY MAXON and SUZANNE MARTA / The Dallas Morning News
[/SIZE]
Southwest Airlines Co. chief executive Gary Kelly doesn't have any offers out to buy another airline, but he expects Southwest to jump in when the consolidation fun begins.
Southwest Airlines CEO Gary Kelly expects 'an interesting 2008' for carriers.
"At some point, I think we'll probably acquire somebody," Mr. Kelly said in a recent discussion with Dallas Morning News business editors and reporters. "There's bound to be a scenario that we would say, 'That scenario out of these 10, yep, that one would work for us.' We'd want to be prepared for that opportunity that presents itself."
Southwest's investment in bankrupt ATA Airlines Inc. in 2004 offers a good example of being ready, he said. Of course, the airline is well aware of the pitfalls of acquiring another carrier, a strategy it followed in 1993 when it acquired Morris Air and in 1986 when it bought Muse Air.
It was also in 1986 that Mr. Kelly joined Southwest as its controller. He has worked for Southwest for more than 21 of its 37 years, moving up to chief financial officer in 1989 and being named chief executive in 2004.
For all that time, he's worked with Southwest co-founder and longtime chairman Herbert D. Kelleher and president Colleen Barrett. Those veterans will step down from their executive jobs next year and become "ordinary" employees.
Here are some of Mr. Kelly's comments:
What is the state of the airline industry?
Very tenuous. I think the business cycle this decade has been very difficult for our industry. You know, finally in 2006 and 2007, you were seeing some profit reports by various airlines. Two emerged from bankruptcy in 2007. It looks like those profits may be short-lived. ...
I think the industry is very unprepared for a slowdown in the economy, especially given the high energy prices. The industry is not well-hedged, and the balance sheets are in terrible shape. The cost structures, for the most part, are still very high, even after bankruptcy. So it'll be an interesting 2008.
What shape is Southwest in going into a possible slow period and the high fuel prices?
I feel that we're as prepared now as we ever have been. We've got a great fuel hedge this year. It's not quite as good next year, but it's still very good and certainly provides us tremendous protection.
We're 70 percent hedged next year at about $50 a barrel. And this year, it was over 90 percent at $50 a barrel. So we just don't have the same amount of coverage, but it's still very, very good, and it will still save us hundreds of millions of dollars.
The balance sheet is in great shape. You know, our leverage is well below 50 percent. We're under 40 percent total debt – that's including all of our aircraft leases.
We've slowed down our growth to be prepared for a more difficult economic environment next year, so we won't be adding to the risk profile aggressively. We'll be growing next year about, oh, 4 to 5 percent, I think. In terms of the fleet, that will be a net of between five to 10 airplanes. So, we'll be slowing our capital spending as well. ...
The signs in the economy are so inconsistent. But there's plenty of reasons to believe that things could be pretty tough next year, so we'll be prepared for that.
You've been at Southwest since 1986, and the stock was pretty much on an upward slope for much of that time. This decade, the stock price has flattened out. That has to concern the board and the executive staff.
Well, those are all undeniable facts. The '80s was actually a fairly similar decade. When I got here in 1986, the stock was flat until about 1991 or so. What it was before that, I don't recollect. But we've had these periods in time. It's a tough industry. It's a tough business. It's been by far the toughest decade the industry has ever faced.
For us to have gotten through this period as well as we have, I feel like, has been an accomplishment. The stock [prices] compared to the earnings are consistent. The stock is a reflection that the earnings haven't performed this decade. That is also a fact. It's something that our employees are very aware of, also.
It is a matter of concern. We want this to be a great place to work. That's aspiration No. 1. But aspiration No. 5 is we need to make money, too. That's the one we're not living up to, in my opinion, that needs some work.
We need to control our costs, which we've done a pretty good job of doing, absent the pressure from energy prices. Then we need to move from the old Southwest to the new Southwest in terms of revenue-generating capability. It's coupled with improving the customer experience. So all of this should fit together very nicely.
But, yeah, our goal is to boost our revenue production over a billion dollars a year. We're a $10 billion company, so that's a 10 percent boost. That doesn't seem outrageous, but it's not a slam-dunk. We want to grow our unit revenues organically as best we can by a modest boost to the load factor, modest fare increases on a year-to-year basis. But on top of that, we're looking for a billion dollars' worth of new sources of revenue.
Business Select [premium-priced tickets that are fully refundable and include a free drink, extra frequent-flier credits and priority seating] is a modest component of that. And then Southwest.com, Rapid Rewards, code-sharing are the three major themes that are truly new for us, at least. I feel very comfortable that there's a portfolio of ideas there worth $1 billion.
Executing them is a different challenge, of course. But the opportunities are there, and I don't think that Wall Street is going to buy into that until we show them the money. I have no problem with that. I think we need to execute, and we've got to perform.
How do you adjust and keep Southwest "Southwest?" The moves you're making seem to be making you more like the legacy carriers.
Well, that's the tightrope. I don't want to be like other airlines. We want to be Southwest. But we're a business, so we also have to be profitable and prosperous in the way that we offer this. So I think that is the trick.
I think as long as we can stay true to those aspirations, those other things are simply features and tactics. I don't think that really defines who we are.
We want to be low fares. We want to have great personal customer service. We are not going in a direction like some of our European counterparts who, they don't capitalize "C" in customer, I assure you. It's just a very different approach. It's a desire to be cheap at all costs. And that's not who we are or where we're coming from.
But, you know, we also have to find ways to beat our competitors and win customers. In some ways, that may give the appearance like we're acting like other airlines, but if you put everything we do today together as a whole, we still, I think, are very different.
And our low cost is, as you all know – in addition to our people and that advantage that we enjoy – the low cost is the sustainable competitive advantage that allows us to offer low fares.
And in that way, we're still remarkably different than virtually any other airline. AirTran [Airways] is the about the only airline that comes close to our cost structure.
What do you say to an analyst or hedge fund manager who says, "Gary, why don't you eliminate your closest competitor by acquiring AirTran?"
We can't let investors guide the company. That's not to say that investors aren't smart and don't have good ideas, because they do. They just have different motives. We've got to stay true to who we are as a company and build for the long term. ...
At some point, I think we'll probably acquire somebody. That's just a reflection of my view that the industry is weak and that there'll be players up for sale, probably in a fire-sale mode, and we'll want to at least be thoughtful about that. We'll still have all the considerations – the fleet, the labor contracts, the seniority issues, the cost implications of it, the cultural aspects of trying to bring two work groups together and on and on and on. We would be concerned about that and always have been.
2008 is going to be a personally different year for you. You've been chief executive officer since 2004, but you've worked with Herb and Colleen for two decades. As of midyear, it's just going to be Gary. You must be having mixed feelings about that.
Very mixed feelings about that. ... From a personal perspective, it's almost like I have the best of both worlds. They both will maintain offices a hundred yards from where I sit, ostensibly for five years. What they will do after they step down from their board and officer positions obviously is unclear at this point, but both want to continue to be involved.
I've got very strong personal relationships with each one of them that will continue. Even with them off the board, I'll continue to consult with them. I think that they'll probably have some role in our employees' eyes after they retire from those positions.
But all of that is a little fuzzy, and we'll all have to adjust to having a new chairman and a new president, and each one of those has not been named yet. But I think we're prepared for it. ... I'm looking forward to that challenge. I think our employees are as well. Sometimes it's tough to say goodbye. But they've both toiled at this for 40 years, and I think we kind of owe it to them. If they want to step back a bit, hopefully they've taught us to carry on
