Gary Kelly Interview

[chase]

Southwest's Kelly on "Our Advantage"
The new CEO pledges to keep costs low even as he expands the airline in Dallas and Chicago -- and wages a legal battle

[font=arial,helvetica,univers]Since becoming CEO of Southwest Airlines (UV ) last July after the unexpected retirement of Jim Parker, Gary Kelly has moved quickly to put the low-fare king back on the offensive. With some of his biggest competitors reeling from high fuel prices, a glut of seats, and shrinking fares, Kelly, formerly chief operating officer, is aggressively grabbing growth opportunities -- and trying to create some of his own.

Witness his acquisition of six ATA (ATAHQ ) gates at Chicago's Midway Airport and his attack on a federal law that limits flights from Southwest's home at Dallas Love Field. Two changes have prompted him to challenge the law: Tennessee legislators are seeking to add that state to Love Field's service area, and Delta Air Lines (DAL ) recently pulled down its hub at Dallas-Fort Worth. BusinessWeek Dallas Bureau Chief Wendy Zellner talked with Kelly recently about the changes at the nation's most successful airline. Here are edited excerpts of their conversation:

Q: Some analysts and competitors believe that we're seeing a "new Southwest," one that's far more aggressive than it has been in years. And some think the leadership change is part of the reason. How would you respond to that?
A: I don't see it as a different Southwest. We've always been a growth airline and have always been a maverick and have always been very competitive. The last four years have been terrible for our industry, and they haven't been so great for Southwest Airlines either. Our profits are way off from our peak in 2000. [But beginning in late 2004] things started to break a little bit.

ATA put itself up for sale, and we pursued that. Delta decided to eliminate 200 flights a day at [Dallas/Fort Worth International Airport]. It was really a reaction to opportunities as they were arising as opposed to any different strategy.

Q: Some of your competitors have said your main motivation in buying the ATA gates is to dominate Midway and keep competition out. Is that right?
A: No. We're dealing with scarcer resources, as in gates. We put in 20 years developing the Chicago market, and in earnest since late 1991. Chicago is the largest market opportunity on our route system. Our main objective is to grow Chicago. A byproduct is it squeezes out a competitor, but that's just a byproduct.

Q: Were you the one who initiated the idea of seeking repeal of the Wright Amendment -- the 1979 federal law, amended in 1997, that limits service for any airline flying from Dallas Love Field to other Texas cities and seven states?
A: I would include all of our executive officers in that discussion. My view very simply was we can't stand still in Dallas. We need to do something here. We've made a living out of serving the secondary airports where that was possible. The only reason we [were] thinking about [going to] DFW is because of the Wright Amendment, which is a bad law. After 25 years of being neutral and after 25 years of having people complain about this silly law, why would we undertake this expansion at DFW at higher costs?

Q: You've been focusing a lot on costs. Are you happy with your progress there?
A: I'm very pleased. We made tremendous progress in 2004. That was a critical year for us to gain some momentum in arresting our nonfuel cost trends, and we did.

Q: Where do you stand now on unit costs, adjusted for length of flights, vs. your competitors?
A: It appears that the advantage we have [after recent cost reductions by American (AMR ), Delta, and others] is about where we were in the early- to mid-'90s. They really let their costs get out of control in the late '90s. We have to assume they will continue to improve their cost structure. They have to, or they're not going to be around.

We've got very aggressive low-cost competitors in the form of AirTran (AAI ), JetBlue (JBLU ), and others. Their costs are pretty close to ours. It remains to be seen over a long period of time, of course, whether any carrier can keep its costs at Southwest's level. We get our advantage through productivity and simplicity and focusing on our market niche. No one else is strategically focused the way we are. I feel very good about our competitive position as long as we continue to improve.
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[lowecur]

[font=arial,helvetica,univers]Q: Some of your competitors have said your main motivation in buying the ATA gates is to dominate Midway and keep competition out. Is that right?
A: No. You're nose must be a foot long by now. We're dealing with scarcer resources, as in gates. We put in 20 years developing the Chicago market, and in earnest since late 1991. Chicago is the largest market opportunity on our route system. Our main objective is to grow Chicago. A byproduct is it squeezes out a competitor, but that's just a byproduct.

Q: Were you the one who initiated the idea of seeking repeal of the Wright Amendment -- the 1979 federal law, amended in 1997, that limits service for any airline flying from Dallas Love Field to other Texas cities and seven states?
A: After 25 years of being neutral and after 25 years of having people complain about this silly law, why would we undertake this expansion at DFW at higher costs?[/font]

There you have it. It's all about costs, not the WA. Love Field is dirt cheap, and Southwest doesn't want to compete on a level playing field with the competition. As I said, if they repeal the WA, watch how quickly SWA monopolizes the remaining gates at Love Field, so the competition still won't be able to compete.

 

[Bake]

Lowecur, that is the second most idiotic post I have ever read from you. (1st of course was about the winds at nightime). Do you just make this crap up as you go or what? I wish we were drinking beer in the same bar so I could call you a dumba@@ in front of your face.

 

[Double Shot]

There you have it. It's all about costs, not the WA. Love Field is dirt cheap, and Southwest doesn't want to compete on a level playing field with the competition. As I said, if they repeal the WA, watch how quickly SWA monopolizes the remaining gates at Love Field, so the competition still won't be able to compete.

WWWWHHHHHHHAAAAAAAAAA!!!!!
WWWWWWHHHHHHHHHHAAAAAAAAAA!!!!!
WWWWHHHHHHAAAAAAAAAAA!!!!

 

[yaks]

In this case I must agree with Lowe. SWA isn't behaving any differently than the majors in the early days (of SWA) trying to drive out competition rather than have to play by the rules.

 

[TAZ MAN]

In this case I must agree with Lowe. SWA isn't behaving any differently than the majors in the early days (of SWA) trying to drive out competition rather than have to play by the rules.

Just curious...what "rules" are you talking about.

 

[yaks]

One of them being the rule that says any flights other than to the surrounding states must be flown by airplanes with 50 seats or less.

 

[TexaSWA]

One of them being the rule that says any flights other than to the surrounding states must be flown by airplanes with 50 seats or less.

Going against the rules would be just flying those routes with the amendment in place.

Challenging the WA in a court of law is completely within the rules.

Outbidding AAI for the ATA MDW deal... also completely within the rules.

 

[vc10]

The "rules" in the case of the Wright Amendment is a nasty bit of special interest legislation that keeps fares high in Dallas to support American at the expense of the average Metroplex resident. The rules, in otherwords, are grossly unfair.

In this case I must agree with Lowe. SWA isn't behaving any differently than the majors in the early days (of SWA) trying to drive out competition rather than have to play by the rules.

 

[apdsm]

Love Field is dirt cheap, and Southwest doesn't want to compete on a level playing field with the competition.

Lowe,

You should be embarrassed by that post. A level playing field is EXACTLY WHAT SWA WANTS!!!!

 

[LUVChild]

Lowecur, you're quite embarrassing sometimes. Please allow me to share a little insight in regards to Southwest and the Wright Amendment.

The Love Field carriers signed an agreement in 1969, agreeing to move to DFW. As I remember, the signing of the deal was necessary, because if DFW didn't start making money, it was the airlines themselves who'd agreed to eat the loss.

Unfortunately, Southwest wasn't in business in 1969, so we didn't sign the deal.

Want to know why we weren't in business? Oh, it wasn't for lack of trying. We'd been trying since 1966 to get up and flying.

Southwest wasn't in business because the other airlines at the time - namely Braniff and Texas International - had us tied up in court battles to try and keep up from ever getting off the ground in the first place.

I remember Colleen saying once (and I'm paraphrasing here), "You know, if they'd just left us alone, we probably would have done ourselves in."

Love Field is a perfect example. Had we been in business in 1969, we might have signed the agreement, too. But you see, certain airlines conspired to keep that from being so.

If the Wright Amendment gets overturned, then I consider that to be a beautiful piece of poetic justice.

The Wright Amendment WILL level the playing field. The Love Field master plan maxes the airport out at 32 gates, I believe. If you think the city of Dallas will let Southwest have all 32 of those gates, then you don't know Dallas. Let's just say that the city of Dallas has traditionally not been known as being a great friend to Southwest. If the Wright Amendment were overturned, we'd get a few more gates, but certainly not all of them.

But more than that, I have an ethical issue with the Wright Amendment altogether. As somebody I believe pointed out earlier, it's a restrictive piece of special-interest legislation, designed to impede competition. At this point, all it really does is protect AA and DFW. I'm sorry that DFW took a gamble and lost with their expansion, but whose fault is that? Why should SWA be penalized for our success? Obviously, DFW was doing well enough at one time that they felt the need to increase in size, thus demonstrating that they were financially stable and no longer needed the protection of the Wright Amendment. The poor business decisions regarding DFW were made by DFW and nobody else, and they have to be accountable for that.

Or to look at it another way, maybe if the Wright Amendment had never been passed in the first place, DFW and its carriers would have learned how to actually compete, rather than screaming for continued help and protection from the government.

 

[lowecur]

Lowecur, you're quite embarrassing sometimes. I guess we shouldn't be seen together in the future. Please allow me to share a little insight in regards to Southwest and the Wright Amendment.

So which is it, the money or is it just a matter of sticking it to D/FW? Could SWA make money at D/FW if they closed down Love Field? Yes, they could. They presently make money at MDW where pax costs are much higher than D/FW. What is it they don't like about D/FW? Must be the location, and those long taxi times. It's all about control. The airline that controls
the most gates at an airport, providing they can compete, controls pricing power.

As far as the gates, rest assured just like MDW, SWA would make sure that no viable LCC could use Love Field as a focus city. Meaning they would more than likely end up with half of the remaining allotment. Sound familiar?..........just take a look at MDW. Now if you're Jetblue or AirTran, do you want to compete from D/FW if the Wright Amendment is lifted? Even if they both went to Love Field, how well could they compete with a few gates apiece, and SWA controlling over 20 gates?

If the WA is repealed, hopefully the negotiation will yield an equal weighted lottery for those other 18 gates. Just watch how the remaining carriers at DFW would abandon them in a heartbeat, thus all but dooming the taxpayers in the area to subsidize what's left of DFW.

In the end, the decision will be based on the greater good to the community, not what's good for DFW, SWA, or AMR.

 

[flyingitalian]

The airline that controls
the most gates at an airport, providing they can compete, controls pricing power.

OK so tell me about fares out of Love. If what you say is true it should be very expensive to fly out of Love on SWA. The oppoiste is in fact true. Love field has one of the lowest fares in the country. When your business is low fares thats what your customers get no matter how many gates you control. People like you want SWA to abandon hundreds of millions of dollars in capital investment for exactly what reason?????

Dallas is no different than any other city in america, except for the fact that they have given a virtual monopoly to one airline at one airport. Let American comete on a level playing field just like every other airport and every other airline. Kill the Wright amendment

 

[lowecur]

OK so tell me about fares out of Love. If what you say is true it should be very expensive to fly out of Love on SWA. The oppoiste is in fact true. Love field has one of the lowest fares in the country. When your business is low fares thats what your customers get no matter how many gates you control. People like you want SWA to abandon hundreds of millions of dollars in capital investment for exactly what reason?????

Dallas is no different than any other city in america, except for the fact that they have given a virtual monopoly to one airline at one airport. Let American comete on a level playing field just like every other airport and every other airline. Kill the Wright amendment

Goombah

Pricing power doesn't mean screwing the pax, it just means you control the ticket prices. SWA is not going to deviate from their LCC model at DAL. However, if SWA was limited to their present number of gates, and Jetblue came in and took 14 gates, then their pricing power would disappear. Capire?

 

[Dave Siegel]

There you have it. It's all about costs, not the WA. Love Field is dirt cheap, and Southwest doesn't want to compete on a level playing field with the competition. As I said, if they repeal the WA, watch how quickly SWA monopolizes the remaining gates at Love Field, so the competition still won't be able to compete.

I don't think you're an idiot, but I love Southwest, so if we can stack the deck in our favor, it just means HK/GK are smarter than everyone else.

 

[Dave Siegel]

Lowe,

You should be embarrassed by that post. A level playing field is EXACTLY WHAT SWA WANTS!!!!

WHAT???? Are you nuts? When SWA clearly has the advantage, why would we want a level playing field? Why do you think we DON'T post our fares on EXPEDIA.COM? Because we don't want people to see our fares on the same screen with the other LCCs. People PERCEIVE that our fares are lower, so they go to Southwest.com and check out our prices. Let them keep making that assumption. Why would a smart businessman want a level playing field when the current conditions favor us? Maybe we should level the playing field by making fuel a fixed cost for everyone and getting rid of hedges. No thank you. I think SWA likes the playing field just the way it is (unless we can further tilt it in our favor).

LEVEL THE PLAYING FIELD??? Be careful what you wish for.


Disclaimer: I DON'T WORK FOR SOUTHWEST (YET)!

 

[FlyinGuy]

There is no legal justification for the WA. The only reason that this is such a major issue right now is because DAL pulled out of DFW. DFW is left holding the bag because of DAL not SWA. They built the terminal and ran themselves into debt. If SWA would have challenged this several years ago, this would not be such a major issue.

Why are they (AA and DFW) scared of the WA being lifted...Because SWA will show the travelers how they have been gouged over the years. The WA will go away and when the dust settles, everyone will see that this was not that big of a deal. There will be short term hoopla, but most travelers are closer to DFW than to Love.

 

[FlyinGuy]

Dave,
A level playing field is exactly what SWA would like. Do you know why??? Because we believe that we are the best at what we do (LCC). We know how to compete and we know how to make money. Something that people forget when they make statements about how lucky we are or how our management team will not always be this good forget one important aspect of our company. PEOPLE...we value people and give them the resources to do their job. If we ever forget that, then that will start the slide backwards.

 

[flyingitalian]

Goombah

Pricing power doesn't mean screwing the pax, it just means you control the ticket prices. Capire?

You have made my point for me. If what you say is true then SWA should have pricing power at LUV, yet the fares are low. What do think American is going to do the airline that comes in to compete with them? They are going to price their product beneath cost until it crushes them. You say LUV is "dirt cheap", however DFW would be free under DFWs proposal.

Look at what American did to Legend, remember them? They put a fokker with 59 seats to compete with an airline that had what.... maybe 6 airplanes? How many millions of dollars did that cost them?

Listen, Ive feed the monster, my fault. Go back to what you know...whatever that is. comprendere?

 

[HPaul3]

FlyinGuy, thanks for the reasoned response. Well said. The WA was conceived for one purpose...to drive SWA out of business because they couldn't afford to move to DFW. Our friends who conceived the WA were counting on SWA just folding up after a year or two because of competition across town from DFW. When that didn't happen, the ridiculous law stayed on the books all these years and SWA prospered in spite of it. The politicos were all left scratching their heads.

Dave, a level playing field is exactly what SWA wants. And your analogy to fuel hedging is spurious. No relationship at all. SWA does have a level playing field when it comes to market economies that dictate the price of a barrel of fuel and the ability to hedge against it. That ability is based on the credit-worthiness of the operation, which SWA has in abundance at this time. As for the credit-worthiness of other carriers, they may not be able to hedge fuel at this time because of their balance sheets, but they certainly have been successful at pulling operating credit down from General Electric and from federal loan guarantees, both of which SWA does not need or want.

And if you don't think SWA cannot compete on a level playing field against other LCCs, I respectfully suggest you review your airline history, especially SWA's history. No dig intended, but if you want to work there, you might want to understand the fundamentals of the company a little more in-depth. I would not bet against them in any dog-fight, and they've been through many of them; operating under the WA is just one good example.

Respectfully,
HP

 

[yaks]

"The "rules" in the case of the Wright Amendment is a nasty bit of special interest legislation that keeps fares high in Dallas to support American at the expense of the average Metroplex resident. The rules, in otherwords, are grossly unfair."

No, the rules include the contract which swa signed that allowed them to operate out of luv at all. The deal made between Dallas and Ft. Worth to get the DFW airport built included no scheduled service out of the old airports. That is how the bonds, which financed the airport, were sold. SWA, after much persuading (and who knows how much payola) was able to secure operating out of luv with the old restrictions. Now the bondholders should be screwed because SWA doesn't want to play by the rules any more? I have no beef with SWA, but the deal was made. Live with it or leave luv.

 

[apdsm]

WHAT???? Are you nuts? When SWA clearly has the advantage, why would we want a level playing field? Why do you think we DON'T post our fares on EXPEDIA.COM? Because we don't want people to see our fares on the same screen with the other LCCs. People PERCEIVE that our fares are lower, so they go to Southwest.com and check out our prices. Let them keep making that assumption. Why would a smart businessman want a level playing field when the current conditions favor us? Maybe we should level the playing field by making fuel a fixed cost for everyone and getting rid of hedges. No thank you. I think SWA likes the playing field just the way it is (unless we can further tilt it in our favor).

LEVEL THE PLAYING FIELD??? Be careful what you wish for.


Disclaimer: I DON'T WORK FOR SOUTHWEST (YET)!

I was referring to The Wright Amendment which currently puts SWA at a disadvantage. The above topics you refer to are all decisions made my SWA.
I am referring to an unlevel playing field created by politicians.

 

[ivauir]

No, the rules include the contract which swa signed that allowed them to operate out of luv at all. The deal made between Dallas and Ft. Worth to get the DFW airport built included no scheduled service out of the old airports. That is how the bonds, which financed the airport, were sold. SWA, after much persuading (and who knows how much payola) was able to secure operating out of luv with the old restrictions. Now the bondholders should be screwed because SWA doesn't want to play by the rules any more? I have no beef with SWA, but the deal was made. Live with it or leave luv.

You are wrong. That is not at all how it went down and we made NO deal regarding the WA.

 

[NEDude]

That is how the bonds, which financed the airport, were sold. SWA, after much persuading (and who knows how much payola) was able to secure operating out of luv with the old restrictions.

According to "Hard Landing":

The deal with the bonds and operating out of DAL vs DFW stated that all "Certificated" airlines had to stop flying out of Love and move to DFW. The original business plan for SWA was to make flying to other TX cities as convienient and cheap as driving. By having to move out to DFW, their business plan was shot. The existing companies that were moving out to DFW (mainly American, Braniff and Texas International) brought up the clause about all "certificated" airlines having to move out to DFW and got the city council in Dallas to tell SWA they had to move out in hopes it would kill SWA and their business plan. Herb, as legal council for SWA, did some research and noticed that the only place in all regulations that refered to an airline being "certificated" was in reference to the CAB. Airlines only had to be "certificated" byt the CAB if they operated across state lines. At the time SWA operated only in Texas and as such was not a "certificated" airline. SWA was able to use that legal loophole to stay at Love much to the dismay of the existing airlines and city of Dallas that were trying to kill it.

I highly suggest reading the book "Hard Landing". It deals with all of the airlines and their histories, not just SWA. But you get to see how much effort the established carriers put towards killing SWA, and how much work Herb put in on his own time trying to save it. Also a great explaination about Lorenzo and his history.

I do not feel sorry in the least for AMR or DFW if the WA is lifted. When you see how much SWA had to fight just to get off the ground, you will root for them every time. A true underdog success story.

 

[lowecur]

Revenge

Although I'm not a religious person, there is a saying I believe from the Bible that goes something like "an eye for an eye" & is followed by "Revenge is mine, Sayeth the Lord." Now for all you religious nuts out there who love to interpret these biblical sayings, maybe you can give us your thoughts.

Very simply I believe what is done is done and it's not about the past, it about the present and what is both monetarily and morally best for the community. Now God Bless, and good night.

 

[FlyBoeingJets]

Lowecur,

quotes from the old testament???

morally right for the community??? America, especially concerning business, is a moral wilderness.
take a week off from this place and come back when you recharge your batteries.

Regards,

FBJ

 

[SKLJ]

Dumb thinking, lowecur.

Although I'm not a religious person, there is a saying I believe from the Bible that goes something like "an eye for an eye" & is followed by "Revenge is mine, Sayeth the Lord." Now for all you religious nuts out there who love to interpret these biblical sayings, maybe you can give us your thoughts.

Very simply I believe what is done is done and it's not about the past, it about the present and what is both monetarily and morally best for the community. Now God Bless, and good night.

The stockholders of WN should be concerened with what is best monetarily. It is not the job of WN to correct the problems for DFW caused by its poor business and expansion decisions.

 

[yaks]

"You are wrong. That is not at all how it went down and we made NO deal regarding the WA."

Bitch all you want but Herb even alluded to it in an article in the paper last week.

 

[SWA/FO]

Hey Dave Siegal,

Whats this "we" $hit. You don't even work for SWA!

 

[Dave Siegel]

Hey Dave Siegal,

Whats this "we" $hit. You don't even work for SWA!

I'm going to paste something I wrote on this very thread:

"Disclaimer: I DON'T WORK FOR SOUTHWEST (YET)!"


So, if you're a Boston Red Sox fan, do you say "they won the World Series", or "WE won the World Series"?

If you're wife is pregnant, do you say "she's having a baby", or "WE'RE having a baby"?

So, I'm not ALLOWED (by you) to say "WE"????



I'm NOT ALLOWED BY YOU to be a big fan of SOUTHWEST?

What's the DEAL with some of you people? What? I need to be a member of the club and learn the secret handshake before I'm ALLOWED to post stuff about Southwest? Oh, EXCUSE ME for saying "WE".

One of your fellow workers said that it's the PEOPLE that matter at Southwest, and to never lose sight of that.

What are you going to do when you hear a passenger say that the LUV our airline?

"Well, actually Sir, technically it's OUR airline, you're just flying on it".

You guys better check yourself, because this little Southwest Snob Act you have going on is NOT COOL at all. I still believe that there are great people at Southwest. YOU are proving to be the exception to the rule.


But I still LUV Southwest and I hope WE continue to do great!!!!