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Course corrections ahead at Southwest
[size=+1]New CEO believes cost cuts and growth will win back Wall Street
[/size]
[size=-1]11:06 PM CDT on Friday, July 16, 2004 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
By almost any measure, Southwest Airlines Co. soon will be among the nation's top three or four airlines.
As the Dallas carrier's newly appointed chief executive, Gary Kelly has the job of making sure Southwest continues to look nothing like its competitors – culturally, perceptually and especially financially.
Unfortunately, one situation Mr. Kelly inherited does resemble Southwest's troubled competitors: its mostly stagnant stock price.
By other measures, the carrier is making big gains. It remains the most profitable company in the industry. And most months, it carries more domestic passengers than any other airline.
In three years it will be No. 3 in fleet size measured by large jets, surpassing bankrupt United Airlines Inc., which analysts guess will shrink in coming months.
After it was announced Thursday that he was succeeding Jim Parker as CEO, Mr. Kelly said he he would keep Southwest profitable, but he hinted the road ahead may be paved with new thinking.
Critical cost cuts
With airfares flat or declining, Southwest's success depends on keeping its costs close to 7.5 cents for each seat mile flown. Those costs rose above 8 cents per "unit" in the second quarter, raising red flags on Wall Street.
But Mr. Kelly believes his airline's growth plan, along with new technology, can get costs back where they need to be.
"We've changed a great deal in the past three years," he said on a conference call Thursday, noting self-service kiosks at airports, an enhanced Web site and winglets installed on aircraft to save fuel.
Mr. Kelly also referred to new approaches the airline has taken to its cost problems. And he said he has ideas he didn't have the authority to try just two days ago as chief financial officer.
"When you're the CFO, you're a lieutenant, and you're a loyal lieutenant," he said. "You play a role you're asked to play."
Mr. Kelly now has broader authority to dictate how the airline thinks. An example of his innovation will be evident in its fall schedule, which starts in October.
The schedule trims some lightly filled short-haul flights – including a couple stragglers out of Dallas Love Field – that weren't making much money. With new fare and inventory software that Mr. Kelly shepherded in as chief financial officer, the carrier can maximize revenue on each airplane.
Next up: Running the new schedule through a different program to optimize costs. "There's a lot more we can squeeze out of it," he said.
More up for grabs
There's also plenty more revenue to grab in the domestic market for Southwest, analysts say.
The carrier could increase its $6 billion in annual revenue by as much as 50 percent by just "connecting the dots" between its cities on both coasts, wrote analyst Gary Chase of Lehman Bros.
James Higgins of Credit Suisse First Boston upgraded Southwest shares Friday on the strength of its expansion plans in comparison to the struggles of traditional carriers.
Southwest doesn't have to add big cities such as Philadelphia to succeed financially.
"They can just backfill the routes they already have with more frequencies," said Darryl Jenkins, a visiting professor at Embry Riddle Aeronautical University and a longtime airline consultant.
Traditional full-service airlines such as Fort Worth-based American Airlines Inc. – what the industry calls legacy carriers – have little defense against lower-cost Southwest.
Those that go head-to-head with Southwest have no choice but to match the low fares and hope fliers dislike the discounter's no-frills service. American, with its higher costs, can't earn a profit charging Southwest's prices.
Southwest has more growth coming; it has orders, options and purchase rights for 372 more Boeing 737s, more large jets than No. 5 Continental Airlines flies today.
Growth continues
In terms of seat miles flown, Southwest will probably jump into the No. 4 slot from No. 6 in just two years as it expands its schedule 10 percent next year and beyond. And that includes the international flying done by its competitors, something Southwest doesn't do. Measured solely by domestic flying, it's almost United's size.
"Southwest will make a habit of making life miserable for the legacy carriers," Mr. Jenkins said. The only thing that can stop Southwest, he said: "An act of God."
Mr. Kelly, 49, is less concerned with competitors than with maintaining Southwest's culture. Like chairman Herb Kelleher and Mr. Parker, he believes taking care of employees first will lead to satisfied customers and, ultimately, happy shareholders.
"We want this to continue to be a great place to work," Mr. Kelly said. Moving the stock price would be the most effective morale tool, as the carrier's 32,000 employees are its largest group of stockholders.
"Every cent move means millions of dollars lost or gained," said Gary Shults, president of Transport Workers Union Local 555, which represents ground workers at the airline. "It's a big deal."
Mr. Kelly recognizes that he won't do himself any favors by mimicking Mr. Kelleher's firebrand style. "I don't for one minute think that I can be a Herb or a Jim, and I won't try to be."
[size=+1]New CEO believes cost cuts and growth will win back Wall Street
[/size]
[size=-1]11:06 PM CDT on Friday, July 16, 2004 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
By almost any measure, Southwest Airlines Co. soon will be among the nation's top three or four airlines.
As the Dallas carrier's newly appointed chief executive, Gary Kelly has the job of making sure Southwest continues to look nothing like its competitors – culturally, perceptually and especially financially.
Unfortunately, one situation Mr. Kelly inherited does resemble Southwest's troubled competitors: its mostly stagnant stock price.
By other measures, the carrier is making big gains. It remains the most profitable company in the industry. And most months, it carries more domestic passengers than any other airline.
In three years it will be No. 3 in fleet size measured by large jets, surpassing bankrupt United Airlines Inc., which analysts guess will shrink in coming months.
After it was announced Thursday that he was succeeding Jim Parker as CEO, Mr. Kelly said he he would keep Southwest profitable, but he hinted the road ahead may be paved with new thinking.
Critical cost cuts
With airfares flat or declining, Southwest's success depends on keeping its costs close to 7.5 cents for each seat mile flown. Those costs rose above 8 cents per "unit" in the second quarter, raising red flags on Wall Street.
But Mr. Kelly believes his airline's growth plan, along with new technology, can get costs back where they need to be.
"We've changed a great deal in the past three years," he said on a conference call Thursday, noting self-service kiosks at airports, an enhanced Web site and winglets installed on aircraft to save fuel.
Mr. Kelly also referred to new approaches the airline has taken to its cost problems. And he said he has ideas he didn't have the authority to try just two days ago as chief financial officer.
"When you're the CFO, you're a lieutenant, and you're a loyal lieutenant," he said. "You play a role you're asked to play."
Mr. Kelly now has broader authority to dictate how the airline thinks. An example of his innovation will be evident in its fall schedule, which starts in October.
The schedule trims some lightly filled short-haul flights – including a couple stragglers out of Dallas Love Field – that weren't making much money. With new fare and inventory software that Mr. Kelly shepherded in as chief financial officer, the carrier can maximize revenue on each airplane.
Next up: Running the new schedule through a different program to optimize costs. "There's a lot more we can squeeze out of it," he said.
More up for grabs
There's also plenty more revenue to grab in the domestic market for Southwest, analysts say.
The carrier could increase its $6 billion in annual revenue by as much as 50 percent by just "connecting the dots" between its cities on both coasts, wrote analyst Gary Chase of Lehman Bros.
James Higgins of Credit Suisse First Boston upgraded Southwest shares Friday on the strength of its expansion plans in comparison to the struggles of traditional carriers.
Southwest doesn't have to add big cities such as Philadelphia to succeed financially.
"They can just backfill the routes they already have with more frequencies," said Darryl Jenkins, a visiting professor at Embry Riddle Aeronautical University and a longtime airline consultant.
Traditional full-service airlines such as Fort Worth-based American Airlines Inc. – what the industry calls legacy carriers – have little defense against lower-cost Southwest.
Those that go head-to-head with Southwest have no choice but to match the low fares and hope fliers dislike the discounter's no-frills service. American, with its higher costs, can't earn a profit charging Southwest's prices.
Southwest has more growth coming; it has orders, options and purchase rights for 372 more Boeing 737s, more large jets than No. 5 Continental Airlines flies today.
Growth continues
In terms of seat miles flown, Southwest will probably jump into the No. 4 slot from No. 6 in just two years as it expands its schedule 10 percent next year and beyond. And that includes the international flying done by its competitors, something Southwest doesn't do. Measured solely by domestic flying, it's almost United's size.
"Southwest will make a habit of making life miserable for the legacy carriers," Mr. Jenkins said. The only thing that can stop Southwest, he said: "An act of God."
Mr. Kelly, 49, is less concerned with competitors than with maintaining Southwest's culture. Like chairman Herb Kelleher and Mr. Parker, he believes taking care of employees first will lead to satisfied customers and, ultimately, happy shareholders.
"We want this to continue to be a great place to work," Mr. Kelly said. Moving the stock price would be the most effective morale tool, as the carrier's 32,000 employees are its largest group of stockholders.
"Every cent move means millions of dollars lost or gained," said Gary Shults, president of Transport Workers Union Local 555, which represents ground workers at the airline. "It's a big deal."
Mr. Kelly recognizes that he won't do himself any favors by mimicking Mr. Kelleher's firebrand style. "I don't for one minute think that I can be a Herb or a Jim, and I won't try to be."
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