With fuel prices on the march again,
Southwest Airlines Co. is taking a pause after a 41-year expansion that has taken it to the brink of the global industry's top 10 by traffic.
A year ago, the airline and its rivals faced the worrisome prospect of jet fuel rising to $3.30 a gallon, but the industry successfully managed to pass on most of the increases through higher fares.
"We prepared for $3.30, and now we're going to have to be prepared for $3.50," said Chief Executive Gary Kelly in an interview in Chicago, where he was attending an employee event at what is now the airline's busiest market.
Southwest is keeping its aircraft fleet flat at around 700 planes until it reaches its investment-return target of 15%, though it will boost capacity by introducing larger planes and adding extra seats on existing aircraft.
While demand remains robust, Mr. Kelly concedes that Southwest will have to look at "schedule adjustments" if it fails to secure cost savings and push through higher fares to counter fuel costs.
The fuel challenge comes as Mr. Kelly continues to assimilate discounter AirTran Airways and face off against larger legacy airlines that restructured and then merged. The AirTran deal boosted Southwest's scale by around 20% in one swoop, and also gave it access for the first time to international markets.
Southwest has been limited to domestic routes because of an outdated reservations system that Mr. Kelly says it is still "years away" from replacing, as well as union contracts that kept it focused on the Lower 48 states.
Meanwhile, new rivals such as
JetBlue Airways Corp. and
Spirit Airlines Inc. have grown quickly into markets from the U.S. to Mexico and the Caribbean.
But Mr. Kelly seems unhurried about shifting his focus from domestic routes, where he sees potential to add "hundreds of planes"—though not as many as 500—before it runs out of growth opportunities in the Lower 48. Services to Hawaii, Alaska, Canada, Mexico and the Caribbean are all seen as on the horizon, but Mr. Kelly views the core domestic market as far from saturated.
The big prize from AirTran was access to Atlanta, the busiest airport in the U.S., and it is also expanding its presence in the New York area, and eyeing further expansion in Washington, D.C.
AirTran, which Southwest acquired last May, is expected to generate $400 million to $500 million in revenue synergies, with much of that sum coming from the smaller carrier's extensive network out of Atlanta. Mr. Kelly said the deal is adding 22 cities to the 72 that Southwest already serves and is moving the strictly domestic airline into some overseas destinations in Mexico and the Caribbean.
It is one of several strategic cards in hand that Mr. Kelly hopes will boost revenue by nearly $500 million over the next few years.
In April, the first of 100 larger, more fuel-efficient
Boeing Co. 737-800s will arrive, and Southwest is also the launch customer for the revamped Max version of the airplane, part of a $19 billion order announced last December.
The Max jets are due to start arriving in 2017, and though Boeing and rival Airbus have seen recent new aircraft programs running several years late, Mr. Kelly believes the U.S. company may even come in ahead of time after learning from past mistakes.
Beyond that, Mr. Kelly said, Southwest will have opportunities to grow from Dallas Love Field in 2014 upon the expiration of a federal law that limited the carrier to serving only Texas and eight nearby states nonstop with flights from its home airport.
Mr. Kelly said the company also has many opportunities to improve its labor productivity, although many of those potential changes would need to take place within the confines of union labor negotiations.
One piece of AirTran he wants to jettison is that airline's 88 smaller Boeing 717 planes.
"We tried to look for a purpose for the 717s that was different than for the 737s," Mr. Kelly said. "We couldn't find one."
But AirTran's leases on those planes don't begin expiring until 2017 and run to 2024. So Southwest has reached agreement with Boeing—from whom it leases the aircraft—to try to place the planes elsewhere.
"If we can't find a home for them, we'll fly them and pay for them, or not fly them and pay for them," he said.
Write to Susan Carey at
[email protected] and Doug Cameron at
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