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Gary Kelly Interview

Mon Nov 20, 2006 4:54 pm

In Business Q and A

Gary Kelly, chief executive of Southwest Airlines

Interviewed by Richard Velotta / Staff Writer

Southwest Airlines jets are shown at McCarran International Airport in January.

Photo by Sam Morris

When Southwest Airlines started service in Las Vegas on Jan. 31, 1982, it offered five daily nonstop flights to Houston and Phoenix and it was the 15th city in the Southwest system.

With the silver anniversary of that startup approaching, things have changed dramatically.

Today, not only is Southwest the busiest air carrier at McCarran International Airport, but Las Vegas is the busiest station in the Southwest system with 225 flights a day to 52 destinations.

The city's importance to Southwest is not lost on Chief Executive Gary Kelly, who frequently credits the city as one of his company's top success stories.

Kelly joined Southwest in 1986 as controller, then moved up the corporate ladder as chief financial officer, vice president of finance and executive vice president. He was named vice chairman and chief executive officer in 2004.

Kelly talked with In Business Las Vegas about Las Vegas' role in the Southwest story.

Question: October was a pretty good month for Southwest Airlines with the repeal of the Wright Amendment. How big is this for the future of the company?

Answer: It's big. First of all, it's the end to the restricted era. It's something that we've suffered under since 1979 and really earlier than that. It brings closure to a festering issue. I could not go to a social event in Dallas without being peppered with questions by friends and family and business colleagues about "When are we going to get rid of the Wright Amendment?" And so now, that long, festering problem is gone.

The immediate benefits are real. There is a phase-out, of course, of the restrictions over an eight-year time period, but as a practical matter, even if it wasn't legislated that way, it was going to take time to add airplanes, to refurbish facilities and to add service and lower fares at Love Field.

The immediate benefit is huge, fares have come down by as much as two-thirds and we want to keep it fresh and new. We want to offer what we can until its fully repealed in 2014 and the major offering that we have is price, of course, and we're famous for low fares and we're going to use that to our advantage and use it often.

In many respects, isn't this like starting up a new city?

It is, indeed, exactly like starting a new city. There's an excitement that comes along with that. Our employees feel it and you can see it in their eyes and in their step. It's always fun to offer a market something new and the best thing we have to offer in our business is a new route or a new flight time on a route. So, yes, this is big, to be able to offer instantly overnight, 25 new destinations is a lot of fun. We're just beginning to work with the landlord, the City of Dallas, on refurbishing the airport so that we can handle more flights and more passengers in the future.

Although everybody's pretty happy about the repeal, didn't it come at a pretty steep price — you aren't able to start nonstop flights to Dallas until 2014, right?

You just have to compare it to the alternative, which is not even one-stop service, forever. It's just an enormous step forward. I can't justify the eight years, other than that's what it took to get an agreement by the other parties and without that five-party agreement, I don't think Congress would have ever acted. It's just the price we had to pay to get that concurrence. In the end, the eight years will pass, we'll at least benefit from much lower fares in the meantime. The competition has matched, so the economic benefits began Oct. 19 and it's obviously something to be very proud of, a lot better result than where we were before.

Have you gotten any initial reading on your loads connecting into Dallas?

The load factors are up, noticeably up. We run 60 to 70 percent load factors on our Dallas routes routinely and they're up a couple of percentage points which isn't a remarkable change, but it is a noticeable one. That suggests that we still have seats that I would expect we would sell. How full those flights get between now and some future date when we add more flights is anybody's guess. But what we can promise is that travelers will at least have a lot more access to low fares than they had before.

Southwest had a high-profile experiment with assigned seating. What happened with that?

Well, it's ongoing. It wasn't so much an experiment as it was a test of the time it takes to board the aircraft. The long-standing theory is that it takes more time to board an aircraft with assigned seating and we had a theory, at least, that we wanted to explore that if the boarding was orderly — in other words, where people were arranged in such a way based on their seat — that it actually might be faster. So we tried a variety of methods. They weren't remarkably different than open seating. Nothing was faster, at least convincingly. They were all roughly the same or slower. We learned what we wanted to learn. We weren't too surprised with the findings, but we have hard facts now to move forward.

In the meantime, we are finishing out the technology construction to be able to assign seats and that will take well into next year before we can have that completed. In the meantime, we're continuing to evaluate that whole boarding and seating process and see if can come up with something that improves customer service and also our efficiency, so no determination has been made yet, mainly because the pacing item is the technology construction.

Could you describe the different boarding methods you tested?

Well, we're in the process of doing that still. And no, we're keeping those ideas close to the vest. We don't want to reveal any new ideas to our competitors, quite frankly. And I'm not at all convinced that we'll even change anything when you get right down to it. But the point is, it's just a high-profile example of how we're constantly looking for ways to improve, No. 1, the customer experience and No. 2, something that's cost-effective.

People we've talked to have said loyal Southwest customers don't want you to change your boarding procedures. How can your team be convinced to try anything new when you have such a loyal following saying don't do it?

Well I think that's the whole point. In other words, you want to find things that improve the customer experience and it's customers that will tell you if it's an improvement. There is no product I can think of that satisfies 100 percent of consumers, whether it's an automobile or a soft drink, clothing, you name it. There's always going to be preferences for certain products and we know that we're not all things to all people.

What is very encouraging is when we ask for feedback, we get it. It's meaningful, it's passionate, it's thoughtful and we have enormous loyalty built up over 35 years, so I see that as a very good thing. Until we asked the question, we never fully understood how much our customers liked the open seating. I'm proud of the company that we asked and got facts as opposed to assuming that maybe consumers would prefer something else.

When you were in Las Vegas earlier this year, you said Southwest is modifying its technology to prepare for the possibility of introducing service to Mexico. What's the status of that?

Unchanged. In other words, we're pursuing that course. It's part of the construction effort with our reservation system that includes assigned-seating capability as well as international capability. We're further along with our assigned-seating work than we are with international, so it's going to be a couple of years. And I'm not sure at all that we'll fly international ourselves anytime soon, but we do have a plan to code-share with ATA, whereby they'll fly the international segment and we'll connect with them in Las Vegas, as an example So it would be a one-stop itinerary to take you to wherever ATA wants to fly, and they do fly to Mexico as an example.

So if it's ATA out of Las Vegas, Southwest wouldn't even be a part of the trip.

Not from Las Vegas. That's possible. That's more than likely the way we would start and then we would, of course, have the option, once we build the technology, to fly those routes ourselves.

So under that scenario, we'd probably see more Southwest passengers coming into Las Vegas and connecting on ATA flights to Mexico.

I think that's true. It would be a logical consideration because we have more flights in Las Vegas than anywhere else. Our focus in Las Vegas, though, is not connections. Our primary focus there is people who want to go in and out of Las Vegas. The airport doesn't have infinite resources and the airport and Southwest love the fact that we focus on local traffic. So I think that would be a consideration. It's better served for us to offer connecting flights into Mexico somewhere else. But all those things would be decided with our code-share partner and with Las Vegas and with the Las Vegas airport. But based on flight activity, it would be a logical place for us to evaluate.

Since the last time we talked, a Southwest jet slid off a runway at Chicago's Midway Airport, crushing a car and killing a young boy. How has that accident changed Southwest Airlines?

It's had a deep impact on the company. Obviously, we were very saddened by that event. Our first thought, then and now, is for Joshua Woods and his family because it was a tragedy. It was a good wake-up call for us. We're a very fine company with a very rich tradition, but it just underscores the need to have safety as the top priority. We've always had it, but you can always be safer.

We have continued to support the (National Transportation and Safety Board) investigation. They have not issued their final report. We have, coincident with that effort, worked in partnership with the (Federal Aviation Administration) to do what's called a systems analysis team, where they have a comprehensive review of an agreed-upon scope of procedures which is not totally dissimilar from the NTSB investigation. They have different objectives, but you're still looking at similar operating procedures.

By what the FAA told us, they were delighted with the work effort, with some of the recommendations that we've made and with some of the changes that we've already made to make a very fine company with a great safety record even safer. We need to deal with what life offers us and this is a wake-up call and a reminder that it can be dangerous if we're not careful and we do need to do everything that we can to protect our customers and our employees and everybody on the ground.

Some travelers say they've detected a little more attention to safety precautions after that accident. Real or perceived?

That's hard to know. My judgment is that it's probably real, just a little bit more attentiveness. Sometimes proficiency can breed complacency, just because you think you're really good and you think you're invincible. We have very specific checklists that we go through at disciplined points in the flight process in the cockpit, as an example. From that perspective, we haven't made any changes because we think we have an outstanding procedure to make sure all the settings are appropriate. The runway was an intense focus of that investigation and there are so-called "contaminated runways." So that's where our focus has been as well. What can we do to ensure that we operate safely in that environment? For the most part, what we do everyday from a safety perspective is the same thing we've been doing and we're really good at that.

Some analysts have said in order for Southwest to continue to succeed in a far more competitive environment, it may have to veer away from some of the systems that have spelled success in the past — like the single aircraft type, for example. Some say you've already done that by going to destinations you never would have tried before. What, if anything, will Southwest do differently in the future?

First of all, no one or no company remains exactly the same. In a sense, you're either getting better or you're getting worse, but nobody stays exactly the same, and that's certainly true for Southwest Airlines. We want to stay true to our core values and we're very passionate about what we stand for. We stand for low fares, we stand for outstanding customer service, we want Southwest Airlines to be a great place to work and we want to be profitable doing all that. Safety within our operational excellence goals, we want to be the safest airline we can be. We want to be the most reliable. We want to be the most efficient. All of those things were true in 1971 and remain true today.

The route expansion we've had over the past five years is classic Southwest Airlines. We've been in Los Angeles International, which is one of the busiest airports in the world, since the early 1980s. So, certainly, going into Denver doesn't fly in the face of that kind of an idea. We're also a major-market airline. We fly big airplanes, 137-seat Boeing 737s. So 100 percent of our traffic goes either in or out of our 10 largest locations.

So we don't fly from a small market to a small market. We might fly from a small market to a big market, but it fits within that context as well. We're looking for airports that are underserved and overpriced, so that does suggest that we shy away from a lot of the dominated hub airports, but Denver is an example of an airport where the large carrier got into trouble, went into bankruptcy, shrunk dramatically. Voila! There's an opportunity. Costs are very high, therefore the fares are high and we can come in and offer something different and we think we can be very successful. So I don't consider any of that to be different. We were out of Denver for 20 years because the airport costs had gotten high with the new airport. They're now half of what they were. We're still true to who we were, but at the same time admit that we're not the same company that we were five years ago or 10 years ago. I think we're better.

JetBlue is going with a 100-seat aircraft to go into markets that simply wouldn't work with its Airbus jets. Would Southwest ever consider a smaller aircraft type to get into some of the emerging markets JetBlue is seeking out?

That's an interesting opportunity and one that we have probed often over a 15-year time horizon. Each time, we have concluded that we are best served by sticking with the one aircraft type. But I'm sure we'll continue to evaluate that. For now — whatever now means, it has to be at least three or four years — we're going to be dedicated to the single fleet type. Over that two-to-three-to-four-year time period, I'm sure that question will come up and need to be revisited again. But the reason we're not deviating right now is that the opportunities to expand with the 737 are more than we can handle.

I think it would be a mistake, in other words, to be distracted and chase different opportunities with different jets because there's a tremendous amount of complexity that comes along with it — and therefore risk — in an environment where fuel prices are very high and no airline is hitting its financial targets and many of them are still losing money, in fact. The risk-reward just needs to be there. We're really good at what we do and we've got plenty more to do and I think that pretty easily defines what our focus needs to be for the near term.

The aviation industry is excited about the arrival of the Boeing 787 Dreamliner, a jet with more composite plastic than anything flying today. Has Southwest had any talks with Boeing about a Boeing 737 Dreamliner — a version of your plane with more composites?

We have and we have expressed the desire to make a great airliner even better. There are no ready solutions to the 737. In the meantime, we think we've got the best narrow-body aircraft out there. But we've certainly expressed the desire, especially with higher fuel costs, to find a more efficient airplane than what we have today and Boeing, the engine manufacturers and Southwest are all working together. But it's in the very early stages and there's no solution eminent and I'm sure it will be years.

How complicated is it to adapt the technology to the 737?

It's very complicated. In other words, if you simply took the 787 technology and tried to downsize it by 100 seats, it just won't work. The engineering doesn't match. The economics don't correlate in the same way. There's a lot more weight to reduce, in other words, with the composites on the bigger airplane as compared to what you could realize compared to the engineering investment on the narrow-bodied airplane. So you just don't get the same scale of improvement, if any.

So it's not as simple as just building a mold of the 737 and developing it?

Unfortunately not. But in an interesting way, it just underscores what a great airplane the 737 is. So it's not so bad. More than anything, I'm glad that we picked Boeing and that we picked the 737 because they've proven to be a great partner and it's the most popular aircraft in the world.

Let's talk about Las Vegas. You're the biggest carrier at McCarran International Airport. Is there any more growth to be done in Las Vegas and how would you do it?

I think Las Vegas growth opportunities are huge. Everyone knows that there are thousands of rooms planned over the next four to five years and Las Vegas has proved that if they build it, people will come, and we've been the vehicle to bring the people and it's been good for us, good for Las Vegas and good for our respective customers. The airport has a limit as to how big it can get, how many daily operations it can support. I think that's going to be more the problem if history is a guide, at least. If the demand is there, we want to be there to support Las Vegas growth and we think we are a very good partner. We carry more passengers in the U.S. than any other airline and Las Vegas, obviously, is a destination market so we fit well with each other. So the challenge will be just airport capacity because we're continuing to grow.

Southwest Airlines will have the people and the aircraft and the money to continue to expand. It's just whether or not the airport will have those facilities. Of course, there are already discussions about a secondary airport which makes sense to us. The other advantage that we can offer to Las Vegas is our high productivity. We can get more flights out of a gate than any other airline and the airport, of course, is very aware of that and very appreciative of that. We'll do everything we can to be as efficient as we can, including having a more intense focus on local passengers in and out of Las Vegas than anyone else. So we'll just do the best we can to optimize the scarce resources that exist there.

Any problems with moving some of your flights to the B gates at McCarran?

It's not the best. I think our service is excellent because our people are so excellent. It's sort of like, "Please pardon our dust." We're in the middle with the airport of constructing a connector between the B and C concourse to provide better access between the two concourses. But in the meantime, we're getting it done and it at least allows for more flights and more low fares. Customers want to come to Las Vegas. That's the primary objective and I think we're delivering on that objective.

Do you have any concerns about McCarran hitting capacity well before a new airport in Ivanpah Valley gets built?

I do. That is based on the history, which suggests that for the most part, they've exceeded their traffic expectations. No one knows when the demand curve will flatten out. Just because we're building 40,000 more rooms doesn't mean there will be that many more travelers, but we always want to be prepared for that eventuality. I think we're all comfortable that we can support that level of traffic increase relative to that number of room nights. But much beyond that, it seems like we're nearing capacity.

The other constraints that the airport has, of course, are beyond just runways and gates. You've got to have ticket counter space and checked baggage throughput. So I don't think there's any question that managing the demand and the volumes are a challenge in Las Vegas. But that's a good problem to have. I think the reverse is much worse, if you've got a house built and nobody wants to come to the party. So we all have to be happy that that's the problem to solve.

Has McCarran talked to Southwest about how operations would change when the new airport come on line?

No. It's too early for that.

The company just announced plans for a crew base in Las Vegas. Based on your experience with other crew bases, what will that mean for Las Vegas?

It's a little bit premature to know. I think the dynamics are pretty straightforward. Wherever we have a crew domicile, many people will choose to live. The culture in the airline industry is interesting — a lot of people don't live where they're domiciled, so they're commuters. We do have a lot of employees that already live in Las Vegas, so for them, it will mean less hotel overnights. So you'll have more hotel nights available for sale for customers other than airline employees. But I would expect, on balance, you're going to have a lot more of our employees that would relocate and live in Las Vegas. So I think the net benefit should be an increase in the population and all the economic benefits that flow from that.

We're talking about hundreds of people ..

Oh yes.

... and not just hundreds of people, but hundreds of people with a high-income level when you talk about a pilot's salary.

It's definitely hundreds of each work group with the aggregate being about 1,000 people. What I don't know off the top of my head are how many of the 1,000 already live there and how many of the 1,000 will commute. Those are wild cards. But those are the big drivers. And, of course, it will have an office and an office staff on a permanent basis there. That's not large, but it does make Las Vegas a focal point within our system because we don't have that many domiciles. You will logically see more follow-on activities like large company gatherings that would naturally evolve to our larger locations and with a crew domicile, it would easily be one of our larger locations.
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