One on One with Southwest Airlines CEO Gary Kelly
Thursday, October 18, 2007
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SUSIE GHARIB: Shares of Southwest Airlines fell today even though the low- cost carrier's quarterly earnings tripled. Excluding charges, the airline earned $0.21 a share, in line with estimates and revenues rose 11 percent, thanks to strong passenger traffic. Joining us now to talk about the outlook, Southwest CEO Gary Kelly. Mr. Kelly, welcome back to NIGHTLY BUSINESS REPORT.
GARY KELLY, CEO, SOUTHWEST AIRLINES: Thanks, Susie, it's great to be back.
GHARIB: Tell me, do you think that Southwest can keep up the momentum on earnings given that oil prices are now just about at $90 a barrel?
KELLY: Well, that's certainly our intention. You know, one advantage that we have at Southwest Airlines is that we have been very well prepared for tough times. Our fuel hedging has served us extremely well. Next year as an example, we're 70 percent hedged at about $51 crude oil equivalent barrel. So yeah, I think we're in a good position to continue to grow.
GHARIB: Analysts do say that you have been very successful on your hedging of oil. But how much can you hedge in the future with oil prices this high and possibly going higher?
KELLY: It's really tricky, of course. You know, the only thing you can buy today at current market prices. So I'm just glad that we've got the insurance protection, if you will, in place. But we're hedged with declining positions admittedly. But we're hedged all the way out through 2012. It is just something we're going to have to continue to work at and make adjustments to and do the best job we can to keep that cost down and what we can pass on to our customers.
GHARIB: You have been very aggressive about keeping your costs down and cutting costs. How much more can you cut?
KELLY: Well, I've been very, very proud of the people at Southwest Airlines. And of course in turn we've never had a layoff. We've never had a pay cut so they've been very job secure. But if you look at the productivity improvements that we have realized over the last five years, our productivity is probably improved by 25 percent. So that, that's been our secret. We're the most efficient airline arguably in the world. And we'll just need to continue to find ways to get more and more efficient.
GHARIB: I noticed that Southwest has raised airfares in select markets. Are you planning to raise prices in other markets as well?
KELLY: We've had to resort to price increases much more than we like over the last couple of years. And it's driven solely by higher and higher fuel costs. As a transportation company, we're very energy dependent. So we will need to continue to find ways to grow our revenue base. We've got an ambitious target to grow our revenues by 2009 by over a billion dollars annually. And hopefully we can find ways to generate revenue without price increases like having more passengers per flight. So we've got a lot of initiatives under way just to do that.
GHARIB: So how are you going to grow revenues? What is your strategy? What are your plans?
KELLY: Well, specifically we think that we can generate more business travel demand. So we're evolving our customer experience to better meet the needs of road warriors. We've just introduced a new boarding methodology which will save time for our customers. And we are unveiling a new fare structure and an enhanced frequent-flier program soon. So all of those things should make us a stronger brand and have a greater appeal and especially to business travelers.
GHARIB: Let's talk about your stock. It's been sliding since August. What do you need to do to get investors interested in Southwest shares?
KELLY: Oh, it's been a tough year, you know. We've had the increasing cost pressure driven by higher fuel prices, even with a great fuel hedge. And at the same time, the domestic economy and the domestic airline environment has been a little soft. So the earnings just haven't been there. That is what we've got to do. We've got to drive more revenues and we've got to keep our costs under control and get that earnings growth back on track.
GHARIB: All right. Thank you very much, Mr. Kelly. We appreciate your time.
KELLY: Thank you, Susie.
GHARIB: My guest tonight, Southwest CEO Gary Kelly.
