Southwest CEO, Gary Kelly Explains His Company's Profitable Flight Plan
Thursday, July 24, 2008JEFF YASTINE: Southwest Airlines today showed Wall Street something it doesn't normally see from an airline, black ink! The carrier earned $0.16 a share in the second quarter, helped by its fuel-price hedging program. Joining me to talk more about the carrier's outlook is CEO Gary Kelly, who joins us from Dallas. And Gary, welcome to NIGHTLY BUSINESS REPORT.
GARY KELLY, CEO, SOUTHWEST AIRLINES: Thanks, Jeff.
YASTINE: You know, tell us a little bit about the fuel price hedging program. How much did that contribute to Southwest's profits for this particular period, the second quarter?
KELLY: Well, it's just been an enormously successful program for us. We're close to 20 years with our hedging program and have the good fortune to report that we've actually never had a loss with it on an annual basis. But this year alone we're over 70 percent hedged. Now for the second half of the year, 80 percent hedged at around $58 to $60 a barrel. In the second quarter, it saved us $511 million in cash. And of course our net income without special items was $121 million. So without that, we would have lost money and for the full year we're looking at about a $2 billion savings in our fuel costs because of our hedging program.
YASTINE: Did you say around $70 a barrel is what the average price, what that works out to, with the hedging?
KELLY: We were about 70 percent hedged in the second quarter, around $51 a barrel. And that equated to a fuel hedging gain of about $511 million.
YASTINE: Now tell us briefly with your competitors, so many of them are hunkered down, just trying to get through this perfect storm. What is Southwest doing? What is your airline doing to sort of enable that competitive position that your airline has? How are you going to help to continue to grow despite this ongoing situation with fuel prices?
KELLY: Well, I'm very excited about Southwest Airlines future. It's a very treacherous time. And I guess that adds to the excitement, if you will. But we're prepared. And that's one of the hallmarks, one of the strengths of Southwest over the years. And the rest of the industry is not. So in our markets as an example, in the fourth quarter of this year, our competitors are reducing their seats by 15 percent. So without doing anything, we'll be gaining a very significant market share. But thinking about next year and 2010, we have a number of programs under way to improve our revenue production so that we too can overcome higher energy costs. And I would like to see the results of some of those initiatives before we expand aggressively. But the nice thing is, with all the shrinking going on in the market, we have a number of opportunities to expand. We'll just keep our powder dry here for the time being.
YASTINE: Gary, when you talk about increasing revenue, are ticket prices, an increase in ticket prices on that menu, because it sounds like some of the comments you've made elsewhere sort of hint that that is something that the company is contemplating?
KELLY: You know, I just think that's the inevitability that we'll have to find some way to raise revenues. Our total operating cost on a unit basis are up 30 percent over the last five years and destined to go higher as our hedged fuel costs continue to go higher over the next four to five years. So we're looking for over a billion dollars of incremental revenues through a variety of sources. Certainly raising fares will be one source. We are not charging surprise or hidden fees like the rest of the industry is doing. And of course I'm very proud of that. But we have opportunities with our frequent flier program, with our web site where we are the second largest travel site in the world and also co-chair relationships to tap into international markets for the first time. So the opportunities are there. It's just up to us to execute.
YASTINE: Well, we'll have to see how the company executes as we move forward here. Gary, thank you for being on the program.
KELLY: Thank you, Jeff.
YASTINE: Our guest, Gary Kelly, CEO of Southwest Airlines.
