Southwest Airlines CEO Gary Kelly
Courtesy, Southwest
Southwest Airlines—which this week revealed a new logo and brand overhaul—is committed to keeping fares low. But in order to do so it must cut costs, with the bulk of those cost savings coming out of labor, CEO Gary Kelly says.
About one-third of the carrier’s costs are for fuel, one-third is for labor, and one-third for “everything else.” The airline can do little about the cost of fuel, but labor costs are the variable it can control. “We need to execute against our people cost.” However, how Southwest plans to do that remains unclear, except Kelly said that “our people understand this.”
About one-third of the carrier’s costs are for fuel, one-third is for labor, and one-third for “everything else.” The airline can do little about the cost of fuel, but labor costs are the variable it can control. “We need to execute against our people cost.” However, how Southwest plans to do that remains unclear, except Kelly said that “our people understand this.”
Southwest’s costs are about 35% lower than those of the legacy carriers, although this is historically high for Southwest, Kelly said.
Kelly noted that Southwest, unlike virtually all of its competitors, has not sought to manage costs via bankruptcy protection, nor has it had a single layoff or pay cut in its 43-year history. “We have no intention of doing that,” he said.
“Our current cost performance is quite good,” he said. The carrier will continue to operate the remaining AirTran Airways Boeing 717s until the end of the year, when the integration of AirTran is completed. All 88 717s eventually will go to Delta Air Lines. Of those, 43 have been modified to Delta’s specifications, while 45 are being pulled from service by year end and parked. These will be modified over the course of next year, with the aim of delivering the remaining 717s by the third quarter of 2015. “The 717 is a cost-inefficient aircraft for us,” Kelly said.
The last decade has been “very difficult” for Southwest, Kelly said. The carrier battled both the economic slump in 2008 and the spike in fuel prices. This led to a period of contraction, during which Southwest eliminated almost 150 routes, but recent years have seen the airline restore about as many routes, although not all service has been restored.
Now, Kelly forecasts Southwest to add 3% in capacity in 2015. By 2017, Southwest will be poised to start adding to its fleet, which has remained stable at just under 700 aircraft for several years, he said.
Turning to one revenue item that could offset rising costs, Kelly was adamant. The carrier will not be charging fees for checked baggage anytime soon. Kelly estimates that Southwest earns $1 billion in extra revenue from passengers choosing it over carriers that charge baggage fees, which is roughly equivalent to the amount it is leaving on the table by not charging those fees.
To skeptics who suggest the carrier is eschewing revenue for no reason, Kelly was blunt. “We are churning out 17% return on invested capital” without having to resort to baggage fees, he said. “Our customers love us for not charging for bags and they hate bag fees.”
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