=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/c/a/2008/03/02/BUTVV9LPB.= DTL --------------------------------------------------------------------- Sunday, March 2, 2008 (SF Chronicle) Southwest CEO describes 2008's challenges George Raine, Chronicle Staff Writer In January, Southwest Airlines reported its 67th consecutive quarter and 35th consecutive year of profitability, something no other airline has done. It will be difficult for more history to be made in 2008. Gary Kelly, the lifelong Texan who has been Southwest's chief executive officer since 2004, has never promised he could keep the streak alive. And now, with the operating budget of the low-cost leader increasing 30 percent since 2005 - led by the price of crude oil in this decade rocketing from less than $20 per barrel to more than $100 - the scramble is on for increased revenue. Since last year, there has been an aggressive effort at Southwest to attract business travelers, who will pay more for airfare. It's unknown, however, how deep the pending recession will cut, and how much revenue from business travelers may evaporate. Kelly, 52, wants us to believe Southwest is prepared, and has begun the year with a can-do spirit - well aware of the challenge ahead. It is, after all, the largest air carrier in the United States, in terms of domestic boardings, and carried 101.9 million passengers in 2007. Kelly, raised in San Antonio, is a graduate of the University of Texas a= nd joined Southwest as controller in 1986. He became chief financial officer in 2001. He's had a crush on his wife, Carol, since the eighth grade, and the couple's two daughters were married last year, 10 months apart. He said he considers the 34,000 people who work for Southwest Airlines family, too, and there's long been a friendly, fun-loving corporate culture at the airline. Kelly is on his annual trip around the country delivering the CEO's message to employees. This year it is appropriately themed "Everyone Matters." He sat down for an interview while in Oakland. Q: You're not predicting profitability and you face headwinds in 2008. H= ow difficult a year will it be? A: We have always been conservative and we have always been well prepared for all the risks that are attendant to the airline industry, and there is a whole litany of risk, and what we do to try to mitigate that. We are well prepared coming into 2008 and we have two primary concerns. Obviously the overall economy is one. If the economy goes into a recessi= on and it is a business recession, we will see business travel cut very sharply. That has been the case in every single recession in history, and that will put tremendous pressure on our revenues and therefore profits. No. 2, with oil closing at $100 - as an energy-intensive industry, that is a huge concern. Now, again, we are well prepared for those risks, but that does not mean we won't be impacted by them. Q: Isn't it true that you would have lost money in 2007 had you not been so well positioned with fuel hedging, and isn't that also the reason you've been profitable for all these years? A: That's a fair statement, but to be more fair, it is never just one thing. I think our people deserve a majority of the credit. Had they not worked to make Southwest Airlines more efficient, more productive, deliver the customer service, we would not have gotten the revenues. We would not have gotten our unit costs, besides fuel, down. I was one of the architects of hedging (contracting for advance purchases of fuel at a fixed price for future delivery), but it goes back to the first Gulf War, in 1991. We have positions established, but at declining amounts. Last year, more than 90 percent of our fuel was hedged at approximately $50 per barrel. This year it's over 70 percent hedged at approximately $51 per barrel. In 2009, it's over 55 percent at $51. In 2010, it's nearly 30 percent at $63 per barrel. In 2011, it's over 15 percent at approximately $64 per barrel and in 2012, it's over 15 percent at approximately $63. Q: Your employees are the highest paid in the industry. How did that happen? A: They are. Now, you can't take that too literally. It varies by seniority, by work group, what the comparisons are around the industry. If you look at me, I'm not the highest-paid CEO in the industry. The goal is to be prosperous, and pay our employees what we can afford. = If you go back 20 years or so, you look at the list of major airlines that were flying at that time. Every single one has gone bankrupt or is out of business, except American Airlines, which is just a remarkable statement. So, in other words, because those other airlines have not been prosperous, one would expect that their pay would not be as good as ours. Q: I have heard grumbling about starting pay of $10 an hour for ground workers. That's a tough row to hoe in places like the Bay Area. Is there any movement on that in labor contract negotiations just under way? A: Things change, so I think we have to continue to evaluate our pay vis-a-vis the market, and we also have to evaluate it vis-a-vis our competition. That is something we have to continuously evaluate and if that is a factor, we will address it. Q: How will the expected mergers in your industry affect you? A: We don't know until we actually see what flows from a combination. It is real and these conversations are taking place, very serious conversations. The Delta-Northwest conversations seem to be much further along than the United-Continental, and I don't have any particular insight other than what I read in the newspaper. It is just confirmed by others who I think are knowledgeable. They could provide an opportunity for us to get into a market that the combined airlines choose to de-emphasize. Or, who knows what role the Justice Department will play in this? You just have to see what they are planning and then make a move accordingly. We try to find those markets that are not overserved and come in, lower fares, add frequency and meet the needs of local markets. What we do is very, very different than any other airline. Q: Tell us about the aggressive campaign for business travelers. (Higher-priced tickets are offered at www.southwest.com under the heading Business Select and Business, along with the lower-cost advance purchase "Wanna Get Away" tickets. The more one pays, the better the perks, which can include same-day purchase, priority boarding, extra frequent flier credit and a free drink. (The Business Select fare from Oakland to Salt Lake City on March 18 is $168. It's $153 for a Business ticket and $77 for a Web-only Wanna Get Away ticket.) A: The point is, how do you overcome $100 crude oil, which has increased our expenses over a billion dollars a year? Where do you go to get an extra billion dollars of revenue? Well, let's get more passengers per departure. And so it becomes a fairly common sense exercise to look at our strength= s, see what we can leverage, see what obvious opportunities there are. The airline is built to serve business travelers in that we offer outstanding operations, outstanding customer service by our people and a flight schedule that offers a lot of flights for convenience. That is not built for leisure travelers. Leisure travelers obviously will enjoy the same service that business travelers do and will certainly enjoy the low fares, but the rest of the airline is really built for the business travelers. What we concluded was that we had not sold hard enough the merits of flying Southwest Airlines for business, and that made for a messaging or marketing task. It was also a recognition that the airline game has changed over the last decade. Fifteen years ago we were the only low-fare game in town, and now we have got more competition in our space. I think that the way to view that is they are making us better. So, we are moving away from a one-size-fits-all, because business travelers' needs are different. There are things that they want and are willing to pay for and we are tweaking our product offering to better meet the needs of those business travelers. We aren't going to first class, we are not going to dual-class seating. = We are not going to assigned seating. There is a long list of things that we don't think is true to the Southwest model. The push for the business traveler seems new, but if you go back to circa 1990, our advertising campaign was "The Company Plane." Our frequency program was called "The Company Club." It was very hard-hitting and we have gotten away from that a little bit. Now, we are again being a little heavy-handed. We are exercising our business muscle right now, but that is to make sure the message gets out. We're not walking away from the leisure market. Over time I think you will see a more balanced presentation. Q: Will Southwest Airlines be a fun place to work in 2008? A: I think we have to be prepared for 2008, and it's very difficult to go beyond a couple of weeks. Any airline telling you the truth would tell you that. This year we have to be more cautious and that does not mean it won't be a good year. It certainly does not mean we should be discouraged, and it certainly does not mean that we should give up. We are going to pull hard to hit our earnings target this year, which is at least a 15 percent increase over last year. Q: Do you want to grow in 2008? A: We do want to grow. We have 108 firm orders, 84 options and 54 purcha= se rights through 2014 for Boeing 737-700 aircraft. We have the ability to grow. We are trying to match our growth to opportunities and - side note - in a year like 2008, when we all have concerns about the economy, that may not be the year to be growing very much. Q: You do have legendary Halloween parties. That's an important part of the culture, right? A: This will be my 22nd Halloween at the company. It has become this tremendous competition to outperform one another. I've been Dracula and the Terminator and Darth Vader and last year I was Edna Turnblad from "Hairspray." It was over the top, and our employees like that costume the best. It happened that I had to travel that day. I got to the airport and I figured everyone would be dressed up in Halloween costumes. No. I'm the only moron out there dressed up. Somehow I got through the TSA: My picture does not look like Edna. I flew to see my father at his ranch in that costume. I think he still loves me. Southwest Airlines by the numbers 3,400: Approximate number of daily departures 34,000: Number of employees 2,600: Number of employees in the Bay Area $645 million: Net income in 2007 101.9 million: Passengers carried in 2007 Source: Southwest Airlines E-mail George Raine at graine@xxxxxxxxxxxxxxxx -------------------------= --------------------------------------------- Copyright 2008 SF Chronicle <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> If you wish to unsubscribe from the AIRLINE List, please send an E-mail to: "listserv@xxxxxxxxxxxxxxxxx". Within the body of the text, only write the following:"SIGNOFF AIRLINE".