Southwest Airlines’ annual employee Rallies are a mixture of “State of the Union”, exuberant pep rally, and a party that the company is famous for. Over a thousand fervently passionate employees make the pilgrimage on their days off to each of the 3-4 rallies held each year.

The airline’s Warrior Spirit mantra is on full display at these spirited events that feel as impassioned as a religious revival.

These include caring for the 60,000 team members and customers, a hyper-focus on cost control to allow the airline to deliver low fares and grow, with a zealous determination to crush the competition.

In spite of the hyped up atmosphere, there is proprietary, candid, and sensitive information discussed. The few press members invited to attend this employee the only event do so on the condition that everything discussed is off the record.

Gary Kelly, Southwest’s CEO, granted Airways Managing Editor Chris Sloan a quick impromptu interview backstage following the event in Houston on February 20, 2019.

At this point, though the airline had completed all eight FAA certification flight to Hawaii, the new routes had yet to go on sale nor had schedules been loaded into the CRS. What follows is an unedited transcript of the Q&A.

AW: Can you give us a sense of what the Hawaiian operation will look like at critical mass, particularly the inter-island routes?

Kelly: We’re not quite ready to reveal all that yet. I think we want to have more certainty as to exactly when we’re going to start and what fares we’re going to charge and all of that. So, stay tuned.

We went into this back in October of 2017. We weren’t that focused on the inter-island routes and when you get over to Hawaii, that’s what the interest is.

And they convinced us that we ought to take a hard look at it. When we did, we felt like it was a really good opportunity. So we’ll be doing the inter-island very quickly after the initial startup.

It’s their interstate highway system, as you know. So we’re pretty good at turning aeroplanes in short haul. Of course, these will be big aeroplanes (Southwest’s compared to Hawaiian’s 717s) over there, but we’ll have the time to do it. And we’ll have low fares and I think people are going to be very excited to have some competition. And we’ll win our fair share of customers.

AW: Will Southwest compete on frequency against Hawaiian’s inter-island, intra-state franchise monopoly as it has done in other competitive intra-state markets like California, Texas, and Florida?

Kelly: It’s hard to say. I will admit to you that right now we don’t have an ambition like that and we’ve fallen short of spending the time or effort to evaluate whether it made sense to park airplanes over there for that mission.

We’re going to start humbly there and see how that develops and if we have some opportunities beyond what our initial thoughts are, well, great. The commitment to Hawaii over the next 24 months, as you can tell by my remarks, while we haven’t given any specifics, it’s big and it’s clearly our focus for two years.

And that’s tough for us to do because we have other needs. When we have 4,000 flights, we’ve got other needs in other parts of the country.

AW: Have you been surprised at the amount of attention that the new routes to Hawaii have attracted?

Kelly: It’s just how much attention Southwest attracts and then you add the obvious excitement of the topic of Hawaii and it’s a pretty powerhouse combination. So yeah, it’s been fun to watch

AW: As Southwest embarks on longer missions to Hawaii, and continues to expand to long-haul flights such as transcon, the Caribbean, and even flights exceeding six hours like Baltimore-Cabo San Lucas, are you re-considering adding power to seats?

Kelly: I don’t think so. We’re certainly not thinking about it or looking at it right now. It’s very expensive and now you’re talking about a retrofit. We’ve got a lot of airplanes. I guess you could think about just retrofitting the E-Tops 737s, but more and more people have backup batteries that they carry. I do. And I don’t count on having access to power.

And of course, I fly on Southwest too. I admit, but it really feels to me like things are going the other direction as opposed needing to feel like we have to provide the power on board more and more. So, it’s not a huge thing with our customers and I think they’d rather save the money in the fare.

AW: Southwest is about to disrupt the Hawaii market. Turning to the contiguous 48, you operate transcontinental routes like Baltimore-San Diego and LA. But do you see prime transcon city-pairs such as as Newark (New York City) or Boston to Los Angeles, Burbank, San Francisco, or Oakland as ripe markets for the Southwest Effect to disrupt?

Kelly: Well, I think there’s more opportunity for us to Hawaii then than there is on the transcon. We have a huge presence in California. A lot of business customers, a lot of short-haul customers, they’re very loyal.

They are frequent flyers. They’ve got a credit card. We have by far the number one market share out there. And the piece that’s missing here is a Hawaii.

There was a lot of capacity going transcon if you think about serving our California customers. We have some, we fly San Diego to Baltimore as an example and that route does fine, but it just feels like the much bigger opportunity here is going to be Hawaii.

AW: Ancillary revenues are a prime focus at Southwest. Dynamic Early Bird pricing already contributes $200 to $300 million dollars annually in revenue to the topline. Are there other levers you can pull for ancillary revenue, particularly in technology that could have such a dramatic positive effect on the topline?

Kelly: I think your insight there is a good example. We still have hard-coded Business Select in A1 – A15. We do have the ability to upgrade to A1-A15 at the gate at least. That was rolled out maybe four or five years ago. But as we gain more and more technology tools and sophistication, I think it continues just to, incrementally add those kinds of opportunities.

So, revenue management, I don’t know that I would say it’s at its infancy, but it is still kind of throwing a dart blindfolded because all you can do is rely on history and if you don’t have a history, then you really don’t have much to go on.

And history is not always representative of what’s happening now or what’s going to happen in the future. The pricing environment has been very wild since oil collapsed in 2014.

That’s been a real challenge with all the low fares and especially during the week of travel competitively and how do you match and how do you not match and you’re dealing with matching airlines with unbundled products. So all that has, has forced us perhaps to make improvements incrementally with revenue management.

But that overall, I would hope that we can see some meaningful breakthroughs with just that in the next five years. But beyond that, on the ancillary front, there are some very good opportunities to drive some incremental revenue streams without resorting to bag fees or anything like that.

AW: You have staked your brand on customer friendly policies like “First Two Bags Fly Free” and “No Change Fees”. Investors and shareholders say you’re leaving money on the table by resisting these charges. Now, other customer-friendly airlines like JetBlue are tweaking their PaxEx model: charging for a second bag, creating their own basic economy product, and at the same time slightly reducing seat pitch. Sure, there’s immediate blow-back but it’s short term and dissipates. If Southwest were to follow suit and charge for bags, what would the effect on the brand be? At one point, I believe you had said it would be a billion dollar hit.

Kelly: I think it would be huge. Over five years what people forget is that we’re just so unique and truly a category of one, and I’m not disparaging Jet Blue, but Jet Blue never capitalized on no bag fees because they charged for the second bag and it really diluted their effectiveness and claiming that positioning, I thought that was a mistake.

So you’re either in or you’re out and I think ultimately they decided they’re going to get in and charge for bags and you know, good for them. There was nothing evil about it. But, now we’re the only one, you know, and I think it’s just very powerful and simple.

Some of the airlines offer free bags with certain things, but that makes things complicated and you just don’t get the brand value out of it. But every time I travel, I’ll have a customer come up to me and thank me for Southwest, tell me a story and generally they’re thanking me either for no bag fees are no change fees.

It was just so high in their hierarchy of important things. I talked to a guy this morning in Dallas and he said, I’m Platinum on American and I drive right past DFW, and I come over here for you guys. I like the fact that you don’t charge change fees.

Kelly: There’s a fabric that comes into our brand or culture or whatever it is, and you pull one string and you just never know where it’s going to unravel. And, we’re very prosperous today. So, I think the challenge for us is, that’s great, but you still have to innovate. And I think that the challenge is to make sure that we’re continuing to grow and innovate and make a change that is productive and preserve the things. There are traditions that shouldn’t be tinkered with and therein lies the leadership challenge.

AW: I was quite struck today with the Warrior Spirit on display today. But at the same time, right now you are experiencing significant operational disruption with hundreds of cancelled flights due to aircraft on the ground seemingly connected to the current negotiations with the mechanics union. As an airline and a person so obsessed with a positive culture how does this conflict make you feel?

Kelly: Well, I didn’t take the time to overplay the point today, but I opened up with resilience. And I do think that the world is just not perfect and you don’t have 100 per cent unanimity on any topic and you have to recognize that. The other thing that you have to recognize is that this is a constant pursuit of perfection.

And we spend more time on people and culture and love and all. And that was the reason I just resurrected that thought of 9/11 (Southwest never had a furlough or layoff post 9/11) is – it just aren’t words. These are deeds. And there’s a long history of that. And I don’t want people to forgive because that’s how I want people to behave in the future when I’m gone.

 I hope we never have a layoff. I was at a company before and we had it and it just destroys the culture because you’ve broken the bond, you broke a trust. You made a promise to me and you didn’t stick with me when times were tough.

So when you get to these disagreements, we’re going to have this. Herb in fact, in his 1996 message to the team, he was talking about tribalism, he was talking about the exact same thing. So you just have to be, it happens.

We will get over it, you know, we’ll reach a deal, the shenanigans will stop and we’ll hug each other and we’ll get back to normalcy here. But in the meantime, you can’t say you’re happy about it, but I also think that we shouldn’t overreact to this.

These are our people, this is our family. They’re frustrated. I try to be empathetic with that. What you can’t allow is you just can’t allow bad behaviour. So that’s the decision – what’s right, what’s wrong and what things are we going to take corrective action on. If its an illegal job action, it is what it is and we’ll address it as such. If it’s not well then we need to be fair-minded about it.

But you saw Mike’s Chart (a chart at the Rally which clearly demonstrated maintenance interruptions tied to the mechanic’s negotiations) so we’ve got emergency procedures in place to make sure that we are attending to all of these write-ups and we’re investigating every one of them. I think that there’s an obvious link there, but we’ll get past it.

AW: Over a month after his passing, Herb’s bigger than life personality, leadership, and teachings are strongly felt here today. As a mentor to you, is there something he taught you that resonates with you the most?

Kelly: I kind of struggle with that, so I don’t know that it was just any one thing. But it was a long pattern of pretty consistent behavior. First of all, he was a complicated person.

Especially when I was young, I thought I kind of anticipated where he was going to go and he would be over here. And so he threw me a lot. And you know, years go by and we worked together. We became closer and closer.

He was very conservative financially, but really wacky as a personality and as a marketer. So it was an interesting yin and yang all in one person. That’s fascinating. He was also brilliant. He was number one in his class at New York University Law School. And, then again had, you know, this enormous heart for people. He never took a business course. You just don’t come across someone special like that often.