MIAMI — Airways Managing Editor and Senior Partner, Chris Sloan conducted this interview with Southwest Airlines CEO Gary Kelly onboard Southwest’s Boeing 737 MAX Inaugural Flight on October 1, 2017. At the time of the interview, Southwest had yet to announce its intention to serve Hawaii, nor had the initial 737 MAX being introduced into revenue service suffered from any hiccups.
Gary is a 31-year Southwest veteran who began his career at Southwest Airlines as Controller, moving up to Chief Financial Officer and Vice President Finance, then Executive Vice President and CFO, before being promoted to CEO and Vice Chairman in July 2004. Gary assumed the roles of Chairman and President in 2008. In January 2017, Gary relinquished the title of President. Prior to joining Southwest Airlines in 1986, Gary was a CPA for Arthur Young & Company in Dallas and Controller for Systems Center, Inc.
– Courtesy of Southwest Airlines.
AIRWAYS: Today, Southwest launched an unprecedented number of a new model aircraft on the same day with 8 Boeing 737 MAX’s beginning service in 1 day. Can you talk a little about this new aircraft type beginning service with 46 flights on day 1? And how your team has and will be accomplishing this feat.
Gary Kelly: Well it’s been a long journey to get here. It’s been 12 years in the making. First of all, we first started talking to Boeing in 2005, they were working on the Dreamliner at the time. I said ‘You know what, what about a Dreamliner version in the narrow body?’ So even getting the airplane committed by Boeing took quite a bit of work, they wanted to have an all-new airplane.
Ultimately, they arrived at a re-engined airplane, performance to the max and it’s here much earlier than it otherwise would have been. And really the launch has been flawless. So we’ve been very very pleased with that. The airplane began flying revenue flights in May 2017 and some of the other airlines around the world that have broken the airplane in, if you will. That’s been to our advantage.
We received our first 737 MAX deliveries beginning at roughly a month and a half. Our ninth aircraft was delivered here this past week, so we have eight airplanes that are flying today. Boeing is ahead of production schedule and has had ample time to break into the airplane. We are off to a great start.
Can you describe the potential new missions and operational opportunities of the MAX as it pertains to Southwest? Do you view the MAX as more evolutionary than revolutionary for the MAX?
The range is really significant if you go back to the 737-200 and I think the range in those days was probably 1,100 miles. And now with the MAX, it’s closer to 4,000 miles. The distance of the range is very meaningful for us. We have been expanding beyond the forty-eight states since 2014.
This translates into tremendous opportunities to add destinations, all within the North America footprint and maybe as far as South America.
Ultimately the airplane can fly to Europe and the UK. There’s no question that it expands our opportunities. I don’t think it transforms the airline into something radically different than what we were. But certainly gives us more capabilities. It’s more than that and more cost-effective. It’s more environmentally friendly. It’s quieter. So all those things are very desirable attributes.
As you launch the Max 7, are you considering upgrading the order book to the MAX 9 or MAX 10?
Well, our focus will now turn to launching the MAX 7, and that will take a couple more years. There is work to do still getting that airplane going. I think the Max 9 is something that probably isn’t appreciably better enough for us to look at that seriously.
But I think going down the road maybe the MAX 10 is something better and would be logical to look at. But right now we’re not discussing that we’re not seriously considering it.
Other than just to keep up with Boeing to see what they’re doing with their product line. I think it’s important for us to be engaged at that level. In terms of us seriously considering and doing work on bringing different models, no we’re not.
So, in the end, was it fortuitous that Southwest, who was the original 737 MAX customer wasn’t the first to operate the airplane. Your launching 8 aircraft on the first day of the Fall schedule after removing 30 Classics on Friday. Does the capacity decline actually work out to your benefit? Was it intentional?
Well, that was all intentional. In other words, we had the Classics, we have the NextGens, and now the MAX. We never arrived at the training protocol to operate all three versions of the 737. We simply decided that it made business sense for us to retire the Classic prior to putting the MAX into service.
We’re fine with implementing it in the Fall. Our schedule takes a seasonal dip after mid-August and certainly after Labor Day. And that allowed for us to ground the Classic without doing any harm to our flight’s schedule.
Let’s turn to the passenger experience. The updated Heart cabin, first introduced on the 737-800 a year ago is obviously an upgrade. But as your stage length increases, you’ve chosen not to add USB seat power or to no one’s surprise, add an extra legroom section with an enhanced pitch.
You know this is our choice. What you have is what we were envisioning. And we will continue to think about enhancements in the future. Right now there’s no thought about bringing power onboard for a couple reasons: One is just the performance of personal electronic devices is improving significantly including battery life.
It’s fairly complicated to wire the aircraft and then there’s the ongoing maintenance. Additionally, there’s the added weight of the airline which adds operating costs. We felt like it’s not in our best interest. So we chose another approach. As far as changing the configuration of the seating, we really like what we have.
We have really focused on 46 years to make every seat important and not having an elite section of the aircraft. You’re right, I mean there’s a variety of things that we could consider. We have the capability to do those kinds of things but this is what we like right now.
Many analysts, stockholders, and industry wags concede Southwest is very customer friendly but criticize the airline for leaving money on the table for ancillary fees, bag fees, lack of change fees and the like. Even with a new CRS that would allow you to monetize those things. I remember you said that charging for these things would cause more damage to the brand than create upside, perhaps even costing a billion dollars? How do you rationalize that?
You know; those are all facts which you describe. What is interesting is that as time goes by you know our financial performance is superior to most other airlines.
I think those questions just fall by the wayside. Some of those critics are beginning to realize the full value of having a strong brand and strong relationships with customers – a fact they may have overlooked in the past. One, in particular, is that if you just took a real estate of the airplane and looked at revenue per square foot, which I thought was interesting.
I am an old CFO and I never looked at it that way. We came out at number one. I don’t know that we’re trying to necessarily maximize the revenue per square inch of the airplane. We need to get the right balance between what it costs us to offer the trip versus the revenue. I think we’ve got a nice balance there. But I think there’s more to it than that at least the way we think about the company. We want our employees to be proud of what they do, we want them to be proud of the product they offer, the service they offer our customers.
Doing things that are unpleasant to the customer experience aren’t things that most people are happy with. I remember a story from years ago from a board member who said: “You know we’ve got a great business with our business model.” He wasn’t talking about Southwest, but another airline.
“But I would never put my friends on my airline.” Well, we think about it just the opposite because we want to have something that people are proud of. That is sustainable over a long period of time. Because a lot of techniques can be matched, but no one can match our culture or our people. You know our brand is a part of that and helps sustains the culture.
But I think we’ve got a very strong business model, it’s depending on us to keep cost low. So that we can have this low fare brand and not be forced to nickel and dime our customers just to make a buck like the rest of the industry.
I want to go back to how you arrived at the billion dollar figure that charging for things like bag fees would damage the brand.
At least if you think about baggage fees, we’re roughly eight or nine years into that analysis. So there should be sufficient empirical data available to do some pretty good analysis there. We did the reverse. Maybe four or five years ago, we did surveys with customers trying to estimate the change in our business that would happen if we started charging baggage fees. And then with that estimate the revenue that would come in from the baggage fees. It was a net negative about a billion dollars.
What about meeting in the middle as JetBlue has done and offering one bag for free, yet charging for the second?
Well, charging for one bag I thought was the worst place to be, to be honest with you. In other words, either you’re all in charge of bags or you’re out because you try to split the difference. You don’t get the benefit of the customer’s mind of not charging for the bags and you don’t get the revenue from charging for the bags.
So to me, it is the exact worst place to be. And revenue from the second checked bag is very modest. The big money is with checking the first. And paying for the first checked bag. So you can tell we did explore that, we did debate it and that came up with that was not the right thing for us to do.
To combat the ULCC’s, would you consider an unbundled Southwest bucket of a basic economy type fare that your legacy competitors have instituted?
Honestly, we thought about it years ago. Because there is a benefit for the customer who wants the lowest possible fare When you let them choose their amenities that can bring in more revenue. It helps keep the other customers fare lower. That’s why we do offer a few things like Early Bird or Business Select. We offer that choice. But carrying it to an extreme, no. To me, that violates the brand philosophy that we have and brand promise we make to our customers.
I’ll ask the question: what’s the number one question people ask you?
Hawaii is the number one question that we’re getting right now. I have been at Southwest for over 30 years. When I first got here, the question was always when are we going to Florida? You know, so I’m glad we have that kind of excitement and interest for Southwest and I’m glad that we have those kinds of opportunities. So one of these days I expect you’ll hear something.
And lastly as the number one airline in California now, how are you fending off more engaged and formidable competition, particularly the surging challenge from Alaska as it integrates Virgin? What’s the Southwest advantage in this battle for market and mind share in the Golden State?
It’s just back to the future, in other words, it’s always going to get better. Most of our airline life, we’ve been the underdog. And so we welcome that. It’s just we compete for the old-fashioned way. We need to have a superb network. We need to have superb service and the lowest fares and that’s what we strive to do.
A component of our service which is unmatched by any competitor over 46 years is our people and the hospitality they offer. You know we need to have very strong operating performance. Being on-time and having reliable baggage delivery obviously matters too. We’re the number one airline in California by a very wide margin and we will not lose that position.
The once-dismissed ULCC’s particularly Spirit, Frontier, and to some degree, Allegiant have upended the airline industry worldwide. Among things: reducing profit margins and forcing competitive responses from legacy airlines to do things like introducing basic economy, raising capacity, and densifying cabins to compete.
At the same time costs are increasing and fuel prices likely won’t remain so benign forever. Southwest, was once known as the low-cost leader, who would stimulate a market. This gave birth to “The Southwest Effect”, but this isn’t a phrase heard as much anymore. The ULCC’s to some extent have taken that place. What is Southwest doing to respond to these ULCC challengers?
Well, I think it’s just another example that you brought up of how competitive the environment is. We do everything that we can to make sure that we’re offering the best service at the lowest cost. In many ways that is aspirational and it’s something that maybe we’re not literally delivering on every single flight of every single day of every year.
But it’s still within our grasp to be able to achieve both of those things. So that works whether we’re competing on the West Coast in California or whether we’re competing with ULCCs across the country. They can’t match our network. They can’t match our service. And you put the entire package together and we win.
You know we’ll continue to have that kind of a focus. But so what we have chosen not to do is to diminish our products by adding too many seats by paying below-market wages or by having old airplanes. We want to have again great service at a low efficient cost and do things that are sustainable over a very long period of time.