Southwest CEO Defines Irony

[tonyw]

"The single overriding issue [in the US market] is excess capacity" that keeps US carriers in red ink, Southwest Airlines CEO and Vice Chairman Gary Kelly said Wednesday. Speaking to the Aero Club of Washington, Kelly said, "The market needs to be allowed to run its course. There has been no meaningful reduction of surplus capacity," unlike the experience of the last downturn. The US Airways/America West merger "is a step in the right direction," he said, adding, "The first thing I would do if I was losing money would be to stop buying airplanes."

When his call for reduced capacity was contrasted with Southwest's continuing expansion--its fleet is growing at about an 11% clip this year--Kelly said, "We're adding value, giving more flights, so more people will be flying" at lower fares.

http://atwonline.com/news/story.html?storyID=2871

What kind of logic is this? We gotta reduce capacity, but, hey, I'm gonna expand my fleet.

[Realms09]

He states he believes excess capacity should be reduced by allowing the market to run its course, i.e., let survival of the fittest take place. Southwest is relatively fit and should therefore expand. Those that are not fit should contract. Add it all up and at the end of the day you should have a net contraction.

[mrivc211]

I"m not too sure about Southwest being fit. There were a lot of articles last month saying southwest would be well into the red if not for their fuel hedges. What happens when they run out of that? In the same place as all the others.

Theres an article put out by the boyd group on flightinfo that you should read that talks about this very thing. Boyd is predicting that Southwest will have a run for its money because its fuel prices will dramatically rise in 06 and 07' even with the fuel hedges and the legacies pretty much are operating at the same price if not cheaper.

[greaper007]

Southwest has survived for 30 some years. I'm sure they'll be able to figure something out, even when the hedges run out. Besides, fuel has already hit it's peak. Steve Forbes predicted that the price of fuel will crash soon. But hey, I could be wrong.

[Maximillian_Jenius]

Originally Posted by greaper007

Southwest has survived for 30 some years. I'm sure they'll be able to figure something out, even when the hedges run out. Besides, fuel has already hit it's peak. Steve Forbes predicted that the price of fuel will crash soon. But hey, I could be wrong.

What does Steve Forbes know about money/economy? I'm smarter then Warren Buffet!

-Matthew

[av8trxx]

Originally Posted by tonyw

What kind of logic is this? We gotta reduce capacity, but, hey, I'm gonna expand my fleet.

I'd only be worried about reducing capacity when you have to make payments on planes that you can't fill. SWA apparently doesn't have that problem.

[mtsu_av8er]

Everyone hates SWA, but they've worked the system the right way.

If more carriers would think that way, maybe they'd make a profit too . . .

[Maximillian_Jenius]

Originally Posted by mtsu_av8er

Everyone hates SWA, but they've worked the system the right way.

If more carriers would think that way, maybe they'd make a profit too . . .

They do however need to invest in 737-800's coming and going to Vegas those lil 700's were at capacity with a full 137 souls on board. And it is cramped and hot!

-Matthew

[caliginousface]

Originally Posted by greaper007

Southwest has survived for 30 some years. I'm sure they'll be able to figure something out, even when the hedges run out. Besides, fuel has already hit it's peak. Steve Forbes predicted that the price of fuel will crash soon. But hey, I could be wrong.

why would the price of fuel crash?

[mpenguin1]

Not sure why the aviation experts have been attacking Southwest for quite some time, they have an excellent business model & are always planning ahead.

They phased out all of their 737-200's as they were replaced by the newer 737-700's, which also helped with their fuel savings & MX cost.

As for the excess capacity I would think that would be the airlines that are losing money.

[tonyw]

The problem is Southwest and the other LCC simply cannot provide us with the air transportation system we need in this country. Period. Their own founder said this.

So if the guys who do have the ability to provide us with the air transportation system we need do cut too much capacity, we're gonna have problems.

[greaper007]

So who can provide transportation tony.

[mpenguin1]

Tony

Never said for Southwest and/or the rest of the LCC's to take over the flying for the US, but, the prices that the airlines are charging for tickets have to match their operations plans. My wife found a ticket on United LAX-NRT- for $300, what the hell, that is cheaper than I paid 10 years ago!

At one time, Southwest was able to make money on a 59% load factor (which is very impressive), not sure what the number is today?

I am starting to see encouraging things in the airlines, American has been getting their economics together, Continental is starting to look good, Alaska is coming on strong.

Just a thought, perhaps the airlines should start researching to reduce and/or eliminate the cheap tickets that are offered on the various internet travel sites? Jetblue and Southwest offer tickets only on the company websites & seem to be doing just fine.....

[Tim]

Carriers now are trying to think like SWA but almost of them have such a high cost structure that its almost impossible to mirror them.

[Tim]

Talking bout SWA being in red if not for hedges well thats part of the game. Hedges can be a gamble if for some reason fuel drops below the going rate. SWA has just been able to hold their hedges and not to immediate cash. Hedges are a gamble and SWA is winning

[flyover]

Originally Posted by tonyw

The problem is Southwest and the other LCC simply cannot provide us with the air transportation system we need in this country. Period. Their own founder said this.

So if the guys who do have the ability to provide.......cut too much capacity, we're gonna have problems.

Yeah, that would be bad. We certainly don't have any problems right now. The guys who do have the ability...... have absolutely run the legacy carriers into complete collapse. SWA just keeps making profits. Hang in there Tony, keep saying it long enough it's bound to come true some day.

I love the breathless anticipation of SWA being in the same trouble as everyone else. Just check out their balance sheet and try to figure out how even a few losing years gets them in the kind of trouble everyone else is in:
http://finance.yahoo.com/q/bs?s=LUV&annual

What kind of logic is this? We gotta reduce capacity, but, hey, I'm gonna expand my fleet.

It's the kind of "logic" you get from someone who is running a company that always makes money. As he said: "The first thing I would do if I was losing money would be to stop buying airplanes."

Frankly, I believe him. I think SWA will protect their balance sheet. Something Delta used to be famous for.

[flyover]

Originally Posted by Tim

Talking bout SWA being in red if not for hedges well thats part of the game. Hedges can be a gamble if for some reason fuel drops below the going rate. SWA has just been able to hold their hedges and not to immediate cash. Hedges are a gamble and SWA is winning

Actually being completely exposed to fuel price swings is a gamble. Hedging is taking the gamble out of it by locking in fuel costs. But you've got to be credit worthy.

[tonyw]

Originally Posted by flyover

Hang in there Tony, keep saying it long enough it's bound to come true some day.

Interesting. On the one hand, you praise Southwest, but on the other hand, you say the founder, who is on record as saying his airline cannot provide the service that we need in this country, is wrong. You wanna call me an idiot, fine, I'll live. But then you'll have to be calling Kelleher one for saying the same thing.

I'll tell you one reason why Southwest and the other LCCs cannot provide us with the air transport service we need in this country.

International travel.

With the economy becoming more global, you better be able to hop on a plane in Albuquerque and end up in Shanghai. Or start in Schenectady and end up in Tokyo. Or start in Raleigh and end up in Bangalore.

[mrivc211]

Tokyo? Is that a new city or something?

[n77j]

Tony,
I think whay FLYOVER and others supportive of SWA, are not talking about flying international destinations. They are more or less implying that management in the legacy carriers, with some exceptions, do not have the success and knowledge of running an airline. In addition, SWA is a strong airline and based on their balance sheet and management style, they are imortal.

Most of the legacy carriers are trying to survive with a very old infostracture that is not functioning anymore with the current economy. Therefore, i hate to say it but one of them will be in the graveyard soon!

[Maximillian_Jenius]

I'm surprised that SWA doesn't fly to HNL with their 700's.
An Aloha 700 flies over my job every morning about 9:30-ish doing the PHX-HNL run.
Anyone think SWA might announce HNL service ina couple of years?

-matthew

[mpenguin1]

Originally Posted by Maximillian_Jenius

I'm surprised that SWA doesn't fly to HNL with their 700's.
An Aloha 700 flies over my job every morning about 9:30-ish doing the PHX-HNL run.
Anyone think SWA might announce HNL service ina couple of years?

-matthew

I doubt it, none of the Southwest aircraft are equipped to fly over the big ocean and none of the Southwest aircraft do not have ETOPS approval. Southwest has that nice code share with ATA, which is the next best thing to flying to Hawaii.

[flyover]

Originally Posted by tonyw

Interesting. On the one hand, you praise Southwest, but on the other hand, you say the founder, who is on record as saying his airline cannot provide the service that we need in this country, is wrong. You wanna call me an idiot, fine, I'll live. But then you'll have to be calling Kelleher one for saying the same thing.

You're talking in circles here Tony. I've watched SWA come up from the beginning. I constantly heard how they couldn't do what they were clearly doing. Then when they surpassed all the legacy carriers and became the number one domestic passenger carrier in 2003 most people were caught completely by surprise. Now there are still a few saying that they can't do what they are doing.

So while, like any other single carrier, they can't provide all the service to all the cities and carry all the passengers, they're doing ok. 31 years old and never an unprofitable year. Yeah, these guys obviously don't understand the airline biz.

Clearly there will be a need, going forward, for hub carriers. And clearly there are too many hub carriers and too many hubs and too much capacity in the national hub system. And the fact that you can't understand how
Kelly can point out the obvious need for hub carriers to shrink capacity while continuing to build his own profitable company would indicate you don't exactly think like Kelleher. It doesn't mean you're an idiot, it just means you are not a Kelleher, but then who is?:-)

[wheelsup]

Originally Posted by Maximillian_Jenius

Anyone think SWA might announce HNL service ina couple of years?

-matthew

They already do, via a turnkey operation courtesy of ATA.

Even though Southwest does point to point service almost exclusively, they still have a very advanced version of hub/spoke. Almost none of Southwest's connecting flights retrace steps,

Hypothetically:

If you want to go from Boston to Orlando on Northwest, you'd have to travel through DET or MSP, right? Basically go through their hub, no matter how far out of the way it is.

If you do it on southwest, and don't go direct, you'd connect in Baltimore, Philly, etc. etc. Basically, airports that are on the way there.

If more airlines redid their hub/spoke system in this manner, they cut fuel costs by a huge percentage.

~wheelsup

[tonyw]

Well, for what it's worth, I think SWA is a hell of a well run airline.

However, I personally do NOT buy the shrink capacity argument. Here's why.

Check out the FAA forecasts. Do they show traffic declining? Nope, they're talking traffic soaring to levels that would create gridlock. Congestion is alreday back.

Now, if you've got a situation where more and more people are demanding your product, what possible long term -- not immediate -- benefit would reducing your ability to provide that product give you?

Reduce capacity, and someone's going to add it. Nature, and airports abhor vacuums.

Don't believe me? Delta pulls out of DFW, and what's the airport doing? Looking for someone to fill those gates, and they will find someone. So Delta pulled capacity off the market, and someone's going to put it right on back in.

You might get a short term pop by reducing capacity, but trying short term fixes are what have put airlines in the situation they are in now. Sure, structural changes are required, but cutting capacity isn't going to help any airline in the long run.

Hell, man, know how many seats were empty on my flights to Vegas? On the two flights combined, there were four empty seats. Now, that doesn't seem like a situation where taking capacity out makes sense, because you've got tremendous demand for a product.

Instead, raise your prices, get more incremental revenue from each passenger, and see what happens. That would be a "paradigm shift," it would create "revenue synergies" and "deploy corporate assets to monetize the customer base."