More Opportunities Than Planes at Southwest

It's the morning after Halloween, and there's still a smattering of evidence suggesting that Southwest Airlines' holiday party was quite festive.

Wooden crates, faux stone walls and other decorations from a pirate-themed display are tucked in corners at the carrier's headquarters. Dozens of balloons still cover the floor of a conference room.

And workers chatter about the guy who dressed up as Captain Jack Sparrow, the lead character in the Pirates of the Caribbean movies.

The guy in costume was none other than Gary Kelly, the chief executive officer of the airline industry's most profitable carrier.

In his two years at the helm, Kelly has managed to keep Southwest's fun-loving culture intact - its famed Halloween celebrations included - while extending the airline's record streak of profits despite rocketing fuel prices and other challenges that have battered the industry.

The 51-year-old financial whiz, who has worked at Southwest for two decades, also diversified the company's strategy, branching out into large airports in major cities such as Denver. Previously, Southwest primarily focused on secondary, lower-cost airports often located on the outskirts of large cities.

Some analysts question the moves, speculating that the company appears to be running out of solid growth prospects.

But Kelly says Southwest's fundamental strategy is the same - look for strong opportunities in cities where fares are high - and that the company has more promising prospects than new airplanes.

He also says the airline has exceeded expectations in Denver, indicating that growth is on the horizon.

Kelly sat down with the Rocky Mountain News last week at the company's annual media day to talk about Southwest's Denver operations, its growth plans for next year and how it will avoid some of the pitfalls that have tripped up other airlines. Following are excerpts from that conversation, edited for space and clarity.

On the carrier's performance in Denver:

It's going exceptionally well. We have had a terrific response to our service, to our product, to our low fares. It's a big market, and we quickly found we didn't have anywhere near enough seats to satisfy the demand from our existing customer base into Denver, let alone new customers there.

On the response from Denver-based travelers:

We're in this getting-to-know-each-other phase still with Denver residents. We have to work hard to earn new customers and earn their trust. But our load factors (a measure of how full planes are) in Denver continue to be very strong, easily in the 60 percent to 70 percent range and often higher than that. That's consistent with what we see in our overall system.

On growth at DIA:

Denver is very high on the list. It is very obviously a very large city in and of itself, and in addition to that it's a terrific destination. And there's competition. There's no reason to be complacent about (growth) because if we don't serve the market our competitors will.

On the possibility of overcapacity in Denver:

There is always a danger of overcapacity. I don't know where we are in Denver relative to that risk. I don't think it's there now or whether it will be or whether it's years away. You haven't had Southwest low fares (for very long), much less Southwest low fares offered in a broad way. We have 32 daily departures, and that will do something for Denver. But it's nowhere near what could be done with a lot more flights to a lot more places. Certainly for the near term we know we need to add flights, and you'll see more being added. I wouldn't be too surprised if you saw some sooner rather than later.

On news that DIA is considering expanding Concourse C by eight gates:

That's in large part because of us. They're trying to anticipate our growth. They've got a footprint they can expand in, which makes us feel real comfortable. Under the assumption that we continue to add flights, we'll need more gates, and I hope that's what happens. We could not be happier with the airport. In terms of our desire to grow, they have been very supportive.

On overall growth in 2007:

We have a plan that is pretty well formulated through much of the first half of the year, where we'll pretty much focus on our current markets rather than new ones. We don't have all our plans set for the rest of 2007 though. The conflict, as usual, is that we have more opportunities than we have airplanes. But if we can get through the year without adding a new market and it supports our overall strategies and growth objectives, I think that would be preferred.

On being flexible:

Sometimes opportunities present themselves and you've got to move. We know better than to get locked down and say this is what we're going to do for the year and then not be able to react to changing conditions. Washington Dulles is an example of that. If you go back a year ago, we weren't even planning on going to Dulles. And then things happened in the first quarter of this year. The airport's costs were much more favorable than what we had understood, and Independence Air shut down. There was an opportunity there that was different than last fall. So we decided to move on that.

On the dangers of expanding too rapidly:

From the outset we try to plan our aircraft growth conservatively. We're talking about 8 percent growth next year, not 20 percent. We've positioned ourselves where it's less likely that we'll need to throttle back. We feel that because our costs are low, because our fares are low, there's a much larger potential market where we add service. Therefore the risk that we're wrong is mitigated. If you come into a market with more service and higher fares, you're just going to have a smaller universe of passengers.

On industry consolidation:

There are still too many seats, and the flying is inefficient. I don't think the hub-and-spoke system is so great for customers. There are still arguably too many hubs, and the industry is a financial failure still. Something needs to dramatically change to have an industry as a whole that is successful, and consolidation makes sense. I don't think you need 20 airlines, although I don't know whether you want just two.

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