Southwest Airlines CEO Talks About Fares, Fees And New Routes

Southwest Airlines is, by far, the busiest commercial air carrier at McCarran International Airport. And, McCarran is Southwest's second-largest station of the 98 airports it serves.

With more than 2,700 Southwest employees in Las Vegas, the company is a major economic force in Southern Nevada, and the airline views the city as a key corporate partner.

Chairman and CEO Gary Kelly recently sat down with VEGAS INC to discuss the airline's future at McCarran, Southwest's "bags fly free" program and the strategies the company is taking to stay profitable:

You're in Las Vegas for a "message to the field." What happens at that event, and what will you be telling employees?

It's a celebration, a way to kick off the year. Last year, we did six locations and had an attendance of around 11,000.

At Southwest Airlines, we like to have fun, so this is another opportunity for us to get together. It's really basic things like sharing recent accomplishments, near-term goals, challenges we face and just being available for questions. It's a town-hall format, so I have some prepared remarks. We also give away prizes.

It's roughly a 2.5-hour event, very well-attended, very enthusiastic. It has a typical Southwest family feel to it. It has been awhile since we've held one in Las Vegas, where we have pilot and flight attendant domiciles. So we're back. We're glad to be back.

You've alluded in the past to Southwest's desire to fly to Mexico, the Caribbean and Hawaii. We've also heard a new rumor that Southwest is looking at Anchorage, Alaska. What's the status of international routes, and are there any plans for Hawaii or Alaska?

Our plans are pretty well known and set for the near term. Buying AirTran and closing on that transaction in May 2011 really set a significant amount of our work in concrete. That's a 3.5-year integration period.

The main deliverable in 2013 is to connect our networks, and that will set the stage so that we can begin to optimize the two airlines on a combined basis. Since '11, they've operated completely independently, and it's very inefficient.

In the meantime, we've been profitable. We bought a very solid business, and they've done a very nice job of running their business independently. Now, we begin to gradually integrate them into Southwest. That's the main objective for 2013.

For 2014, it will be to bring up the international capabilities within Southwest. That work was begun last year, so it's roughly a two-year effort. At that point, we'll have an international reservation system capability that will set the stage for us to complete our reservation system replacement on the domestic side.

We have all the multifleet work in place. We have a deal with Delta to retire the (Boeing) 717s so that by 2015, we'll be all 737s again. There are 88 of those aircraft.

In the meantime, both airlines have been operating well with very strong on-time performance. Southwest, by itself, had the best baggage-handling record in its history in 2012. So the wheels are still on, even while we have all this construction under way.

The stage is set to begin thinking about international after 2014. AirTran has a small international presence right now. The idea would be to move most, if not all, of that into Southwest when Southwest is ready, and then we'll be at a point where we can contemplate where we want to grow.

What we've been saying for a long time is the return on investment is like Las Vegas. Las Vegas isn't building new resorts. Likewise, we're not adding aircraft right now because we're not hitting our profit target that generates a sufficient return on investment.

That's a 15 percent goal, right?

That's the metric we use. Every company has one.

Why 15 percent?

That is sufficient to cover the cost of capital and to generate a sufficient return for investors. It's very, very basic.

Investors can argue whether that should be 18 percent or 12 percent. It's set based on alternative investments that are safer, then adding a risk premium. Airlines are considered to be pretty risky, and therefore you have to have a pretty good business plan to generate a sufficient return to accommodate that risk that you take.