Southwest Airlines CEO talks plans, growth for Las Vegas

Gary Kelly has a lot on his plate, and that's very good news for Las Vegas.

The chairman, president and CEO of Dallas-based Southwest Airlines, the busiest commercial air carrier at McCarran International Airport, has been on the go during the past year, which means it's a lock that his calendar will be full for the next five.

In a short time, Southwest has acquired AirTran, signed deals with Boeing to take delivery of new 737-800 jets that have a larger capacity than the planes the airline now flies, and started a partnership with a Mexican carrier, Volaris, to provide service for Southwest customers to Mexico and Volaris customers to nearly everywhere in the United States. Southwest accomplished all of that while maintaining profitability for its 38th straight year in the midst of the nation's worst-ever recession and skyrocketing fuel costs that threw many of its rivals for a loop.

With Las Vegas mired in a deeper recession than most of the country, McCarran recently ceded its position of busiest Southwest station to Chicago's Midway Airport. Las Vegas is No. 2 with 226 daily nonstop departures to 55 cities. Using 19 McCarran gates, Southwest also provides jobs to 2,700 employees in Las Vegas.

Southwest started flying to Las Vegas in 1982, four years before Kelly joined the airline after working as a CPA for Arthur Young & Co. in Dallas. He was named chief financial officer in 1989 and moved up the ranks under the tutelage of Southwest's legendary co-founder and chairman emeritus Herb Kelleher. Kelly was named CEO in 2004 and took on the president's and chairman's roles in 2008.

Kelly talked with VEGAS INC about the airline's potential growth at McCarran, what the acquisition of AirTran will mean for Las Vegas and the success of its "bags fly free" marketing campaign.

Friendly. I think that's one thing that really sets Southwest apart from the competition. Of course, we're famous for low fares, but I feel what people really love about Southwest is our people and how friendly they are.

I hope so. We're still continuing to recover from the recession and looking for opportunities to grow. We're obviously combating high fuel prices, but we're seeing a nice recovery and our traffic is up year over year and up compared with 2009, so it's all dependent on customer demand--and demand, of course, is going to be somewhat dependent on fares and fuel prices. We're at 227 daily departures today and we've got capacity to add more flights to that, and we'll continue to look for opportunities to grow in Las Vegas. The other thing I'd mention in terms of growth is that we're working on integrating AirTran into Southwest Airlines.

I hope it brings a lot. Las Vegas is such a popular destination in the United States, certainly a top destination. We'll be adding somewhere around 35 new Southwest destinations, plus or minus, with the AirTran acquisition. Obviously, it's still early in that integration process. All of those new destinations for Southwest will potentially be new nonstops for Las Vegas. Clearly, we won't be adding 35 new nonstops, but my point is that there are a lot of new markets we'll be adding, Atlanta in particular. We'll give a good hard look at whether we want to have nonstop service into Las Vegas for all of those. Even if we don't have nonstop service, you'll see more traffic flowing in and out of Las Vegas if only on a one-stop basis. Anytime we can add destinations to the Southwest route map, that will be very good for Las Vegas.

I think the near-term growth potential mostly lies with new markets, whether they're nonstops or whether they're simply new destinations on the Southwest route map. Over a longer period of time, I remain bullish regarding the airline industry and especially Southwest Airlines. We're just running into some bumps right now in the economy and unemployment is still very high. All of that has an impact on travel and tourism, which obviously has an impact on Las Vegas. I'm hopeful that we'll get the economy going one of these years, and when we do, I think we'll see a nice pickup in demand in Las Vegas. We'll be looking for opportunities to add frequencies in existing markets that we serve.

Absolutely. Las Vegas, especially when you think about the East Coast or if we ever serve Hawaii or Alaska or Mexico--those clear long-distance markets--that's what the 800 is best suited for. Again, with Las Vegas being a top US destination, we'll certainly be putting 800s into service in Las Vegas.

I think that's premature. The short answer is nothing beyond very casual thoughts. We've got a lot of work to do over the next five years with bringing on the 800, integrating AirTran, we're early in our all-new Rapid Rewards (loyalty program) implementation and we want to be sure that we get it fully up and running and meeting customers' needs, and then we'll also be working on adding international capabilities to our current reservation system as a first step toward ultimately replacing our current reservation system. So that's a lot to do and those will be our priorities. If you're thinking about in a decade or the next 20 years, will we look at bigger airplanes and more international service? Perhaps. But we want to take first things first. We have a tremendous number of opportunities to grow our fleet with just the things that I've indicated, so we've got our work cut out for us for quite some time.

I don't know. They have a different business model than we do. There are a lot of similarities, of course, with their friendliness and their low fares and their efficiency. But they're primarily an intra-Mexican carrier and they just offer different trans-border flight times, so a lot of it will depend on whether they want to schedule their flights more in the heart of the operating day that will connect into Southwest flights. It's mostly dependent on their schedule and their scheduling decisions as opposed to Southwest. We'd welcome more flights and we'd welcome more flights connecting with us, but whether that's what they plan to do, I can't say.

First of all, I think McCarran is an outstanding airport. I think it's very well managed. It's always a challenge to manage growth, and of course growth for Las Vegas and growth for Southwest Airlines is a good thing. It just has to be managed very well. I think McCarran is doing a good job in responding to growth challenges. Space and gates have been our challenge historically, and that's a good problem to have. We're anxious for the construction of the new facilities to be completed and in the meantime, that's our primary challenge.

I think it's a challenge to manage transferring customers and transferring bags. Of course, our focus is primarily on nonstop local traffic in and out of Las Vegas, so it's less of a concern in Vegas. But that's the primary challenge that it presents operating out of two terminals.

I don't know of any effect that it would have on us.

First of all, I'm delighted with our boarding process. I think it's very well conceived, very well executed. It's been very well received by our customers. And we're topping brand-ranking surveys month after month. We were just No. 1 in Consumer Reports, and we were vying for first in the most recent J.D. Power surveys. I'm very pleased with all of that. As for the concessions in the airport, it's back to the growth. It's wonderful if customers want more. I think that helps manage the overall economics of operating the airport and it also improves the customer experience. All of that has to be taken into consideration in terms of planning for space at the airport. We want our customers to have their needs met, so I think we're very supportive in increasing and improving the airport concessions.

Well, that's a trade-off. My point is that I think all of those things have to be taken into consideration. At the margin right now, I think we can handle one gate. But it's back to your original question: If you want more flights, we're going to have to have more gates. I think that's all a good thing and if there are more customers and you want more concessions, all of that has to be planned for. Right now, we can certainly handle one gate.

I think we've proven that those policies work. We're continuing to report record load factors. It's back to the word "friendly," and we think not only are our people friendly, but our way of doing business is friendly. It's straightforward, it's transparent, we're not trying to nickel-and-dime our customers, so absolutely we think that we'll win customers by being upfront with them. Fares have gone up this year. I don't like that. But it's a direct response to increased fuel prices and we're still being rewarded with record load factors by our customers. Obviously, the policy is working very well.

Very successful, in two ways. One, we measure the awareness that a campaign generates. Before the "bags fly free" campaign a couple of years ago, the majority of customers didn't realize we didn't charge for the first bag. Now, of course, the vast majority knows full well that we don't charge for the first two bags. I would say from that perspective, it has worked extraordinarily well. In terms of driving more revenue, we're turning out record load factors. We've seen a two percent market share shift domestically to Southwest Airlines and that's adjusting for changes in capacity relative to our competitors. It's hard to argue what the cause is if it's not "bags fly free." It's all coincident with us continuing to run a very good operation and also performing very well in customer surveys. I think a lot of the performance in customer surveys is attributable to "bags fly free." All the way around, there's a lot of evidence that it has been a huge success.

Some of them, we already comply with. The 24-hour fare guarantee, as an example, is one that we have done historically. We're very opposed to the changes required based on the so-called full-fare advertising, where the Department of Transportation is asking the industry to present fares, including all potential government taxes and fees, which flies in the face of 25 years of policy of having those separated. So it's treating an airfare differently than other products and services are traditionally treated. You don't advertise prices at a state level including state and local sales taxes as an example. So it's an unnecessary expense and burden on the industry and we're very opposed to that. Otherwise, many of the provisions of the Department of Transportation are OK. We're pro-consumer, pro-customer and we advocate transparency. So many of those things, not only are we supportive of them but we're already doing them.

That's the way it's done now. The way it's done now is very straightforward, it's fair, it very clearly illustrates what the airfare is and what the government fees and taxes are. What they're advocating is combining and commingling it all and it is a massive programming effort for really no benefit. The fees are often dependent on the specific itinerary, so it makes it very challenging to provide an accurate advertisement on a combined basis.

We're members of the Air Transport Association. I'm actually the vice chair. So we're working with the ATA to make our views known to the Department of Transportation. I don't have any comment about whether we'll seek litigation or not.

You just need to run a good airline. You need to be on time, you need to do a good job of handling the bags, and you need to be friendly. We think that part of that is not nickel-and-diming customers. Those are the things we focus on.

We have 76 installed. If we talk about the Southwest fleet separately from the AirTran fleet, Southwest has 553 airplanes. Our focus now is on outfitting the nearly 400 next-generation 737-700 jets. Those will be outfitted with the satellite-delivered Row 44 WiFi. We expect to have those airplanes outfitted by the end of next year. The AirTran airplanes, 140 of those and I'm reasonably sure that all 140 have the Aircell ground-to-airplane WiFi service. We've now inherited a different approach to satisfying WiFi needs and we're in the midst of reconciling those two product offerings. So as it stands today, 140 AirTran airplanes are outfitted and 76 Southwest airplanes outfitted.