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Southwest Airlines CEO Gary Kelly in December spoke at the Wings Club in New York. He told those in attendance that "from even before the financial crisis unfolded in the fall, air traffic is down--and for the simple reason that fares are up because operating costs (i.e., energy costs) are up." He also said that some "question our sanity" following Southwest's decision to pursue a New York LaGuardia operation, a move he described as "a slight departure from our business model, but nonetheless a departure." Regarding that development and others, he explained that "circumstances did not allow us to stick with what had been so successful for the previous three decades." Before his speech, Kelly sat down with Management.traveland discussed LaGuardia, corporate sales and distribution. An excerpt follows.
You beefed up corporate sales effortsin late 2007. Was that fortuitous timing or poor timing given the deterioration in business travel demand since mid-2008?
We have recognized that it is difficult to get new customers if you try to have one-size-fits all. Now that we have grown, have more capabilities and there is just more to leverage ... we're excited about the opportunity to provide more choice, and the corporate sales effort is simply a component of that. As to the timing, in the grand scheme of things, we have seen tremendous cost pressure in transportation the latter half of this decade because of energy. While [oil] prices have collapsed dramatically here over the last quarter, I don't think we can assume that will continue, especially over a three-to-five-year time horizon. So we have to be prepared for higher operating costs. It is very difficult to offset in the rest of our cost structure. We've got an economic proposition that says, "We've got to find a technique to get our revenue per departure up," and getting more customers, especially more business customers, fits very cleanly in that strategy. We have had a pretty narrow approach historically in working with corporations. So there is a loosening up of our attitude toward corporate deals. Most people will instantly go to discounts, and I don't know that's necessarily the right way to be thinking about it. It's more of an attitude when we sit down with large corporations to say, "What do we have to do to win your business? We have more tools to offer today than we have had historically. We have made distribution easier for you via Galileo and Worldspan," and we're still in an evolution with that. We just have more boots on the street to make those sales calls and work through those issues. We'll just have to see where that leads us.
If the loosening of how you look at corporate relationships does not automatically lead to negotiated discounts, what are the buyers asking for in return for more business?
At this point, the biggest issues are, number one, product. "We need flights to the places we want to go." Far and away, that is the biggest feedback that we get. And then it is service features like priority boarding, assigned seating, first class and, of course, the loyalty programs. Those are the typical kinds of discussions we have. Fares are typically not first and foremost in many of these conversations. I think we are going to have an opportunity now in a recessionary environment where travel managers are going to be under a lot of pressure to manage their travel budgets to make our low fares a bigger part of the discussion. Our fares are low and we get credit for that--that is not the issue in terms of making a more forceful effort. It is more distribution and loyalty programs and destinations. Sometimes it's just a matter of us making our case. Sometimes we don't have all the nonstops you may want but, in many cases, we can get you where you want to go very conveniently on a one-stop basis.
Did you accomplish the corporate sales goals that were set out for the year?
I think that, at least, we have accomplished growing the business. There are too many other variables to know whether the specific agenda that we had is really succeeding. It is a little bit too early to draw those conclusions. Our revenue performance this year has been good. It continues to be good in the fourth quarter, despite a very difficult economic environment. When we look at some of the frequent flyer statistics in particular, we have been very pleased with that aspect of the changes we have made because we have seen a boost in flying by that group of passengers.
Is there any desire or need on your part to work with Travelport to change the economics of your listings in Galileo and Worldspan, which accompanied a $1.25 per-segment cost for those systems' users?
It is too early. It is premature to tinker with much. I'd rather follow through with the other initiatives that we have planned--Rapid Rewards [loyalty program] and southwest.com--and see what are the effects of some of the capacity changes in the industry. We are still growing our route network in terms of adding destinations even though we are reducing some of those frequencies, but our competitors are making some very aggressive capacity changes. So it is too early to draw that conclusion, but it may be something that we want to revisit at some point in the future.
Regarding New York LaGuardia, we understand the appeal as a business market. That said, why change expectations of efficiency and go against your ethos to operate at that airport?
The change is more the willingness to have a modest operation in a more committed way. We feel like we have worked out a strategy that has a modest presence but a significant appeal to our customers, and also presents a low financial risk and a handsome return financially. We don't feel like we have to add LaGuardia to the route map and have 75 daily departures, which is where you really introduce the kind of operational risk you are asking me about. We're talking about 14 daily flights in and out of LaGuardia--we're just not very worried about it. I am not for a minute arguing that it is more efficient to operate at LaGuardia than it is at Lubbock. But I am saying our operation can absorb some of those imperfections better today than they could 10 or 15 or 20 years ago in a way that makes it a powerful proposition to add to the route map. The other thing I don't mind admitting is that it is a higher-cost operation, and we are expecting that we will realize higher revenues to compensate for that and still not distort our low-fare brand. We're comfortable that we can manage all those with seven daily departures [and seven daily arrivals]. I don't think we could with 75. That is a very important distinction to make. We'll grow beyond seven [pairs of slots] if we can get facilities and slots, and that is a big if. We're satisfied at seven; we'd rather have a few more, but just a few more. If we decide to grow more aggressively here, then we can make that decision in the future but that is not a foregone conclusion at this point. In fact, I kind of doubt we'll have a large operation at LaGuardia. We have not said what we are going to do [in terms of destinations]. It is very premature because we have not closed on the transaction [to acquire LaGuardia slots from defunct ATA Airlines]. My hope is that all of this gets wrapped up by March, and then we'll have an announcement and begin flying at the earliest in the summer if we want. Clearly with seven dailies, there is only so much that we can do. I have a hard time believing that we'd want to do more than two nonstop [destinations], but these are just thoughts. Until we have to commit, we can change our mind.
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