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Chris Jones

Airline Sees More Turbulence Ahead

24 March 2006

LAS VEGAS - America's intense desire to fly is shielding most U.S. airlines' from crashing financially. And when today's strong demand ebbs, the head of Las Vegas' busiest carrier foresees more mergers and shutdowns in the dangerously turbulent aviation sector.

"Clearly it's a failed industry financially," Gary Kelly, chief executive officer of Dallas-based Southwest Airlines, said this week in Las Vegas.

"Every single major airline that existed in 1991 has either been bankrupt, is bankrupt or is gone" with the exception of Southwest and American Airlines.

Recent losses reported by most carriers can't continue, Kelly said, adding "the pressure is on" Southwest to overcome industrywide challenges and raise revenue by 15 percent in 2006.

Last year, Delta Air Lines and Northwest filed for Chapter 11 bankruptcy protection. Independence Air shut down, a fate its Washington-area neighbor US Airways likely avoided by merging with America West.

And Kelly said there are still too many seats in the sky.

If demand falters, revenue will follow, and Kelly said most carriers aren't ready to ride out a downturn.

"As long as you have a really strong revenue environment, it gives people time," Kelly said. "But unless (airlines) make some fundamental changes, inevitably the bad times will come again.

"We're a long way away (industrywide) from having healthy balance sheets, stable cash flow -- companies that feel like they can live up to promises they make to their employees. Any little hiccup ... and you'll see carriers in very treacherous financial positions."

Kelly spoke with the Review-Journal on Wednesday afternoon at the Marriott Renaissance hotel, site of his Thursday lunchtime address hosted by the University of Nevada, Las Vegas.

He spent much of Wednesday meeting employees at McCarran International, a familiarization effort the 51-year-old executive aims to do weekly as he travels Southwest's 62-airport system.

The native Texan peppered his comments with politeness, frequently tossing in "Yes, sir" or "No, sir" when answering questions from someone nearly 20 years his junior.

Such manners, Kelly believes, are key to Southwest's continued success.

"Our people must be providing the best customer service," Kelly said. "That is the way to win customers and differentiate Southwest Airlines."

Beyond a few more smiles, Kelly said improved efficiencies are critical. Southwest's Web site has proven popular with travelers, reducing its need for reservations agents, he said.

A 15-month-old code sharing relationship with Indianapolis-based ATA Airlines improved Southwest's service for a relatively small investment, Kelly said. The deal produced $50 million in additional revenue last year, and expanded Southwest's network to busy destinations such as Honolulu and New York City.

A la carte food and in-flight entertainment services' costs outweigh their benefit, however.

"We don't want to be cheap, but we're walking a very fine line of offering people a very high-value-but-lower-priced product," Kelly said.

Last year, the airline prepurchased, or "hedged," 85 percent of its fuel at $26 a barrel, saving $900 million vs. market prices.

This year's supply is 73 percent hedged at $36 a barrel, which Kelly said gives Southwest another edge with prices now topping $64.

Southwest's Boeing 737s last year carried 13.9 million passenger through McCarran, nearly one-third of the airport's total, Clark County Aviation Department records show. The airline offers nonstop service here from 51 U.S. airports.

More will be added, Kelly said, most via new long-haul routes. Increased frequency on existing routes will also bolster local service.

"Las Vegas wants to continue to grow. It's still building rooms, and the airport is building another terminal," Kelly said. "We'll grow as long as there's demand."

Dallas service would be a prime addition should the airline win its ongoing congressional fight to repeal the Wright Amendment, a federal law restricting flights from Love Field to airports in Texas and certain nearby states.

Airport capacity remains a concern in Las Vegas. But Kelly said Southwest enjoys a good relationship with McCarran, and he'll meet with leaders here next month to discuss increasing his company's gate count.

Kelly does not foresee increases to his airline's late-night service at McCarran. Instead, workers there have focused on improved efficiency at Southwest's 21-gate C concourse.

Some of the carrier's flights recently moved to the B concourse, offering limited relief to space restrictions in C. A planned pedestrian bridge would expand that option's long-term effectiveness.

Southwest's frustration surrounding the Wright Amendment recently led airport leaders in Phoenix to ask the airline to consider relocating its headquarters. The company prefers to stay in Dallas, where it has 5,500 employees.

"Our focus is on repealing the Wright Amendment, not relocating our corporate headquarters," Kelly said.