Southwest Airlines has always flown solo among its competitors. But since the September 11 terrorist attacks, it has been absolutely flying circles around them. While the rest of the U.S. airline industry was axing thousands of workers and threatening bankruptcies, the low-cost leader kept all its flights aloft, and laid off no one. It even added a new destination–Norfolk, Virginia- -several weeks after the tragedies, and posted a third-quarter profit.
For CFO Gary Kelly, there was never a question about Southwest’s course. With more than $1.5 billion in cash and the industry’s lowest debt-to- capital ratio, drastic changes were not called for, he says. While the Dallas-based airline did delay the receipt of 11 Boeing jetliners, Kelly points out that none of the 436 on order have been canceled. In addition, while Southwest–now grown into the nation’s fourth-largest airline in passengers flown, with a market capitalization that tops the combined equity valuations of its six main rivals–initially froze head count, it is now actually looking to hire 400 new flight attendants.
Where the 45-year-old Kelly did stand shoulder-to-shoulder with his CFO peers was in the industry’s remarkable petition for federal aid. Together, the CFOs drafted documents that company top executives, including Southwest chairman Herb Kelleher, used to request a $24 billion industry bailout. What was finally approved amounted to $15 billion–$5 billion in cash and the rest in loan guarantees.
Going forward, Kelly sees Southwest poised to take advantage of any shakeout that hits the industry. After what he calls a “temporary crisis,” Southwest’s “long-term opportunities are as good as ever,” he says, thanks to its low-cost model and conservative financial philosophy. And, to capitalize on those opportunities, Southwest intends to continue the light and breezy style that has won it fans since its start as a Texas-only carrier in the 1970s, when it introduced its “peanuts fares.”
Recently, Kelly sat down with CFO deputy editor Lori Calabro to discuss Southwest’s reaction to the travel crisis that began on September 11, and the company’s priorities for the future. “Our country is grappling with terrorism, but so far we haven’t seen anything that is going to shut down our business,” he says. In fact, Southwest’s operating strength, and the resiliency of traffic, suggest the opposite. “We’ve recovered quite nicely,” says Kelly. “Now we just need to make some profits.”
Third-quarter results show Southwest remains the most profitable U.S. airline, but there’s a big difference between this year and last. How can you separate the negative impact of the poor economy in general from the industry damage the attacks caused?
We had two full months under our belts before the attacks occurred. And since last January, we’d seen a steady decline in revenue production, right up through the date of the attacks. Our earnings were on track to be down close to 20 percent from 2000. The attacks probably cost us a good 9 or 10 cents a share. That was offset, of course, by our federal grant. If you exclude those proceeds, and special charges related directly to the attacks, we earned 10 cents a share. In fact, it was still the second-best third quarter on record. So we were profitable, just not nearly as much as we would have been.