Photo credit: Southwest CEO Gary Kelly considers his legacy as he prepares to step down. Southwest AIrlines / Stephen Keller
It’s rare in any industry for a CEO to stay on top of his or her company for nearly two decades, let alone in the rapidly changing airline sector.
To say that Gary Kelly has seen it all would be understatement. Kelly will retire in February after 35 years at Southwest Airlines, or most of the company’s 50-year history, a stretch of time that has seen the airline transform itself from a discount carrier beloved by price-conscious vacationers to one of the country’s largest airlines, with a thriving and lucrative corporate travel business.
After 17 years at the helm of Southwest, Kelly will pass the torch to Robert Jordan, a company veteran who now is executive vice president for corporate services. Kelly, who trained as an accountant, came to the company in 1986 as controller, joining from Arthur Young & Co.
On the heels of his big announcement last week, Kelly, 66, spoke on Monday with Skift’s Airline Weekly about his legacy, the pandemic recovery, and where Southwest is headed.
“In 1986, we weren’t that different than we were in 1971,” Kelly said. The airline then still was focused on short routes, mainly from Texas and neighboring states. It was hamstrung by the Wright Amendment, which limited the number of states it could reach from its base in Dallas Love Field. Southwest then was still the disruptor whose right to fly founder Herb Kelleher defended before the U.S. Supreme Court.
But in the decades since, Southwest has reinvented itself, with much of that occurring since Kelly took the top job in 2004. When he took over, the airline industry was reeling from the post-9/11 travel slump and shortly would be confronted with the Great Recession. But Kelly oversaw some of the airline’s most significant transformations, all while trying to keep the spirit of Kelleher’s scrappy airline alive.
Among the most important part achievements Kelly sees as is legacy was getting the Wright Amendment repealed. The law limited flights from Southwest’s base in Dallas Love Field to a handful of states, and shortly after taking over, Kelly started lobbying for the repeal. After moving at the speed of government for several years, the process finally ended in 2014, when Congress let the amendment expire, allowing nonstop flights from Dallas Love Field to anywhere in the country. “This has been a tremendous success,” Kelly said.
But Southwest did not sit still while Congress churned through the Wright Amendment repeal process. It started expanding in Chicago and the Midwest by striking a deal with bankrupt ATA Airlines. It got its first international routes through the $1.4 billion acquisition of AirTran Airways in 2010, as well as a foothold in one of the country’s most lucrative air travel markets, Atlanta. Southwest under Kelly began moving away from its previous strategy of flying short routes to secondary cities to focus on longer routes to major airports. The carrier began replacing its smaller Boeing 737-200s with larger Boeing 737-800s and eventually 737 Max aircraft. “One of the things we had to do was to pivot to be more attractive to business travelers and to offer longer distance flights,” Kelly said.
The Empire Strikes Back
It did this as many of its major competitors filed for Chapter 11 bankruptcy protection in the early 2000s, allowing them to wipe their slates clean of costs and “cleanse their sins and have significantly reduced labor costs.” Mergers — United and Continental, Delta and Northwest, American and US Airways — winnowed the field down from more than a dozen major carriers to just four. By the end of that decade, “It was like the ‘Empire Strikes Back,'” Kelly said. “They were restructured and strong and reborn.”
Meanwhile, the Great Recession saw the rise of the ultra-low-cost-carrier (ULCC) business model, with low costs, and low fares buoyed by ancillary fees. So while Southwest faced renewed competition for its foray into business travel from the legacy airlines, it faced new competition for its bread-and-butter leisure travelers on the bottom end of the market. “It was a far different competitive offering in the 2010s as compared to where we were before 2001,” Kelly noted.
And this provided the contrarian Kelly to make one of his most controversial stands. In the face of competitors on both ends of the market adding fees to offset rising oil prices, Kelly remained adamant that Southwest would never charge for checked bags. In doing so, the carrier left more than billion dollars per year on the table. “The pressure [to charge for bags] was really intense,” Kelly said. “We were pressured to look for revenue opportunities as well as cost opportunities to drive better profits,” he said, adding, “but customers hate it.”
The goodwill this policy earns is worth far more than the billion dollars Southwest would earn from charging for checked bags. “It was very clear that customers were voting with their wallets and choosing to fly Southwest.” Kelly is confident that this part of his legacy will endure. “Robert Jordan is pretty emphatic” that bags will continue to fly for free on Southwest.
Scrappy Underdog Spirit
But Southwest under Kelly had its share of growing pains. Contentious labor negotiations culminated in 2016, when the carrier’s pilots union held a vote of no confidence in Kelly’s leadership. “We believe that a change is needed for the best interests of Southwest Airlines and the loyal customers we serve,” the union said at the time.
“All of our labor negotiations have been vigorous,” Kelly quipped. “We’re a family, and families have disagreements.” At the time, Kelly said, the major carriers had lowered their wages as part of the bankruptcy process to almost 35-40 lower than Southwest’s. The carrier struggled to maintain its cost advantage and to remain competitive with the rest of the industry. But the negotiations worked out. Eventually, the market moved toward higher pay, matching Southwest’s levels and therefore eliminating the cost advantage the other carriers enjoyed.
Among Kelly’s proudest achievements is that Southwest has not laid off a single employee in its 50-year history, although this year and last that was partially due to generous federal pandemic help. Pointing to this, he is confident the carrier’s labor travails are behind it, because, despite what the pilots said in 2016, he has hewed closely to Kelleher’s vision for the airline’s corporate culture. “We talk about love, we talk about job security and financial success,” he said. “We attract the kind of people who want to be a part of that.” He added: “Yes, we’re bigger today, and yes, we’re more famous today, but I think that scrappy underdog spirit prevails.”
And that spirit is key to seeing Southwest through the current crisis. The Covid-19 pandemic is such a singular event that Kelly, unlike in past crises, Kelly can’t predict the way out. “I don’t think anybody could be prepared for this,” he said, referring to the pandemic. “It leaves a scar.”
Leisure demand is encouraging, Kelly said. “People want to make up for lost time.” But he is taking a more measured stance than many of his peers on the return of business travel after the pandemic. Where most U.S. airline leaders say road warriors will return in force after the September Labor Day holiday, when the kids are back in school and more workers go back to their offices, Kelly is skeptical.
Though often though of as primarily a leisure airline, about 40 percent of Southwest’s traffic before the pandemic came from business travel. And that is one of the key legacies Kelly leaves behind.
To Kelly, the nature of work has changed. Remote work is here to stay. Workers won’t be in a rush to get back to their offices. In-person meetings could be less important than they were before the pandemic. And companies have figured out how to use videoconferencing and other tools to do business they used to to face-to-face. “I don’t think anybody is smart enough to know these post-pandemic trends will unfold,” he said. “The business travel aspect of air transportation is the biggest question I have.” It could take two to five years for business travel to recover to pre-pandemic levels, he said.
Kelly will join Southwest’s board, and pending an election, is expected to become its executive chairman. That’s his plan for the future, despite persistent rumors that he’s being eyed for higher office. When asked if he has any interest in running for governor of Texas, Kelly said with a laugh, “Absolutely not!”