Southwest’s Kelly Reflects on His Legacy

Madhu Unnikrishnan

July 6th, 2021

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, Kelly, 66, spoke last week with 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Among the most important part achievements Kelly sees as is legacy was getting the Wright Amendment repealed.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.

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.

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!” 

Madhu Unnikrishnan

Alliances and Partnerships Lift Qatar Airways

As Qatar Airways begins to climb out of the worst of the pandemic, the Doha-based airline is even more convinced of the value of its partnerships and alliances, particularly with airlines in areas of the world that are further along in their post-pandemic recovery.

Qatar Airways is a member of the Oneworld alliance, a stark contrast from its immediate competitors United Arab Emirates-based Etihad Airways and Emirates Airline, which are unaligned and have fewer partnerships with other carriers. But like those airlines, Qatar is based in a geographically small country with no domestic market to speak of. Airlines that have seen demand return are those that serve large domestic markets, as in the U.S., China, Russia, and Brazil, or the single market of the European Union. Partnerships and the Oneworld alliance have given Qatar better access to markets that have recovered the most.

“There is a lot of value of us in Oneworld, for customers and for the airline,” Mark Drusch, Qatar Airways senior vice president of revenue management, alliances, and strategy, told Airline Weekly. “We are big believers in the alliance.”

The carrier recently announced deeper relationships with JetBlue, American, and Alaska in the U.S. With the U.S. market rebounding more quickly than those in Asia and other parts of Qatar’s network, the carrier is increasing frequencies to its partners’ hubs. Qatar has restored service to 12 U.S. destinations and has either raised frequencies or upgauged at American’s hubs in Los Angeles, Chicago, Dallas/Fort Worth, Miami, and Philadelphia; JetBlue’s hubs in New York and Boston; and Alaska’s hubs in Seattle and San Francisco. In addition to these, Qatar operates to Washington, D.C., Houston, and Atlanta.

Drusch singled out the growth of the Alaska partnership, which was announced in December. By January, average daily sales were about 300 passengers per day but have quadrupled since then, he said. Alaska Vice President for Network and Alliances Brett Catlin said about 100 passengers per day connect across both networks. (See story in Routes & Networks.)) “When you put the two systems together, particularly with the customer base Alaska has, it creates traffic you can’t imagine,” Drusch said, pointing to such diverse itineraries as Khartoum-Phoenix and Fairbanks-Perth.

Similarly, the American partnership has revealed strong demand from American’s system to the Middle East, the Levant, Subsaharan Africa, and South Asia. “We provide one-stop connections that no other partnership can deliver,” Drusch said.

Across Qatar’s system, markets that were previously strong have struggled with pandemic restrictions or new outbreaks of the disease. Australia, Southeast and North Asia remain depressed, due to travel restrictions. Nepal, Bangladesh, and Pakistan also are struggling to contain Covid-19, Drusch said.

“Exotic leisure destinations,” like the Seychelles, Maldives, and Tanzania have been resilient. Demand is picking up to those destinations, as consumers spend money saved during the worst of the pandemic and plan postponed trips. “People have a lot of money, and they haven’t traveled in 12-18 months,” Drusch said. Demand across Africa has been relatively strong as well, he said.

The booking curve remains short, although it is lengthening from the worst days of the pandemic. Still, Qatar is seeing bookings average about four to six weeks before travel, a relatively short amount of time for a longhaul airline, Drusch said.

Cargo has been a lifeline for Qatar through the pandemic and will remain at the fore of the airline’s planning even as the world returns to normal. Although always important — particularly during the years when Qatar’s neighbors blockaded the country — it was a secondary concern. Cargo planners always had to “fight for aircraft,” but now “they have a seat at the table,” Drusch said.

Madhu Unnikrishnan

European Commission Raises Antitrust Concerns on Air Europa-IAG Deal

The European Commission said last week it is opening an antitrust investigation into the proposed IAG-Air Europa deal. The merger could reduce competition in Spain and on routes to Spain, the EC said.

IAG’s deal for Air Europa, first proposed in 2019, would have significantly beefed up the conglomerate’s presence in the Iberian Peninsula, becoming, by some counts, the group’s fifth Spanish carrier. But it is this strength in Spain that most worried the EC.

“We will carefully assess whether the proposed transaction would negatively affect competition on domestic, short-haul and long-haul routes to and from Spain, possibly leading to higher prices and reduced quality for travelers,” Commission Executive Vice President Margrethe Vestager said. “Although the financial situation of many airlines is still fragile, there are signs that demand for air transport services is recovering from the coronavirus crisis. It is important to ensure that the recovery of the sector takes place in a competitive environment preserving sufficient choice for travelers.” 

The EC says Air Europa and IAG’s carriers often are the only airlines a given route and could reduce competition on 70 city pairs in Spain and outside of Spain. Another concern is domestic feed for Air Europa’s longhaul flights to South America. The EC says the merger could cause airlines that feed traffic to end their commercial relationship with Air Europa and thus reduce access and competition on those routes.

The EC is expected to render a decision in 90 days, or by November.

Madhu Unnikrishnan

Study Questions How Green Airlines Can Get

A new report has questioned just how green flying can become, despite the aviation industry appearing to be on track to hit some agreed emission reduction targets over the next few decades.

The study, published by several universities in Nature Communications, also warned that the pandemic’s travel restrictions will only have a temporary effect on aviation’s climate impact, because international flights are seen as critical to kick-starting the global recovery.

However, its authors appear to be supporting the use of sustainable aviation fuels — something many travel agencies, their corporate customers and airlines are backing. Aircraft contribute to climate change by creating carbon dioxide, but there are non-carbon dioxide effects too, the study, “Evaluating the climate impact of aviation emission scenarios towards the Paris agreement including Covid-19 effects,” points out.

These include nitrogen oxides, ozone and contrail cirrus clouds, which it said contribute to global warming. And they’re not included in the International Civil Aviation Organisation’s goal of climate neutral growth, and only partly addressed in the European Commission’s Flightpath 2050, it added.

“Technological improvements to engines and airframes and operations won’t be enough to sufficiently reduce the impact of aviation on climate change,” said Dr Simon Blakey, senior lecturer in mechanical engineering, at the UK’s University of Birmingham, which contributed to the report. “We must explore all mitigation options in parallel — including the increased use of sustainable fuels and market based measures in order to limit aviation’s impact on the environment.”

Clearly, if a business traveler wants to take action, the most efficient way to reduce their carbon footprint is to not fly but Zoom instead. If it’s an essential trip, they’d need to consider alternative modes of transport, such as rail. And there is willingness to be greener; some 97 percent of corporate travelers would increase journey time if it significantly reduced environmental impact, while 80 percent are more inclined to work for an organization with a sustainability policy, according to SAP Concur research.

After rail, taking a plane filled with sustainable fuel could be the next best option — at least until electric aircraft go mainstream. Currently, aircraft don’t need to be modified to use sustainable fuel, as they blend it (up to 50 percent) with conventional fossil jet fuel. The overall footprint benefit is realized because of the way the fuel’s made. For example Neste, one of the biggest producers of sustainable fuel, manufactures it from sustainably sourced renewable waste and residue raw materials.

The study’s publication comes days after a new partnership between Neste and Boston Consulting Group was announced. The consultancy will purchase Neste’s sustainable fuel, which will be delivered to SAS and Finnair, and cover the volume of all the flights with these airlines taken by BCG’s employees in the Nordics.

BCG will be the first corporate client of Neste, which represents a shift from most of the other corporate alliances so far. “In my view, they’re the first corporation in the world to make a direct purchase of sustainable fuel from the producer,” said John Heywood, managing partner at consultancy Harvey & Heywood. “Other people have done it through schemes that have been assembled by the airlines, where the airline goes out to buy some fuel and tries to get corporates to help fund it.”

And there have been plenty of these types of schemes announced over the past 12 months. In May, Shell Aviation and American Express Global Business Travel began a collaboration to make sustainable fuel available. In April, United Airlines launched its United Eco-Skies Alliance Program, with some of its global corporate clients paying towards more sustainable fuel. They include Autodesk, Deloitte, DHL Global Forwarding, Nike, Palantir and Siemens, as well as Boston Consulting Group. Collectively they’ll contribute towards the purchase of 3.4 million gallons of sustainable fuel.

In the same month, Lufthansa made sustainable fuel available to AXA Deutschland, while in October 2020 Alaska Airlines and Microsoft signed a partnership to reduce carbon emissions with flights powered by sustainable fuel on key routes.

These alliances are a step in the right direction, but the amount of sustainable fuel available appears to be a fraction of what carriers typically burn through. Heywood estimates in a normal year, the world’s airlines use 300 million tons of fuel, but the amount of sustainable fuel available is 200,000 to 300,000 tons.

One reason there’s not a lot of this fuel around is because it costs a lot to make it.

“We need to demonstrate to investors and the industry that we’re ready,” said Sarah Wilkin, founder and CEO Fly Green Alliance, speaking at the SAP Concur Travel Industry Summit. The concept behind many of the alliances is to drum up interest, commit big dollars and eventually bring the average fuel price down. Wilkin also believes the new fuel has the best chance of reducing aviation’s harmful effects on the environment.

At a time when carbon calculations are gaining momentum, and more airlines are experimenting with ways to get their corporate customers onboard, the next couple of years could be a tipping point for producers like Neste, as well as SkyNRG. The travel buyer also predicted that in the future more airlines will include the fuel as an option in their so-called New Distribution Capability fares, which would drive more funding.

Matthew Parsons

American Sues Sabre Over How Fares Are Displayed

American Airlines this week sued Sabre in a Texas court, seeking to stop the travel technology company’s start on Thursday of a new way of displaying airfares on its reservation systems.

American said Sabre’s new format for displaying airfares breaches its contract with American by biasing search results in favor of its domestic rival Delta Air Lines. In May, Sabre announced a multi-year distribution contract with Delta that promised to use more modern methods of “merchandising” airfare content.

American said that in its review of a preview of the interface that Sabre provided, the airline “discovered numerous instances of the storefront favoring Delta products over those of American, including displays that omit, hide, or misrepresent certain American products.” The airline said this violates its contract with Sabre, which requires the tech firm to display its content “fairly, neutrally, and accurately. The lawsuit language implied the carrier had “anti-display bias” and “anti-financial incentive” terms in its distribution contract with Sabre.

Sean O’Neill

In Other News

  • While the headlines trumpet that passengers, particularly in the U.S. and Europe, are filling up airplanes, the real news still isn’t very good. Leisure demand in both regions is up significantly, and is surpassing pre-pandemic levels in some regions, but Asia and Latin American airlines, in particular, continue to suffer, IATA reports in an assessment of first-quarter finances. Worldwide, passenger revenues were down 74 percent in the quarter. In June, airline share prices fell even in one of the world’s strongest markets, the U.S., where airline shares were down 8 percent. Why? International and business travel remains depressed. The only airlines to report profits did so thanks to generous federal government support, which ends in September. And against this backdrop, oil prices are rising, with demand expected to be up 6 percent this year and back to 2019 levels by the end of next year, the International Energy Agency reports.
  • The reaction to Belarus’ diversion of a Ryanair flight in May is escalating, as the U.S. now has banned all ticket sales between the two countries. In its order, the U.S. Transportation Department, working with the State Department, said it is temporarily prohibiting the sale of all tickets between the two countries, including interline tickets, except for humanitarian flights. The move essentially suspends the bilateral U.S.-Belarus air services agreement. Belarus forced a Ryanair flight en route over its airspace to divert to Minsk in order to arrest a dissident journalist.
  • Airports Council International estimates the world’s airports need to invest $2.4 trillion in capital improvement projects between now and 2040 to accommodate the expected growth of air travel. If these capacity-improvement needs are not met, as many as 5.1 billion fewer people than expected could travel in that time period, the group warns. The pandemic set investment back. From mid-2019 through the depths of the crisis, ACI estimates that airports spent $28 billion less than they had planned on improvement projects.
  • Delta exercised an option to buy $185 million of Aeromexico‘s second tranche of debtor-in-possession financing from Apollo. The move will strengthen Delta’s strategic partnership with Aeromexico, the Mexican carrier said in a statement. Aeromexico filed for Chapter 11 bankruptcy protection last year.
  • South Africa’s parliament has provided Mango with 819 million rands ($57 million) in state aid in a special appropriations bill. The funds are aimed to drive investment and productivity and create jobs, according to the bill published in the government gazette. Local news reports say Mango has struggled to pay its staff and is down to operating just two aircraft.
  • Canada threw Porter a lifeline of CAD$250 million ($201 million) through the same lending facility Ottawa extended to Air Canada in April. Porter also will get an additional CAD$20 million to refund tickets canceled due to the Covid-19 pandemic. Porter, which suspended all flights in March 2020 and has delayed its restart several times, now says it will restart flights on September 8.
  • MediaRadar, which tracks advertising spending, found 188 airlines placed advertising during the second quarter of 2021. While Qatar, United, Southwest, Delta, and American topped the list in spending between $2 million to $10 million in ads, airlines with ad spending below a million dollars include Icelandair, Allegiant Air, Air France, KLM Royal Dutch, Emirates, and Alaska Airlines, a MediaRadar spokesperson said.
  • The U.S. Transportation Department (DOT) granted final approval to Italy’s Neos to begin scheduled service to the U.S. The carrier said it intends to operate its first Milan-New York flights later this month. Neos operates a fleet of six Boeing 787-9s, in addition to 10 737s (including four -8s).
  • Lion Air Group and Sabre have reached a deal on selling ancillary revenue. The money raised from selling ancillary revenue will enable Sabre to update technology assisting shoppers while Lion Air Group will be able to sell more services through its partner carriers, the companies said. 

Madhu Unnikrishnan, Rashaad Jorden & Ruthy Muñoz

Madhu Unnikrishnan

July 6th, 2021