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Yahoo Finance interviews Southwest CEO Gary Kelly

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In a wide-ranging interview with Yahoo Finance, Southwest CEO Gary Kelly discusses the challenges of COVID-19, a recent wave of cancellations, and why the airline has never had a single layoff.

Video Transcript

ADAM SHAPIRO: Gary Kelly is the CEO of Southwest Airlines. Under his leadership, Southwest enjoys some of the best passenger ratings in the business. It can also boast a record few other companies, let alone another airline, can. It's been profitable for 47 straight years through 2019. And another point of pride for Kelly-- Southwest has never laid off a single employee in its 50 year history, even during COVID. With that kind of track record, what's not to L-U-V love?

Hello again. I'm Adam Shapiro. And Gary Kelly, the CEO of Southwest Airlines, joins us now live. And, Gary, it's always good to talk with you.

GARY KELLY: Great to meet with you, Adam. Thanks for having us.

ADAM SHAPIRO: The purpose of what we're doing today is the path forward. And in about four months, your path forward is going to be transitioning out of the role as CEO into executive chairman. A lot of us are curious. What's going through your mind right now?

GARY KELLY: Well, right now, I think we're really focused on the moment here and dealing with the pandemic still and working very hard to get back to profitability. We're very excited about our plans for 2022. And next year will be 18 years for me as CEO and I think a very good time to transition in the sense that Southwest is so well prepared financially. Our people are superb.

And as the intro said, we've enjoyed fantastic customer service rankings for years and a 47-year streak of profitability. So it's a good time to transition in that sense. And I'm going to remain executive chairman and be part of that path forward I hope for many, many years.

ADAM SHAPIRO: Sometimes when you look at the path forward, where we've all been impacts where we're going. So let's take a look back, because the Southwest Airlines, most of us know, is roughly 50, 50-plus years old, even though the airline has its origins back in 1967. And I want to read something I found from an article in 2018. And they said, "The main reason Southwest makes so much money is because people love working there. Unlike much of corporate America, it realizes happy employees will make you money."

You have always said that your greatest achievement has been no layoffs, even just mentioned that. The airline's never been bankrupt. The other carriers have. How important is that relationship for the airline with its employees? Because even today there are occasionally those hiccups.

GARY KELLY: Well, it's the most important thing. It always has been, and it always will be at Southwest Airlines. The culture is very, very strong. But you just think about what it takes to create a business, a good business, a bad business. It takes so many different inputs. And in our particular case as an airline, it's very capital intensive with all the aircraft that we invest in. It's very energy intensive. As a transportation company, we buy a lot of jet fuel. It's heavily regulated, very much subject to economic cycles. And it's very people intensive, very labor intensive.

So all of those things have to be managed well to be successful. But ultimately, it's people who do all of those things. And so you very quickly realize it takes a lot of people. It takes a lot of teamwork. It's a customer service business as well. Our customers are experiencing our product as we're making it. And one of the huge advantages that we've had competitively over 50 years is our customer service, which means our people.

And I didn't invent it. Herb Kelleher said our people come first. They'll take care of our customers, and then everything else takes care of itself in terms of other stakeholders, especially shareholders. And I think what that translates to is when you get up to bat and times are really tough, do you really put your money where your mouth is?

And through 9/11, through wars, through fuel price spikes, through the Great Recession and now the pandemic, we've never had a layoff. We've never had to a furlough. We've never had a pay cut. And, yes, I'm very, very proud of that. The 47 years of profitability obviously goes hand in hand with that. And you can't accomplish that unless you're successful as a business also. But the two do go hand in hand.

ADAM SHAPIRO: Well, many of today's CEOs studied Southwest's brand, Southwest's business model when they were in business school. And if you go to the investor page, you can read the Southwest promise. And the company's promise includes that "employees will be provided the same concern, respect, and caring attitude within the organization that they're expected to share externally with every Southwest customer."

And I was reading that when you interview prospective employees, and you're hiring 5,000 by the end of the year, that you look for within those discussions empathy. And you set up a process where there's a group interview. Is that still part of the culture, and can other companies look at that as a way to improve?

GARY KELLY: Oh, sure. But, again, I think it starts with purpose. It starts with values. And, again, you have to prove to your employees that you love them. You have to do more than just tell them. You have to prove over a long period of time. But, yeah, we look for people that have a great attitude, people that want to serve, people that want to be part of a championship team. And ultimately, we think of Southwest as a family.

And one of my favorite phrases is, as our family, we want to treat our customers, each of them, like they're guests in our home. And it just translates into so many acts, acts of kindness, acts of service by our people. And that's what makes Southwest special. That's what makes our customers raving fans of Southwest Airlines. But because it's part of a larger community, absolutely, we still have those kinds of vetting processes looking at new candidates just to make sure they're a good fit for the Southwest culture.

ADAM SHAPIRO: I want to talk about the Southwest brand and that relationship with the customer as one last thing looking back because it is part of going forward. How did Southwest go from an airline with an ad-- and I think it's the early '70s-- hostesses in hot pants to being named this year of best employer for women by Forbes?

GARY KELLY: I just think you have to continue to grow. You have to continue to evolve and then continue to strive to live up to your values. And if we want to be an inclusive environment-- in those days that you're describing, Adam, all of our flight attendants were women. And so obviously that changed and changed very quickly.

But in the times, it was fun. There was definitely a play on the LUV word that was used over and over and over. Drinks were LUV potions on board the airplane. It was great fun. And it established a certain light, good-humored personality. And we just need to make sure that as times change and as sensitivities change that we change along with it.

ADAM SHAPIRO: And that balance between a brand that people do love-- there are advertising executives who talk about the relationship between a consumer and a company when they, quote, "love the company, they'll forgive the mistakes." And, of course, we've talked about last week during earnings the problems that happened that were beyond the airline's control with weather impacting Florida.

And yet you have this linear route system. As you go forward, would Southwest ever consider changing that kind of business model so as to, one, keep your consumers happy when there are hiccups in the system? Or is it still going to be what we've seen in the past, the linear routing as opposed to this hub and spoke?

GARY KELLY: It'll still be linear. And, again, over the course of time, they're going to be one-off events. And that was more than weather. Weather compounded the problem. But that was really staffing shortages within the air traffic control center in Jacksonville, Florida is what the FAA has said. And it impacted us significantly because we had close to 200 airplanes that, by Friday evening, were out of position with 66 different locations that we needed to get them and our flight crews to.

And in my history at Southwest, I don't remember an event like that that created such problems. So we do have opportunities, though, to rebuild our route network, which has been dismantled to a degree in this pandemic just to try to survive the collapse in demand.

So we've got a theory that we call backbone, which is a real dense set of frequencies between important city centers in our route map. And we'll build those back, and it will definitely create better resilience for us to recover in the future. So it's a very tried and true system. Obviously, it served us well. No one comes close to the success Southwest has had in the airline industry. So every reason to believe that we can continue to be very successful with this point to point system going forward.

ADAM SHAPIRO: As we look at the industry going forward, you have served as chairman of the Board of Directors of Airlines for America. What does the industry face next year and the year after as it recovers from the pandemic? Are there hurdles in the way that we're not paying attention to now but that are coming at us?

GARY KELLY: Well, I think if you just think about broader industry issues, traffic demand obviously collapsed in 2020. It has recovered nicely in some ways, in other ways not so much. Two broad groups of travelers, business travelers and leisure travelers-- leisure travel is very strong, and business travel is still quite weak. So I think the industry will be looking very carefully at that recovery over the next one to five to who knows how many years. Things have changed a lot, as we all know, in this pandemic environment.

But I think even longer term than that and for the Trade Association in particular, what we're all really focused on is climate change with net zero carbon emission goals no later than 2050 as an industry. So a lot of long range challenges that we'll need to make steady progress on and see a lot of innovation quite frankly. And then just the immediate task of getting past this pandemic will continue to be another focus here for the near term.

ADAM SHAPIRO: Try not to blush as I go through some of your accomplishments. But over the last 35 years that you've been with the airline and the last 18 roughly that you've been CEO, you had the launch of international destinations outside of North America to the Caribbean. You had the introduction of the new frequent flyer program and also initiation of service recently to Hawaii. Where does Southwest grow in 2022 when there's a new CEO at the helm?

GARY KELLY: Well, Bob Jordan has been my partner for 33 of my 35 years. And, as you might guess, after 33 years, he's very, very well prepared. And he is an active participant over the last 33 years in getting Southwest to this point and a co-architect, if you will, of the strategy going forward. And, clearly, he's a different person, and he'll have different challenges and have to make different choices, what to keep, what to change.

But Southwest still has-- amazingly, after 50 years and after having become the largest airline in America, gosh, around 2004 when I first started as CEO, we still have enormous opportunities to grow with the Boeing 737, which is a great, very versatile narrow-body airplane, all in North America. And I think we have a number of years of growth available to us. So I like our product. I like the customer service experience that we offer. I like our low fare brand and the fact that we don't nickel and dime our customers.

And, again, I think Bob embraces all those things too. So we're in a great position. We have a strong balance sheet, still investment grade even after the pandemic. We have a great order book with the Boeing company for the 737-8 and -7, which I hope will be certified next year, and more than ample opportunities to grow. We need to restore our route network backbone that I referred to earlier close to what it was pre-COVID in addition to continuing to expand our route network in North America.

ADAM SHAPIRO: I mean, pre-COVID you had more than 4,000 flights. As we wrap up, what advice do you have for other CEOs? And you brought up Mr. Kelleher. There's that story about the malice in Dallas years ago. I think the tagline United was-- United, excuse me-- Southwest was using was just plain sense. And there was another aviation company that had a similar tagline. They sued, and they resolved this issue over an arm wrestling match that Herb lost, paid $5,000 to a charity, and then was allowed to use the slogan. That kind of humility, you don't see that in a lot of CEOs. What advice do you have for corporate America about that lesson?

GARY KELLY: Well, yeah, it was just plain smart. And it was a tongue-in-cheek trademark dispute and great fun. It obviously continues to attract attention almost 30 years later, I guess 29 years later. But, yeah, I think it's-- what would you what would you hope out of a company? That it's passionate about what it does, that it's really good at it, that it makes money, to paraphrase Jim Collins.

And then when we look at our people, we ask them to work hard and treat everybody with respect. don't take yourself too seriously. We want to strive to be the best, and that's a never ending pursuit. But it just pays to be humble because sometimes things don't go perfectly.

But I think the word love, humor, family, those are all important for us. And it all leads up to a strong desire to take great care of our people and then, in turn, our customers. That's why we've never had a layoff. That's why we've never had a furlough, because we care about our people. They're part of our family. So all that I think is critically important to our success. And I think it works for any company to just take care and especially about your employees.

ADAM SHAPIRO: Gary Kelly is the CEO at Southwest Airlines. Thank you very much for joining us.

GARY KELLY: Thanks for having us, Adam.

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