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Old 08-07-2005, 08:44 PM   #1  
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Default Q&A with Gary Kelly

EXCLUSIVE REPORTS
From the August 5, 2005 print edition

Q&A: Gary Kelly
SW in fight for the long haul

Margaret Allen
Senior Writer

Gary Kelly, CEO of Dallas-based Southwest Airlines Co., defends the airline's ongoing quest to repeal the 26-year-old Wright Amendment, which restricts long-haul flights from Dallas Love Field in this exclusive sitdown conversation with the Dallas Business Journal. Kelly said Southwest (NYSE: LUV) won't be deterred from the fight, citing the need for low fares in North Texas. American Airlines Inc., fortress carrier at Dallas/Fort Worth International Airport, faces little competition at D/FW since the huge loss of flights in January of Atlanta-based Delta Air Lines Inc.

Q. Logistically, what would it take for Southwest to expand operations at Love Field if the Wright Amendment is repealed?

A. The airport is small. The masterplan limits it to 32 gates. We operate 14 today. Under the masterplan, we would have seven more. Presumably that implies a capacity increase of 50%. We don't fully utilize the 14 we have today. At this point, we don't know how many flights we might add.

The opportunity for us to activate seven gates is very real. It would take a modest investment of several million dollars and would take 12 to 18 Gary Kelly, CEO of Dallas-based Southwest Airlines Co., defends the airline's ongoing quest to repeal the 26-year-old Wright Amendment, which restricts long-haul flights from Dallas Love Field in this exclusive sitdown conversation with the Dallas Business Journal. Kelly said Southwest (NYSE: LUV) won't be deterred from the fight, citing the need for low fares in North Texas. American Airlines Inc., fortress carrier at Dallas/Fort Worth International Airport, faces little competition at D/FW since the huge loss of flights in January of Atlanta-based Delta Air Lines Inc.

Q. Logistically, what would it take for Southwest to expand operations at Love Field if the Wright Amendment is repealed?

A. The airport is small. The masterplan limits it to 32 gates. We operate 14 today. Under the masterplan, we would have seven more. Presumably that implies a capacity increase of 50%. We don't fully utilize the 14 we have today. At this point, we don't know how many flights we might add.

The opportunity for us to activate seven gates is very real. It would take a modest investment of several million dollars and would take 12 to 18 months. If they'd repeal the Wright Amendment tomorrow, we'd do everything we could to accelerate that. It's all very manageable.

We'd develop the market like we would any other market opportunity: We would put flights in, we'd put marketing support behind it, and then as demand dictates, we'd add more flights. We serve 42 airports that we don't access today (from Dallas Love Field), that we could in theory serve on a nonstop basis.

Just within our existing route system, there's potential for a large number of cities. One independent study, the Campbell Hill study, assumed we'd add 15 cities from Love Field. I don't think that's unreasonable. They also assumed 30 to 40 additional daily flights. In the big picture, that's a very small number of daily departures, to a large, hub airport like D/FW. So it's a nit. We're adding 50 flights a day in Chicago in a year. So flights of that magnitude come and go at airports all the time. I certainly don't see that has any, any, negative impact on an airport like D/FW.

The issue is competition. It's about finding a way to offer consumers in North Texas low fares. Right now, American Airlines obviously has a very strong, dominant position at D/FW Airport. You don't see other airlines lined up to take Delta's place because of that. We have an excellent way to provide low-fare service to North Texas. I don't see that it is in any way harmful to the region, or D/FW Airport. It's quite the opposite. Competition is always good. A way to keep airport costs in check is to have an alternative to that airport. Love Field will in no way be a major competitor, because it is just so small.

Dallas and the citizens have already spoken. They don't want Love Field to grow beyond 32 gates. We respect that and aren't arguing for anything else. But where we fly from those gates should be irrelevant. That's just restricting the market and restricting competition.

Q. What kind of revenue could Southwest hope to gain with repeal of the Wright Amendment?

A. As we research the fares out of Dallas, they're among the highest in the market. When we're looking for a new market, we're looking for underserved and overpriced. D-FW certainly fits the overpriced. It looks like we'll be able to generate a lot of incremental traffic. Independent studies have amazingly arrived at about the same number of incremental passengers that would be generated from classic, lower Southwest fares, and I think that was about 3.7, 3.8 million (North Texas originating) passengers annually. I don't think there's any disagreement at all that lower fares will stimulate more traffic. That's supported by many years of history with Southwest Airlines. The only question is do we allow a proven concept to serve that need?

Q. Southwest has done well with the system as it is. Why now, when American is trying to get its footing back?


A. We would ask, with all respect, if not now, when? If ever the community needed competition, it's now, because competition has been run out of the market. Delta has pulled 230 daily departures out of the community. There are city-pare markets out of Dallas that are only served by American Airlines. That's not good for the community.

It is so clear now that we are so dominated by one carrier, that led us to make a choice. We're either going to go fill the void at D/FW Airport, or seek the repeal of the Wright Amendment. D/FW, in no way, works for Southwest Airlines. The only reason we would even think about it is because of the Wright Amendment. That just made it clear to us that the thing we need to deal with is the Wright Amendment.

The thing that is so offensive about the Wright Amendment is the Wright Amendment has little to do with managing the activity at Love Field and everything about restricting competition. Because you could have a perimeter rule all these years that restricted nonstop flights to the Wright Amendment states, but that still allows through-ticketing. It just begs the question "Why in the world was that put in there?" It was put in there for the express purpose of limiting competition and constraining the opportunity for Southwest Airlines.

The principle at play here is real straight forward -- it is one of free enterprise and competition.

Q. Why has Southwest refused to go to D/FW Airport, given the financial incentives offered?

A. Because we want to be profitable. We want to be successful. And I don't think that we would be either of those at D/FW because the costs are high. The airport is inefficient to operate in. And it is dominated by a carrier that will soon have more than 900 daily departures. And it will take years for anyone to gain enough of a presence against that kind of a competitor.

At the same time, it's not a lay-up for Southwest to grow at Love Field absent the Wright Amendment and be successful, because American already has so many frequencies in place to everywhere that we would want to serve. We'd have to fight hard for those customers.

In addition, it's not a real incentive. To put it in perspective, we started service to Pittsburgh in May. We have 10 daily departures. With 10, we need one gate. To offer us free access to gates for one year is not anything we can take advantage of.

The more significant aspect for an airline is we're a network business. Most of the passengers on Southwest Airlines go from point A to point B. But our profit margin in our best years is only 10%. So that marginal passenger is the difference between a profit and a loss. So we have about 10% to 15% of our customers who either connect on another flight or they stay on the same plane and they fly on to their ultimate destination.

So all of the network that we have at Love Field would do nothing for the flights that would then operate from D/FW. If you flew San Antonio to Dallas Love Field and you wanted to go on to New York, for example, that San Antonio flight wouldn't be able to feed that Dallas-to-New-York flight. The airport's are close enough, this is essentially a single market. Where we've chosen to have separate airport operations around the country, like in L.A., they are in essence separate markets.
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Old 08-07-2005, 08:47 PM   #2  
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Q. What would you do if the Wright restrictions were lifted today?
A. I think we would begin selling all these points beyond the Wright Amendment, with no additional flights. So we have 117 daily departures today at Love Field. And now you would see Baltimore lighting up on southwest.com, as well as Pittsburgh, Philadelphia, L.A., Florida. And then we'd be able to flow aircraft to those locations so you could stay on the same aircraft.

For example, Birmingham, Ala., was added in 1997 as legally accessible under the Wright Amendment via the Shelby Amendment. And to this day there are still not nonstop flights and not much service between Dallas Love Field and Birmingham, because there aren't enough passengers to justify the flights. The problem is we have no way to flow passengers through Birmingham and beyond. But if you could have a passenger who would fly Dallas to Birmingham and then have that airplane flow on to Tampa, then we could logically support more service.

The opportunities are numerous. And it would actually help most of the cities in Texas. Another example, we opened Pittsburgh in May but San Antonio and Houston have no published service to that market, because so many of their flights flow through Love Field. So that's why you see and hear so many editorials around the state supportive of repealing the Wright Amendment, because it would be good for all those communities as well.

We could add roughly 20 departures a day with the 14 gates we have. Then we'd get busy with a plan to refurbish the other seven gates available.

Q. And what's the key in Congress? Whoever gets the most powerful people on their side?

A. Well, it takes an act of Congress. I know we have the principle on our side. The vast majority of people that get polled, or that you engage in this conversation, agree. We've got virtually every major city editorial board agreeing with that. Most large cities have multiple airports. As an airport user of services, I can tell you that competition is always good. To have an asset that is built, and then, as some have suggested we should close Love Field, well that's just the craziest thing I've ever heard. Most cities would love to have that additional air capacity.

Q. What's the revenue potential for Southwest Airlines if the Wright Amendment is repealed?

A. I don't really know. It's definitely an opportunity for us. It just depends on how fast we grow and how successful we are in stimulating the market, and how much of that we're able to capture. It will be a competitive situation. And that's all good for the consumer. It is not unlike any other new market that we go into. So we're not afraid of the competition.

It's going to be something north of $100 million a year. We do not have a study which adds up to a number, which shows exactly what cities we're going to serve and with how many frequencies. We have steadfastly refused to give a projection, because we really don't know.

Love Field certainly stacks up as a very interesting opportunity. But American has a lot of capacity. That is the issue. I don't know how much or how fast we'll be able to grow, because American does have a very, very significant presence in Dallas-Fort Worth, and they should be proud of that. It's just how do we compete successfully, maintain our profitability, overcome ever-increasing energy prices, and try to do good things for our employees, shareholders and customers.

Q. How long will you fight for repeal?

A. We're not going to let up. Twenty-six years is long enough. And people change their minds. So we'll just keep after it. And there's plenty of support out there for this.
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Old 08-08-2005, 10:45 AM   #3  
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Very Interesting!
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