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On the Record: a Conversation with Herb Kelleher

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On the Record: a Conversation with Herb Kelleher A Conversation with Herb Kelleher OnTheRecord Staying Aloft in Today’s Turbulent Skies Southwest Airlines executive chairman Herb Kelleher, a member of the Dallas Fed’s board A. All major U.S. airlines are now reducing of directors, gives a front-line executive’s view of the economy and the changes buffeting domestic seating capacity and/or paring back one of Texas’ most important industries. the rate of domestic expansion in response to weakening absolute demand across the nation. That’s part of why load factors right When asked about the secret to South- now are so great. So much capacity has been west Airlines’ success, Herb Kelleher jok- taken out. The players that had been growing ingly replies, “Charismatic leadership.” Be- fast are slowing down, and we have started yond that, being the only major U.S. airline to see some airlines cancel or delay plans to to make a profit every year since 1972 has add planes to their domestic fleets. come down to three factors: having a con- trarian strategy and sticking to it, keeping Q. How has the recent run-up in oil prices costs down in good times so the company affected the outlook? is prepared for the bad times and—perhaps most important—treating employees well A. Thanks to the globalization of business and trusting them to do their jobs. and the weakening dollar, the major inter- Kelleher joined with Rollin King to cre- national airlines reported good third quarter ate Southwest Airlines in 1967. After four earnings. But I suspect that the increase in jet years of legal challenges from existing car- fuel prices will translate into flattish to down riers, the fledgling airline finally began -op earnings for the industry as a whole for the erations in 1971 with a fleet of three Boe- fourth quarter. It’s also probably impacting ing 737s that served Dallas, Houston and how passengers view travel. San Antonio. Southwest began to grow by In the past, a big spike in gasoline prices emphasizing low fares, friendly service and would push more travelers to fly. But today, quick ground operations that kept planes in because of the pocketbook toll of high gaso- the air. With a fleet of more than 500 aircraft, line prices and the angst about the economy, Southwest now offers more than 3,300 flights A. We had been saying for some time that I suspect some people are deciding not to a day, serving 63 cities coast to coast. the Eleventh District was a standout, a star take discretionary trips at all. with respect to airline bookings. But from the There are other possible responses to Q. Some analysts worry that the U.S. economy perspective of passenger traffic, we can no the long rise we’ve seen in oil prices. It has is slowing. What do you see from your vantage longer say that the district is head and shoul- caused airlines to try to persuade engine point? ders above the rest of the country. Today, it’s makers to expedite efforts to make more sort of in the middle of the pack relative to fuel-efficient engines. On this count, we’ve A. What we have seen is a gradual softening the rest of the country and continuing to ex- made much greater strides in efficiency than that started at the beginning of this year. If hibit a gradual downward trend in demand other industries. In the past 25 to 30 years, you look at the consumer confidence read- for domestic travel. we’ve decreased fuel use per seat by 50 per- ings from the Conference Board or the Uni- cent. Of course, we can go only so far. You versity of Michigan, you can see there has Q. Are there areas of the country that remain can’t realistically expect to fly an airplane us- been a downward trend. standouts? ing wind power or electricity. For us, the trend wasn’t totally mani- fest until the second quarter, but there’s little A. At this juncture, we’re characterizing “no Q. Are there other factors impacting the bottom doubt that many people are getting a little change” from last year’s bookings, on a ca- line today? more cautious with their discretionary spend- pacity-adjusted basis, as doing “pretty well” ing. Consumer demand is looking somewhat relative to peer districts. On that basis, Cleve- A. It may surprise most Americans to learn dicey, and the public seems increasingly skit- land and Kansas City appear to be strength- that the industry is beating itself to death to tish about the prospects for the U.S. econo- ening, and Boston and New York are still fill airplanes at 1990s fare levels, when we my. relatively strong. take inflation into account. About 70 to 75 percent of an airline’s costs are fixed. On any Q. What about the Eleventh District, consisting Q. How is the glum turn in the consumer’s psyche flight taking off, you’ve already paid for ev- of Texas and parts of Louisiana and New Mexico? impacting the way airlines conduct their day-to- erything from the crew that’s flying the plane How are things faring in our neck of the woods? day domestic business? to the jet fuel that’s providing the power. So if SouthwestEconomy 8 FEDERAL RESERVE BANK OF DALLAS • NOVEMBER/DECEMBER 2007 “In the broadest sense, it seems to me that globalization has for some time held down the cost of living in this country.” you have 20 empty seats, it’s best to fill them changed. In the absence of at some price rather than not fill them at all. globalization and diversifi- That’s why you hear about a goodly number cation, I suspect we would of fare increases but see relatively little in the be in a recession right way of higher average fares actually paid. now. In the broadest sense, Q. What are these signals telling us about the it seems to me that global- outlook for the economy? ization has for some time held down the cost of living in this country. A. Some analysts regard airline bookings as That’s one reason why I suspect that in the Q. Are there any risks that accompany a a lagging indicator, but I have always seen absence of globalization, we would be in a globalizing airline industry? them as somewhat of a leading indicator. recession. Saying that always reminds me of a speech I A. There is something looming out there— gave in San Antonio back in the 1980s, when Q. How has globalization affected the airline more flights and new competition. As inter- things were turning down in Texas. At the industry? national restrictions continue to fall away, the time, bookings in San Antonio were down 15 number of flights and competitors is grow- percent, which compelled me to inform my A. We’ve seen a very vivid, concrete and ing. Start-up low-fare carriers, for instance, audience that though they might not know compelling manifestation of the effects of are now operating between the United King- it, they were currently in a recession. And it globalization, a trend that really picked up dom and the U.S. I have little doubt that you soon became evident that they were. steam three to four years ago and has ac- will see more low-cost incursions into the celerated ever since. At the time, the United global market. Q. So are we in a recession? States had begun to succeed in pushing for “open skies,” whereas opportunities to fly Q. Ryanair has been mentioned as a candidate A. I would say “probably,” if I were only look- between two countries had previously been for just that and been characterized as Europe’s ing at the traditional domestic indicators that much more curtailed. Southwest Airlines. I always have. But we’re not in a recession; Even where you don’t have open skies, if we were, things would look much worse you have markets that are liberalizing using A. We have just begun to hear talk that Ry- than they do at the moment. bilateral agreements. China is a great exam- anair might begin to fly between Europe and I have thought about this a lot and ple. There has been an enormous percent- the U.S. Michael O’Leary is a fabulous and venture the difference may be globalization age expansion with respect to the number of charismatic leader for Ryanair, and he’s built and diversification, which have strengthened flights permitted; the restrictions have been Europe’s largest low-cost carrier and exhib- our overall economy. Something has indeed loosened. ited a willingness to break molds. In yet an- other manifestation of how much things are Q. How has this shift toward a globalized airline changing, Ryanair recently tried to buy Aer industry affected U.S. carriers? Lingus, which amounts to a low-cost carrier in this country trying to buy one of the small- A. Our big international carriers have benefited er old-line legacy carriers. from globalization by effectively connecting the business world. It’s not only that there is com- Q. Is there a message for existing international paratively less competition than on domestic carriers? routes. The weakening dollar is also providing a boost to international carriers to the extent A. As international flight restrictions continue they receive payments in foreign currencies, to disappear, the sustained move toward such as the strong euro. greater competition will trigger the next In essence, globalization has produced a major transformation in the industry.
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