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By: Michael Maloof
Students jockeyed in the balcony and faculty packed the floor seats at the Cable Center on March 8 as Daniels College of Business hosted one of the most revered CEOs of recent years. Gary C. Kelly began his run at Southwest Airlines back in 1986 and moved steadily up the ranks until being promoted to CEO in 2004.
Since then he has presided over the growth of one of America’s most profitable airlines. He was lucky to inherit a company that for 40 of its 42 years in existence has sustained consecutive profits and whose streamlined fleets contribute to some of the lowest operating costs of any carrier. In person, Kelly credited many reasons for his love of Southwest, noting its customer service focus and culture of “fun and happiness.” But what really sets Mr. Kelly apart is his business vision.
Southwest has always operated in a “niche” market, says Kelly, providing cheap and friendly service non-stop between domestic destinations in the sun-belt. Kelly and former CEO Jim Parker have successfully applied this approach to an array of domestic markets outside of the American South and Southwest.
In an industry that has not seen true growth in the number of total fliers in years, Southwest has still managed to muscle competing heavy-weight airlines like Delta and United out of various smaller markets. Kelly claims that passengers want the best price first and foremost. He has strived to reduce operating costs by cutting fuel use and even redesigning the seats to be lighter.
Southwest is praised for its fuel hedging program that kept the airline running in the black during the bleak days of peak oil prices between 2008 and 2009. The company’s hedging team speculated on oil futures that amounted to 10-year fixed prices on aviation fuel which resulted in up to 25% savings over other airlines in 2008. The bet allowed Southwest to avoid the bankruptcies suffered by most of the American airlines in the years that followed.
Today, with changes in hedging practices and falling fuel prices, that model may not be nearly as profitable, but the trend caught on. Delta Air Lines, unable to speculate on oil futures, simply purchased its own refinery in Pennsylvania last year for a staggering $150 million in an attempt to control fuel prices. Either way, Kelly and his predecessor are pioneers in the post-deregulation airline industry. The American customer wants to get there and get there cheap.
Kelly said during the event that strategic thinking and the simple goal to take his airline “wherever markets are underserved and overpriced” has been his company’s secret. He even alluded to his company’s not-so-secret hopes to take on major flagship carriers in markets from Canada to Colombia by the end of the decade. But he made clear that he was not going to abandon the constant planning and goal-setting that landed Southwest where it is today. The company’s remarkable success goes to show that the right pairing of foresight and finance can win in even the most competitive of markets.
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