Southwest Airlines CEO Gary Kelly: Jet-Fuel Prices Are No. 1 Worry

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Southwest Airlines's CEO Gary Kelly says jet-fuel prices top his list of concerns for 2011.The price of jet fuel is high on Gary Kelly's mind. During a trip to New York this week, where he met with aviation executives and airline analysts, the chief executive of Southwest Airlines (LUV) called jet-fuel costs his greatest concern for next year.

Representing one-third of Southwest's total expenses, fuel costs are a major factor for the consistently profitable low-cost carrier. They have "the potential to change rapidly and to very rapidly destroy profitability," Kelly (pictured) says. "It is very, very difficult to respond in the short term to a fuel-price spike."

Southwest hedges its fuel purchases: Kelly says the carrier has contracts to buy about half of its fuel through 2014 at prices "roughly equivalent to the current market, somewhere around $90 per barrel." In the past decade, similar hedging activity has saved Southwest $4 billion, equivalent to the cost of 125 airplanes, Kelly adds.

"It's All Within Our Grasp"

Southwest, which flies more passengers than any other U.S. carrier, also has cut its fuel expenses by retiring less efficient aircraft. It also uses blended winglets -- devices that attach to wingtips to reduce drag, thereby reducing fuel consumption -- and electric, instead of fuel-burning, ground equipment. And it has changed pilots' flying habits to get higher efficiency.

A proposed modernization of the air-traffic-control system, which the airlines back but hasn't yet found funding, could reduce the industry's fuel usage by 15% more, Kelly says.

"All of the tools are there, they simply need to be implemented, deployed. . .it's all within our grasp," he says. "We put a man on the moon. We ought to be able to modernize our air-traffic-control system." Kelly also supports the use of alternative fuels, which he called "a much longer undertaking, but in the long run, the right thing to pursue."

From Hawaii to Bermuda

As it tries to save fuel, Southwest also is expanding its routes. In a speech to the Wings Club, an aviation group, Kelly announced that Southwest plans to substitute 20 of the 737-700 aircraft it has ordered from Boeing (BA) with longer-range 737-800s. The first delivery of the 737-800s is scheduled for March 2012.

The longer-range plane will enable Southwest to extend its route network to Hawaii, Alaska, Canada, Mexico, Central America and the Caribbean. With its purchase of AirTran (AAI), Southwest also will inherit a Bermuda service beginning next spring, if the merger is approved. The company is now upgrading its reservation system to accommodate all the new international flights.

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More immediately, Kelly says Southwest, which obtained slots at Newark Liberty Airport in New Jersey as part of the approval process for the Continental Airlines (CAL) merger with United Airlines, on June 5 will considerably increase its Newark service, which begins March 27.

The carrier, which will initially serve the Newark market with six daily nonstop flights to Chicago Midway and two daily nonstop flights to St. Louis, in June plans to add three daily nonstop flights to Baltimore/Washington Airport and Denver, as well as two daily nonstop flights to Houston Hobby and Phoenix Sky Harbor. Southwest already serves LaGuardia Airport and Long Island MacArthur Airport in New York.

At an event in Bryant Park in New York this week, Kelly indicated that Southwest might one day serve destinations further afield than North and Central America. "Eventually it is an idea that we have, to continue expanding to Southwest Asia, Europe, South America," he said. "But at this point in time, we've got a lot of work to do to integrate AirTran Airways into Southwest first, add the 800 into our fleet second and then implement new reservations technology that will create that international capability. So maybe one of these days."

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