Online Extra: Southwest's Kelly on "Our Advantage"

The new CEO pledges to keep costs low even as he expands the airline in Dallas and Chicago -- and wages a legal battle

Since becoming CEO of Southwest Airlines (UV ) last July after the unexpected retirement of Jim Parker, Gary Kelly has moved quickly to put the low-fare king back on the offensive. With some of his biggest competitors reeling from high fuel prices, a glut of seats, and shrinking fares, Kelly, formerly chief operating officer, is aggressively grabbing growth opportunities -- and trying to create some of his own.

Witness his acquisition of six ATA (ATAHQ ) gates at Chicago's Midway Airport and his attack on a federal law that limits flights from Southwest's home at Dallas Love Field. Two changes have prompted him to challenge the law: Tennessee legislators are seeking to add that state to Love Field's service area, and Delta Air Lines (DAL ) recently pulled down its hub at Dallas-Fort Worth. BusinessWeek Dallas Bureau Chief Wendy Zellner talked with Kelly recently about the changes at the nation's most successful airline. Here are edited excerpts of their conversation:

Q: Some analysts and competitors believe that we're seeing a "new Southwest," one that's far more aggressive than it has been in years. And some think the leadership change is part of the reason. How would you respond to that?


I don't see it as a different Southwest. We've always been a growth airline and have always been a maverick and have always been very competitive. The last four years have been terrible for our industry, and they haven't been so great for Southwest Airlines either. Our profits are way off from our peak in 2000. [But beginning in late 2004] things started to break a little bit.

ATA put itself up for sale, and we pursued that. Delta decided to eliminate 200 flights a day at [Dallas/Fort Worth International Airport]. It was really a reaction to opportunities as they were arising as opposed to any different strategy.

Q: Some of your competitors have said your main motivation in buying the ATA gates is to dominate Midway and keep competition out. Is that right?


No. We're dealing with scarcer resources, as in gates. We put in 20 years developing the Chicago market, and in earnest since late 1991. Chicago is the largest market opportunity on our route system. Our main objective is to grow Chicago. A byproduct is it squeezes out a competitor, but that's just a byproduct.

Q: Were you the one who initiated the idea of seeking repeal of the Wright Amendment -- the 1979 federal law, amended in 1997, that limits service for any airline flying from Dallas Love Field to other Texas cities and seven states?


I would include all of our executive officers in that discussion. My view very simply was we can't stand still in Dallas. We need to do something here. We've made a living out of serving the secondary airports where that was possible. The only reason we [were] thinking about [going to] DFW is because of the Wright Amendment, which is a bad law. After 25 years of being neutral and after 25 years of having people complain about this silly law, why would we undertake this expansion at DFW at higher costs?

Q: You've been focusing a lot on costs. Are you happy with your progress there?


I'm very pleased. We made tremendous progress in 2004. That was a critical year for us to gain some momentum in arresting our nonfuel cost trends, and we did.

Q: Where do you stand now on unit costs, adjusted for length of flights, vs. your competitors?


It appears that the advantage we have [after recent cost reductions by American (AMR ), Delta, and others] is about where we were in the early- to mid-'90s. They really let their costs get out of control in the late '90s. We have to assume they will continue to improve their cost structure. They have to, or they're not going to be around.

We've got very aggressive low-cost competitors in the form of AirTran (AAI ), JetBlue (JBLU ), and others. Their costs are pretty close to ours. It remains to be seen over a long period of time, of course, whether any carrier can keep its costs at Southwest's level. We get our advantage through productivity and simplicity and focusing on our market niche. No one else is strategically focused the way we are. I feel very good about our competitive position as long as we continue to improve.

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