Things in the Sky

As I mentioned in an earlier post, Southwest CEO Gary Kelly was one of the keynote speakers at the AAAE conference, and here’s my summary of his speech.

Gary started off with a great joke by saying he gave up smoking when Herb retired, and that it was all secondhand. But, it wasn’t all fun, as Gary turned right to the recession and said that Southwest really isn’t seeing much improvement in the economic environment, and that it is a difficult time for the industry as a whole. He mentioned that the industry is facing a “one-two-three punch” of low last-minute ticket sales, low demand, and rising fuel prices.

On the bright side, he did say that he thought Southwest was in good shape, as it has a strong cash position and access to new capital if it needs it. But then he mentioned that May RASM was weak and June isn’t looking much better. He also announced that this is first time that Southwest is reducing ASM capacity.

Gary then focused on new revenue initiatives like pets on board, and said that “we’re hard at work on several other near-term as well as longer-term revenue initiatives.” But, he quickly mentioned that he believes Southwest has a “very strong competitive advantage” by not charging for the first two bags and “isn’t leaving any money on the table” because of it, as Southwest is still outperforming other carriers in terms of revenue. He also claimed that the low fare brand helps Southwest in a recession, but that Southwest has had to discount fares, bringing about lower yields.

Soon, Gary got into the most important topics in the speech, and had a great sound bite: “airline economics have fundamentally changed this decade.” Thanks to volatility in fuel, variable costs have increased. And you’d think that with a talk about costs, Gary would start telling airports to work on their fees and charges, right? Nope. He quickly said: “I’m not going to take your valuable time and hammer you about costs…with very few exceptions, airports are doing a great job of managing costs…I just don’t think it does any good to have a contentious relationship between airports and commercial aviation.” Instead, Gary said he wanted to find “common ground.” I’m sure that made the audience happy. Instead, he decided to focus on the “enormous threat” of volatile fuel cost and ways that to make the airline industry on that is “built to last.”

Gary was quick to plug the efforts already made by the industry. For example, he mentioned that while airlines have a large economic impact, they only account for about 2% of greenhouse gases in the United States. He then said that the industry has improved fuel efficiency by 110% between 1978 and 2007, and that the industry burned less fuel in 2007 than in 2000, even while carrying more passengers and cargo.

Next, Gary explained the three goals of the ATA: optimum flight paths, viable alternative fuels, and more energy-efficient aircraft. He said that these efforts can help reduce both costs and emissions, and are a much better alternative to the proposed Cap and Trade system.

First up was NextGen, and Gary was very quick to mention the downfalls of today’s ATC system, and said how NextGen will help reduce flight time, and therefore fuel consumption (he mentioned fuel burn savings of around 6-15%). Gary then talked about Southwest’s efforts to equip the fleet with RNP technology. In March, the airline flew a DAL-HOU flight using RNP, and there was a 6% reduction in fuel cost. Southwest is aiming to start RNP flights in the 4^thquarter of this year, and that will be ramped up through 2013. He was then quick to say that he FAA really needs to get going on this. As he put it, “NextGen needs to be NowGen.”

The next topic was energy policy, specifically one that provides “stable supply at stable prices.” Gary specifically mentioned alternative jet fuels here, and talked about how the government can play a big role on this front. The most important point he made here was investment in infrastructure for alternative fuels, and that government assistance and funding would be needed, especially in this economy. I disagree on the idea that government involvement is really needed in the alternative fuel area, but I’ll talk about that in another post, I think.

Finally, Gary discussed improved technology on the aircraft side, whether that be aircraft or engine manufacturers. He said that while progress has been made, it hasn’t been good enough. One concept he mentioned was blended body aircraft, which I found interesting.  Gary didn’t mention any specifics on the engine side, though I was really expecting a mention of the geared turbofan, like the PW1000G.

It was then time to finish up the speech, and Gary said how achieving future goals require a team effort of groups like airports, the government, the airlines, and energy companies. I was surprised that he even mentioned general aviation in that list.

Anyway, that was about it for the highlights from the speech. I’ll cover the question and answer session tomorrow, which had some pretty interesting stuff.