October 24, 2003
Wrap-Up: Simplicity Key to Low-Cost Strategy, Says Southwest CFO
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The following is a wrap-up of Gary Kelly's speech to students on October 22, 2003, as part of the Lyceum speaker series.
Speaking to students as part of the Lyceum Speaker Series, Southwest Airlines Executive Vice President and Chief Financial Officer Gary Kelly explained one of the less frequently discussed virtues that has helped his company remain successful while other industry giants have suffered devastating losses: simplicity.
As is widely reported, Southwest employs a low cost structure that allows it to make more money with the same resources as other companies. Less well known, Kelly explained, is the role that simplicity plays in Southwest’s successful operations. For example, Southwest planes fly a lot. The planes spend around twelve hours a day in the air, as opposed to an average of seven hours a day for other leading airlines. This operational streamlining helps the company recover the cost of a Boeing 737—about $35 million—more quickly than its competitors.
A common fleet strategy further aids productivity and efficiently greatly, Kelly said. Southwest only uses AWK 737 planes instead of a wide range of different models. “Don’t make it complex,” he said. “Any pilot can fly any plane. Any flight attendant can work on any flight. We don’t spend a lot of time and money figuring out who can do what.”
Southwest chooses the markets it enters very carefully, picking underserved and overpriced areas. “We would not run an Austin to Tulsa flight, for example. We couldn’t fill 737s to fly from Austin to Tulsa all day, every day. Some airlines will do that, they’ll just use smaller planes.” Southwest does not deal in smaller markets, which makes it more efficient, Kelly said.
The company has posted 30 years of consecutive profits while other major players in the industry have declined in recent years.
Kelly mentioned employee relations and Southwest’s renowned corporate culture as additional reasons for its success. The airline buys top-of-the-line healthcare plans for its 35,000 employees and tries to make work fun. “We have a work-hard culture,” he said. “We have fun, but our employees know they’re there to work.”
Notable Soundbites
On Southwest after Sept. 11:
“After September 11, when we couldn’t fly for three days, when
we wondered if we’d ever make money again, we became very
conservative with our cash. We keep a lot more cash. Right now,
we have about a 0.9 percent effective interest rate on cash. As
things pick up, we can be less conservative.”
“Before September 11, we spent $20 million [annually] on security to meet federal requirements. Now we spend $200 million. Those machines that look like mini-vans to check baggage cost $1 million each.”
On new accounting regulations:
“We do not assign value to stock options, but FASB will probably
make us soon.”
“Sarbanes-Oxley puts legal teeth into misrepresenting the books and filing false financial statements. It is a lot of extra work and the marginal benefit is not very much, as far as I can tell.”
For more information on the Lyceum series contact the director of the Professional Program in Accounting, Richard Joseph (512-471-3081).
For information on specific programs at the McCombs School, consult our contacts page. For media information, contact the Communications Director by phone at 512-471-3314 or by email at CommunicationsDirector@mccombs.utexas.edu.
