November 15, 2004
Accounting for Success: CEO Offers Insights on Southwest's Record
by Niti Dalal

Since the world’s first human flight in 1903, the airline industry has not been very profitable, with one exception: Southwest Airlines, which recently posted its record 54th consecutive profitable quarter. Speaking at the McCombs School of Business Nov. 10 as part of the Lyceum Speaker Series, Gary Kelly, the CEO of Southwest, discussed the role that accounting plays in the company’s ongoing success.

Airlines are losing billions of dollars every year, Kelly explained. Three carriers are currently in bankruptcy and another will probably join them by the end of the year. Why such a bleak financial picture?

According to Kelly, there are four main reasons. Airlines take a huge execution risk when purchasing large, expensive equipment for their fleets; they are sensitive to rising fuel costs; they rely on their labor forces to be maximally efficient; and they are vulnerable to a fluctuating economic cycle that dictates when and if people will purchase tickets.

In response to these factors, Southwest strives to be the lowest-cost provider in the industry, seeking opportunities to cut costs everywhere from the amount of time it takes to “turn” a plane (25 minutes for Southwest compared to 50 minutes for other airlines, according to Kelly) to selecting cheaper materials for its annual reports. By utilizing assets efficiently and tightening turnarounds, Southwest has been able to double the number of trips it can provide and increase revenue.

“It is important to look for opportunities to improve the company through financial analysis,” said Kelly. “If you’re not profitable, you don’t have a future.”

Most recently, the airline introduced a performance metric system to help shrink costs. By analyzing information such as how long it takes to answer telephones and how many people it takes to accomplish a task, the system allows the company to find areas to improve and, ultimately, to cut costs.

Southwest has managed to remain consistently profitable for more than three decades without ever having to lay off employees or institute pay cuts. Treating the employees well, Kelly noted, goes a long way to achieving higher efficiency and customer satisfaction.

While Kelly is confident that Southwest will continue to be successful, he said that a new set of challenges for the company’s accounting department has arisen with the dawn of the Sarbanes-Oxley era.

Because the Sarbanes-Oxley Act makes accountants, CEOs and board members liable for inaccurate financial statements, accountants have to put in more effort to ensure fewer errors. More effort generally implies higher costs.

However, according to Kelly, accurate financial statements should be a given.

“In the end, we can’t legislate integrity,” he said. “We only want honest people in the accounting profession.

Notable Soundbites

On advice to students:
“My number one advice is to find yourself at a great company when you graduate. Look for the same joy you have at UT in your new job.”

On investor relations:
“In the old days, if you didn’t call the company, you were out of luck getting an explanation of financial statements. In the mid-1990s, companies began holding conference calls to discuss the statements, but there was still a disadvantage for people who didn’t have the phone number to get into the call. Now, webcasts provide more people with the opportunity to listen to the discussion.”

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