Southwest CEO Gary Kelly Warns Costs are Too High

In what might be taken as another sign of Southwest Airlines’ coming of age and possibly outgrowing its low-cost carrier roots is today’s memo to the troops from CEO Gary Kelly, which notes that “Great customer service cannot overcome high costs.”

Southwest: Lower Costs ‘Imperative’

Lest there be any misunderstanding, the executive continued with this grim warning: “All the majors from 1989 have gone bankrupt. Pan Am. Eastern. Braniff. Continental. America West. TWA. US Air. United. Delta. Northwest. And now, American. Every single one failed.”

Kelly’s memo, obtained by the Dallas Morning News, went on to note that high costs were the culprit and employees were told that keeping costs low was “imperative.” Kelly said Southwest no longer has a big advantage cost-wise over post-bankruptcy Delta, United and US Airways – which he refers to as “New Airlines” – in that they have had to necessarily streamline financially, and he expects this will hold true for a reorganized American Airlines as well.

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“In the good old days” wrote Kelly, “when the Legacy Carriers’ costs were higher, we brought our low costs and low fares to their markets, stimulated demand, and expanded dramatically. Now…our advantage has been cut in half. We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors.”

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Southwest’s Costs Jump

According to the Terry Maxon of the Dallas Morning News, Southwest’s own labor costs have jumped nearly 32 percent to 3.94 cents per available mile, which is higher than costs for Delta, United and US Airways.

However, the memo does not mention anything employees or even executives are expected to do to contain or lower costs “increased productivity,” and at an investors conference Tuesday, Southwest’s Chief Financial Officer Laura Wright stated, “I wouldn’t say that there was anything in there that was asking for concessions.”

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Published: December 6, 2011