Southwest Airlines CEO: ‘We’re looking for a profit in March’

Southwest Airlines CEO Gary Kelly joins Yahoo Finance Live to discuss the company's fourth quarter earnings, the demand for air travel, labor shortages, and the impact of COVID-19 on the airline industry.

Video transcript

ADAM SHAPIRO: There's a reason shares of Southwest Airlines are trading higher today. The company reported an adjusted profit in the fourth quarter of $0.14 per share on net income of $85 million. CEO Gary Kelly said in the press release on the earnings report, quote, "while we continue to manage through an incredibly challenging operating environment, we made such progress in our recovery in 2021 and are well-positioned for future growth with our industry-leading balance sheet."

Let's talk about that and the future not only for Southwest, but also for Gary Kelly, in this interview with us. Gary, it's good to see you. Congratulations on the quarter and for turning back to profitability.

GARY KELLY: Thanks, Adam. Great to be with you.

ADAM SHAPIRO: You talk about how difficult the past two years have been and the recovery. And you're guiding that this quarter, like other airlines, because of the omicron variant, is going to be difficult. Help us as investors understand, though-- once we're past the first quarter, what's in store?

GARY KELLY: I think a lot of that depends, Adam, on what variants we see, what surges we see. And we're assuming that we'll have more. And it's just an assumption. But I think the fourth quarter is a great illustration of how robust the demand for air travel is. And our business travel component is still down about 50% compared to pre-pandemic levels, and we still had a really strong revenue performance.

So I think that bodes well for the rest of the year. I'm hoping that the last unprofitable months that we have in 2022 are January, February. We're looking for a profit in March and a profit every quarter thereafter. So I think, again, forecasting in this environment is kind of treacherous territory. So it's all based on the assumption that the pandemic continues to recede. But even with that, we cut our losses by 2/3 for the year. We ended the year with a profitable quarter.

We're very much able, with our cost structure, to live in this environment with less business travel and more heavily oriented towards consumers. We have a great fleet, a great contract with the Boeing Company. Our employees do a wonderful job. So we're set up very, very well. You mentioned our balance sheet. So all across the board, we've got a lot of competitive strengths. I'm very excited.

ADAM SHAPIRO: Well, let's talk about some of the ways you're set up well. For instance, the new fleet of aircraft that you're bringing in are more fuel efficient just as we're seeing fuel costs, you've actually said, almost double compared to what they were two years ago. And I was watching an interview with you in which you said business travel should be, by the end of the year, between 10% to 20% lower than what it had been in 2019. That would all bode well for the airline going forward. So when you get ready to hand over the reins to Mr. Jordan, it seems like you've set things up pretty well.

GARY KELLY: Yeah, we hope so. And of course, Bob has been my partner for 34 years. And he's been a huge contributor to our success, to the strategy, and to the direction that we're headed. So it'll be a really smooth handoff next week. But yeah, I think that you set it up very well.

Fuel prices are more or less in line with where they were in 2019. We're very well hedged. The value of our hedge is $1 billion, and we're about 65% hedge this year and about 35% hedge next year. So that helps mitigate those price increases in addition to modernizing our fleet. Our fleet, our 737-8, is about 14% to 15% more fuel efficient than its predecessor. So there are a lot of risk in this business. We just do our best to manage each one of those as best we can.

ADAM SHAPIRO: The other thing that perhaps isn't getting as much attention but is a big headline is that you met the hiring goals in 2021 and exceeded them. And you intend to hire 8,000 people this year. Would it be perhaps better to slow down on that, or are you confident not only that you need those people but they are going to be working despite the risks of this pandemic?

GARY KELLY: Well, again, I'll just use the fourth quarter as a springboard. The demand for travel is strong. The need for us to restore our routes system to pre-pandemic levels is also really strong. So more people will travel if they have more flight options. And especially as business travel recovers, we need to restore flights in a lot of our core business markets.

So that means more people just for that. But then beyond that, we've got wonderful growth opportunities. And really, the success of this airline is dependent upon driving our unit costs down by restoring our productivity, both of the assets that we have and the ones that we want to bring on, and restoring the productivity of our employees. So where our employment numbers are down about 5% to 10% compared to where we were pre-pandemic levels, demand is recovering to 100%-plus from pre-pandemic levels. So we absolutely need to hire.

ADAM SHAPIRO: There's one position that's going to change. You mentioned when Mr. Jordan takes over as CEO in a week-- February 1, Tuesday. What's going through your head right now? You've been in that role for 18 years. You've been with Southwest for 35, almost 36 years. You're not leaving Southwest, but this is a transition. What's it like?

GARY KELLY: Well, it's just time to move. And it reminds me of my kids growing up. And you don't want to lose them and let them go off to college, but at the same time, you want to get them out of the house and get them off to college, you know? So it's just time for me to move down the hall. I moved 50 yards down the hall. We've been in transition here for seven months. We'll have a very smooth handoff next week.

Bob is terrific. I'm getting compliments daily as people get to know him and hear him and see him in action. So he's going to do a great job and take us to even greater heights. So I'm very proud of him and very much looking forward to the future. As you said, I'm not going anywhere. I'm going to be the chairman. And I just want to do a good job for him, support our board, support our shareholders, but obviously, support our leadership team, and especially Bob.

ADAM SHAPIRO: He's no newbie to Southwest either. He's been there almost as long as you have. But how do you, in the new role you're going to be in, stand back to let him then grow as the CEO?

GARY KELLY: Well, as you said, I've been CEO for 18 years, and I've had the advantage of working for the former CEO. And I saw what that was like. And as usual, Herb Kelleher was the greatest CEO of all time, and then he turned out to be the greatest chairman of all time too. So I learned a lot from him. And I'll have a few executive duties to help Bob out. Eventually, we'll transfer those to him.

But in terms of strategy and just owning the operation and the customer experience, all the P&L results of the company, all that will very clearly be Bob's accountability. I'll do some governmental affairs work, help out with some airport projects, and work on some out-of-the-box Innovation ideas. But otherwise, Bob, he's got the ball. And I'm here to support him.

ADAM SHAPIRO: Gary, thousands of people who are part of Southwest have relied on you and the leadership team not only for the last 18 years, but really over the last two years through this pandemic. What advice do you have for anybody in a c-suite office, whether it be in the airline industry, but in leadership, about going forward as we emerge from the pandemic?

GARY KELLY: Well, I think it's a lesson for everybody. Everyone has been touched by this pandemic in one form or fashion. And there's just a reality to it. I'm a baby boomer, so I didn't live through World War II, but it must be something like that. And there are challenges in one's life that you just have to fight your way through. And you have to maintain your focus. You have to maintain a calm.

You have to get things done that are within your control and just not dwell on the things that are out of your control. But in the end, I just think you have to have faith, and you have to believe. You have to believe in yourself. You have to believe in your team, believe in your-- in this case, your company.

And there's no greater company in my mind than Southwest. We have such a wonderful purpose. We have so many strengths. I mean, there's every reason in the world to be hopeful about the future. So this too shall pass, and we're just in the middle of the firefight still. And we just have to fight our way through it. The fact that we've accomplished a profit, the fact that our folks are running a great operation and our customers are happy-- hey, those are things to celebrate.

And it is a time where you have to find things to celebrate for and not dwell on all the negatives, whether it's politics or whether it's polarization or whether it's illness or what have you. I think my favorite word is "gratitude." So I'm thankful to be a part of Southwest for all these years and thankful to be a part going forward. And I know our best years are ahead.

ADAM SHAPIRO: I've got my boarding pass for Southwest, but now you'll have a little bit more time to roam about the country, Gary Kelly. We wish you all the best in your new role at Southwest starting February 1 and to the whole team. Congratulations again on the fourth quarter. Be well.