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When Herb Kelleher talks, aviation buffs listen. He lauds the airline industry’s capacity discipline given the problem of volatile fuel prices.
Herb Kelleher and “éminence grise” shouldn’t really go together. But the Wild Turkey 101-drinking, chain-smoking founder and chairman emeritus of Southwest Airlines (LUV) is now 82 and knows more about the airline industry than practically anyone else on the planet.
“Well, I think that the industry now is establishing kind of an equilibrium because it used to be a fixed-cost industry,” Kelleher says. “Fuel was very inexpensive, and your airplanes were the biggest fixed expense that you had. So under those circumstances, you tended to keep flying your airplanes even when they weren’t returning a profit, but they were generating some revenue as opposed to no revenue. With fuel prices higher, variable costs have come into play. And in some cases, the cost of flying a route simply in fuel — I mean, forget the ownership costs of the airplane, the route costs, and everything else — makes it unprofitable. Now, this has produced to my mind, at least, a newfound — for the industry, not for Southwest Airlines, because we’ve always been this way — a newfound discipline. As demand diminishes, the industry is reducing capacity.”