Southwest CEO Doesn’t Expect Business to Be This Good Forever

Last year, American Airlines CEO Doug Parker made an optimistic prediction: After a widespread transformation, he said, the airline industry may never see annual losses again.

Southwest CEO Gary Kelly doesn’t sound quite as confident in what the future holds. Speaking to analysts during a second quarter earnings call on Thursday, he defended the airline’s decision to hold onto a cushion of cash for a rainy day.

“We’d like to have some cushion because there will be bad times and our strong balance sheet has served us very well,” he said. “The balance sheet strength is one of those shock absorbers that has really helped us in bad times.”

Kelly’s comments came in response to a question about an upgrade to the company’s debt, based in part on the expectation by Moody’s Investors Service “that Southwest will continue to conservatively manage its capital structure.”

Chief financial officer Tammy Romo said the company wants to hold onto its investment grade rating while optimizing the way it uses its capital.

“We’re trying to strike the right balance there,” Romo said.

The plan, Kelly said, is to manage Southwest “under the assumption that there will be very difficult times again.”

“I’ve heard comments about things are different now,” he said. “Maybe. But we’re going to make sure that Southwest is very well-positioned to weather the storm.”

Kelly didn’t say what talk he was referring to. But at American’s annual meeting last year, Parker said modern airlines could survive a downturn.

“We have gotten to the point where we like other businesses will have good years and bad years, but the bad years will not be cataclysmic,” he said. “They will just be less good than the good years.”

Second-Quarter Performance

There weren’t many storms to weather in the second quarter, though a long-planned switch to a new reservations system from Amadeus in May caused a few wrinkles that are still being ironed out.

“It was literally a flawless deployment,” Kelly said. “We discovered some design issues, if you will. I expect those to be remedied quickly.”

Operating revenues increased 6.7 percent to $5.7 billion, but profits fell from $820 million in the second quarter of 2016 to $746 million this year. Operating income dropped from $1.28 billion to $1.25 billion.

Passenger revenue per available seat mile, a metric that measures how much money an airline earns for each seat it flies one mile, increased 1.6 percent and average passenger fares were up 1.5 percent to $153.95.

Kelly said he was “pleased to see growth in average fares for the first time in almost two years.”

More Talk, Still No Hawaii Announcement

After years of dangling the prospect of adding Hawaii to the route map, executives kept dangling on Thursday.

Wolfe Research analyst Hunter Keay asked if the carrier needed to address “some complicated maybe product-related things” such as in-flight entertainment over water or catering before considering a launch in the Hawaii.

“Or do you think that just brand and low fares alone are simply enough to sort of have the Southwest effect in a traditional sense in that market?” he asked.

Kelly said there would be operational challenges for the airline, but didn’t expect that those would involve snacks or entertainment. He said Southwest will evaluate whether Hawaii might need a strategy different from other markets, but expected the service to look familiar.

“We haven’t made any decisions obviously about Hawaii at this point, and my belief is that when we do — it’s not if we’re going to go, it’s when we go — we think it’s an important strategic offering that Southwest needs to make,” Kelly said. “When we do that, it’s my belief that it will be off-the-shelf Southwest Airlines.”