Southwest CEO Gary Kelly: When An Airline Falls Behind, It’s Hard To Catch Up

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Following is the unofficial transcript of a CNBC interview with Southwest Airlines Co (NYSE:LUV) Chairman & CEO Gary Kelly on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Tuesday, October 12. Following are links to video on

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JIM CRAMER: Southwest shares are edging higher this morning, thank heavens. The airline is hoping to normalize the schedule by tomorrow. Normalize is an odd term because I expect normal from Southwest. The wave of cancellations in the past few days, wave in cancellations let’s go back earlier in the spring. This is suboptimal. So, joining us now is Southwest Airlines Chairman and CEO Gary Kelly. Gary, I got to tell you, you do not shy away. I said you got to come on and here you are. Gary, because you are so good and so deserving of the respect, could you please tell us what you see going on because this is not you and it's not southwest.

GARY KELLY: Hey, morning Jim. Great to be with you. Yeah, I know it's been a really rough weekend and obviously I really feel for our customers and our people that are trying their best to serve our customers but when an airline gets behind, it's hard to catch up. So, if you go back to Friday, basically the FAA had a series of delay programs that were implemented that covered all of Florida, every single one of our stations including a seven-hour ground stop at Orlando. You'll have to ask the FAA what was the cause of all of that, but about half of our airplanes touch the state of Florida. We’re one of the largest airlines in the country. So, by the end of the day we had significant numbers of airplanes and flight crews that were totally out of position and as any, again, any aviation expert knows it just takes several days to get everything back aligned so we had a pretty good day yesterday. Far fewer cancellations than what we were experiencing Saturday and Sunday. And today was pretty much shaping up to be a normal day. As usual we have other issues that we have to deal with whether it's weather or other ATC delays across the country but for the most part, today's pretty much back to normal.

CRAMER: Okay, Gary, I understand that the weather-related issues. Florida didn't really see that much cancellations from other companies in your industry, but there's a lawsuit that was filed, filed Southwest Airlines Pilots Association, it’s in the Northern District of Texas. And what disturbed me about it, this was earlier this year, is they say that basically you're using illegal tactics are a form of asymmetrical warfare negotiations. Gary, Gary, you know when you read this and then you read about the Texas governor says, listen we can't, we're gonna be against mandates. I see. Well, wait, wait a second, maybe vaccines are an issue, maybe labor problems of which Southwest Air has not historically had so you understand how we quickly just pivot from Florida and FAA to wondering what happened here with the pilots?

KELLY: Well yeah, again, I think that we're uniquely affected because we have so many of our flights that touch Florida. All the airlines were impacted on Friday, it was just more of an impact on us and it just took us longer to recover. But all of our employees worked very hard through the weekend and it's, it's tough on our customers but it's also tough on our people so they did a phenomenal job. There's absolutely no, no issue in working with our employees. Talking about the vaccine mandate, oh yeah, I mean there are some that have very strong views on both sides of that issue and, you know, it's not as I think you probably know, I've never been in favor of corporations imposing that kind of a mandate. I'm not in favor of that, never have been. But the executive order from President Biden mandates that all federal employees and then all federal contractors which covers all the major airlines have to have a mandate vaccine in place by December the eighth so we're working through that. We're urging all of our employees to get vaccinated. If they can't, we're urging them to seek an accommodation either for medical or religious reasons and my goal obviously is that no one loses their job. The objective here obviously is to improve health and safety, not for people to lose their jobs. So, yes, we have some very strong views on that topic but that's not what was at issue with Southwest over the weekend.

CRAMER: Alright but I still want to go over this. United has only 3% people who are not vaccinated. Delta, you have a $200 monthly surcharge healthcare if you don't get vaccinated. What do you have to make it so people get vaccinated and if they don't, what is the procedure?

KELLY: We're encouraging them and we're offering the equivalent of two days pay for them to turn in their vaccination card that compensates them obviously for the time that it takes and any aftereffects, you know, from the vaccine. So, it's an encouragement and not, not any kind of a stick if you will.

CARL QUINTANILLA: Gary, all the same, the, the cancellations are being used by some to argue that this was a huge vaccine protest in the words of Donald Trump Jr. on Twitter in the past 24 hours. I mean, how much can you push back on that? You say it was not an issue but to what degree did it contribute to this problem at all?

KELLY: Zero. I mean, again, we look at all of our employee behaviors in terms of absenteeism, in terms of people volunteering to come in and pick up what's referred to as open time, and they're very, they're all very normal. The president of our pilots union has been out talking to the media confirming all of that so I think people again that, that understand how airlines work, when you get behind, it just takes several days to catch up and the fact that we're basically caught up yesterday and today supports, you know, the, the assertion that we're making here but we were significantly set behind on Friday and it just takes several days to catch up.

CRAMER: Gary, I feel awful doing this but I got to go back in June. Two days, technical issues, 500 flights canceled. I want to step back for a second. You’re Southwest Air. I frankly don't care that there were problems with Florida, with FAA, you’re Southwest Air. You solve these things. You have two outages, again, you had one in June. Maybe Southwest Air has to change its ways that it can't be just shut down because of what Orlando, maybe you shouldn't do that maybe you need to go more hub and spoke. This is your, your airline and everyone knows, never, never, no cancellations, no problems. The fact that I have to ask about labor, the fact that I have to ask about the outages, something's wrong at Southwest Air.

KELLY: Well I think very fair criticism Jim and so I was simply answering the question of what happened here over the weekend, you know, not whether we should have been better prepared or have done something differently. So, we operate a linear route network, we don’t hub and spoke. We’re the probably the largest airline in terms of seats offered in the state of Florida. Again, every single airport in the state of Florida was impacted by this. So, it's, it's very unique. It's very unusual. It wasn't anything that Southwest caused. If you go back to the June outage, that was, that was us. That was a technology outage and those are, those are few and far between. But it's been a rough summer and I'm not offering any excuses. Our customers didn't get their best from Southwest Airlines is not what we want. We definitely are, we definitely have some staffing challenges as well that we've talked about before so we have moderated our flight schedule and accelerated our hiring plans so there were definitely steps underway to, to mitigate the issue. We were thinly staffed coming into the weekend and that certainly didn't help things as we were trying to recover but point well taken, and, you know, it's, as usual, any company is a work in progress and we've always got opportunities to improve and you get no argument from me that this is not, not the kind of service that we want to offer from Southwest.

CRAMER: Fair enough.

DAVID FABER: Hey Gary, it’s David. I mean when, when it comes then to those opportunities to improve, where is your, and by the way the next CEO, where is the focus going to be on that improvement given what you've seen both this weekend and obviously from June? I know not necessarily related, separate issues but still.

KELLY: Yeah not related at all but I think in the, in this particular case, it would help for us to have better tools to recover. So, there, there aren't perfect optimization tools to re-flow airplanes when we have a setback like we did on Friday. And then, secondly, there's technology that's required to reschedule our flight crews, so we have flight attendants, we have pilots, we have airplanes and once it gets behind, it's just difficult to get that back together so I think the opportunity is to improve on that process. It's called repair. It's complicated, but we definitely have some good opportunities there, you know, for the future.

QUINTANILLA: Gary, finally there's some commentary from some of the other carriers today about the holiday season, preparing for robust travel period. Are you seeing that kind of booking in Q4?

KELLY: Yeah, I think, you know, on the business side of things, you have the Delta variant, the surge in cases that occurred, you know, beginning back in June and then eventually that has an impact on air travel and it suffers so that wave has turned over and we've definitely seen some improvement in, in bookings there so yeah we're looking forward to a strong holiday season. And we just want to be very focused on offering a high-quality schedule and experience for our customers.

CRAMER: I want to go deeper on this weather issue. IBM has a weather product, the Wall Street Journal seemed to indicate that maybe it was not up to snuff. There are questions about whether you had spent enough money on IT during the 500 flight cancellation in June. Are you underspending on IT and have you over furloughed and therefore having trouble getting people back?

KELLY: All great questions. I think the answer is, you know, a very emphatic no, we're not underspending. We suspended investing in some of our initiatives early on when the pandemic first unfolded in March, but we very quickly got back on track once the CARES Act Payroll Support Program came through and made sure that we continue to make those investments. The two technology outages that occurred back in June were human error so it wasn't a lack of technological capability, it was simply, in one case, not adhering to a procedure. So, it happens to companies, you know, occasionally we just don't want it to happen very often and obviously every time something like that happens, we, we tried to learn from it. We've deployed new technology for reservations, we're in the process of deploying new maintenance, record keeping software that supports all of our aircraft, one of the largest projects we've ever undertaken, probably the largest deployment in the airline industry in history. So, we have wonderful technology, we have a wonderful technology department. They’re, they're very well resourced. I think what like a lot of companies, we definitely are having some hiring challenges. We're trying to get 5,000 people hired by the end of this year, we're about halfway there. But overall technology's in pretty good shape in terms of staffing and for the most part, our staffing challenges have moderated. I’d still like to have more cushion in the operation so we can absorb the kind of blow that we saw last Friday better.

CRAMER: Alright, thank you Gary Kelly, Chairman & CEO of Southwest Air. Good luck to you sir. Appreciate you coming on “Squawk on the Street.”

KELLY: Thank you sir. You bet.