Southwest Airlines's CEO Gary Kelly says jet-fuel prices top his list of concerns for 2011.The price of jet fuel is high on Gary Kelly's mind. During a trip to New York this week, where he met with aviation executives and airline analysts, the chief executive of Southwest Airlines (LUV) called jet-fuel costs his greatest concern for next year.

Representing one-third of Southwest's total expenses, fuel costs are a major factor for the consistently profitable low-cost carrier. They have "the potential to change rapidly and to very rapidly destroy profitability," Kelly (pictured) says. "It is very, very difficult to respond in the short term to a fuel-price spike."

Southwest hedges its fuel purchases: Kelly says the carrier has contracts to buy about half of its fuel through 2014 at prices "roughly equivalent to the current market, somewhere around $90 per barrel." In the past decade, similar hedging activity has saved Southwest $4 billion, equivalent to the cost of 125 airplanes, Kelly adds.

"It's All Within Our Grasp"

Southwest, which flies more passengers than any other U.S. carrier, also has cut its fuel expenses by retiring less efficient aircraft. It also uses blended winglets -- devices that attach to wingtips to reduce drag, thereby reducing fuel consumption -- and electric, instead of fuel-burning, ground equipment. And it has changed pilots' flying habits to get higher efficiency.

A proposed modernization of the air-traffic-control system, which the airlines back but hasn't yet found funding, could reduce the industry's fuel usage by 15% more, Kelly says.

"All of the tools are there, they simply need to be implemented, deployed. . .it's all within our grasp," he says. "We put a man on the moon. We ought to be able to modernize our air-traffic-control system." Kelly also supports the use of alternative fuels, which he called "a much longer undertaking, but in the long run, the right thing to pursue."

From Hawaii to Bermuda

As it tries to save fuel, Southwest also is expanding its routes. In a speech to the Wings Club, an aviation group, Kelly announced that Southwest plans to substitute 20 of the 737-700 aircraft it has ordered from Boeing (BA) with longer-range 737-800s. The first delivery of the 737-800s is scheduled for March 2012.

The longer-range plane will enable Southwest to extend its route network to Hawaii, Alaska, Canada, Mexico, Central America and the Caribbean. With its purchase of AirTran (AAI), Southwest also will inherit a Bermuda service beginning next spring, if the merger is approved. The company is now upgrading its reservation system to accommodate all the new international flights.

More immediately, Kelly says Southwest, which obtained slots at Newark Liberty Airport in New Jersey as part of the approval process for the Continental Airlines (CAL) merger with United Airlines, on June 5 will considerably increase its Newark service, which begins March 27.

The carrier, which will initially serve the Newark market with six daily nonstop flights to Chicago Midway and two daily nonstop flights to St. Louis, in June plans to add three daily nonstop flights to Baltimore/Washington Airport and Denver, as well as two daily nonstop flights to Houston Hobby and Phoenix Sky Harbor. Southwest already serves LaGuardia Airport and Long Island MacArthur Airport in New York.

At an event in Bryant Park in New York this week, Kelly indicated that Southwest might one day serve destinations further afield than North and Central America. "Eventually it is an idea that we have, to continue expanding to Southwest Asia, Europe, South America," he said. "But at this point in time, we've got a lot of work to do to integrate AirTran Airways into Southwest first, add the 800 into our fleet second and then implement new reservations technology that will create that international capability. So maybe one of these days."


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strother215j

Only a person that has had to deal with the jet fuel issue knows what the deal is, and it doesn't come cheap. That fuel you can't tell it from water, it is the cleanest fuel you will see. Though carriers have to contract on their fuel, the price doesn't come cheap, and just getting their daily needs is hard enough. I have spent many days looking for a load of fuel to meet the need. Always hearing an excuse why the loads ordered are not met. If the air carriers do not cover the increases, then you will be sitting in a terminal, and no way to get there. Believe what you may, but those planes don't fly on air. Some loads are refuse by microscan as there is less than a themble of contaminant in the fuel. That is one reason the price is so high. Next time you fly don't complain about the price of your ticket.

December 17 2010 at 1:22 PM Report abuse rate up rate down Reply
KSMITHSPECTRUM

You don't need to worry. The President has assured us that the cost of fuel will go down with his new make America energy Free Act. I find a little problem with this to be free means that you provide for your self. HUH he must be meaning that we can proiduce fuel here in the US. With a great Idea. I knew I liked this man. Go Barrack, Drill baby drill!

December 17 2010 at 12:29 PM Report abuse rate up rate down Reply
dpaustex

I love the uneducated (and just plain stupid) people on here spouting off about oil. The LAST time the U.S. did something productive about oil was in 1976. Since then, our imports have steadily risen, while domestic production has gone down (due to fields being depleted). Bottom line, oil fields are being run dry, and you can drill all you want, and can't catch up with demand of U.S. - and now China. Add less than 1/2 of 1% to our total availability of oil - by drilling offshore, won't make much difference at all. It WILL increase the risk of another major spill - whose impacts will be felt for a generation (at least). Brazil has enough deep water reserves to be the 5th largest producer in the world - but they are in water over 5000 feet deep, and then under another 6500 feet of rock-hard salt. I am so sick of Obama being the boogey man for everything, with absolutely no basis in fact. Case in point, the term "government run Obamacare" was named biggest lie of the 2010 year by several organizations.

December 17 2010 at 12:14 PM Report abuse +2 rate up rate down Reply
dpaustex

I love the uneducated (and just plain stupid) people on here spouting off about oil. The LAST time the U.S. did something productive about oil was in 1976. Since then, our imports have steadily risen, while domestic production has gone down (due to fields being depleted). Bottom line, oil fields are being run dry, and you can drill all you want, and can't catch up with demand of U.S. - and now China. Add less than 1/2 of 1% to our total availability of oil - by drilling offshore, won't make much difference at all. It WILL increase the risk of another major spill - whose impacts will be felt for a generation (at least). Brazil has enough deep water reserves to be the 5th largest producer in the world - but they are in water over 5000 feet deep, and then under another 6500 feet of rock-hard salt. I am so sick of Obama being the boogey man for everything, with absolutely no basis in fact. Case in point, the term "government run Obamacare" was named biggest lie of the 2010 year by several organizations.

December 17 2010 at 12:14 PM Report abuse +1 rate up rate down Reply
independick

Rentech (RTK) is the company pioneering renewable jet fuel. It can also be made from coal. At some point the economics of imported oil will force us to produce it here. (that includes offshore drilling). We shouldn't be exporting our money.

December 17 2010 at 10:07 AM Report abuse +2 rate up rate down Reply
2 replies to independick's comment
muenft

The obama administration is stopping or delaying drilling and oil leases. This drives up the cost of oil. If you drive up the cost of oil all the expensive alternatives the administation is pushing become viable. Problem is, you ae competing with the rest of the world which has a much cheaper cost-of -doing business and it drives our economey into the ground. What does it matter when the arabs and chnease have all our money and we have created a green world for our new masters.

December 17 2010 at 11:39 AM Report abuse -1 rate up rate down Reply
muenft

You can probalby make jet fuleout of beer or vodka but its the cost of making it from coal, beer, weeds, garbage, thats impotant. The rest of the wold is using oil and we will destroy our makets if we use a substitute that cost two or three tiems as much..

December 17 2010 at 11:45 AM Report abuse rate up rate down Reply
procompdynamics

With the incomming repubs it will get worse as the speculators can run wild again.

December 17 2010 at 9:28 AM Report abuse +3 rate up rate down Reply
2 replies to procompdynamics's comment
tj1108

It was a republican President that lifted the offshore drilling ban when oil was at $150/bbl (he should have done it way before).Oil plummeted to $36/bbl because of it. It was a Demacrat President that put the ban back in place and oil has been rising ever since. As supply decreases the speculation will ramp up again and kill any chance of the economy rebounding.

December 17 2010 at 11:29 AM Report abuse +3 rate up rate down Reply
muenft

The democratic administration is stopping the drilling of oil on our coast and other places in the U.S. We have to buy oil from the arabs and others..uless you are givingup your car and walking to work. Not that you willhave a job for long

December 17 2010 at 11:41 AM Report abuse rate up rate down Reply