By Julie Johnsson | Tribune staff reporter
Chicago figures large in Southwest Airline's plans to expand overseas for the first time. In excerpts from a late June interview, Southwest CEO Gary Kelly maps out his international strategy and explains the complex fuel hedges that have given his carrier the financial muscle to expand while other airlines contract.
On Tuesday, Southwest announced plans to code-share with Canada's WestJet. Kelly, speaking earlier, wouldn't name the low-cost carrier's first overseas partner, but described its likely impact on Midway.
KELLY: Chicago is going be one of the No. 1 locations that we will want them to fly to, i.e. Midway. So, it may not be a Southwest flight, but you're going to see more flight activity and we'll be connecting more passengers to Chicago at a minimum.
It's a hub-like effect, without us having all the trappings and inefficiencies of a hub-spoke system. So you could have many more destinations being added to Midway by one or two code-share partners. I would see Chicago being an attractive destination from Hawaii -- ATA flew there -- from Canada, certainly, Mexico and probably the Caribbean as well. So, there could be a lot of action, and not just with Southwest flights.
Now, eventually, we want to add Europe and Asia as code-share destinations. We can't do everything simultaneously, so we'll pace all this out. We've made the near-international markets our first priority. And to come online in 2009, maybe some of it will spill into 2010. And then we don't have any efforts under way beyond that, but at some point here we will and with a little luck maybe we can add Europe and Asia in 2010, 2011
We're not just thinking that we will code-share internationally. We will very well eventually begin to think about our own flights to these entities. I don't know if Hawaii will ever make sense for us. But certainly Canada, Mexico and the Caribbean ought to be eligible in our own route planning. But it's an added layer of complexity and change and investment compared to where we are.
Numbers-crunchers at Southwest Airlines were already studying how to hedge fuel costs when Kelly joined the airline as controller in 1986. Kelly, who was named CEO in 2004, discusses how he convinced the airline's board to start hedging, then to double down its bet.
KELLY: If you get a mortgage, you're required to have homeowners insurance. That's all this is. It's a little different form, but it is insurance against catastrophic rises in energy costs.
I remember very vividly when Iraq invaded Kuwait. We were paying about 57 cents a gallon for energy [jet fuel] at the time. And it went to 90 cents a gallon in pretty short order. By January of 1991, the advent of the war, we had a program in place. It was primitive. But from that point forward, we've had our "insurance" policy in place every year. We have never lost money with our hedges.
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