Southwest Airlines finds itself at a crossroads

DALLAS — To say that Southwest Airlines has undergone profound changes during Gary Kelly's decade-long tenure as CEO there would be something of an understatement.

There's the company's revamped frequent-flier program.The carrier has undertaken a new focus on courting business travelers, including expanding to the big-city airports those fliers prefer. Sustained rapid growth has seen Southwest overtake rivals such as American and United to become the USA's top carrier of domestic passengers. And, starting Tuesday, the company's first-ever foray into international flying begins.

"A lot has changed in a 10-year period," Kelly said during a recent sit-down interview at Southwest's headquarters in Dallas. "And I don't think it's overly dramatic to say it's been the most transformative period in our history."

That transformation also has left Southwest at something of a crossroads. For much of its 43-year history, the carrier cut its teeth as a scrappy upstart looking to carve out market share against established legacy rivals including American, Delta and United.

Now, buoyed by a fleet of nearly 700 Boeing 737s, Southwest flies more passengers within the USA than any other carrier. The carrier flies to every major city in the lower 48 states except Cincinnati.

"This isn't the Southwest of old," says Henry Harteveldt, a San Francisco-based travel analyst at the Atmosphere Research Group. "It's a much more mature Southwest, a much more complex Southwest. This is an airline that's flying coast to coast."

Kelly, who was promoted to CEO in July 2004, acknowledges that Southwest has been thrust into something of a different role, but he's also quick to assert that despite Southwest's growing prominence, the carrier's ethos remains different from its rivals — which still dwarf Southwest in size when international traffic is counted.

"I think that's more of a mindset when you compare us to the largest airlines in the world," Kelly says. "The biggest three are the United States carriers that we compete head-to-head with. They're twice our size. They are gigantic. There's no doubt that we're still the little guy in that sense."

Kelly says Southwest has balanced its growth by trying to maintain its folksy, down-to-earth image.

"What is different, really, is that beginning in the mid-90s — compared to the '80s — we became a nationwide brand with enough size to justify nationwide advertising," Kelly says. "And we have stuck with it. ... So we do have a personality. I think that does come through very strongly with our messaging and our advertising."

Southwest's growth also has led some industry observers to suggest that the company's corporate culture — long lauded as one of the best — has begun to fray at the edges as the company becomes ever larger.

Harteveldt says the company has been able to maintain such a strong culture because "Southwest places such an emphasis on the types of people they hire."

But "they have a big challenge in keeping the culture alive," he says. Harteveldt believes the company's workers — notably the frontline "troops — aren't exactly motivated" they same way they have been over the carrier's history.

Kelly says there's "no truth" to that.

"We've never had a layoff, much less asking our employees for pay cuts or benefit cuts," Kelly says. "It's a great place to work."

He does acknowledge that there's been "some rhetoric" by unions around the company's ongoing contract negotiations with several of its labor groups.

"Labor negotiations are always vigorous and there's always rhetoric," Kelly says. "That's not surprising and there's nothing new about that. It's certainly not new at Southwest."

Among the items that are new at Southwest: An increased focus on longer flights, part of what's leading to Tuesday's launch of international flights.

"We've been making a pivot over the last five to 10 years to be less dependent on short-haul markets and prepare the airline better for flying longer distances and longer times for our customers," Kelly say. "So we've changed our frequent-flier program. We've changed our boarding process. And we've offered more choices for business customers."

One thing that Kelly says won't change as the company grows is its no-fee stance for such things as checked baggage or ticket changes.

"We have absolutely no plans to charge, especially for bags," Kelly says. "Bag fees don't fit. I won't promise that into infinity, I don't think that's fair. But we have absolutely no plans to ever charge for them, and I hope we never do."

Another thing that won't change is the carrier's focus on fares — which Kelly acknowledges have risen along with fuel costs.

He points to "the dramatic increase in fuel prices" that hit the U.S. in 2008, saying fuel has since gone "from about 10-15% of our spending for operations … to 35% of our spend. And that's forced fares up."

Overall, though, Kelly expects Southwest to continue its transformation this year. Its first international flights begin Tuesday — when Southwest-operated planes will take off to three international destinations in the Caribbean. Southwest could eventually add as many as 50 destinations outside the lower 48, from Canada to the "northern tier" of South America — though he cautions that could take a decade or more.

Elsewhere, the carrier is expected to wrap up its integration with AirTran before Dec. 31. And, in October, the carrier will be able to begin flying long-haul flights from its "home airport" at Dallas Love Field, something it will be able to do for the first time thanks to the phase-out of legislation that had restricted flight options there. And Southwest will beef up its presence at Washington's Reagan National Airport, something it was able to do by successfully bidding for slots given up by American Airlines as part of its merger with US Airways.

"We've got a lot of things coming together this year," Kelly says.