Southwest "can handle two or three aircraft types"; "anxious to have answers this year" from Boeing

"It is inevitable that the next generation aircraft will be a different aircraft, whether we go with Boeing or Airbus or Bombardier," he told investors yesterday. "We don't want a lot of aircraft, but we can handle two or three types. The B717 [from AirTran] is new to us and we are excited to take up that challenge. It is a good aircraft for short-haul markets. The biggest question is what is the next generation B717 solution, but that is a long way out."

Despite the surprised reactions he drew during an earlier investor conference, the airline is already dealing with increasing fleet complexity with the acquisition of the B737-800 versus the 'classic' it has already operated. In addition, Mr Kelly reiterated his intention to keep AirTran's B717s.

When asked, in the face of a pressing need for more fuel efficiency, how he feels about the timeline for new, more efficient equipment, he said, "I'd like to be able to use the new engine technology as soon as possible. We are also under pressure to reduce green-house gasses and there is every economic argument that we need a solution sooner than later. Ten years is a long time to wait. I'll repeat what we've already said; we like the -800 in terms of size at 175 seats in our configuration but the -700 will continue to be the dominant mix in the fleet at 137 seats".

He added, "It remains to be seen where the aerospace industry is headed in terms of optimising the size of narrow-body aircraft. There are a lot of unanswered questions. We are working with Boeing and we are anxious to have some answers this year. We need to advance discussions with Boeing. There are some theoretical advantages in thinking about a twin aisle narrow body. Maybe it doesn't work as a 137 seater but does for 150 seaters. We just don't know enough about it yet but we are open to options."

For now, however, the company is concentrating on its as yet unapproved merger with AirTran and the monumental task of improving its technology platform to enable both international and codeshare flights. Southwest has encountered no unexpected barriers to a smooth integration with AirTran and plans are in place as soon as they are granted government approval.

Kelly rejected the idea of becoming "more legacy-like" by offering AirTran's two classes of service or joining an alliance. "There is an array of things we think about, but we want to be different and there is ample evidence that that means success," he said. "Our fundamental advantage is our low-cost structure and we've worked hard to maintain that. In the immediate term we will not be changing our boarding process or our open seating or single-class seating. We have first hand experience with an airline that does something different than we do and we'd be foolish not to look at that, understand it and update our view, but we have no desire to change single-class seating."

He reminded investors that despite the fact the gap between legacies and low-cost carriers is closing, there is still a huge gap between the two including the fact that 80% of Southwest customers flew nonstop historically and today its increase in load factor has been driven by increase in connecting passengers. He estimated that 75% of passengers go nonstop. "I don't think we'll push connections too far, but as far as joining a global alliance where the product is very different, I just don't know how that would work. We want a customized approach to very few numbers of codesharing partners over the next few years."

Kelly said Southwest is sticking with its original capacity guidance this year and having used the fare lever successfully, he does not think springing the capacity lever is necessary. "I feel like we are managing well in this environment so we don't need to change capacity at this stage," he said. "We've had six fare increases so far this year. That is a lot in 90 days. Traffic has held up and is more than strong so we are comfortable with capacity. You also have to remember our capacity is not fleet driven so much as it is driven by utilization and our bags fly free has fueled a lot of success."

See related report: US airlines increasing capacity for 1Q2011, but cutbacks seen beyond

Finally he said it was inconceivable that the AirTran network would not undergo changes especially taking on 138 aircraft at USD100 per barrel crude oil. "Our primary focus will be bringing those aircraft on board and integrating them into the Southwest system," he said.