Mad Money

Southwest Airlines CEO: Ramping up the competition

Fly with LUV?
Fly with LUV?

Last week, when Jim Cramer spoke with American Airlines' top exec on "Mad Money," he had no idea that the interview would send the entire airline group plummeting the next day. Whoops!

That was exactly what happened when Cramer spoke with American's CEO Doug Parker, who shared his concerns regarding the large amount of capacity being added into the industry by his competitors. Why was he worried? Because excess capacity means bloody competition in the airline industry.

"Some airlines are talking about 8 or 10 percent growth rates. They can't believe they have that kind of demand growth, so what they must believe is that at these economics they can fly more than they used to fly. Look, I don't think that's right," Parker said.

Previously, Cramer stayed away from the airline stocks and would not touch them with a 10-foot pole because the competition merely led to endless price wars and bankruptcies. However, a few years ago a wave of merges and acquisitions took place, finally allowing airline companies to earn a consistent flow of money.

But if airlines are now adding too much capacity, Cramer thinks this means the airlines could be reverting back to the old days of fierce competition. He suspects this is the reason why the group has been crushed in the past week and half.

Gary Kelly, CEO of Southwest Airlines
Jason Janik | Bloomberg | Getty Images

On the same day of the American Airlines interview, Southwest Airlines CFO Tammy Romo confirmed that her airline's capacity would increase by 7 or 8 percent this year. This sent the stock down 9 percent in a single session and it has gone lower since.

Do investors need to be worried about increased capacity, or is this an overreaction to the news? To find out, Cramer spoke with Southwest Airlines CEO Gary Kelly.

"Our competitors are always complaining about Southwest, and we're just going to continue to focus on running a great airline… So our plans have not changed," Kelly said.

The CEO confirmed that the company will stand by its plan to increase seats in 2015, though he stated that almost everyone in the industry is planning to add more seats than Southwest.

"We are very sensitive to what our investors think about capacity growth at Southwest Airlines, and I acknowledge that is something that they are concerned about. It is obvious here over the last week," Kelly added.

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In his perspective, it seemed as though before last week everyone was fine with the company's plan to add capacity and he considers that plan to be sensible. He plans to grow the company in the long-term to be a low cost provider, but does not think it can grow any faster than GDP.

Looking at the fleet growth over the past four years, Kelly pointed out that it has literally been flat as is the available seat-mile growth.

"Our available seat-mile growth will be a little bit more than our seat growth, but it will be around 7 percent for this year; and likewise we will manage aggressively to the low end of that range for next year. Much of the growth in 2016 is simply carryover from 2015," he added.

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