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Key to Southwest earnings beat: Don’t 'nickel and dime,' says CEO

Southwest Airlines CEO Gary Kelly said Thursday his company's secret to standing out from the competition is simple: Don't nickel and dime your customer.

Kelly spoke after Southwest reported earnings that set new company records for first-quarter profit, operating income and free cash flow. The airline came in 4 cents above estimates with adjusted quarterly profit of 88 cents per share. Revenue also beat forecasts.

To be sure, low energy costs have given airlines a cushion. Southwest reported its fuel costs before hedging fell about 30 percent from a year ago and were down 3.3 percent on a hedged basis.

Shares of Southwest were 2.4 percent higher in premarket trading Thursday.

Kelly attributed his company's success in part to its policy of letting customers check two bags for free and waiving change fees when travelers alter their flight details.

"We don't nickel and dime our customers," he said. "We call that 'transfarency,' and I just think that that's really struck a chord," he told CNBC's "Squawk Box."

Kelly acknowledged that Southwest had considered raising fees when fuel prices were considerably higher, but he said the company's revenue results from the current policy show its approach is working.

Southwest does charge extra for premium services, such as early bird seating. Kelly said that was a far cry from forcing customers to pay for bags and itinerary changes.

Also underpinning the earnings results, Southwest's developing markets are maturing rapidly and producing "very nice gains," Kelly said.

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