WHEN: Today, Thursday, January 23, 2020
WHERE: CNBC's "Squawk on the Street"
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Southwest CEO Gary Kelly on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today, Thursday, January 23rd. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2020/01/23/watch-cnbcs-full-interview-with-southwest-ceo-gary-kelly-on-fourth-quarter-earnings.html.
All references must be sourced to CNBC.
JIM CRAMER: Southwest, symbol love, out with its latest quarterly results. The airline continuing to face pressure, not from their operations because they're the best operator in the business, but because Of the 737 Max fleet. So, joining us now exclusively, Southwest Chairman and CEO Gary Kelly. Gary, great to see you. Sorry about this thing just not making your year so far. You were angry last time. Do you feel a little more ameliorated now?
GARY KELLY: Oh, no. No. You know, I think it's three months on and we're still talking about the same thing. And so, no, there's -- on that point there's nothing to be happy about. I feel like there's been progress made. But not enough yet. We need to get this thing done and get the Max back up in the air.
JIM CRAMER: Gary, I've got to tell you, I think I took about 20 flights in the last four weeks. All everybody wants to talk about is -- if this is the 737 Max six months from now, I'm not flying it. Gary, how do you reassure people when the longer this takes, the more worried the consumer is?
GARY KELLY: Well, it's -- first of all, the airplane needs to be – it needs to perform. And we need to be comfortable that the airplane is safe. We need to feel that our pilots are adequately trained. So, all that needs to be very, very carefully vetted at the right time. That's number one. Number two then, we need to be transparent, we need to communicate, Boeing needs to step up and communicate and the FAA has a role here. Of course, we'll rely heavily on our pilots as a part of that communication campaign. But we need to get the airplane back in the air. We need to convince people by its performance that they can be confident in it. We are not going to operate the airplane unless we are confident. We've established a lot of trust with our customers over a near 50 years and we're certainly not going to squander that now.
JIM CRAMER: Yeah, it's important to point out that a pilot would not want to go into something that they were unsafe in. But this brings up another issue. What we're hearing from Boeing, and they have been very cryptic, you almost have to read the tea leaves the way they used to be or the Kremlin Wall, there was a story that Dennis Muilenburg felt this is the same plane as the old planes so you didn't need to put pilots in the simulator. Obviously, your pilots have thousands of hours. I'm sure they can handle anything. But we do not have that across the board. Was Muilenburg wrong to say, 'You know what, we don't need new training'?
GARY KELLY: I don't think so. You know, but again, in fairness to your question, and it's a legitimate question, I just know Southwest Airlines. I know our pilots. We hire very experienced pilots. On average they have 6,000 hours of experience before we even hire them. So, they are expert on the 737. It is the only airplane that we fly. We're the gold standard when it comes to hiring our flight crews, our training, our procedures, all of that. So, I'm very confident in that, as are our pilots. What other airlines do, as you all would understand, I'm not knowledgeable. And, you know, others will have to make that assessment. But as far as our company and our pilots, is there question, is there a need for additional simulator training? Our pilots tell me no. Is additional training harmful? Absolutely not. But it needs to be fact and data driven in terms of setting those requirements and not just doing things that make us all feel good. And, you know, we're very comfortable with the airplane. We have almost 80,000 hours of flight experience in it. We have no problems with the airplane. And we're just looking forward, again, to getting it ungrounded and getting to work on getting it back in the air.
DAVID FABER: Mr. Kelly, you know, I'm curious, have you had a conversation with or heard from David Calhoun since he took over as CEO. And if so, can you share at all what that conversation was like?
GARY KELLY: Well, I know David well. David is a friend. I've known him since his GE days, you know, 20 years ago and have kept up with him over the years and consider him an outstanding business leader, and just a top-notch executive. So, absolutely we've had conversations. I had conversations with him when he was lead director at Boeing and then, of course, when he was Chair. I would never want to share those conversations because, you know, they were private conversations. But, you know, it's certainly the things you hear from him publicly, I agree with. I believe in him. I believe in Boeing. I've said that before. And they're an important company for our country. And they'll get these things addressed. They've made a lot of mistakes. They have got things they need to fix. But I think he's the right man at the right time.
CARL QUINTANILLA: Gary, last time you were with us, we talked about the prospect of maybe the board considering becoming a customer of a manufacturer other than Boeing in the future, whether you would consider that one day. A lot of people were skeptical given the cost that would involve, and others suggested 'Well, maybe Gary is just posturing for better prices.' How serious were you? How serious are you?
GARY KELLY: Well, we're -- obviously it has those posturing benefits, but that's not who we are and that's not what we're doing. No, we're serious. And I think if you were to turn the question around and we hadn't shared that that was our view, you would say 'Why aren't you, Southwest, looking at some alternatives now?' I think it's our duty to do that and it's a serious endeavor and we need to give it a good look. Now is not the time to be focused on exploring that question. Right now, we need to be laser focused on running a great operation, taking great care of our customers and getting the Max back into service. So, at the right time I want to take a good look at that. But yeah, any competitor to Boeing has a real challenge. They're going to have to come with some solutions. A timeline that makes sense for us, a product that meets our needs and the price has to be right and factor in that there's an extra cost involved with operating multiple fleets. The other thing to remember is that we cherish our low-cost position. We cherish our low fare brand. And so, all of that has to fit. And it just remains to be seen whether that problem can be solved.
CARL QUINTANILLA: You don't have a lot of international exposure, but airlines as a sector are under pressure on this Coronavirus.
GARY KELLY: Yeah.
CARL QUINTANILLA: We've been through scenarios like this before. I wonder how you see this one playing out, at least given the information we have right now?
GARY KELLY: Well, and your point is a good one, which is this is not new. We've been here before going back to the SARS epidemic, gosh, 15, 20 years ago. So, we know what to do. We have the right protocol. You're correct, we don't have exposure to Asia. But that doesn't mean that we don't have exposure here. So, we're working with the CDC, all of our operations folks are poised to step up our protocols if we need to. But at this point we haven't made any changes in terms of our operations.
JIM CRAMER: All right, Gary. This is a great time for this country in terms of growth, in terms of business. I've got to ask you, how much could you have made if it weren't for this?
GARY KELLY: Well, Jim, I'm glad you asked. You know, going back a year ago, I shared at the time that we were so excited about 2019. It was really positioned to be our best year ever. We had some cost pressures, and as you all know from our release, we came in under budget. If you take into account the effect of the Max, our costs were only up 2.7%. And that was with a lot of different inflationary pressures. So, that was good. But straight answer, you know, if you just look at the effect on our earnings that the Max penalty imposed, the 828 million that we shared, the estimate, that means our earnings would have been 28% greater. You know, that's many billions of dollars in terms of shareholder value, just using the multiple that we have. So, we had a near record fourth quarter as it was. But even with that penalty, we had record earnings per share on a non-GAAP basis. Earnings would have been up a third compared to a year ago. It would have easily been an all-time record. So yeah, that is frustrating. What is concerning to me, though, is the fact that we weren't able to grow. We're losing share. Had we maintained our normal pace, we would have earned another six or seven million customers in 2019. And so, yeah, we don't want this to go on indefinitely. It won't. We'll get the Max back. We'll get it back into service and we'll get back on our growth track. And the nice thing is the economy is solid. We have wonderful opportunities to grow. And we're anxious to get at it.
JIM CRAMER: Talk about buying opportunity the closer we get. Gary, one last thing. ESG, we have to ask, it's just right to the ask, what can an airline do to cut down its emissions?
GARY KELLY: Well, first of all, Jim, it's a very important topic. It's something that the industry -- the airline industry needs to do more over the next -- certainly the next 10 to 20 years. But you can reduce your consumption per trip, which is helpful, and the industry has done that. Consumption over the last three decades has been cut in half. So, a very significant improvement there. The Max is important in that regard because there's a 15% reduction in fuel burn and carbon emissions, so that's important. But ultimately, I think the most tangible thing that the industry needs to do and we need to work with the energy industry is alternative fuels. Alternative fuels is the answer for air transportation, and they need to be commercially available in adequate supplies, commercially available in terms of the right pricing, and there just needs to be more focus and more effort on that. Carbon offsets are fine. But in the ending, you know, there's only so many offsets available in the world. So, that's not going to solve the problem. We need to get at fossil fuel replacements and the technologies there. We have some alternative fuels that we use. But right now, it's a hobby. Again, as a country we need to get serious on that and get going.
DAVID FABER: Mr. Kelly, before we let you go, if we can come back to the Max one final time here. I mean, I was struck by those numbers you shared with us in terms of potentially a 28% increase in earnings that would have been available to you. You've got a product that is not working that was sold to you or you bought. I wonder to what extent do you go back to Boeing and say, you owe us a lot more money in terms of what we've lost and the opportunity we've lost here?
GARY KELLY: Well, those discussions will absolutely happen. And we shared that in the press release. Now again, to be clear, our earnings -- we estimated our earnings would have been say 28% higher and we settled with Boeing on that. And I don't think investors have paid enough attention. Because at least from the balance sheet, from the cash perspective, I'm not going to disclose exactly what our settlement was, but, you know, we have the financial resources as if we had the Max in operation for 2019. So, now you fast forward to 2020 and adding the issues that you bring up, we'll absolutely be talking to Boeing about that. Because it is a setback for us and we are going to have to work hard to catch up. We'll need Boeing's assistance to do that.
JIM CRAMER: Gary, thank you so much for coming on. You are always a straight shooter and it is much appreciated.
GARY KELLY: Thank you all for having us. And appreciate all that you all do. You all have a great show.
JIM CRAMER: Okay. Thank you so much. Gary Kelly, Southwest Air.
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