Kelly, in an interview with The Associated Press, said air fares aren't going to rise, so carriers will have to learn to live with lower costs. Even for Southwest, the leader of low-cost airlines, there is room for cost-cutting, he said.

Kelly, 49, was named last month to replace James F. Parker, 57, who unexpectedly announced his retirement after only three years as CEO.

In his first days on the job, Kelly chatted with Wall Street analysts and reached out to Southwest's labor leaders. He said his top priority will be keeping employees happy — even as he works to keep costs, including salaries, under control — and hopes that will lead to better customer service, higher ticket sales and grateful shareholders.

As the airline's longtime financial wizard — he was named chief financial officer in 1989, at age 34 — Kelly is eager to dispel any notion that he might be unfamiliar with the operations side of the business. He said that as CFO, he spent more time on operations and customer-service initiatives than purely financial ones.

"You can't just talk about cost and not understand how the operation works," Kelly said. "Yes, I have a finance background, but I'm not going to focus on cost to the exclusion of everything else."

Then, Kelly conceded that his first order of business is reducing costs.

Southwest's cost per mile is much lower than older airlines — about 20 percent below Fort Worth-based American Airlines, the largest U.S. carrier — but rose in the first six months of this year while everyone else was cutting costs.

Controlling costs is unavoidable, Kelly said, because customers have spoken: They won't pay higher fares. He said Southwest will cut costs by increasing efficiency.

Southwest is using technology such as the Internet and airport kiosks to replace ticket agents and call-center operators. It is also tinkering with changes in purchasing and payroll practices to shave a few more dollars.

Beyond that, Kelly indicated that future pay raises for employees will be more modest than recent deals, such as a tentative contract that would give flight attendants an average 31 percent raise over its six-year term. The attendants' deal, with raises retroactive to 2002, was a factor in Southwest's second-quarter earnings falling short of Wall Street expectations.

"We've had some wage rate inflation over the last year or so that has been higher than normal," Kelly said. "We're pushing the boundary of what we can afford with our wages."

Kelly said he won't personally be involved in the negotiations over future contracts. That's in contrast to Parker, who personally handled all of Southwest's labor contracts for a decade until this spring, when he stepped away from the increasingly bitter talks with the flight attendants. Kelly said the airline has other people who are more talented at that sort of work.

Southwest has been the only carrier to remain profitable since 2001, making it a favorite on Wall Street. However, the shuffle in upper management did make investors uneasy; Southwest's stock has fallen about 5 percent since Kelly succeeded Parker.

Industry analysts pointed to the steadying presence of Herb Kelleher, the 73-year-old co-founder and chairman, and said they expect little change in Southwest's strategy or success because of the new CEO.

"It's not going to change anything — Gary has been there 18 years," said Michael Boyd, an airline industry consultant in Evergreen, Colo.

Airlines consume huge amounts of fuel every day. Fuel is the second biggest expense for U.S. carriers, behind only labor costs.

To smooth out volatile prices, airlines sometimes buy options that let them purchase fuel far in the future at set prices. The practice, called hedging, is an insurance policy against sharp price increases. Kelly has hedged aggressively in recent years.