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Southwest Airlines Co. (LUV)
Q1 2014 Earnings Call
Southwest Airlines Co. (LUV) Q1 2014 Earnings Call
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CORPORATE PARTICIPANTS
Marcy Brand Director of Investor Relations, Southwest Airlines Co.
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co.
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co.
Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co.
Linda B. Rutherford Vice President-Communications & Strategic Outreach, Southwest Airlines Co.
................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Michael Linenberg Analyst, Deutsche Bank Securities, Inc.
Savanthi N. Syth Analyst, Raymond James & Associates, Inc.
Glenn D. Engel Analyst, Bank of America Merrill Lynch, Pierce, Fenner & Smith, Inc.
Hunter K. Keay Analyst, Wolfe Research LLC
John D. Godyn Analyst, Morgan Stanley & Co. LLC
Joe W. DeNardi Analyst, Stifel, Nicolaus & Co., Inc.
Thomas Kim Analyst, Goldman Sachs & Co.
David Fintzen Analyst, Barclays Capital, Inc.
Jamie N. Baker Analyst, JPMorgan Securities LLC
Terry Maxon Aviation Writer, The Dallas Morning News, Inc.
Andrea Ahles Business Reporter, Fort Worth Star-Telegram
Aaron Karp Senior Editor, Air Transport World
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MANAGEMENT DISCUSSION SECTION
Operator: Please stay on line, we're about to begin. Welcome to the Southwest Airlines First Quarter 2014
Conference Call. My name is Tom, and I'll be moderating today's call. This call is being recorded and a replay will
be available on southwest.com in the Investor Relations section.
At this time, I'd like to turn the call over to Ms. Marcy Brand, Senior Director of Investor Relations. Please go
ahead, ma'am. ................................................................................................................................................................................................................................
Marcy Brand Director of Investor Relations, Southwest Airlines Co.
Thank y ou, Tom. Good morning, everyone and welcome to today's call to discuss our first quarter results. Joining
me on the call is Gary Kelly , our Chairman, President, and CEO; Tammy Romo, Senior Vice President of Finance
and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer, and President of AirTran Airway s;
and Mike Van De Ven, Executive Vice President and Chief Operating Officer.
We will begin with opening remarks from Gary followed by Tammy providing rev iew of our results and our
current outlook. We will move to the Q&A portion of the call following Tammy 's remarks. Please be advised that
today 's call will include forward-looking statements. Because these statements are based on the company's current
intent, expectations, and projections, they are not guarantees of future performance, and a variety of factor s could
cause actual results to differ materially .
As this call will include references to non-GAAP results, excluding special items, please refer to this morning's
press release and the Investor Relations section of southwest.com for further information regarding forward-
looking statements and reconciliations of non-GAAP results to GAAP results.
I'll turn the call now over to Gary for opening remarks. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co.
Thank y ou, Marcy and good morning every one and thank y ou for joining us. Our first quarter results of $126
million were excellent. I'm very pleased. I'm very happy for all of our Southwest people. They've worked very hard
to get us to this point and I am delighted to see them rewarded for their efforts.
Demand was very strong and very steady, and resilient you might say considering the extreme weather and all the
flight cancellations and we're very grateful to our customers for hanging in there with us as well. The bad wea ther
definitely cost us, but we still managed to stay on plan. Fuel prices continued to be stable, with some help from
our fuel hedging program and currently we expect fuel price stability to continue with modest hedging protection,
at least, for 2014 at about 20% coverage.
I'm very pleased with the progress on our five strategic initiatives. Starting at the top All -New Rapid Rewards is of
course up and running and very smoothly. And in my opinion, our folks are delivering the best frequent fly er plan
in the business and it is exceeding our expectations. Next is the 7 37-800. We're now up to 54 units in the fleet. It's
delivering high load factors, very strong revenues, and of course, lower unit costs, so very pleased with that
initiative.
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Third is the rest of our fleet modernization. It's very much on track. The Evolve seating retrofits were completed
last y ear and those aircrafts are also delivering the added revenues at a lower unit cost. The AirTran 7 17
retirements are underway, gradually being replaced by AirTran 737s in the Southwest. This too significantly boost
revenue per trip for really the same if not lower cost per trip. And then, finally , we're continuing the accelerated
retirement of the 7 37 Classics. All combined, these fleet activities are pr oviding a boost to our fuel efficiency gains
as well.
Next, we completed the first phase of our reservation sy stem replacement with the on -time launch of our new
international reservation sy stem that was done on January 27 , and even more satisfactory , it's performed
flawlessly .
And finally , the last y ear of the AirTran integration is right on track. Aircraft remained transitioned out of AirTran
and effectively into Southwest. Flight crews and dispatchers are transferring into Southwest at the same rate.
Published flights are rapidly coming down in the AirTran brand and coming up in Southwest Airlines. The
commercial aspect of the integration will be done by year end, and we'll have some wind down activ ities that will
spill into 2015, but all those should be inv isible to customers.
We'll launch more flights from LaGuardia, Reagan and Love Field as planned. LaGuardia and Reagan slots of
course resulting from the AA divestitures and then the Love Field expansion is due to the repeal of the Wright
Amendment. And then next year we'll launch more international flights and out of our new international terminal
that's under construction at Houston Hobby. So a lot of things going on in 2014, and they 're clicking right along.
We're working on our 2015 plans. We have a desire to grow modestly next year based on the results that we expect
for 2014. We're on track to achieve our return on invested capital target for 2014. And of course as usual that
assumes no change in economic fuel price or cost trends.
But assuming we keep the fleet flat next y ear or roughly 695 aircraft, given the large number of out -of-serv ice
airplanes that are coming back into serv ice in 2015, in addition to the up -gauging effect of trading out 7 17 s for
7 37s, as well as adding 7 37-800s, that would increase our seat capacity next y ear in the 2% to 3% range. But until
we report otherwise y ou should continue to assume a flat fleet for 2015, and that will allow for meaningful growth.
Our balance sheet is in superb shape. It should strengthen this y ear, as we continue to produce strong cash flow
and pay down debt. At the same time we've continued to reward our shareholders with share repurchases and
increased div idends. And our liquidity is exceptionally strong, supporting these balance sheet moves.
So in short a great quarter and especially considering the weather, the integration drags that continue, and the
high percentage of developing markets. So I'm very, very pleased to be here with y ou all this morning. And now I
want to turn it over to Tammy Romo, our CFO. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co.
All right. Thank y ou, Gary , and thanks to every one for joining us today . I'll begin with a quick summary of our
overall results. And then I'll jump into the revenue and cost trends.
As Gary said, our first quarter net income excluding special items was a record $126 million, which was $0.18 per
diluted share. And that exceeded First Call consensus of $0.16. This was a significant improvement over our first
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quarter last y ear's $53 million, which was driven by improved performance each month of the quarter, especially
March, which was a record profit performance. Our first quarter GAAP net income was also a record $152 million.
Operating income excluding special items also set a first quarter record of $242 million, which was a stellar
performance especially considering the estimated $50 million reduction resulting from the winter storms.
Our pre-tax return on invested capital excluding special items for the 1 2 months ended first quarter was 14.2%,
which on an after tax basis was 8.9%, which exceeded our average cost of capital.
These are superb results, and I'm grateful to our Southwest and AirTran warriors for their outstanding efforts,
especially during this y ear's challenging weather.
We are close to our 15% pre-tax ROIC goal. And we plan to hit it this y ear, although of course it's alway s difficult to
predict the economy and fuel prices. But we will continue to exert every effort to hit it.
Our record first quarter operating revenues increased 2% y ear-over-y ear to $4.2 billion on a 1% decrease y ear-
over-year in ASMs. Solid load factors across all haulings and healthy contributions from our revenue products
contributed to our very strong first quarter revenues. In addition our strategic initiatives remain on track and
continue to contribute significantly to our profitability. Both operating and passenger unit revenues were record
first quarter performances.
Our first quarter business travel trends were also strong with double-digit increases in corporate sales. Our
passenger unit revenues grew 3.5% y ear-over-year, which included about 1 point benefit from significant winter
storm cancellations that reduced revenues by about $45 million, but on 1 .7 % fewer ASMs.
January and February PRASM were each up over 5%, followed by a 1% increase y ear -over-y ear in March PRASM.
This was an outstanding performance, especially considering 2 point y ear-over-year unit revenue headwind from
increased seat gauge and stage length, which of course has a greater unit cost benefit. In addition nearly 20% of
our first quarter ASMs were under development.
Our revenue strength has continued thus far into April, of course benefiting from the Easter and Passover holiday
shift. And based on current bookings and revenue trends thus far, we expect April PRASM to be up y ear -over-year
in the 6% to 7 % range. Keep in mind April also benefits from easier year-over-y ear comps compared to May and
June. Bookings for May and June are also currently solid. And just one other consideration, the July Fourth
holiday that falls on a Friday versus Thursday last y ear, which could impact June travel.
Let's turn to freight and other revenues. And our freight revenues grew 2.6% y ear -over-y ear, as we continued to
expand our award winning cargo service with the integration of our AirTran network. And other revenues declined
y ear-over-y ear as expected, largely due to a decrease in ancillary AirTran fees from a reduction in AirTran
capacity, all as planned. Ancillary revenues on Southwest however did experience strength, which was driven by
Early Bird and our A1 through A15 select boarding and as well as pet fees.
We currently expect second quarter other revenues to also decline y ear -over-y ear likely at a greater rate than
experienced in first quarter, again due to the ongoing conversion of the AirTran network.
I'll turn to fuel now. Our first quarter 2014 economic fuel price per gallon including fuel taxes was $3.08 per
gallon, which was in line with our expectations. And this was 6% below first quarter last y ear's $3.29 per gallon.
And that was largely driven by favorable swing in [ph] jet disk (12:13). We also had a $0.06 hedging gain for the
quarter. And Brent also declined y ear-over-y ear, but that was partially offset by an increase in crack spread.
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Our first quarter results also benefited from better fuel efficiency as a result of our fleet modernization and other
fuel conservation efforts. Our first quarter fuel burn improved by about 1% y ear-over-y ear and that also reduced
our fuel costs by roughly $15 million.
In our ongoing commitment to the environment we recently operated our first flight utilizing our Boeing 737 -800
equipped with Scimitar Winglets. And we are expecting annual fuel sav ings of ap proximately 5% to 5.5% per
aircraft.
Our hedging premiums including below the line and other expenses were $17 million at first quarter and we are
currently expecting a similar amount in the second quarter. Our second quarter fuel consumption is, we've go t a
modest hedge in place of about 15% and that's vary ing crude oil positions and based on our market prices and this
is as of April 21 and our current hedge position, our current second quarter 2014 economic fuel price is forecasted
to be comparable to second quarter last y ear's $3.06 per gallon.
Excluding fuel, profit sharing and special items, our first quarter unit cost increased about 3.5% y ear -over-y ear.
And approximately three points of that y ear-over-y ear unit increase related to winter storms during the first
quarter.
This better than expected cost performance was primarily due to favorable airport settlements that were not
anticipated and our operating costs also benefited from lower advertising and technology spend for the quarter
that have been reallocated to later in the y ear. So, based on current cost trends, we expect second quarter unit
costs excluding fuel, special items and profit sharing to increase y ear -over-year in the 2% to 3% range. And for the
full y ear 2014, we are also expecting a 2% to 3% y ear-over-y ear increase in our unit cost excluding fuel, special
items and profit sharing.
Turning to the balance sheet and cash flow, we ended fourth quarter 2014 with $3.5 billion in cash and short -term
investments, which included $10 million in collateral held from third parties. We had very healthy free cash flow.
For the first quarter, it was $712 million, which supported our ability to return $37 1 million to our shareholders
through repurchasing of $315 million of stock and distributing $56 million in div idends. The repurchase of shares
included a $200 million accelerated stock repurchase program that was executed on February 24, at which time
we received 7 million shares, representing 75% of what we anticipated receiving under the program. T he program
will be completed by May 9, at which time if needed, we'll settle on either cash or shares.
We have $20 million remaining under our $1.5 billion share repurchase authorization, which we intend to
complete this quarter. Since the initial buyback authorization in August 2011 and including our quarterly div idend
pay ments, we've returned a meaningful $1.6 billion to our shareholders, which demonstrates our long -term
standing commitment to return value to our shareholders.
We made $46 million of debt payments during the first quarter and as a reminder, we have approximately $500
million in debt and capital lease scheduled pay ments for the remainder of the y ear. Our leverage, including off
balance sheet aircraft leases, was 38% as of March 31.
Our 2014 capital spending forecast is approximately $1.8 billion and that does include the cost of the DCA slots.
And about $1 billion to $1.1 billion of our total CapEx relates to firm aircraft spend. With this manageable level of
capital spend, our cash flow outlook remains strong. And we also remain steadfast in our commitment to manage
invested capital, which we've reduced by $1.1 billion since 2012. Our balance sheet is investment grade and it is
alway s a priority for us to keep that strong.
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Before I close, I will spend just a few minutes on our fleet. As y ou saw in the press release, we provided the detail
in the text of the press release, but to recap, our full y ear 2014 fleet plans we have 33 firm orders for -800s from
Boeing and plan to add at least 14 pre-owned -700s. We removed 22 717s from service in 2013 and the remaining
66 7 17s will be removed from service by the end of the y ear, even though there will be some transitioning to Delta
in 2015.
As of the end of the first quarter, we have transitioned 24 717s to Delta. In addition, thus far we have transitioned
21 of the 52 AirTran -700s to Southwest, which leaves 31 -700s aircraft remaining that we plan to transition before
the end of this y ear.
And as Gary mentioned, we have significant amount of act iv ity . We're managing the share as we wind down the
AirTran brand and phase out the AirTran 7 17 fleet. But at a high level, we've been managing to a relatively flat
fleet through the end of 2015, give or take few aircrafts with the baseline of roughly 695 aircrafts, which was our
combined fleet at the time of the AirTran acquisition.
Our flight schedule is currently published to October 31 of this y ear and we will hold to our plan to maintain flat
y ear-over-year ASMs for 2014. We haven't set our fleet or capacity plans for 2015, so while it's premature to give
an ASM forecast for 2015, y ear-over-y ear growth in seats will be 2% to 3%. And this, of course, will have
significant unit cost benefit as we anticipated and of course, we've got exciting growth oppo rtunities ahead such as
Love Field and Houston Hobby and then international fly ing in 2015.
Our commercial team has done excellent job to-date of optimizing our network and our operations team is doing a
superb job managing a significant amount of conversion activ ity .
In summary , we have not set our 2015 plans, but we have options to flex capacity up or down as needed, and our
Classic retirement plan was built to provide flexibility and we can also augment our fleet needs through the pre -
owned market. As we manage the integration work and removal of the 7 17s, we will augment the firm orders and
pre-owned aircraft. We may augment that beyond what we had disclosed in our press release, but, again all with
the intention to manage to a flat fleet of 695 aircrafts.
All of this has been contemplated in our CapEx guidance of $1.8 billion for 2014 and our 2015 CapEx is expected
to fall below 2014 with a flat fleet of 695 aircraft in line. We have very exciting network opportunities and we will
manage with a continued focus on achiev ing and sustaining adequate returns on capital.
So in closing, we had a very strong first quarter 2014 performance and second quarter trends support continued
momentum. Our strategic plan is coming together very nicely and we're recognizing substantial benefits from our
initiatives and investments. We continue to have a disciplined growth strategy with flat y ear -over-y ear ASM
capacity in 2014 and at least 2% to 3% seat growth in 2015. We expect healthy free cash flows this y ear with
manageable CapEx and debt obligations in 2014 and 2015. And we have an investment -grade balance sheet.
We continue to return significant value to our shareholders through share repurchases, div idends, and healthy
earnings, and our 15% ROIC goal remains unchanged. We are close to the goal and as I said earlier, we will
continue to exert ourselves to hit that.
And so, with that, Tom, we're ready to take questions.
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QUESTION AND ANSWER SECTION
Operator: Thank y ou. [Operator Instructions] Thank y ou for waiting. We'll now begin with our first question
from Michael Linenberg with Deutsche Bank. ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Hi. Y eah. Hey. Tammy, I think y ou talked about most of the AirTran or I think, Gary had mentioned by y ear-end
that the commercial side will have been wound down, what's the carry ing costs? Like I can go on to the website
and there is an AirTran website and I can call up and presumably I'm speaking with an AirTran res employ ee,
even though they're a Southwest employee. What's that additional carry ing cost that essentially goes away ? Is it
$30 million, $40 million a y ear? What's the number? How do we think about that? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Just to make sure I'm tracking y our question, Mike, y ou're asking what kind of inefficiencies do we have as we
wind down the AirTran brand? ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Y eah. The cost of just supporting the separate brand, I don't know if there is still any billboards left, but the
signage, I mean, there is obviously to maintain it, there has got to be some costs associated with it that presumably
go away ? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Y eah. No. I agree with y ou. Certainly , there are some inefficiencies as we maintain two brands and just the fact
that we just from a scheduling perspective and accruing perspective and especially given that we don't have a
stable, we've been managing our schedule to disintegration. I agree with y ou, there should be some opportunities
for improvement next y ear. We'll start to work on our plan here for 2015 very soon, but I would anticipate that
there would be some efficiencies that we'll be able to gain next y ear. We haven't put a figure to it y et, but y eah,
we'll certainly work to wring out any efficiencies that we can. And of course, our unit costs will also benefit from
the up-gauging and our fleet modernization efforts as well. ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay . ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A And Mike, the only thing that I would add to that really perfect answer is that most of the obvious stuff is gone. So,
in other words, the way you were describing it, I don't think there are any material inefficiencies there by having a
dual brand because our marketing folks are managing to one marketing budget. So, y ou might say that the
AirTran brand – in other words it's possible that the AirTran brand could be a bit under supported, but in any
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event I think there are definitely inefficiencies in the scheduling of two separate fleets that Tammy was referring
to. And those I think we've at least described qualitatively, but I don't think we have put a number to that y et. But
most of the obvious stuff is gone. We don't have two headquarters. We don't have any thing like two headquarters
departments operating. It is all consolidated in the Southwest. So, it's reall y the inefficiency of hav ing two
operating companies I think is where the big opportunity here. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Mike, I'll give just one example of an inefficiency is just that we're going through the transition with the
implementation of our new reservation sy stem as an example. ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay . ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Right now, we are maintaining three reservation sy stems and of course, with the goal to ultimately get to one. So,
we do have some of those inefficiencies that we'll continue to work through it. So it's those ty pes of ideas that we'll
need to – are opportunities that we'll need to continue to work as we plan for 2015 and even into 2016. ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay great. And then just my second question, you talked about the higher CapEx number due to the purchase of
the slots. Have y ou called out what that number is, what y ou paid for the slots? And then sort of along those lines,
I know that y ou're interested obviously in the Dallas, Love Field gates. Are there other American U.S. Airway s
gates around their sy stem that y ou'd be interested in? Or is it just Love Field? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well I'll let Tammy speak to the slots. I believe that's confidential. So we have not disclosed that. But the... ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay . ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A The Love Field gates are obviously – there is only two of them, so it's a rather modest opportunity there. But in
any event at this point we don't have any other interest. ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay . Okay . Very ... ................................................................................................................................................................................................................................
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Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Y eah, Mike. And the slots are confidential, and we have not disclosed that. ................................................................................................................................................................................................................................
Michael Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay . Very good then. Thank y ou. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Okay . ................................................................................................................................................................................................................................
Operator: We'll take our next question from Savi Sy th with Ray mond James. ................................................................................................................................................................................................................................
Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Hey . Good afternoon guy s. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Hi. ................................................................................................................................................................................................................................
Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Just on the seat growth in 2015, I know it's still very early stages. But I was wondering how much of that might be
domestic versus international? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well international, Sav i, is so small. It's only 1% of our total capacity right now. The international opportunity that
I highlighted that y ou're aware of out of Houston Hobby is fourth quarter. So it's no t going to have a material
capacity impact on 2015.
Bob? Thinking out loud, I think the vast majority is going to be domestic and probably oriented towards – what
we've already announced is our plans to expand at Dallas Love Field, so all of that will be domestic. And so it'll be
heavily weighted towards domestic. ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co. A Y eah, I would agree. It's really Dallas, and it's really the investment in the DCA slot fly ing and the LaGuar dia slot
fly ing that carry then into 2015. And as Gary said our international business is a very small percent of the total
already . So even Houston on that for part of the y ear, it's a small percent of a small percent. So it's really the
domestic. ................................................................................................................................................................................................................................
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Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A And let me just repeat again that we're only published through October. So these aren't committed plans that Bob
and I are sharing with y ou. That's just our assuming that the fleet is flat and assuming y ou see that kind of seat
growth, that is what I would assume the split would be with those markets.
But just to be fair to y our question, we could decide between now and whenever we publish the second half
schedule that we want to put more capacity next y ear internationally . But to me that's what is assumed with that
flat fleet. ................................................................................................................................................................................................................................
Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Understood. And then just on the international flights that y ou're switching from AirTr an to Southwest. I know
AirTran has some ancillary like baggage fees and other fees. Are you able to capture that through higher fares on
these international flights? Or is may be introducing bag fees on just international something y ou would consider? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well I think the answer to y our first question is y es. You just look at the continued unit revenue growth, and that
includes bringing down the AirTran brand and bringing those flights up at Southwest. And y eah, there is no
thought to confusing the brand by offering bag fees on certain flights like international. No. ................................................................................................................................................................................................................................
Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q All right. Great. And if I may just squeeze one last one related to this. Just so 1% of ASMs today , how much and
how fast could that increase do y ou think over the next few y ears international? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well again I think it's premature. First of all we want to grow, but we're cautious. The first priority here is to hit
and then sustain our return on capital. So I think that's really premature.
But I think it's going to continue to be a relatively modest component of the Southwest route sy stem for the near
future, for over the next several y ears. ................................................................................................................................................................................................................................
Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q All right great. That's very helpful. Thank y ou so much. ................................................................................................................................................................................................................................
Operator: And we'll take our next question from Glenn Engel with Bank of America. ................................................................................................................................................................................................................................
Glenn D. Engel Analyst, Bank of America Merrill Lynch, Pierce, Fenner & Smith, Inc. Q Good afternoon. ................................................................................................................................................................................................................................
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Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Hi. ................................................................................................................................................................................................................................
Glenn D. Engel Analyst, Bank of America Merrill Lynch, Pierce, Fenner & Smith, Inc. Q Two questions on labor. Hi, Gary . Hi, Tammy . One is when I looked at the departures, they were down 5.9% in the
quarter, yet head count was down only 1 .4%. So why aren't we seeing – it seems like y our productivity at least on a
departure basis got worse?
And then two, can y ou go over the profit sharing calculation and how we should do that going forward? And
whether current integration charges are now starting to flow through the profit -sharing line? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Y es. Glenn, I think on just y our question on trips relative to head count. We obviously had a lot of inefficiency just
due to I would attribute that largely to the weather.
And on the profit sharing, again our profit sharing was $29 million for the quarter, and that was reduced by $6
million related to acquisition and integration costs, half of which were incurred in first quarter 2014, and the other
half related to integration costs incurred from April 2011 through [ph] December 2013 (32:03), which was in
accordance with our profit sharing plan.
And so the integration cost for that deferral period totaled about $385 million. And this is probably what y ou
need, Glenn, and that will result in $58 million of lower profit sharing expense to be recorded January 2014
through December 2018. And $3 million of which lowered first quarter 2014 profit sharing expense. ................................................................................................................................................................................................................................
Glenn D. Engel Analyst, Bank of America Merrill Lynch, Pierce, Fenner & Smith, Inc. Q And additional integration costs, do those now impact profit sharing? Or are those also deferred? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Those just flow right through like y ou no rmally would. So we're past our cutoff period. ................................................................................................................................................................................................................................
Glenn D. Engel Analyst, Bank of America Merrill Lynch, Pierce, Fenner & Smith, Inc. Q Okay . ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A So y eah. Those would just flow through the profit sharing calculation as normal. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A
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So Glenn, on y our head count productivity question. The other thing and of course I know y ou know all this, but
y ou can't just use trips as the only proxy for the head count. So the available seat miles are probably a better proxy
for the flight crews. And then the trips, some of them are getting more flight attendants per trip as an example. So,
while, y es, the trips are down and it does provide some relief for some more groups, it is certainly not all. ................................................................................................................................................................................................................................
Glenn D. Engel Analyst, Bank of America Merrill Lynch, Pierce, Fenner & Smith, Inc. Q Thank y ou. ................................................................................................................................................................................................................................
Operator: And we'll take our next question from Hunter Keay with Wolfe Research. ................................................................................................................................................................................................................................
Hunter K. Keay Analyst, Wolfe Research LLC Q Hey . Thank y ou. So, Tammy, about a y ear ago, y ou said y ou guys are going to tighten some flexibility around some
of y our most restricted fares and y ou said it was going to be done later in 2013. I'm kind of curious to know what
y ou did, what y ou found out, and if it was successful or not and if there is any thing y ou can do going forward on
that? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Y es, Hunter. What we did recently is we did tighten the restrictions on our want -to-get-away fares and that's just
essentially – it's just a no-show. I would consider that really more of a no -show penalty and essentially if y ou don't
call and cancel y our flight, those funds would be forfeited. ................................................................................................................................................................................................................................
Hunter K. Keay Analyst, Wolfe Research LLC Q Okay . Y ou're specifically referring to the no -show policy . ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A That's correct. That's exactly what I was referring to. ................................................................................................................................................................................................................................
Hunter K. Keay Analyst, Wolfe Research LLC Q Thank y ou. And can we talk about sort of the relationship between advertising expense and distribution strategy ?
Y ou guys spend about $200 million plus a y ear on advertising, which is a lot and I understand that because y ou
need people to go to southwest.com to buy your tickets, but have you thought about that in the context of may be
putting some more of y our inventory on online travel agencies that would give y ou more exposure that way and
may be alleviate some of the expense on the advertising side that y ou would have to get in people's minds to go to
southwest.com? If they just go to Expedia and see if y ou are there, may be y ou could spend a little bit less on
advertising while sort of tweaking the distribution strategy a little bit. I mean any thoughts on the relationship
between those two? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A
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Well, Hunter, I guess I'll comment and then see if Gary , Bob have any thing to add, but in terms of usually – the
online, as y ou know, those are usually customers looking for discount fares and we have no issue with that on
southwest.com. We drive lot of customers to southwest.com because they know that the y can rely on us for low
fares. And just another I think interesting fact too is that, once we started distributing AirTran fares on
southwest.com, we quickly became their largest distribution channel. So, we're alway s looking at advertising and
alway s looking for ways to spend those dollars more efficiently and we will obviously continue to do that going
forward. But, at this point, we don't have any major changes contemplated for our distribution strategy . ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co. A Y eah. Hunter, I'll – this is Bob. I'll also add a couple of more things. Obviously , AirTran uses the OTAs and to
Tammy 's point, we've seen no issue converting AirTran markets, flights and customers to southwest.com. In fact,
those markets are converting and maturing at a rate that's better than a ty pical new market for Southwest. So, I
really believe in our distribution strategy. The other thing really on the advertising, when y ou comp us to other,
y ou've got to think about total distribution costs. So, what y ou've got add back are they're pay ing for GDS fees and
bookings and there are all kinds of costs that y ou have to look at in total as distribution in addition to just
advertising. And every time we look at that across all of our competitors we are in the lowest, whether y ou look at
that on a per passenger basis or a per revenue generated basis, I am very comfortable with where our costs are if
y ou look at total distribution costs, which would include advertising. But as Tammy said, we're alway s watching
our advertising cost. I mean, as an example only , we're managing the combined AirTran and Southwest brand
basically at the same level of advertising cost that was Southwest -only prior. So, we're constantly looking for
efficiencies there. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Y eah. And we certainly have realized that, to Bob's point, but all that's been factored into the sy nergy numbers
that we provided for AirTran. ................................................................................................................................................................................................................................
Hunter K. Keay Analyst, Wolfe Research LLC Q It's interesting. Okay . Thank y ou very much. ................................................................................................................................................................................................................................
Operator: And we'll take our next question from John Gody n with Morgan Stanley . ................................................................................................................................................................................................................................
John D. Godyn Analyst, Morgan Stanley & Co. LLC Q Hey . Thank y ou for taking my question Gary and Tammy . Definitely I appreciate the additional color on seat
count growth next y ear. Of course, some of that is sort of one -time in nature. I'm curious if the team is willing to
speak to a long term ASM growth rate? If we envision a world where y ou're hitting y our 15% ROIC target, what
would be like a steady state Southwest growth rate? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well, I think it's premature to say. I think that's really not so much a strategic question as it is tactical. This is a
very tactical business and especially, when it comes to growth and growth opportunities, I think, number one is,
y ou have to have a strong balance sheet. Number two, y ou have to have confidence that y ou r earnings will provide
adequate returns. And then y ou have to be confident that y ou know how to manage growth. So, we've been a
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growth company for most of our history. And I do feel like the company has a lot of institutional knowledge about
how to identify new markets and about how long it takes to develop them and about how much should be exposed
at any given point in time.
The other factor, of course, over a longer period of time that is key to y our question is, what are fuel prices going to
be? And then, secondly, what are our overall costs going to be, because that will mean everything about generating
more passengers and traffic and share for Southwest Airlines. So, under the assumption that we continue to be, if
not the low-cost producer, darn near close to it and maintain our low fair brand and fuel prices remain stable over
the next decade, I think we have significant opportunities to grow the fleet from here. I wouldn't say that that's
10% per annum. I think that that was for this industry and for our company unwise. So, something in the low
single-digits makes sense in terms of a planning horizon. But y ou are right to point out John that here in the
meantime when y ou go from 2012 to 2013 to 2014 to 2015, there's a lot of noise from y ear -to-y ear. And so, once
we get clear of 2015, that's something will be focused on and we want to manage our growth very carefully and
again with an ey e towards keeping the balance sheet strong and hitting our return on capital. ................................................................................................................................................................................................................................
John D. Godyn Analyst, Morgan Stanley & Co. LLC Q That was very thorough. Thank y ou. And the good part about the noise, as y ou mentioned Gary in y our prepared
remarks, is that, it's going to improve the cost structure. When we think about all the moving parts in 2015 and we
think about sort of the seat utilization kind of popping back on, the up-gagging from the dash 800s and the change
in mix there, as well as perhaps even going back to Mike's question earlier in some of these AirTran expenses
going away , I mean, it seems natural to think that we should see a deceleration meaningfully in the CASM ex -fuel
growth, perhaps even a flat to downtrend given all these numbers. I'm not sure if I've got the moving parts right,
may be I'm missing some risks outside of labor. If y ou could just help me kind of think through that directionally ,
that would be helpful? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well and Tammy , y ou chime in too, John, you've been very thorough as well in y our analysis. That is all intuitive.
We have the same v iew that y ou do. We've not finalized our plan yet and therefore, we're just not ready to provide
any guidance, but if y ou think about the swap from the 717 to the 737, just to repeat what I said in my remarks, the
costs are essentially the same. They may even be lower to operate the same number of airplanes, yet you're getting
26 more seats on every single departure. So, when we talk about growth for Southwest next y ear, I'm not going to
argue to y ou that it's free, because it is true that we could choose to have fewer airplanes if we don't believe that we
can generate that much traffic. But y ou're right, with this the growth that we're talking about in the near term
should come at a very modest cost relative to a normal v iew of a fully allocated unit of growth. So, that certainly
factors in somewhat to our thinking, but the bottom line is, we need to be comfortable that we can generate traffic
to absorb the increase in seats that we are planning for next year. So, if we end up at growing seats 2.5% next y ear,
then we need to be comfortable that we'll grow our traffic by 2.5%. If we don't, then I don't think that we should be
pursuing it. ................................................................................................................................................................................................................................
John D. Godyn Analyst, Morgan Stanley & Co. LLC Q Very helpful. Thank y ou. ................................................................................................................................................................................................................................
Operator: And we'll take our next question from Joe DeNardi with Stifel. ................................................................................................................................................................................................................................
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Joe W. DeNardi Analyst, Stifel, Nicolaus & Co., Inc. Q Hey . Good afternoon. So, I guess my understanding the part of the reason y ou're keeping capacity flat this y ear is
to facilitate ROIC improvement. So does that imply simply that growing capacity is a negative for ROIC? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A No, but I think it's just common sense that tells you that if y our base business is not achieving y our return target,
why would y ou increase the base. I think it's just that simple. As a practical matter, the other thing that we keep
reminding y ou and everyone about is that there is just a lot of work going on. So, the aircraft movement s out of
Southwest-AirTran and into Southwest are going to be record numbers. And then for Mike Van de Ven and our
operating departments that creates record numbers of training events for employ ees. So, it's a lot of activ ity to
manage. If y ou then said, now, I want to grow by X number of aircraft on top of that, I just think that that is
unwise on its face. So, for several reasons, we want to maintain relatively flat capacity in 2014, but the main
reason is, we haven't hit our 15% target y et, so I think we need to do that first and then make a judgment about
whether that's sustainable with growth. ................................................................................................................................................................................................................................
Joe W. DeNardi Analyst, Stifel, Nicolaus & Co., Inc. Q Okay . Y eah. That's helpful. On the flexibility y ou have in terms of capacity for 2015, should I think ab out the driver
there in terms of up or down, is that really going to be a function of the demand and pricing trends that y ou're
seeing or should I think of it more as y ou guy s using that as a means of managing CASM growth? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A I think it's demand. Y eah, clearly, what we're trying to do is optimize the network to match customer demand and
I think our commercial team is doing a great job within network and as ev idenced by our first quarter results. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A And again, that's what I was try ing to say earlier, which is, if we're going to increase seats, we need to be
comfortable that we will also increase customers. It helps mitigate the risk to know that the growth is going to
come online at a very attractive cost, but that's not the reason to grow. The reason to grow is because we believe
we can increase the traffic and the revenues, and then it would again come hopefully at very attractive cost to have
that serv ice. ................................................................................................................................................................................................................................
Joe W. DeNardi Analyst, Stifel, Nicolaus & Co., Inc. Q Okay . Thank y ou. ................................................................................................................................................................................................................................
Operator: We'll take our next question from Thomas Kim with Goldman Sachs. ................................................................................................................................................................................................................................
Thomas Kim Analyst, Goldman Sachs & Co. Q
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Thanks. Tammy , can I just ask y ou with regard to some cost items. Can y ou provide a little more color on the
maintenance side? I think y ou had mentioned that there was a little bit of delay or deferral in Q1. Should we
assume that that gets pushed into Q2? And if y ou could quantify that to some extent, would appreciate it? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Y eah. Our maintenance cost, that we did have – they came in a little bit lower than expected for first quarter just
due to shifting, but all of that's been incorporated into the guidance that we gave y ou. So, it's not material. ................................................................................................................................................................................................................................
Thomas Kim Analyst, Goldman Sachs & Co. Q Okay . And then just a minor point, but I am curious as to what drove the 5% increase in other OpEx? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A A part of that is weather. If y ou look at our increase, the 3.5% CASM increase, unit cost increase excluding profit
sharing and special ones, really most of that was attributable to weather for the quarter. And we also had some
shifting in our technology spend, so some of that will get shifted out throughout the rest of the y ear, but again
that's been incorporated into our 2% to 3% increase for the full y ear in that guidance. ................................................................................................................................................................................................................................
Thomas Kim Analyst, Goldman Sachs & Co. Q Okay . Thanks a lot. ................................................................................................................................................................................................................................
Operator: We'll take our next question from David Fintzen with Barclay s. ................................................................................................................................................................................................................................
David Fintzen Analyst, Barclays Capital, Inc. Q Hey , I guess good afternoon everyone. I mean Gary , we've been talking a lot about the 15% return target, can y ou
remind me why it's 15%? I mean it's something that I just remember as long as I've been around, and I suspect it
came in the 90s, when 15% probably meant something, much bigger than it does today . What I mean by that is,
15% now as a return target, not dissimilar from your other large competitors, and frankly it's lower than really the
growth-oriented carriers. So when y ou start thinking about growth and return ta rget, shouldn't that target really
be much higher? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A I don't have a problem in debating where the target should be. I think it also depends on how fast one grows. So if
we don't grow I think that the target probably should go up. If we do grow the main thing is, are we creating
shareholder value or not?
And so it's a matter of art as to how much of a premium over our weighted average cost of capital we need to be
earning. Of course y ou're expert at this, so y ou look at broader indices or broader performance across industries,
which we do. And feel like the 15% is an adequate return. But that's something that we obviously would continue
to consider and talk with our major shareholders about.
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And so the other thing, and y ou know the industry well. That I would remind y ou is that there are no airlines who
have hit a 15% return on invested capital over a cy cle except for Southwest Airlines. And that is what we did in the
197 0s, that's what we did in the 1980s, that's what we did in the 1990s.
So that history alone would tell y ou that it is not a lay up to hit that. But in any event, Tammy already said that
that's our target and the target has not changed. Does that mean th at it will forever be 15%? No. I wouldn't say it
that way . But certainly for 2014 we worked very hard for a decade to get to this point. And are not going to be
ashamed to turn in that kind of performance if that's the way it turns out. ................................................................................................................................................................................................................................
David Fintzen Analyst, Barclays Capital, Inc. Q Okay . No. That helps. That's helpful. It just helps kind of frame the debate around the fleet growth. That's very
helpful.
And the question I actually intended to ask was can y ou just help us think a little a bit about airc raft utilization?
And may be even broader asset utilization kind of going forward? I mean historically y ou've run kind of sweat the
assets. It's a little more tactical business now in terms of keeping schedules in the meat of the day and the meat of
the y ear so to speak. I mean when we're thinking about aircraft utilization over time, should we be assuming that
y ou don't go back to where may be Southwest ran five, six , seven y ears ago? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well, David, again y ou know us well and y ou know this business very well. The utilization, just as a quick
refresher, has varied a little bit since we bought AirTran. So AirTran as a unit has never been I would say
efficiently scheduled.
So we've had a little bit of slop in there. And then of course we've had a lot of aircraft out of serv ice in 2013 and
then on 2014 going through various conversions either Evolve seats or now converting airplanes out to Delta or
converting them into Southwest, all the things that y ou know about. So at least we can say that we are
underutilized right now, and that the utilization will improve once we get clear of this integration work in 2015
and especially 2016. So that we can agree to.
As to will the airline schedule the way that it did before 2008 or 2009, where we had a lot of early morning flights,
a lot of late evening flights? I don't think so.
And again I think we just all have to be open to the fact that things might change. But unless the demand
reappears at that time of the day and it is efficient to schedule an airplane on a marginal cost basis, I don't see that
that fly ing will come back.
But y ou've got $100 crude oil, $110 crude oil today compared to a time where it was $10 to $20 a barrel, whic h
made it more v iable to operate flights on the shoulders with less than 50% load factors. And that's just not the case
today . So as long as that case remains, then absolutely y ou'll see the flight schedule in the meat of the day .
And Bob, we're probably at the highest percentage ever, aren't we? About 88%, 89%, 90% scheduled between 7
a.m., 7 p.m.? ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co. A
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We are. For five y ears now we've cut those early and late flights really just based on demand, I mean it's a flight-
by -flight, market-by-market exercise. And y eah. We've got more flights than ever where the demand is in the day .
So I think it's a great thing from a financial and flight performance perspective. Yeah. I wouldn't expect that trend,
cutting early and late, to continue at the pace it has over the past five y ears. So I think we're more stable now. But I
don't see us going back. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A And then for us we've got opportunities to consider red-eye flying and things like that. And that is something that
Bob and Mike are thinking about. But we don't have any plans to make any material change in the way we're
scheduling the fleet for any reason for that matter. But that would be the one exception perhaps to the shoulder
fly ing comments. ................................................................................................................................................................................................................................
David Fintzen Analyst, Barclays Capital, Inc. Q Okay . That's all very helpful. I appreciate the comments. Thanks. ................................................................................................................................................................................................................................
Operator: And we'll take our next question from Jamie Baker with JPMorgan. ................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q Hey good afternoon everybody. Just a quick clarification for Tammy on non -passenger demand. Did y ou say other
revenue would decline y ear on y ear a bit more than in Q1? Or freight mail and other? It doesn't make a huge
difference, but I wanted to clarify . ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A I said other. And that's just obviously as we're moving AirTran fly ing over to So uthwest, that would be the
ancillary revenues. And so we'll see that's just simply the remainder of the ancillary charges going away as we
move them over to the AirTran brand. ................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q Y eah. Got it. And then – oh I'm sorry . Were y ou adding something else? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Jamie, I was just going to clarify that at least on the freight side, since we haven't talked about freight, we are
adding more and more markets since AirTran did not prev iously carry freight. So I think we have decent
opportunities to grow the freight revenue category . ................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q Excellent. ................................................................................................................................................................................................................................
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Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A But the other category that y ou asked about, that Tammy mentioned that will continue to decline. ................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q Got it. Got it. And then, Gary , a question on the progress with the pilots. The challenge that I'm facing is that y our
existing contract already appears to be among the industry's more, if not most efficient and I certainly understand
that the pilots like to see wages increase, I mean that makes perfectly good sen se. What's less clear is what
management's ask might look like in terms of improved economics. It's not like y ou need scope really for RJs or
any thing like that. So, I know y ou don't want to negotiate in public, but are there any competitor contracts that
y ou could point to and at least say , hey , airline X over there has some really interesting flexibility in the pilot
contracts, something like that? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well, Jamie, y ou're right, we are efficient, but we have things that are tangible today that are under discussion that
would give Southwest more flexibility and make Southwest more efficient. So, as good as we are, there are alway s
things that can change and as a matter of fact, there are absolutely some examples with competitors and if y ou
permit me, I won't share who those are. But, at any event, absolutely , there is alway s opportunities with every
work group always to find way s to improve. And the nice thing is, we're doin g well, we've got good news, there are
definitely some things that we can do for our people going forward as well and keep Southwest strong and build
well for all of our employ ees and that's a wonderful place to be. ................................................................................................................................................................................................................................
Jamie N. Baker Analyst, JPMorgan Securities LLC Q Okay . Excellent. Thank y ou very much, Gary . Thanks, Tammy . ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Senior Vice President, Southwest Airlines Co. A Thank y ou. ................................................................................................................................................................................................................................
Operator: And at this time, I'd like to turn the call back over to Ms. Brand for any additional or closing remarks. ................................................................................................................................................................................................................................
Marcy Brand Director of Investor Relations, Southwest Airlines Co. A Thank y ou, Tom. And as always, if there are any follow-on questions please feel free to call. We appreciate y ou all
joining today and have a great day . ................................................................................................................................................................................................................................
Operator: And ladies and gentlemen, we will now begin our media portion of today 's call. I'd like to first
introduce Ms. Linda Rutherford, Vice President of Communication and Outreach. ................................................................................................................................................................................................................................
Linda B. Rutherford Vice President-Communications & Strategic Outreach, Southwest Airlines Co. A
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Thanks, Tom. For the media folks on the call, if y ou've got a question well go ahead, and Tom, let them know how
they can queue up for that. ................................................................................................................................................................................................................................
Operator: Y es, ma'am. [Operator Instructions]
[Music] (58:02 – 58:30)
And thank y ou for waiting. We will now begin with our first question from Terry Maxon with The Dallas Morning
News. ................................................................................................................................................................................................................................
Terry Maxon Aviation Writer, The Dallas Morning News, Inc. Q Good afternoon. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Hi. ................................................................................................................................................................................................................................
Terry Maxon Aviation Writer, The Dallas Morning News, Inc. Q As y ou are probably aware Virgin Americas has scheduled an event tomorrow to announce something about their
Dallas operations. Have you got a sense that the competition for those gates have been settled? Have y ou gotten
any word of whether Virgin Americas is getting them? Or that y ou're out of the competition for them? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Terry , we are waiting patiently to see what the next step is in the process. So as far as I am aware, we are still in
the running for consideration. ................................................................................................................................................................................................................................
Terry Maxon Aviation Writer, The Dallas Morning News, Inc. Q Delta wants the City of Dallas to take control of the gates and make them common use gates, is that an acceptable
alternative to Southwest or do y ou believe that one way or the other one airline should definitely get them? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well, I think that sort of gets into the contractual aspect of the lease and nothing that I really want to comment on.
So I can understand why somebody would argue for that, but it's going to be up to the City of Dallas and its lease
with American and their sub-lease rights to determine how to apply this. So I'd rather not comment on that. ................................................................................................................................................................................................................................
Terry Maxon Aviation Writer, The Dallas Morning News, Inc. Q Thank y ou. ................................................................................................................................................................................................................................
Operator: And we'll take our next question from Andrea Ahles with Fort Worth Star -Telegram.
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Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q Hi. Good afternoon. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Hi. ................................................................................................................................................................................................................................
Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q So Terry already asked part of my question, which was about the Love Field gates. But I was wondering if y ou
could also talk about how has demand been at the new flights, now that y ou've released the schedule – have y ou
had a lot of interest from people on the Love Field flights and what y ou might be doing in it. Are y ou considering
other cities you might be adding in 2015 if y ou get those gates or if – as y ou sort of tinker with y our schedule going
forward at Love Field? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well, Love Field is of course, it's going to happen. So we've already preannounced that we'll be selling more flights
to more destinations sometime soon. So, we're not taking bookings y et, Andrea, as I think y ou know on the 15 new
non-stop destinations that we've announced that they stay tuned. I think, Tammy mentioned already that our
business out of Love Field is up significantly. It's up double -digit this y ear even without the new flights y et. So, I
don't know that we can quite explain that other than just a great service that our Southwest Warriors offer every
day . But y eah our business at Love Field is good and we're looking forward to launching the new service here later
this y ear. ................................................................................................................................................................................................................................
Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q Do y ou know when y ou're going make those [ph] Love flights (1 :01:40) available for purchase? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A I do know. ................................................................................................................................................................................................................................
Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q When will that be? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Linda, have we disclosed that y et? ................................................................................................................................................................................................................................
Linda B. Rutherford Vice President-Communications & Strategic Outreach, Southwest Airlines Co. A We've not y et said that.
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Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A We haven't said that y et. So stay tuned. ................................................................................................................................................................................................................................
Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q All right. Thank y ou, Gary . ................................................................................................................................................................................................................................
Operator: And we have time for one more question. We'll take our last question from Aaron Karp with Air
Transport World. ................................................................................................................................................................................................................................
Aaron Karp Senior Editor, Air Transport World Q Y es. You talked about how y ou think the international fly ing will be a relatively modest component for the next
few y ears. How much of a revenue enhancement do y ou think international will be near -term and are y ou looking
at it primarily as a long-term growth opportunity ? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A Well, the – y eah over the long-term I think it's a large opportunity . We're thinking about it as North America, I
would throw in Hawaii and Alaska just because it is so different than fly ing in the 48 states int o that whole growth
opportunity. We serve 96 cities today with Southwest and AirTran and have a potential to add 50 new destinations
over some period of time and that would be several 100s worth of airplanes, worth of fly ing. So it's a very material
opportunity, and as I mentioned earlier, growing the airline is in many way s tactical. We've made the strategic
investment to create the capability at Southwest to fly bey ond the borders and to fly longer distances. So that
strategic decision is made and is in place. Then where we decide to go within that geographic footprint, that'll
depend on a lot of factors, but in any event I would absolutely expect that 1% would grow as a percentage of our
total. At what rate I'm not willing to predict y et. Bob, I don't kno w if y ou have a number off the top of y our head
what the potential is, I don't think it's going to be half of our business, it's not going to be any thing like that. I'd be
surprised if it was 25% of our business, but it could probably be in the 10%, 15% ra nge, don't y ou think. ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co. A Y eah, I think so. The domestic market is obviously much more mature, so the international markets that we're
looking at are – there is still a lot of room for development. So more room for competition, lot of higher fares.
Obviously those we connect very well to our very mature domestic network, our very wide domestic network. So I
think there is a lot of opportunity there, but it's a lot of opportunity on a relatively small base compared to the
total. So y eah, I would expect to Gary's numbers, so really sort of the high single digits, low double digits is where I
feel like we could grow to. But again that growth rate – the growth potential on the current base is much larger
simply because the base is so small today . ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer, Southwest Airlines Co. A And again this all assumes 7 37 service. The geographic footprint is all in North America including the Caribbean
and actually the Northern reaches of South America. So it's a very exciting opportunity, 200 airplanes, I didn't do
the math in my head but that would be about not quite a third increase in the fleet. So it's longer haul fly ing, which
Southwest Airlines Co. (LUV) Q1 2014 Earnings Call
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takes longer, and it is higher revenue, so may be our 10% to 15% estimate is low. But, we need to walk before we
run here and we're excited and ready to get started. ................................................................................................................................................................................................................................
Aaron Karp Senior Editor, Air Transport World Q Thank y ou. ................................................................................................................................................................................................................................
Operator: And at this time, I'd like to turn the call back over to Ms. Rutherford for any additional or closing
remarks. ................................................................................................................................................................................................................................
Linda B. Rutherford Vice President-Communications & Strategic Outreach, Southwest Airlines Co.
Thank y ou, Tom. If any body has any follow-up, our members in the media can reach out to our folks in the
communications department and have a wonderful afternoon. ................................................................................................................................................................................................................................
Operator: Ladies and gentlemen, this does conclude today 's conference. We appreciate y our participation.
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