Southwest Airlines Company (LUV)

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Southwest Airlines Co. (LUV)

DbAccess Global Industrials and Basic Materials Conference

June 13, 2013 9:40 am ET

Executives

Tammy Romo - Chief Financial Officer and Senior Vice President of Finance

Analysts

Michael Linenberg - Deutsche Bank AG, Research Division

Presentation

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, for our next presentation this morning, we're pleased to have Tammy Romo, Senior Vice President of Finance and Chief Financial Officer. I want to say that Tammy has been CFO for less than 1 year, but she's definitely no stranger to the world of finance at Southwest Airlines. Her promotion to CFO last year capped her 22-year career at Southwest, which she joined in 1991 as a manager of financial reporting. Over the years, Tammy took on roles of increasing importance in Southwest Finance Department, including Head of Investor Relations, which is, when I got -- first met Tammy, Treasurer and Controller. And so now, to discuss the latest at Southwest, I want to introduce Tammy Romo.

Tammy Romo

Thank you, Mike, and thanks to all of you for joining us today. It's always a pleasure to be with you. And as always, before I start my presentation, I just want to remind you that our presentation includes references to historical non-GAAP financial data, and my remarks today will include forward-looking statements. And so I would just refer you to our website at southwest.com to -- for further discussion of any risk factors.

And with that, I would like to start -- just give you a brief update. And as you all know, I think for the airline industry and for Southwest, certainly, our year started off as expected. But revenue trends since March have been softer than we anticipated. Good news is we are able to stimulate traffic, but it has come at weaker yield. This trend has carried into our May traffic results, which hopefully you all followed last week. Still, we reported record passengers in RPM for May with unit revenues, passenger unit revenues, down roughly 2%. We are pleased, however, with the sequential improvement and our year-over-year trends up from April. As a reminder, our April unit revenues were down 4% to 5%, so the results that we reported in May were a notable improvement. On a capacity-adjusted basis, our May results were in line, if not a little better than industry. And just to give you a quick update on June, I'm happy to report that our bookings are good. However, with the environment that we're operating in, we remain cautious about summer demand and any potential ongoing impact from sequestration and just the impact of higher taxes.

Based on current revenue and booking trends for June, we expect our second quarter PRASM to decline in the low single-digit range as compared to second quarter of 2012. I just -- just to give you a quick update on our cost outlook, our -- we expect our second quarter economic fuel price per gallon to fall in the $3.05 per gallon to $3.10 per gallon range for the second quarter. And that is certainly below our plan and below year ago levels, but it is just a bit higher than our previous guidance of $3 per gallon to $3.05 per gallon. And again, that's just based on the current market.

On the nonfuel side, outlook is really unchanged from what we last reported with -- we're expecting a unit cost increase of 2% to 3%, which would exclude profit sharing and special items on a year-over-year basis. The cost that -- we are experiencing some cost inflation here in the first quarter, but we do expect that to ease as we complete the investments in our fleet, which is namely -- namely, Evolve, which is primarily inflating our maintenance expense line item here in the first half of this year.

We, of course -- back in December, our plan for 2013, we told our investors that we intended to aggressively manage our invested capital and we are executing against that plan. And we are managing our invested capital and we are -- we continue to lead the industry and the cash we're deploying back to our valued shareholders.

As you probably saw recently, we announced that we quadrupled our dividend to $100 million annually, which would -- that would be the rate of -- we're going from a $0.04 annual dividend to a $0.16 annual dividend. And then also, in addition to that, we increased our share repurchase by $500 million. In addition to our existing authorization, we implemented a $250 million accelerated stock repurchase program. And with that, that brings our total repurchases under our existing $1.5 billion authorization to $975 million, which approximates 100 million shares. And of course, we intend to continue our steadfast focus on returning free cash flow to our shareholders.

Our cash flow outlook for the year remains strong. And our capital spending requirements are very manageable and that's estimated to be approximately $1.4 billion for 2013 and $900 million of that is in committed aircraft spend.

We are -- just to give you a quick update on our strategic initiatives. We -- I think you're all pretty familiar with those and we are executing very well against those and those are on track and progressing as we had planned.

We expect to benefit more from our strategic initiatives in the second half of the year as we continue to optimize our network with the integration of AirTran. And we continue to see more incremental benefit from the ramping up of our fleet modernization initiatives.

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