Southwest Airlines Company (LUV)

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Industry: Transportation
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Southwest Airlines Co. (LUV)

Q2 2013 Earnings Call

July 25, 2013 12:30 pm ET

Executives

Marcy Brand

Gary C. Kelly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

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

Robert E. Jordan - Chief Commercial Officer, Executive Vice President and President of Airtran Airways

Linda B. Rutherford - Vice President of Public Relations & Community Affairs

Michael G. Van De Ven - Chief Operating Officer and Executive Vice President

Analysts

John D. Godyn - Morgan Stanley, Research Division

Helane R. Becker - Cowen Securities LLC, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Hunter K. Keay - Wolfe Research, LLC

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Savanthi Syth - Raymond James & Associates, Inc., Research Division

David E. Fintzen - Barclays Capital, Research Division

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Presentation

Operator

Welcome to the Southwest Airlines Second Quarter 2013 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

Thank you, Tom. Good morning, everyone. Welcome to today's call to discuss our second quarter results. Joining me on the call today 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 Airways; and Mike Van De Ven, Executive Vice President and COO. Today's call will begin with opening comments from Gary, followed by Tammy providing review of our second quarter results and 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 intents, expectations and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially. As this call will include references to non-GAAP results, excluding special items, please reference this morning's press release in the Investor Relations section of southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now I'll turn the call over to Gary for opening remarks.

Gary C. Kelly

Marcy, thank you very much. And good morning, everyone, and thank you for joining us. We are very pleased to report a strong second quarter earnings performance, and we had record earnings, record earnings per share, record revenues. The first half results are records as well. As with a year ago, we produced very strong operating and net margins and strong returns on capital. Our cash flow from operations was also very strong, and we were able to repurchase $251 million worth of stock, as well as quadrupling the quarterly dividend.

The domestic economy was worse than what we had assumed in our second quarter plan. And really, that's for the fourth year in a row. Fuel prices were nicely below plan and that provided a nice offset at least. So to start with, I want to thank all of our employees for a very strong quarterly performance. I also want to thank them for the tremendous progress that we're making on our strategic plan and especially our 5 strategic initiatives. So just to mention those very quickly, as we have outlined in the press release, we're on track with our AirTran integration. We've got the networks connected. We've got city conversions well underway and aircraft conversions well underway. And the retirement of the Boeing 717s began this next month, also as planned. As far as our All-New Rapid Rewards program that we've rolled out in 2011, we're continuing to see very strong results and a very strong performance from that new program. On the 737-800 front, we have 43 of those units on hand in the fleet as of the end of the quarter, on track to hit 54 by the end of the year. They are performing as expected, producing higher than system load factors, which is a real tribute to our scheduling. And for the quarter, they were a meaningful profit contributor, also ahead of our plan.

Next, we have our fleet modernization initiatives, which, for the second quarter, was principally the Evolve retrofit on the -700s and the -300s. And that was also a very significant contributor and also ahead of plan. So all told, the fleet modernization initiatives, along with the -800s, contributed $89 million of incremental revenue in the quarter.

And then finally, our initiative to implement a new reservation system, beginning with international reservations technology, continues. It is right on track and planned for implementation in 2014. We have a major technical milestone on that project this fall, and I suspect we'll provide a more in-depth update on the project at that point.

The only 2013 project that is off track is our O&D revenue management system. Technology was delivered on time as planned, but the results from that new product are not what we really want and need. So we're redirecting that effort and still expect to drive a significant benefit, but not until we have a revised approach with that in 2014.

So having said all that, again, the economy has been worse than what was assumed in our plan. That has impacted our performance, and it may continue to, and that simply reinforces our very careful outlook with regards to capacity and fleet expansion. We lowered our expectations regarding 2014's available seat miles, for example. We have significant opportunities to grow the network after next year, with the repeal of the Wright Amendment and the introduction of international capabilities. And of course, those opportunities are in Dallas and in Houston and really to all points in North America.

So our financial priorities continue, and they are to achieve and sustain a minimum of 15% pretax return on invested capital, reduce our balance sheet leverage and maintain investment-grade credit ratings, maintain a total liquidity, on average at least, of $3.5 billion, including our line of credit, and of course, continue to enhance shareholder value.

So with that very quick overview, I'd like to turn it over to Tammy Romo.

Tammy Romo

Thank you, Gary, and thank you, everyone, for joining us today. In spite of the weak revenue environment, our second quarter net income, excluding special items, of $274 million was a record performance. Our earnings per share of $0.38 was in line with consensus expectations, and that's up 6% from last year's record results. To achieve these results with all the strategic initiatives we currently have underway took much hard work, and I would like to join Gary in recognizing our employees for their outstanding efforts during the quarter.

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