Southwest Airlines Company (LUV)

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Southwest Airlines (LUV)

Q3 2013 Earnings Call

October 24, 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

Ginger C. Hardage - Senior Vice President of Culture and Communications

Analysts

Michael Linenberg - Deutsche Bank AG, Research Division

David E. Fintzen - Barclays Capital, Research Division

Hunter K. Keay - Wolfe Research, LLC

Helane R. Becker - Cowen Securities LLC, Research Division

John D. Godyn - Morgan Stanley, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

James D. Parker - Raymond James & Associates, Inc., Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Daniel McKenzie - The Buckingham Research Group Incorporated

Presentation

Operator

Welcome to the Southwest Airlines Third 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, and welcome to today's call to discuss our third quarter results. Joining me on the call today is Gary Kelly, our Chairman, President and CEO; Tammy Romo, Senior Vice President, Finance and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer and President of AirTran Airways; Mike Van de Ven, Executive Vice President and Chief Operating Officer.

Today's call will begin with opening comments from Gary, followed by Tammy providing a review of our third 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 intent, 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 and 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

Thank you, Marcy, and thanks, everyone, for joining us this morning for our third quarter financial results. I'll just give a quick overview and then turn it over to Tammy Romo to cover the financial results.

A very strong performance, especially from a revenue perspective, and it was reflecting a robust travel demand environment, but also significant achievements by our people in optimizing the route networks and integrating AirTran. Costs also moderated during the period, and it was a reflection of lower fuel prices versus a year ago and also reduced fuel consumption per unit versus a year ago.

You'll note the increase in productivity with respect to our people versus a year ago, and that is despite the increase in capacity. I want to take this opportunity to thank all of our Southwest and AirTran employees for a great quarter. They are working exceptionally hard. The results show it and I really appreciate it.

We've made great progress during the quarter on our strategic initiatives, in particular the AirTran integration, the fleet modernization and the international reservation system technology project. We broke ground on the Houston Hobby international terminal project, which is slated for 2015, and we started the countdown to the 2014 repeal of the Wright Amendment here at Dallas Love Field. There's a billboard outside Dallas Love Field that says, "51 weeks to nonstop love."

Despite these solid results, we have a lot of work to do and also, I would add, a lot of upside. We still have about 15% of our capacity deployed as the AirTran brand, and it is not optimized. Because of the fleet conversions underway, we're under-scheduling our aircraft revenue service. That's compared to where we will be post-integration. And even though we're on track for our planned 2013 AirTran synergies, we have a higher percentage of our system in development. And all of these create earnings drags, which should dissipate post-integration.

Considering all of that, it was an exceptionally satisfying quarter. Our fourth quarter outlook is encouraging as well, in particular the holiday bookings. And as you would expect, we, like everybody else, saw an impact from the government shutdown, but hopefully, that drag will be short lived.

And then finally, our fourth quarter outlook for fuel prices is stable, at least for right now. We're finalizing our plans for 2014. They will most certainly have a bottom line that achieves our 15% return on invested capital mandate. We have no capacity growth planned for next year. In addition to running the business, our goals are to bring up the international service at Southwest and finish the AirTran integration. We'll be very focused on doing everything we can to make our 2014 plans a reality with the normal caveats, of course, for the economy and fuel prices.

So, Tammy, with that very quick overview, let me turn the call over to you.

Tammy Romo

Thank you, Gary. Hi, everyone, and thanks for joining us today. We reported great results this morning, setting several records.

Our net income, excluding special items, was a record $241 million, which was nearly 150% increase year-over-year, and EPS was a record $0.34, which was in line with consensus and represents 162% year-over-year increase. Our operating income was also a third quarter record at $439 million, which produced an operating margin of 9.7%. Our pretax ROIC for the 12 months ended September 30 was 11%. So, we're making great progress there.

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