Southwest Airlines Company (LUV)

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Southwest Airlines (LUV)

Q4 2009 Earnings Call

January 21, 2010 11:30 am ET

Executives

Gary C. Kelly - Chairman of the Board, President, Chief Executive Officer

Laura H. Wright - Chief Financial Officer, Senior Vice President - Finance

Analysts

Mike Linenberg – Bank of America/Merrill Lynch

William Greene - Morgan Stanley

Hunter Keay - Stifel Nicolaus

Gary Chase - Barclays Capital

Duane Pfennigwerth - Raymond James

Helane Becker - Jesup & Lamont Securities Corporation

Will Randow – Citi Investment Research

Daniel McKenzie - Next Generation Equity Research

Presentation

Operator

Welcome to Southwest Airlines fourth quarter 2009 conference call. Today's call is being recorded. We have on the call today Gary Kelly, Southwest's Chairman, President and Chief Executive Officer and Laura Wright, the company's Senior Vice President of Finance and Chief Financial Officer.

Before we get started, please be advised that this 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.

This call will also include references to non-GAAP results; therefore, please see our earnings press release in the Investor Relations section of our website at Southwest.com for further information regarding our forward-looking statements and for a reconciliation of our non-GAAP results to our GAAP results.

At this time, I would like to turn the conference over to Mr. Gary Kelly for opening remarks. Please go ahead, sir.

Gary Kelly Lang

Thank you. Thanks everyone for joining us. Obviously we are at the end of this roller coaster year we are delighted to be able to report that our profitability string is intact and to be able to report even a very modest profit in this environment I think is a huge accomplishment.

I am very proud of our employees. It has been a real roller coaster. A lot of changes. A lot of challenges but I think they more than proved they are up to the task. The earnings for the fourth quarter if we start there were $74 million on a non-GAAP basis and that is $0.10 per share better than a year ago. Better than the Wall Street estimate and certainly better than what we thought 6-8 months ago.

For the full year we did $143 million of earnings again on a non-GAAP basis. That is $0.19 per share down from the 2008 levels but certainly understandable given the very challenging economy we faced in 2009.

A lot of remarkable things about the fourth quarter though. The fourth quarter to the best of my recollection has never been the best quarter in a year and this year it was by far. It was the best unit revenue performance of the year but that means that we set an all time record in terms of quarterly unit revenue in the fourth quarter of a recession. That is remarkable indeed.

You might say it is because we adjusted our capacity but that doesn’t explain it because our traffic was actually up and we had a record level of traffic for a fourth quarter and that is despite a near 8% drop in our capacity. It is probably not too surprising to find that we also had a record load factor performance for the fourth quarter as we did for the full year.

So a number of very strong metrics if you will measuring our revenue performance and so we are just delighted all the way around. It is not just our marketing department. Not just our operations. Not just revenue management. It took literally every employee at Southwest Airlines to produce those kinds of results and make the kinds of changes that we did in 2009.

At this point we have strong bookings in place for the balance of the quarter here in the first quarter of 2010. January, February and March bookings look really good. Just glancing at yesterday’s bookings this morning we had another strong day yesterday. The trend so far in January Laura will speak to in a minute but we are very pleased with the trend we are seeing so far in 2010.

Just to give you a very quick recap of the things we did in 2009 to boost our revenue I think first and foremost was the focus on a very high quality operation. We have had the best on-time performance we have seen in years. We are turning out some of the best baggage handling numbers that we have ever had in our history and once again we lead the industry in the fewest customer complaints. A very, very high quality operation once again despite all of the aggressive changes that took place.

The other, again first and foremost, step that we took is we just focused on our low fare brand. We had some very successful aggressive fare sales. We launched a series of advertising campaigns that really drive home what we stand for and of course we are all very proud of our bags fly free campaign. You can’t find a customer now who isn’t aware that Southwest doesn’t charge for bags. We are getting a lot of credit for that and I think that of course is certainly one of the reasons we are seeing a pretty significant share shift to Southwest Airlines.

Our capacity is down but our traffic is up. We had a number of aggressive changes to the schedule this year. I have already mentioned our fare sales. We introduced our Early Bird product. We now take pets. We added three very large cities to our route network launching Milwaukee as our fourth city link in the year. We have seen huge gains in our Denver market and Denver in August of this year will be up to 144 daily departures making it the fifth largest city in our route network and by far the most successful new city we have ever had. We also have some very nice opportunities that are unfolding in St. Louis.

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