Southwest Airlines Company (LUV)

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Industry: Transportation
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Southwest Airlines Co. (LUV)

Q3 2010 Earnings Call

October 21, 2010 12:30 pm ET

Executives

Gary Kelly - Chairman, President and CEO

Laura Wright - SVP, Finance and CFO

Analysts

Jamie Baker - JPMorgan

Hunter Keay - Stifel Nicolaus

Glenn Engel - Bank of America Merrill Lynch

Daniel Mckenzie - Hudson Securities

Duane Pfennigwerth - Raymond James

Michael Linenberg - Deutsche Bank

William Greene - Morgan Stanley Smith Barney

Gary Chase - Barclays Capital

Bob McAdoo - Avondale Partners

Presentation

Operator

Welcome to the Southwest Airlines Third Quarter 2010 Conference Call. Today's call is being recorded. We have on the call today Mr. 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. 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 include references to non-GAAP results. Therefore, please see the company's financial results, press release and the Investor Relations section of its website at southwest.com for further information regarding 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 call over to Gary Kelly for opening remarks. Please go ahead, sir.

Gary Kelly

Thanks everyone for joining us this morning. Oh my, what a difference a year makes. We are very, very pleased to report what is a record third quarter earnings performance. I want to start out by thanking all of our employees. Our people have done an extraordinary job operating an excellent airline, providing outstanding customer service and all the while building for the future enhancing our customer brand and our customer experience.

The result is another long list of revenue related records including a record third quarter load factor of 80.9%. Of course, as many of you know, we've deployed a number of revenue initiatives over the last several years. We have deployed a number of revenue management techniques that are designed to drive revenues per flight. We are continuing to optimize each published flight schedule with an emphasis on optimizing our five relatively new Southwest destinations along with a real emphasis on Denver, which has now become our fifth largest operation, and that in less than five years.

We continue to advertise and promote our low cost, low fare competitive advantage and our nationwide low fare leadership and in particular with our 'Bags Fly Free' campaign. We have added new sources of revenues, such as EarlyBird and pets on board. We continue to see strong growth from relatively new sources, relating to areas such as Rapid Rewards, Business Select and our Dallas Love Field new [item] in the itineraries.

We will soon launch our marketing and distribution agreement with Volaris to Mexico. Next year, we will launch the Rapid Rewards 2.0 product. Yesterday, we announced schedules and fares for a March 13, 2011 launch of Greenville-Spartanburg and Charleston, South Carolina. Soon we will announce schedules and fares for 2011 launch of New York-New Jersey. Finally, and I hope a very soon, we will acquire AirTran Airways and that will provide a host of route destination, profit and growth opportunities for Southwest Airlines.

In the meantime, we are evaluating the timing of bringing up a new reservation system, which, among many things, will bring us international capabilities.

Finally, we are in the final evaluation phase of whether to add the 737-800 to our fleet, beginning no earlier than 2012. No commitment has been made on the Dash 800 GF. Needless to say, we think we have got a very exciting future. We have a very full agenda for the first half of the next decade. We have the leadership team, we have got the people, and we have got the financial resources to make all this happen

If I wasn't clear in the beginning, I will just say, I am extremely happy with where we are, with these results. There are always challenges and this very difficult airline business, but I am just glad I'm at Southwest Airlines.

With that very brief overview, I would like to turn it over to our tremendous Chief Financial Officer, Ms. Laura Wright.

Laura Wright

Our third quarter GAAP net income was $205 million or $0.27 per diluted share. Excluding special items, our third quarter net income was $195 million or $0.26 per diluted share, a significant improvement over our third quarter 2009 earnings excluding special items of $31 million or $0.04 per diluted share. This net income excluding special items produced 6.1% net margin. These results exceeded Wall Street's mean estimate of $0.25 per diluted share.

Our third quarter operating income excluding special items was $388 million resulting in 12% operating margin. Our pretax income excluding special items was $315 million resulting in a 10% pretax margin. On a rolling 12 months basis, our pre-tax return on invested capital is approximately 10%.

Overall, we had a very strong quarterly performance delivering a record third quarter profit excluding special items. I would like to join Gary in congratulating our employees on these tremendous results.

Our revenue performance was very strong, continuing the momentum that we had in the first half of the year. Our passenger revenues for the quarter increased by nearly $500 million to a record $3 billion. Our other revenues increased nearly 50% or about $40 million, primarily due to $29 million of EarlyBird revenues this quarter.

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