Southwest Airlines Company (LUV)

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Industry: Transportation
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Southwest Airline (LUV)

Q4 2010 Earnings Call

January 20, 2011 12:30 pm ET

Executives

Laura Wright - Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance

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

Analysts

William Greene - Morgan Stanley

Duane Pfennigwerth - Raymond James & Associates

Glenn Engel - BofA Merrill Lynch

Jamie Baker - JP Morgan Chase & Co

Hunter Keay

Michael Linenberg - Merrill Lynch

Helane Becker - Dahlman Rose & Company, LLC

Presentation

Operator

Welcome to the Southwest Airlines Fourth Quarter 2010 Conference Call. [Operator Instructions] On the call today is 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 the company 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 the company's financial results press release in the Investor Relations section of its website at southwest.com for further information regarding forward-looking statements and for a reconciliation of non-GAAP results to GAAP results.

At this time, I'd like to turn the call over to Gary Kelly for opening remarks. Please go ahead, sir.

Gary Kelly

Thanks, Cynthia. Thanks, everyone, for joining us. We are very pleased to be with you all this morning. 2010 proved to be a very satisfying year. It was an upbeat end to what, I think most would agree, has been a lost decade for the airline industry. Our fourth quarter earnings were very solid. That was despite a 12.7% jet fuel price increase year-over-year. Excluding items, we produced $115 million in earnings, $0.15 a share. That was a 55% and a 50% increase, respectively. We had a very strong revenue performance. We set a number of records. Revenues grew 14.8% year-over-year. Anytime we can get double-digit revenue increases, that's something to be celebrated.

Unit revenues grew 8.8% year-over-year. Traffic grew 10.1%. Load factors were up 3.4 points. Our market share continues to grow compared to the domestic industry. Yields were up 3.5%. We set fourth quarter Southwest Airlines records for load factor, PRASM, RASM, revenues, RPMs, O&Ds, on boards and enplanements. So I think that's just about every revenues statistic one can think of. We set all-time Southwest Airlines quarterly records for PRASM and RASM.

We had a fantastic year as well. We had a wonderful rebound from 2009, well ahead of our plan. We had similar annual revenue records established, along, interestingly enough, we had record earnings per share x items on a split-adjusted basis at $0.74. Our return on invested capital was 10% though pretax. That's short of our 15% target in previous records that we've set. But still that's a nice improvement and great progress towards our goal. Our non-GAAP operating margin for the year was a very healthy 10.7%. Our net margin was another healthy 4.5%, but still both are short of our goals, but again, great progress.

I expect the strong revenue trends to continue in the first quarter and hopefully throughout 2011. In particular, I believe business travel demand will continue to strengthen, and hopefully, in our short-haul markets. Of course, the comparisons year-over-year will get harder, but the sequential trends will hopefully be sustainable.

So except for fuel, our outlook for 2011 is quite good. That is fly free and now are no change fees campaign, along with our continued tuning from revenue management and schedule optimization should continue to provide tremendous momentum.

Through it all, our people are doing a terrific job managing our operation in a changing environment, in a very challenging environment. I am very proud of them. Our customer brand rankings validate my claim that our people are indeed the best when it comes to domestic air service.

So next up for Southwest Airlines in March is the launch of our All-New Rapid Rewards program. I'm very, very excited about that, along with the launch of three new and exciting cities: Greenville-Spartanburg, South Carolina; Charleston, South Carolina; and Newark, New Jersey. And then next quarter, subject to government and AirTran shareholder approvals, we plan to close on our AirTran acquisition and, of course, work is well underway planning that ensuing integration.

So for the future, work is underway to bring in the 737-800 to our fleet. That will occur in 2012. Work is underway also to replace our reservation system, which will come online at a yet to be committed date. But most certainly, it will be sometime after 2012.

And with that very quick overview, and again, my thanks to all of the Southwest Airlines people, I'd like to turn it over to Laura Wright, our CFO, to take you through the quarter and the year.

Laura Wright

Thank you, Gary, and good morning, everyone. We're very pleased to close out 2010 with a fourth quarter GAAP profit of $131 million. Our fourth quarter GAAP results included a net gain of $31 million relating to non-cash, mark-to-market and other items associated with our fuel hedges.

In addition, we have a $7 million charge before profit sharing in taxes related to our proposed acquisition of AirTran. Net of profiteering in taxes, the impact was about $3 million less than $0.05 a share, and the majority of these costs were for consulting and legal fees. Excluding these special items, our fourth quarter earnings were $115 million or $0.15 per diluted share, which was in line with Wall Street's expectations. Our operating income, excluding special items, was a fourth quarter record at $260 million, and our full year 2010 GAAP net income was $459 million or $0.61 per diluted share.

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