Southwest Airlines Company (LUV)

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Southwest Airlines (LUV)

Q1 2011 Earnings Call

April 21, 2011 12:30 pm ET

Executives

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

Ginger Hardage - Senior Vice President of Corporate Communications

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

Analysts

Sheryl Jean

William Greene - Morgan Stanley

Andrew Compart

Garrett Chase - Barclays Capital

Karen Jacobs

Kelly Yamanouchi - Denver Post

Daniel McKenzie - Hudson Securities, Inc.

James Parker - Raymond James & Associates, Inc.

Timothy Martin

Jamie Baker - JP Morgan Chase & Co

Glenn Engel - BofA Merrill Lynch

David Koenig - Associated Press

Michael Linenberg - Merrill Lynch

Presentation

Operator

Welcome to the Southwest Airlines First Quarter 2011 Conference Call. Today's call is being recorded. On the call today is Mr. Gary Kelly, Southwest's Chairman, President and Chief Executive Officer; and Ms. Laura Wright, the company's Senior Vice President of Finance and Chief Financial Officer.

Before the company gets started today, 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 Mr. Gary Kelly for opening remarks. Please go ahead, sir.

Gary Kelly

Thank you, Tom, and good morning, everyone, and welcome to the Southwest Airlines first quarter call. I know you all have been -- many of you at least have been very busy with some other airlines’ reports this morning, so this is Southwest Airlines, and we're glad to have you and we'll try not to work you too hard.

We had a very active first quarter of 2011. There are many accomplishments to report and share with you all. And right out of the box, I just want to thank all of our people for their extraordinary efforts and the terrific results that we've had thus far in 2011.

The one blight on our financial results, of course, was fuel. I know it's on everyone's mind. It's certainly on ours and mine. We'll talk plenty about all of that this morning. But in my overview, I just wanted to emphasize especially the good news in our business. It's been very strong, and the traffic and revenues continue to be very strong. We set a number of revenue-related records in the first quarter: monthly records, quarterly records and even some all-time records.

We're continuing to win customers. We're continuing to take share. And I attribute that to low fares, our no hidden fees and of course, great customer service. And I have to admit I don't like fare increases for our customers, but they're certainly necessary in this soaring fuel cost environment. But it is a testament to our people that the demand has remained so strong in addition to our low-fare leadership versus the competition. So again, I thank them.

March was very strong. With a late Easter this year, April will probably be less so. But then the forward bookings for May look very strong and above what we would normally consider to be the trend from April to May. All in all, the bookings though for the second quarter look strong, and that is with some tough comps year-over-year.

But just turning to the accomplishments in the quarter, before I turn it over to Laura, we launched our All-New Rapid Rewards program that we've had under development for a while, and we overcame some opening day jitters, you might say. But the Rapid Rewards membership and traffic and revenues are all very strong. We've got year-over-year gains in all of those categories above system averages, and of course, our system averages are very strong.

We had three exciting new cities added to our route map in what amounted to two weeks in March. That's a lot of action, a lot of activity. But we were received very, very enthusiastically and very warmly in all three. And again, we're just delighted to be there. Work continues on bringing the 737-800 model into the fleet, and that is progressing as planned for introduction to Southwest Airlines next year.

Early in the year, we launched or deployed our required navigation performance procedures with our flight operations department and that, of course, are designed to more efficiently route aircraft and therefore, save fuel. The integration planning of AirTran, as you can imagine, was very active during the quarter. And also as we reported this morning, we set the date for closing on May 2, which is 11 days from now. I'm looking very much forward to that day and obviously, that will open the door for a lot of new work to finally begin.

We also announced this morning that Bob Jordan will be the President, once we close, of our AirTran subsidiary. Bob Fornaro, who is the very fine and very capable CEO of AirTran at that point, will move to a consulting role for us. And obviously, I'm very much looking forward, as is Bob Jordan, to working directly with Bob Fornaro at that point.

And then finally, before again I turn it over to Laura, I did want to give you all a report on flight 812, which is the event we had on April 1. It's not a first quarter event but nonetheless a big event. There are several points I want to reiterate. First of all, safety is our duty, and it is our top priority, and there should be no question about that. Secondly, no airline has a better safety record than Southwest Airlines, and this year marks our 40th anniversary in operation.

The Boeing 737 is one of the world's most popular and one of the world's most successful aircraft, and we fly them exclusively. And in fact, we're one of the world leaders in terms of operating the 737. Boeing is one of the world's great companies, too. They design, they build and they provide the maintenance plan and guideline for the 737. They are a fantastic partner. They have been terrific to work with, and I'm very pleased with their response to this event. We're working very closely with Boeing along with the FAA and of course, the NTSB. And the NTSB is leading the independent investigation as to what happened and why. And as you would imagine, we have provided them our full support.

After the event, we grounded the similarly configured 737-300s for inspection. That was 79 airplanes over a three-day period. We canceled a little less than 700 flights. I think we've had some questions on this. The revenue effect of all of that was minimal. But I'm sure Laura will speak to that. Of the 79 aircraft that we inspected, we did find five aircraft that had small subsurface cracks. All of those were repaired, and all of those airplanes are back in service as are the other 74 aircraft, which had passed the inspection.

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