Southwest Airlines Company (LUV)

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Southwest Airlines (LUV)

Q2 2011 Earnings Call

August 04, 2011 11:30 am ET

Executives

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

Ginger Hardage - Senior Vice President of Corporate Communications

Robert Jordan - Executive Vice President of Strategy & Planning and President of AirTran Airways

Marcy Brand -

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

Analysts

William Greene - Morgan Stanley

Garrett Chase - Barclays Capital

Daniel McKenzie - Rodman & Renshaw, LLC

Duane Pfennigwerth - Evercore Partners Inc.

Jamie Baker - JP Morgan Chase & Co

Michael Linenberg - Merrill Lynch

Helane Becker - Dahlman Rose & Company, LLC

Presentation

Operator

Welcome to Southwest Airlines' Second Quarter 2011 Conference Call. My name is Tom, and I will be moderating today's conference. Today's 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, Director of Investor Relations. Please go ahead, ma'am.

Marcy Brand

Thank you, Tom. Good morning, everyone. On the call today, we have Gary Kelly, Chairman, President and Chief Executive Officer; Bob Jordan, Executive Vice President, Planning and Strategy and President of AirTran Airways; and Laura Wright, Senior Vice Present, Finance and Chief Financial Officer.

We will begin today's call with opening comments from Gary. Laura will then review our second quarter results and current outlook. And Bob will close with an update on our integration of AirTran before we open the call for questions.

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 this morning's earnings release in the Investor Relations section of southwest.com for further information regarding forward-looking statements and for reconciliations of non-GAAP results to GAAP results.

This morning's second quarter 2011 earnings release includes Southwest's results for the full quarter and AirTran results from May 2, the date of the acquisition, through June 30. Prior year results are Southwest only. In order to provide what we believe to be more meaningful year-over-year comparison on today's call, we will also be discussing specified results on a combined basis, which will include AirTran's results for all periods prior to the acquisition. In addition, outlook commentary will be provided on a combined basis as compared to combined prior period results.

And finally, the impact of purchase accounting has been applied as of the date of the acquisition, May 2, in all financial information discussed. We have provided supplemental currents in prior year financial information on a combined basis in this morning's press release and in a supplemental packet posted this morning on the Investor Relations section of our website at southwest.com.

And now, I'll turn the call over to Gary for opening remarks.

Gary Kelly

And thank you very much, Marcy. And good morning, everyone, and thanks for joining us. First of all, I wanted to start by thanking Laura and her entire team, and especially Marcy in Investor Relations and Leah Koontz our Controller and our accounting department. They have done a superb job in a particularly challenging quarter, given the acquisition of AirTran. So thank you all very much.

I'm very confident whatever questions you have about the quarter from whatever angle, they can answer that. So as you all work your way through the second quarter numbers, I'll just tell you from personal experience, please be patient, and you can find your answers. But again, our kudos to the whole finance department. Great, great job.

Second of all, $0.15 a share was pretty much in line with our Southwest expectations. And that is recognizing there was no public guidance for the AirTran piece of the results. And that, of course, the AirTran results were just for 2 months out of the quarter. So regardless, though, of the expectations, the results were down from a year ago, down 48%. Obviously, we can't be satisfied with that. The primary culprit, obviously, is fuel.

Our second quarter revenue results were strong. We had records across the board. For a number of years, we've significantly outperformed the domestic industry. If you look at Southwest 2011 second quarter results, we're up 27% versus 4 years ago. So it's hard for me to complain about our revenue performance.

Compared to our industry peers, we're often in a different rhythm at Southwest Airlines. It seems the comps for Southwest are tough compared to last year. We had a bang-up performance in 2010. But in any event, revenues are strong. While they are strong, and I think that strength will continue based on July's results based on our current trends, based on bookings for August and September, the rate of growth has slowed, probably beginning in June where we report very modest unit revenue growth for the month of July. Once we publish our July traffic, I believe we'll see stronger year-over-year RASM growth in August, September. If you look at the full quarter, my best guess at this point is that we'll be up year-over-year, somewhere in the low single-digits range on a combined basis.

I do believe, though, we've seen some softening in business travel this summer and based that on demand for full-fare close-in bookings, I don't know whether it will pick back up any time soon. Probably state the obvious, I am concerned about the U.S. economy, concerned about fuel prices. The current level of profits, obviously, demands that we take action, which right now is to manage our capacity more aggressively and very, very carefully.

AirTran announced earlier this week that it will close 4 cities next year. And Southwest announced the previous week that we'll no longer fly to certain city pairs beginning with our January flight schedule.

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