Southwest Airlines Company (LUV)

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Southwest Airlines (LUV)

Q4 2011 Earnings Call

January 19, 2012 12:30 pm ET

Executives

Ginger Hardage - Senior Vice President of Corporate Communications

Marcy Brand -

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

Robert E. Jordan - Chief Commercial Officer, Executive Vice President and President of Airtran Airways

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

Analysts

William J. Greene - Morgan Stanley, Research Division

Helane Becker - Dahlman Rose & Company, LLC, Research Division

David Koenig

Bob McAdoo - Avondale Partners, LLC, Research Division

Kelly Yamanouchi

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Raymond Neidl - Maxim Group LLC, Research Division

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Hunter K. Keay - Stifel, Nicolaus & Co., Inc., Research Division

Daniel McKenzie - Rodman & Renshaw, LLC, Research Division

Mary Schlangenstein

Presentation

Operator

Good day, and welcome to the Southwest Airlines Fourth Quarter 2011 Conference Call. My name is Tom, and I will be moderating today's call. This 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, and welcome to our fourth quarter call. Joining me on the call today is Gary Kelly, Southwest's Chairman, President and Chief Executive Officer; Bob Jordan, Executive Vice President and Chief Commercial Officer and President of AirTran Airways; and Laura Wright, Senior Vice President, Finance and Chief Financial Officer.

Today's call will begin with opening comments from Gary, followed by Laura, providing us a review of our fourth quarter results and current outlook and then Bob providing an update on the AirTran integration.

As a quick reminder, Southwest's full year 2011 consolidated results include AirTran's results since the May 2 acquisition date. Prior-year consolidated results do not include AirTran. However, in order to provide what we believe to be more meaningful year-over-year comparisons on today's call, we will also be discussing specified results on a combined basis.

Combined results is the sum of Southwest and AirTran's stand-alone results for all periods prior to the acquisition, without any retrospective application of purchase accounting.

In addition, outlook commentary will be provided on a combined basis as compared to combined prior-year results, unless otherwise noted. We provided supplemental financial information on a combined basis for full year 2011 and for prior-year results in this morning's press release, along with related reconciliations.

Please be advised that today's call will include forward-looking statements. Because these statements are based on the company's current content, 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 results, excluding special items or non-GAAP results. Please reference this morning's press release in the Investor Relations section of southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

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

Gary C. Kelly

Thank you very much, Marcy, for that very thorough introduction, and thank you all for joining us this morning. We are obviously pleased to report a profit for the year that represents our 39th annual consecutive profit of $330 million, $0.43 a share x items. That's always a good thing in our tough business. We are very pleased to report a fourth quarter profit of $66 million or $0.09 a share x items, which is $0.01 better than Wall Street estimates.

I want to thank all of our employees. 2011 was a very historic year for Southwest Airlines and for the most part, we accomplished what we set out to do and it's all due to their tremendous efforts. So I want to thank them first and foremost.

We had an outstanding record revenue performance, and it helped blunt the very significant rise in jet fuel prices, 33% increase in jet fuel prices. But so far, at least our strong revenue momentum is continuing in the first quarter for the most part. That was really the story all year long in 2011, very strong revenue growth, but not quite sufficient to completely offset what ended up being about a $1.7 billion increase year-over-year in jet fuel costs.

So the resulting decline in earnings, while it is explainable, it's certainly not satisfactory. Our plan for 2012 calls for a significant increase in revenues and profits, and that assumes -- use that word, that assumes that our revenue plans work and that we contain cost increases to manageable levels. And in particular, our outlook for fuel prices in 2012 is pretty benign, always subject to change. And that comes with a very quick caveat that we fully admit, that energy prices are something we just can't predict.

We have no plans to grow the fleet, and certainly until we hit our profit targets and certainly no plans to grow in 2012. Our network plans in that respect are conservative, and they're geared towards boosting our unit revenue performance. Through August of this year, Southwest has only one new city planned and that is Atlanta, as everyone knows, which will start service for Southwest Airlines at least, next month. And obviously, that is an important first step of the AirTran integration.

AirTran will be closing cities this year that are not profitable. And at least through August, AirTran plans to add just 2 new cities and those are international, Cabo San Lucas in Mexico City.

As I mentioned before, we accomplished a great deal in 2011. We launched our completely revamped All-New Rapid Rewards program. It is off to a tremendous start, and I think that we will begin to see very significant revenue benefits from that program here in 2012.

We opened up 3 new cities within the span of 2 weeks. Of course, we closed on our AirTran deal and then we ended the year with a very big deal with Boeing and GE.

For 2012, for many of you it may seem like it's old news, but it's going to be a huge year for us. First of all, we want to continue our focus on the operation, the quality of our operation and our customer service. They are both performing at very high levels and again, I'm very, very proud of our people. In terms of improvement, we'll be focusing on improving our productivity, improving our efficiency to blunt cost increases.

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