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Southwest Airlines Co. (LUV)
Q3 2015 Earnings Call
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CORPORATE PARTICIPANTS
Marcy Brand Director of Investor Relations
Gary C. Kelly Chairman, President & Chief Executive Officer
Tammy Romo Chief Financial Officer & Executive Vice President
Robert E. Jordan Chief Commercial Officer & Executive Vice President
Linda Rutherford Vice President Communication & Outreach
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Savanthi N. Syth Raymond James & Associates, Inc.
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker)
Rajeev Lalwani Morgan Stanley & Co. LLC
Darryl Genovesi UBS Securities LLC
Dave E. Fintzen Barclays Capital, Inc.
Michael Linenberg Deutsche Bank Securities, Inc.
Hunter K. Keay Wolfe Research LLC
Joseph DeNardi Stifel, Nicolaus & Co., Inc.
Duane Pfennigwerth Evercore ISI
Michael Lindenberger The Dallas Morning News
Andrea Ahles Fort Worth Star-Telegram
David Koenig The Associated Press, Inc.
Jeffrey Dastin Thomson Reuters Corp.
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MANAGEMENT DISCUSSION SECTION
Operator: Welcome to the Southwest Airlines Third Quarter 2015 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, Senior Director of Investor Relations. Please go
ahead ma'am. ......................................................................................................................................................................................................................................................
Marcy Brand Director of Investor Relations
Thank you, Tom, and good morning, everyone. And welcome to today's call to discuss third quarter 2015 results.
Joining the call today, we have Gary Kelly, Chairman, President, and CEO; Tammy Romo, Executive Vice
President and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer; and Mike Van De Ven,
Executive Vice President and Chief Operating Officer.
Please note today's call will include forward-looking statements and because of 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.
As this call will include references to non-GAAP results, excluding special items, 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.
At this time, I'd like to go ahead and turn the call over to Gary for opening remarks. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer
Thank you, Marcy. And good morning, everybody, and thank you all for joining our third quarter 2015 earnings
call. We're celebrating. This is a terrific quarter and really a terrific year. I'm very proud of all of our people, all
47,000 of them. And I want to thank them and congratulate them on these stellar results. This is the culmination
of years of hard work on their part as well as daily dedication to running a great airline and taking great care of
our customers. While it is true that the majority of the 71% surge in our earnings per share was due to a dramatic
drop in jet fuel prices, there are a lot of other good things happening in this quarter.
Our Rapid Rewards program continues to grow in terms of members and revenues, and obviously, the amended
credit card deal is a highlight for the quarter and for future years. Next, our core passenger business overall is
solid and steady and that's despite the very brisk competitive environment that we find ourselves in.
I'm especially pleased with our record load factor and record revenues considering the aggressive Dallas Love
Field expansion, the transition of the AirTran markets this year, the slot acquisitions at DCA and LaGuardia and
our continuing international expansion.
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Next, our cost performance was also very good. Profit sharing was up significantly and of course that's a very good
thing. Our nine-month accrual for profit sharing was a record $484 million and well earned by our people, and of
course they too are benefiting from dramatically lower fuel prices.
As far as the year 2015 goes, I just want to recap our plan for a perspective. This year is a confluence of events,
some planned and some not, but the result is spectacular. We have significant opportunities to expand Dallas Love
Field, Washington Reagan, LaGuardia International, Houston International, all converging here in 2015. While
we have significant opportunities, we also have significant access to low-cost incremental capacity to pursue these
opportunities, and that's through the restoration of our aircraft utilization to more historic levels and our fleet
over the last several years has been underutilized as we've been going through the merger process.
And then finally, with dramatically lower fuel prices, we've had the cushion to mitigate this expansion risk and
actually have been very fortunate to help – have that help to drive record profits at the same time that we're
growing.
So, we've been able to significantly augment our revenue production this year also with the amended credit card
deal. So, all this has supported our growth plan of 7% in ASMs for 2015 and still resulted in record earnings and
returns. And our plans for 2016 are unchanged from our previous guidance.
We're expecting unit revenue growth year-over-year in fourth quarter 2015, which will be an improvement from
the third quarter and that's primarily because our developing markets are continuing to mature rapidly.
So, we expect to end this year with roughly 700 airplanes and add roughly 15 aircraft next year, again for an
available seat mile growth of between 5% and 6%. So, the work over the last five years in particular has come
together exceptionally well.
We're exceptionally well positioned for future growth and that will continue dependent upon our continued
success with our low-fare brand, which of course, is built with low cost and our transparency. And we're
exceptionally well positioned for future growth, but also dependent upon our continued success with our customer
service and especially, the hospitality of our people, which is something that Southwest is beloved by our
customers for.
So, with that very brief overview, I'd like to turn it over to Tammy Romo, our CFO, who will take us through the
quarterly results. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President
Thanks, Gary, and welcome everyone. We are pleased to report incredibly strong third quarter results, marked by
many records. Our third quarter earnings, excluding special items were a record $623 million or $0.94 per diluted
share, an increase of 71% over last year's $0.55 per diluted share. Our GAAP net income was $584 million,
including $39 million in special items.
In addition to our usual special items related to out-of-period fuel hedging adjustments, we had two other large
special items this quarter, [ph] first (6:51) we recorded an expense of $140 million associated with the tentative
agreement with our pilots in accordance with accounting guidance, and second, as we discussed last quarter, we
had a special revenue item of $172 million related to the required change in accounting methodology, as a result of
our amended credit card agreement with Chase that was effective in July.
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Our operating income, excluding special items, was a third quarter record, $1 billion, which produced nearly a 700
basis point improvement in operating margin of 20.3%. And to top off these records, we produced a 12-month
trailing pre-tax return on invested capital, excluding special items, of 31.1%. So, congratulations to all of our
terrific employees on these outstanding achievements.
Total operating revenues in third quarter, also a record, were $5.3 billion, up 10.8% year-over-year on a capacity
increase of 7.6%. Passenger revenues were also a record $4.7 billion. Demand for our low fares remained very
strong throughout the quarter, resulting in nearly 9% growth in traffic and an all-time quarterly high record load
factor. The yield environment remained soft, but stabilized, and sequentially, our third quarter unit revenue
trends were above average, driven by our credit card agreement with Chase, which again was amended in July.
Our third quarter operating revenues included a $300 million benefit from the amended Chase contract and
resulting change in accounting. Included in that benefit was a one-time non-cash adjustment of $172 million that
reduced the deferred revenue liability and, thereby, increased revenue. This was recorded as a special revenue
adjustment and was excluded from the RASM that we reported. The remaining $130 million incremental benefit
was due to the improved economics of the co-brand contracts and required accounting treatment combined.
This $130 million of benefit was about a two-point to three-point improvement to RASM and we expect a similar
benefit in fourth quarter 2015 which is incorporated into the guidance I will discuss here with you shortly.
With (sic) [Without] the amended agreement with Chase and change in accounting treatment, our third quarter
2015 passenger revenues would have been $40 million higher and our other revenues would have been $170
million lower for a net incremental reduction to operating revenues of $130 million. And of course we wouldn't
have had the $172 million special revenue adjustments.
As Gary said, our Rapid Rewards program overall is a huge success and continues to contribute significant
incremental revenue year-over-year. On a unit basis, our third quarter operating revenues declined 0.4% on a
7.6% capacity increase. And we are pleased with this very solid performance, especially considering the impact of
increased gauge and stage length, which impacted our third quarter year-over-year unit revenues by about two
points as well as the high percentage of development markets, which impacted year-over-year unit revenues by an
additional point.
For third quarter, about 18% of our network was under development. We are delighted, as we have been talking
about here for some time with the performance of these new markets, which are performing at or above our
expectations. And Dallas continues to outperform the system on margins and returns with robust demand in all
phases of our Dallas growth.
International is also developing as planned, and again, very excited to begin international service out of Houston
last week.
So, looking ahead to fourth quarter so far, demand for our low fares remains strong. Based on our current
bookings and revenue trends, we're estimating fourth quarter RASM will increase approximately 1% year-over-
year, including about $130 million estimated benefit from the Chase agreement and corresponding change in
accounting treatment.
Considering the estimated two percentage point impact of more stage and gauge as well as another point impact
from 12% of our network under development, all year-over-year, we are very pleased with our fourth quarter
revenue outlook.
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Turning to freight and other revenues, we're also very pleased there and we currently expect our first – fourth
quarter freight revenues to be comparable to third quarter this year. And as I've discussed previously, other
revenues increased significantly year-over-year, and that was largely due to the amended Chase agreement. And in
addition to certain ancillary revenues such as EarlyBird and Upgraded Boarding, those were also strong
contributors to our other revenue growth.
The growth in such ancillary revenues completely offset the loss of AirTran ancillary revenues, so we were – again
just a very strong performance on the ancillary revenue side. We expect another significant year-over-year
increase in fourth quarter 2015 other revenues largely due to the combined impact of the Chase agreement and
required accounting treatment change.
So now, I'll walk through our cost performance briefly. Third quarter unit costs, excluding special items, decreased
approximately 8% year-over-year due to substantially lower fuel prices and cost control, particularly fleet
modernization. Our economic fuel costs decreased almost $300 million year-over-year, driven by the 25% decline
in fuel prices and an improvement in fuel burn. Our fuel price per gallon declined $0.74 to $2.20 versus $2.94 in
third quarter of last year. And our third quarter fuel burn improved 1.8% year-over-year, reducing our third
quarter fuel costs by approximately [ph] $18 million (13:55) and we are on track to achieve our target of at least 74
that we mentioned in November, last November at our Investor Day.
Based on our hedge position and market prices as of Monday, we expect our fourth quarter 2015 fuel price per
gallon to be in the $2.05 to $2.10 range, which is well below fourth quarter last year's $2.62 per gallon. And since
last fall, we've – just to remind everybody, we've significantly participated in the market decline, and we currently
expect 2015 economic fuel costs to decline approximately $1.3 billion over last year.
Excluding fuel and special items, our unit costs were up less than 1%, which was largely driven by the 77% year-
over-year increase in profit sharing and our profit sharing expense accrued this far is a record $484 million, as
Gary mentioned. Excluding profit sharing and special items, our non-fuel unit costs decreased 1.6% year-over-
year, which was better than expected due to some spend, particularly in advertising and technology related to
project costs that have been shifted to fourth quarter 2015 and better than expected airport costs.
Our fleet modernization remains on track to produce an estimated $700 million EBIT this year, even with the
drop in fuel prices. Based on current cost trends, we expect total fourth quarter unit cost excluding fuel, special
items, and profit sharing to be comparable to fourth quarter of last year's $8.22.
Now, I'll move to the balance sheet and cash flow. Our investment grade balance sheet and cash flows remained
very strong and we ended the quarter with $3.1 billion in cash and short-term investments. Our free cash flow was
$1.6 billion, with $583 million in third quarter alone. Our very strong cash flow generation has allowed us to
deliver on our commitments to return significant value back to our shareholders, while we continued to reinvest
prudently in our business.
During the third quarter, we repurchased $500 million in common stock, which brings our share repurchases this
year to nearly $1.2 billion thus far. We received approximately 9.7 million shares under the $500 million
accelerated share repurchase during – and we expected to receive the remaining 25% of total shares expected by
the end of this month.
We currently have $700 million remaining of the $1.5 billion repurchase program that was authorized in May of
this year. We've also repaid a $170 million in debt and capital lease obligations thus far this year and our leverage,
including off-balance sheet aircraft leases, is in the low- to mid-30% range.
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We continue to estimate our 2015 capital spend to be approximately $1.8 billion and that excludes assets
constructed for others, which is estimated to be in the $50 million to $100 million range, net. And that includes
approximately $1.1 billion in aircraft spend. And for 2016, we continue to estimate aircraft spend in the $1.3
billion to $1.4 billion range, with total CapEx estimated to be roughly $2 billion.
Turning to our fleet plans for just a quick minute. We ended third quarter with 692 aircraft in our fleet and
continue to expect our fleet to end with roughly 700 by the end of this year. And regarding capacity, our fourth
quarter available seat miles are estimated to increase year-over-year approximately 8.5% on year-over-year seat
growth of 4.4%. Our full-year capacity growth remains on pace to increase approximately 7% year-over-year, with
seat growing only 2.9% year-over-year, which, as you all know, is driven in large part by Dallas' new nonstop
longer haul flights and also on Washington Reagan, LaGuardia and our new international markets.
Our 2016 growth plans haven't changed, as Gary said, and we continue to expect to grow our available seat miles
for the full year in the 5% to 6% range versus 2015. And as a reminder, the vast majority of 2016's growth will
simply be the annualized impact of 2015 capacity additions that we've discussed.
So in conclusion, we couldn't be more thrilled with our results this quarter. Substantially lower fuel prices along
with solid revenues and cost controls produced record earnings and our balance sheet and cash flows remain
strong. And we continue to be disciplined with our approach to capital allocation as evidenced by our very strong
return on invested capital.
So, with that brief overview, I would like to close again by thanking all of our employees for their hard work and
outstanding contributions to these strong results.
Tom, with that, we're ready to take questions.
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QUESTION AND ANSWER SECTION
Operator: Thank you. And ladies and gentlemen [Operator Instructions] . And thank you for waiting. We'll now
begin with our first question from Savanthi Syth with Raymond James. ......................................................................................................................................................................................................................................................
Savanthi N. Syth Raymond James & Associates, Inc. Q Hey. Good afternoon. Just on the growth opportunity, that I'd like to discuss, you kind of talked about, I think,
there still being a substantial kind of domestic growth opportunity here. And I was wondering does that come
from just routes that you're not in today that you want to add or is it more from just increasing frequency and
gaining share in the markets that you are in today, outside of, obviously, what happened in Dallas? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A We have 85 domestic mainland, 48-state destinations today. I don't believe we have many more dots that we can
add to the route map. So that's the first part of the answer. Among the 85, we have a variety of opportunities to
add nonstop segments. And especially in short-haul markets, if those markets begin to return to pre-2000 traffic
levels, we'll have a lot of opportunities to add frequencies in those markets, as examples. ......................................................................................................................................................................................................................................................
Savanthi N. Syth Raymond James & Associates, Inc. Q Great, Gary. And I guess you've also talked about – and I think I've seen you in articles talking about the potential
to gain share in the long haul markets. Now again going to Dallas, I understand that there was kind of an artificial
kind of holding back in that market. But wonder if you can elaborate a little bit more on your comment on long
haul market share opportunity and why maybe Southwest is lagging there and how you kind of go about
increasing that market share? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Savi, I think what you're picking up there was an interview that was done with Fortune. And I really think that's
old news. So that article was really recounting where we've come over the last decade. So, that was much more of a
story 10 years or 15 years ago. Today, we're very, very pleased with the progress that we've made. You're very
familiar with the initiatives that we've been working on over the last five years. So, I think prospectively, that
would not be our messaging today that we believe that we can well gain share in long-haul markets.
Now, in terms of the expansion opportunities that we have just geographically, since we're just now getting started
flying transborder, obviously those will be long-haul opportunities, but, that's really more a function of us building
off of our domestic base, having a very small presence internationally and having a lot of potential destinations
that we can add to our route now. So, we're pleased with the customer experience as we have it today. We're very
pleased with the market performance, whether it's long, medium or short, and we're happy to have the 737,800 as
a component of our fleet. It's just performing exceptionally well. ......................................................................................................................................................................................................................................................
Savanthi N. Syth Raymond James & Associates, Inc. Q
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Helpful. And if I just may, what I'm trying to understand Gary is, just the opportunity to grow 5% or 6% type levels
in the future. I'm trying to understand is, how much of that comes from domestic, I know, [ph] half the
commentary (24:27) on international has been more of this kind of slow growth and it's – 1% of ASMs, so it's a
small base. Just trying to figure out, as you look out over the next three years, four years even, just how the growth
will be – what the composition of the growth and what level of growth is reasonable for Southwest? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, the only guidance I can give you on the growth rate is for 2016, and there we're going to grow 5% to 6%. Next
year, about a point or two of that will be international, and beyond that we'll just take that on a year-to-year basis,
and we'll pursue the opportunities that are the most advantageous for us.
Over time, I think that most of our growth opportunities in the future will skew towards domestic, but clearly,
most of the – virtually all of the new destinations will be international. But we're not – we're not operating under a
route target earthier way. We've got – decisions that we're making still for even for 2016 as to what we want to do
with the additional capacity that that we're adding next year. So and as Tammy has already pointed out, there is
not much new planned for 2016 anyway because most of it's just going to be the full-year effect of decisions that
you're already familiar with here in 2015. ......................................................................................................................................................................................................................................................
Savanthi N. Syth Raymond James & Associates, Inc. Q Got it, all right. Thank you, very helpful color. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from Julie Yates with Credit Suisse. ......................................................................................................................................................................................................................................................
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker) Q Taking my question. Realize that it's a little early to comment on 2016 unit cost trends. Can you offer any color at
least directionally on what we should expect in 2016 assuming the pilot deal is ratified and can we look at the Q4
run rate of flat as a good proxy? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Julie, you were breaking up a little bit there, but I believe that you were asking about our 2016 cost performance, if
I picked your question up right, is that correct? ......................................................................................................................................................................................................................................................
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker) Q Correct. Yeah, I just said, I know it's a little early, but if can you offer any color directionally assuming that the
pilot deal is ratified and can we look at the Q4 run rate of flat as a good proxy as we move into next year? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Sure, I can provide a little bit of color, but we are still working through our 2016 plan. So I'm not prepared to give
you cost guidance here today, but just a couple of items of note, as you're thinking through 2016. While I would
expect ongoing benefit from our fleet modernization effort, I wouldn't expect the year-over-year impact to be as
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significant as this year, since we're past the anniversary of the 717S, so we'd still get some benefit there. I'd also
anticipate some cost pressures, particularly salary, wages and benefits as I think you noted. And in addition, while
we aren't prepared to provide an implementation date of our reservation system until we get past couple of
milestones here, I would encourage you to keep in mind that we would expect to have some training costs
associated with that implementation as well.
So – but as always, I think we've demonstrated year-in and year-out, that we're very diligent when it comes to our
cost control efforts, and we'll work hard here in 2016. But until we have completed our planning efforts here for
2016, I'll hold off on giving you any specific guidance until later this year. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Tammy, I might just add... ......................................................................................................................................................................................................................................................
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker) Q Tammy, to be clear, is that going to be later this year or is that – will that be in January with Q4? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A I – well, it may be with Q4 with earnings. But I don't know, Julie, well, but it will be later. I'm just not prepared
here today to give you specific guidance yet, simply because we're still working through our plans with respect to
cost for 2016. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Julie, the only thing I was going to add to what Tammy said is that, again, to be clear, with the pilot tentative
agreement, if that is ratified, that will be a cost for that work group, that will be a cost increase next year, but that
is an investment in our people, it's an investment in Southwest Airlines. It gives us certainty that we can plan
around. And obviously, our objective here is to work together to grow Southwest Airlines. So, obviously, we're very
pleased to have a tentative agreement and we should know the results of that voting here in, I guess, two weeks. ......................................................................................................................................................................................................................................................
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker) Q Okay. Gary, let me ask you something we had talked about I think during our headquarters visit back in May
about you guys continuing to focus on expanding your fundamental margins. And so you're doing that again in the
fourth quarter now that your RASM is back to positive and your costs are flat. Looking into next year, would you
expect the spread for RASM to exceed the growth in CASM? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A That'll clearly be the target and I would just again defer to Tammy and repeat what she said, which is once we're
ready, we'll provide the cost, our outlook for next year. But part of the strategy with our growth in 2015/2016 is to
allow these – there's a large percentage of markets that are under development, give them a chance to mature next
year. So, the percentage of markets under development a year from now, I think Bob, we'll be in about the 5%
range. ......................................................................................................................................................................................................................................................
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Robert E. Jordan Chief Commercial Officer & Executive Vice President A Yeah... ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A So clearly, we are – we'll set an expectation for some tailwinds here with RASM improvement and do the best job
we can to match that up with some of the cost pressures that Tammy has referred to for next year. Clearly, that'll
be our objective. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A And, Julie, the only other thing I would add to that, just to surmise, we will have a full-year impact from the Chase
agreement. So, just make sure to factor that into your thoughts as you're thinking about next year. ......................................................................................................................................................................................................................................................
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker) Q Okay. Great. Thanks. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A And you all, I know, will take some time to evaluate our revenue results, but there's quite a bit of noise in those
numbers. They look very solid to me, when you tease apart the increase in the stage length, the increase in the
gauge, some of the effective reclassification for accounting purposes from passenger revenues to other. There is
quite a bit of noise there and it looks very good. So, it's just helpful that even with the noise, the fourth quarter
number shows positive, so, you don't have to go through a lot of this analysis. But if you're careful and you look at
the analysis, I think you'll be pretty impressed with the revenue performance here in the third quarter also. ......................................................................................................................................................................................................................................................
Julie A. Yates-Stewart Credit Suisse Securities (USA) LLC (Broker) Q Okay. I would agree. Thank you. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from Rajeev Lalwani with Morgan Stanley. ......................................................................................................................................................................................................................................................
Rajeev Lalwani Morgan Stanley & Co. LLC Q Thanks for the time. Just, first on capacity growth as we look at next year, can you just talk about the cadence and
maybe compare the beginning of the year going towards the – maybe the end of the year? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A In terms of just capacity, Rajeev, yeah, you'll see similar – in terms of ASM growth, you'll see similar trends in the
first quarter as you're seeing here in the fourth quarter, and then it will obviously taper out as we go through the
year. ......................................................................................................................................................................................................................................................
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Rajeev Lalwani Morgan Stanley & Co. LLC Q All right. And then just on the – continuing on the last comment around the revenue environment, I was just
hoping to get more color, like Gary you touched on sort of a brisk competitive environment. So, just get your
thoughts on, sort of what would make that calm down going forward? Is it fuel, is it just lapping certain dynamics?
Just your thoughts there would be great. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, I'm chuckling because you're talking about the competition in the industry, et cetera. So, we are doing well
in this environment. We're a low cost carrier. We're a low fare brand. And we're growing and we love the
competition and we love being pro-consumer. So, I think we'll continue to manage our growth according to our
ability to generate appropriate returns and we're going to continue to work very hard to deliver on our low-fare
brand promise to our customers. So, low fares is our specialty in our business and we've been profitable for 42
years with that. So, I would expect that will continue. ......................................................................................................................................................................................................................................................
Rajeev Lalwani Morgan Stanley & Co. LLC Q Okay. Thanks. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from Darryl Genovesi with UBS. ......................................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Hi, guys. Thanks for the time. So, Gary, you've got a couple of things going on. I guess, you've got a – some new IT
on the merchandising side, and at the same time, your average stage length continues to increase. And I just
wondered if, you could give us some updated thoughts on any, perhaps, big picture kind of changes to the price
positioning that you're concerned currently. I know there has been various questions asked on this topic over the
years, but just wondering kind of how you're thinking currently about all of the things like perhaps doing a
premium economy, perhaps putting in more of a – of a seat selection ability in the main cabin, those types of
opportunities. Anything you could share would be helpful. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A You bet, and again, yeah, thanks for the question there. So, and you're right. We are continuing to invest in the
company in various ways. So, we have investments underway that are physical in nature, in terms of airport
capacity. We just opened up Houston-Hobby, we've got a large project underway at LAX. We've got a large project
underway at Fort Lauderdale, which will create international flying capability there.
So that's one thing that we're doing that I think fits in somewhat with your question. From a technology
perspective, we're replacing our reservation system, but there is a broader commercial agenda that we'll roll out,
Bob, over the next five years, I would say, a lot of it will come online sooner than that. But that will give us
significantly updated capabilities to pursue our commercial goals. And then thirdly, we also have a similarly large
agenda with Mike Van de Ven and his team on the operations side of the house. So, there's a lot of infrastructure
investment taking place. There is a lot of infrastructure spending by the way that will be occurring in 2016, so that
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will be something that Tammy will want to share when we're ready here at a future date. We're excited about all of
that.
With respect to the customer experience, there is no question that we'll have better tools in the future to make
more tactical decisions in terms of changes to the current approach. Having said that and looking at the current
results and our expectation for 2016, I am very happy with our customer experience. And our focus right now is
very much on the basics. It is using the tools that we have to improve the reliability of our operation and also to
invest in our people to improve the hospitality of our customer service, and that we can do without new
technology and it's something that we're very excited about. The technology, I think, will certainly enhance our
ability to better execute against those two goals.
But we're real happy with the product that we have right now. I think we've actually got opportunities to improve
further. And you know that the kinds of considerations that you're asking for, I think something that we could
think about in the future, but we have no plans to make any changes that are material along those lines. ......................................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Great. Thanks for that. And then, Tammy, on the – on the fuel hedge margin, it looks like you reversed about half
of what you had posted last quarter. I think it looks like you've got about $200 million left. Should that come
through in Q4? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A That's – yeah, that's correct. We provided you the – the liability. And for the remainder of 2015, I want to say
that's in the $100 million to $125 million range, I think it was $116 million. ......................................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Great. Thanks very much. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from David Fintzen with Barclays. ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Hey. Good afternoon, everyone. Question on the Wright Amendment line, now that you've got, I guess, about a
year under your belt, do you view the new flying as markets that just sort of jump-started the typical market
development cycle where you kind of got to that 18 months to 24 months processing, you got there quite fast, or
do you think as sort of these markets from here develop, like they're not finished developing, they continue to go? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A But you know, it's both. First of all, we've never had anything like this, it's a pretty unique, well, it's a very unique
scenario. And we were already in those markets already and had a lot of customers and I know you know all of
this. So that, that clearly gave us a head start. And it allowed us, in terms of our planning, if you go back 12 months
before the launch of these flights, it allowed us to be more bold and more aggressive and just believing that those
flights wouldn't be a drag on our earnings.
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As we were – our objective for 2013, 2014 and 2015 was to hit our earnings targets, and we've done that. Having
said that, while they've out of the box virtually every flight, not literally, but almost every flight has been very
successful financially, they're still developing. I mean any – as you know, our flight activity is up 50%. I believe the
available seat mile capacity is up 188%. We all know that is huge. And there are bound to be some imperfections
there that need to be tuned.
So, we'll continue to look at our schedule and we'll continue to look at our revenue management and with the idea
that we'll continue to improve from here. But it is with the understanding that – and we've been very clear about
this, the financial performance out of Dallas has been superb from day one. So, the improvement may not be as
sharp in those markets as it will be in some others... ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Right. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A But nonetheless, I absolutely would expect that we'll continue to see improvement from that capacity. ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Okay. That's helpful. And just – and maybe a quick one in terms of a couple weeks from now, we'd find out about
the TA. If it is voted down, how does the CASM ex guide change for the fourth quarter? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A We will – if there is any change to our guidance, we'll just update you as appropriate later this quarter. ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Okay. All right. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A And the first, just trying to help you a little bit here, that you don't get a full quarter change because – and think
about the fourth quarter, because the effective pay rate change date is November 1, Mike, if I remember right. So,
it's not the – you wouldn't have a full quarter effect of the pay increase in the fourth quarter. ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Okay. And then, in terms of how the contract is implemented, are there things that sort of, maybe from a crew
planning standpoint, et cetera, that sort of hit you cost wise upfront that you kind of manage over time, or is it –
once the sort of contract goes in, that's kind of – that's the right run rate on the pilot side? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A
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Again, I think we'll need to – when that is all certain, one way or the other, I think we'll need to go into the effects
of the contract. But you – at least for the time being, you got good guidance from Southwest on the fourth quarter
cost outlook. ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Okay. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A We've booked the accrual for the bonus. And with that, we are assuming in our guidance that the agreement is
ratified. ......................................................................................................................................................................................................................................................
Dave E. Fintzen Barclays Capital, Inc. Q Right. Okay. All right. I appreciate that. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from Michael Linenberg, with Deutsche Bank. ......................................................................................................................................................................................................................................................
Michael Linenberg Deutsche Bank Securities, Inc. Q Oh, hey. Hey, everyone. Just two quick ones here. Tammy, the next year's growth to 5% to 6% ASMs, do you have
a – what the sense that is on departures? I think you gave us departure growth for the fourth quarter. And then
with the new Houston International Terminal and it looks like you've been adding international flights from other
markets. How should we think about what part of that is international, the split between international and
domestic? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A For 2016? ......................................................................................................................................................................................................................................................
Michael Linenberg Deutsche Bank Securities, Inc. Q Yeah, 2016. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Most of that's going – it's going to be weighted obviously towards domestic, so a small, I guess, probably, call it a
point or so would be international and the rest of that would be domestic. ......................................................................................................................................................................................................................................................
Michael Linenberg Deutsche Bank Securities, Inc. Q And then just the departure growth rate? ......................................................................................................................................................................................................................................................
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Tammy Romo Chief Financial Officer & Executive Vice President A Yeah. Our seats are – we're expecting those to be up 3 point, somewhere – 3.5% – 3.5%, 3.6%, and that is going to
– of course, Dallas, LaGuardia, and Reagan National, and that's, call it, probably half of that, I'm just doing – half
of that and then the remainder would be other just regional additions that we made here this year. ......................................................................................................................................................................................................................................................
Michael Linenberg Deutsche Bank Securities, Inc. Q Okay. Great. And then just a second question, I caught it somewhere in the press, I think it was reported that you
paid $120 million to get access to the Love Field gates. And I was just wondering maybe if you could talk about
how you got to that fair value and whether or not – I mean, do you have exclusivity of those gates or will you have
to accommodate Delta? What's the story there? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, I'll answer the question, Mike, and I just want to recognize that we're under a gag order from the federal
judge on this case. So, I'm going to be very careful not to – not comply with his order. But the value was pretty
straightforward. We simply looked at equivalent values for slot controlled airports, the slots are readily traded,
and I would argue to you that there is no more effectively slot-controlled airport in the United States than Dallas,
Love Field. So, it was pretty straightforward on how we arrived at that value. And, obviously, you've heard our
results from Love Field.
With respect to the exclusivity, this sublease operates like any other airport lease where, yes, we do have
preferential rights to the gates and then are required to make reasonable accommodation, which simply means if
you have room available, then you can't prohibit someone from using the gates. And that's the way it works, that's
the way it works at Love Field, that's the way it works everywhere. Obviously, there is no room at Love Field for
anybody other than Southwest on our gates by the way we are operating. ......................................................................................................................................................................................................................................................
Michael Linenberg Deutsche Bank Securities, Inc. Q Perfect. Yes. Thanks. Appreciate it, Gary. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Yes. Sir. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Hey, Mike, just one clarification, the numbers I gave you are for carryover. And so it wasn't unclear if your
question was carryover or in total, but it's not going to move a lot. It's probably somewhere in that 4% – the seats
are probably somewhere in the 4% growth range. ......................................................................................................................................................................................................................................................
Michael Linenberg Deutsche Bank Securities, Inc. Q Very helpful. Thanks, Tammy. ......................................................................................................................................................................................................................................................
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Operator: We'll take our next question from Hunter Keay with Wolfe Research. ......................................................................................................................................................................................................................................................
Hunter K. Keay Wolfe Research LLC Q Hi. Thank you very much. So we all think of Dallas as being Dallas obviously and it is very competitive. In reality,
there's two different airports there. And at times, they behave like different markets. So I'd love to hear what you
guys have discovered as the Wright Amendment routes have spooled up about the competitive dynamic in Dallas
in terms of sort of when Love Field and DFW truly compete with each other and maybe when they don't, as in
maybe does the competitiveness become a little bit less important during trough period travel times and are there
times where maybe these two airports are maybe more distinct to one another than maybe a lot of people realize
at a high level, anything you can share with your experience, I'd appreciate it. Thank you. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I'd be happy to. I would say more than any other dual or multiple airport market that I can think of, they operate
as one airport and I've been here for 30 years and they always have. So the prices are matched. They're matched
obviously when it's Southwest Airlines leading in the market. It's been rare historically to have any low-fare
offering at DFW because of the dominance at that airport, so really it was left to Southwest in this market to
provide that low fare competition. That changed materially in 2006 when President Bush signed the Wright
Amendment compromise because we could then begin offering itineraries beyond the Wright Amendment area
and you saw prices come down significantly. Now we're able, of course, after 2014 to fly those markets non-stop,
and so there are more seats available at lower fares. You're seeing increase in traffic not just at Love but by virtue
of that increased competition over at DFW.
What we've typically seen over a 30-year period is as we grown with a focus on local traffic, the hub and spoke
carriers, and especially in DFW, began to deemphasize that and shift their focus to flow traffic, which is why in the
old days you'd see one-third of the flights coming from Southwest, one-third from in a city pair, one-third from
Delta, one-third from American and Southwest would have two-thirds of the traffic on that segment. Dallas to
Austin was my all-time favorite example. And that phenomenon continued more and more and more because they
simply could not compete effectively with their costs on especially those short-haul segments.
So they absolutely compete. I talk to customers here in the DFW area all the time who tell me that they choose
between DFW and Southwest for various reasons, or rather Love Field for various reasons. And I am in the same
situation. I can drive to DFW just as fast as I can drive to Love Field, and obviously, I drive to Love Field. But they
are very close together and it is much more of a single market than Houston as an example or the Washington DC
area. Maybe it's more akin to the Bay Area where Oakland and SFO I think are pretty interchangeable, but it
operates as one market. ......................................................................................................................................................................................................................................................
Hunter K. Keay Wolfe Research LLC Q Okay. Yes, that's interesting. And then as relates to fuel hedging, Tammy, can you talk about some of the risk
parameters that you guys put in place when you think about taking on a hedge position? And how much risk
you're willing to absorb in terms of not just bringing the expenses in terms of sort of downside and upside and
collateral being posted, what are the risk parameters you use on putting on hedges? And when you make
unfortunate hedging choices, is there a level of accountability that exists within your department, if the wrong
choice is made? Thanks. ......................................................................................................................................................................................................................................................
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Tammy Romo Chief Financial Officer & Executive Vice President A And I'd be happy to walk you through that, Hunter. As you're aware, fuel represents one of our largest expenses.
So it's either our first or second and it's really pretty straightforward. Our fuel hedging program is designed to
provide insurance when prices are rising. Obviously, when prices are low that's not as great of a risk and I think
this quarter is evidence of that where we're producing very nice earnings. So we really look at our fuel hedging to
help us mitigate the impact of the volatile swings that we see in fuel prices and just provide us at least a little more
certainty with respect to what kind of fuel spikes we might have as we're planning for the future.
So in terms of what do we think about, I think it's all the things that you would expect us to. We certainly do
consider our balance sheet in determining how much risk we're able to absorb either on the high side or the low
side with respect to risk that we might be willing to accept on the floor side. But that's simply what we do. We
really do a lot of scenario planning to make sure that we're comfortable with the possible fluctuations in fuel as we
work through our plans. So hopefully that gives you a little bit of insight. So we're looking up and down the curve
to make sure that we're comfortable when prices are high as well as when prices are low. ......................................................................................................................................................................................................................................................
Hunter K. Keay Wolfe Research LLC Q Thank you. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from Joseph DeNardi with Stifel. ......................................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Hey, thank you very much. Gary, I think in that Fortune interview, you also talked about potentially getting to a
90% loaded factor within five years. So I'm wondering if that's how you're managing the airline, whether
Southwest can handle that operationally and whether you have the appropriate ancillary revenue stream to have
that strategy make sense. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A To be honest with you, I don't remember saying that. You might be right. Mike Van de Ven is sitting next to me.
He is about to punch me for saying that. But I don't know, honestly, I don't know if 90% is a realistic number or
not. I really don't know the context of the statement. But I'll answer it today rather than trying to reconcile to
whatever is in that article. Last year, Mike, we were at 83% annual load factor and that was 15 points higher than
what we produced 15 years ago in the year 2000. And a lot of that increase – of course, it's all been necessary.
We've had economic imperatives to adjust our schedule to have fewer empty seats, but we're also carrying more
connecting passengers.
Still very heavily weighted towards non-stop passengers, but I think that that's all important background to think
about your question. We lag the industry. I think a lot of our employees believe that we're the highest load factor,
but actually we lag the industry because we don't hub and spoke and we don't schedule so intentionally for
connecting customers. We've had a nod more that way in recent years, but not nearly as much as the rest of the
industry.
So it seems to me unless we continue to evolve more towards trying to fill airplanes up with connections, we're
going to be somewhere here in the low 80%s. We're running a bit ahead this year over year ago. We just had a
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record load factor for the third quarter, which was at 85%. That was up one point versus a year ago. It feels like
we'll probably beat last year's 83%-ish 2014 load factor, Mike, that we had. So I think we can kind of hinge things
along from here. I'm happy at these levels as long as the rest of our economics continue to be successful.
So one of the things that we've tried to do over the last five years to 10 years is have more customers per
departure, so we would be relying less on having to raise our fares. That's a great way to increase revenues and still
keep our fares low and obviously we're getting closer to the point where that may not be as achievable. I think we
have opportunities to manage our revenues better with revenue management techniques. That's one of the things
that will come with our new reservation system, and by adding value in areas like our frequent flyer program, so
very pleased with the improvement that we've seen with our credit card compensation there.
So we'll continue to look for opportunities to grow our unit revenues and I think for the most part that will need to
come from optimizing our route network and less so in terms of trying to fill more empty seats. ......................................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Okay. That's helpful. And then I think at the Investor Day you also said that once you get beyond 2015 the growth
out of Love that you see yourselves as a low-single digit type grower domestically. Is that still the case or has that
changed at all? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I'm sorry, I was thinking about your question. So is the question about our domestic opportunities to grow... ......................................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Yes. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A ...beyond our Love Field? ......................................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Yes. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well no, I think we have a large opportunity to grow. It depends upon a number of things. It depends on fuel
prices, fares, the economy, all things that you know, depends on our competition, but as we see things today, there
are more than ample opportunities to grow domestically. And as I've said many, many times we'll want to grow in
a sensible way and we'll want to make sure that we maintain a strong balance sheet, we maintain hitting our profit
targets, our return targets, but it is important to grow. It is important to keep the customers that we have.
We all need to continue to add service to meet their needs as long as the traffic is growing. So not growing is
obviously not a good alternative. But if the domestic economy continues to grow and especially if the short-haul
traffic continues to rebuild as some of the early signs we've seen here in 2015, then we'll have ample opportunities
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to grow. I'm reluctant to put a number on it. Whatever I say it really doesn't matter. We're going to grow at the
rate that is justified by our financial parameters as well as the demand in the marketplace. And if we're lucky to
have growth opportunities like we're experiencing right now at the Dallas out of Washington, out of Houston
International, then that will be fantastic, and we'll grow and we'll manage it and we'll continue hopefully to have
the record earnings; that would be our goal. ......................................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Okay. And then just a quick one, Tammy, can you provide what the no-show fee revenue was in the quarter? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Sure. I'd be happy to pull that for you. It was $16 million for third quarter. ......................................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Thank you very much. ......................................................................................................................................................................................................................................................
Operator: And, ladies and gentlemen, we have time for one more question. We'll take our last question from
Duane Pfennigwerth with Evercore. ......................................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore ISI Q Thanks for the time. Only two for me. I'm not going to ask you six or seven. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A [indiscernible] (59:26). ......................................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore ISI Q Yes. So on the other revenue line, it looks like it increased nicely even excluding the new credit card agreement.
Can you just talk about what is driving that and trends you expect going forward? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Yes. As I mentioned as we opened the call, we have had a nice growth in our ancillary revenue. Obviously, the
Chase agreement is benefiting significantly in the other revenue line. So that's going to be the biggest piece of that,
Duane. And we also had freight and others also performing well. So we were actually quite pleased because our
ancillary is offset. As you know, we have the AirTran bag fees coming off and we were pleased that that offset our
revenue. But it's primarily the Chase agreement and then in addition we had a nice showing with EarlyBird and
upgraded boarding. Those were also contributors to our other revenue growth and I think those are really the
headlines. ......................................................................................................................................................................................................................................................
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Duane Pfennigwerth Evercore ISI Q Thank you. And then just... ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A And then one other note is just charter. We also saw very strong growth during the third quarter as well. I think
our charters were up in the 20% to 30% range. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A But, Duane, again, I'm saying the same thing Tammy is, but the Chase deal, if I do my arithmetic here right,
accounts for all but about $25 million of the increase. So there is a $40 million adjustment out of passenger into
other in addition to the $130 million that we've been talking about that had added during the quarter. So there's
actually a $170 million. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A In other... ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Yes, other. ......................................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore ISI Q Yes. Got it. Got it. And I think the trick was to get beyond AirTran, because it was shrinking for a while and now it
looks like it's growing even ex this deal. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A That's right. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Yes, that's true. ......................................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore ISI Q And then on the domestic res migration, sounds like your messaging a little bit on the cost side, the things that we
can sort of look forward to on the revenue side levers that you haven't pulled yet. Can you give any update there?
Is it 2017? Is it 2018? When can we start to get excited about the new levers that you haven't pulled yet? Thanks
for taking the questions. ......................................................................................................................................................................................................................................................
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Gary C. Kelly Chairman, President & Chief Executive Officer A Well, I'm thinking to myself about the new levers that you must be referring to. In terms of the levers that we have
been talking about, I think it's primarily our new reservation system with some enhanced revenue management
capabilities. And I'll let Tammy talk about that, but beyond that our immediate focus – she's already made this
point, you get the full-year benefit of the new credit card deal, which is something we're excited about for next
year. And then we're working really hard to mature our route network. It's gone through a lot of change over the
last couple of years. We're absolutely expecting that we're going to drive more performance from that especially
with the maturing of the developing markets. But, Tammy, anything else you want to add there? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Yes. No, I really don't have much to add to that. The first phase of that I agree would be the revenue management
opportunities and just continuing to optimize the network. And then as we get past turning on our new
reservation system, we'll certainly provide more insights at that time. ......................................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore ISI Q So when would you expect it to turn on? Is that a 2016 event? ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A We have not given the exact date yet, but what we have said is that we will be on our current reservation through
the end of 2016 and we have transition assistance beyond that. So we're getting closer, so just stay tuned and we'll
be back in probably not too much longer with more details on the timeline, but we're just not ready to lay all of
that out for you today. ......................................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore ISI Q Thanks for taking the questions. ......................................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Thank you. ......................................................................................................................................................................................................................................................
Operator: And that concludes the analyst portion of today's call. Thank you for joining. Ladies and gentlemen,
we will now begin our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Vice President
of Communications & Outreach. ......................................................................................................................................................................................................................................................
Linda Rutherford Vice President Communication & Outreach A Good day, everyone. We'll just jump straight to the questions. So, Tom, if you could instruct them on how to queue
up, we'll get started. ......................................................................................................................................................................................................................................................
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Operator: Thank you, ma'am. [Operator Instructions] Thank you for waiting. We'll take our first question from
Michael Lindenberger with Dallas Morning News. ......................................................................................................................................................................................................................................................
Michael Lindenberger The Dallas Morning News Q Thank you very much for the time. I'm wanting to ask you, you've saved a lot of money on fuel and you've made a
lot of efforts to try to keep your prices low by finding other revenue, I guess by volume. Is there any calculation
that you ought to invest some of these savings rather than in share buybacks, but in more aggressive pricing to
drive up your volume, and to sort of give the flying public the benefit that you guys have been sharing with your
shareholders currently? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, first of all, we want to be America's low-fare leader and I think that we are. We're the only – I think the only
– I was going to say the only major carrier. We're the only carrier that doesn't nickel and dime with bag fees,
change fees, so we offer a tremendous value. And we are meeting our financial goals with respect to our cash and
our balance sheet and we're trying to serve all of our constituents: our people, our customers, our shareholders. So
we're trying to take care of each one of those.
Nobody a year ago saw a 50% decline in fuel prices looming, nobody saw that. And so logic would tell you that as
we sit here today, it is going to be very difficult for any of us – you, me, Tammy, anybody – to predict what fuel
prices will be a year from now. What I can tell you from experience is it is very difficult to increase fares rapidly.
Customers hate that and it tends to chase away demand very rapidly.
Every one of our legacy competitors that we compete against has been bankrupt over the past decade and
bankrupted primarily because of surging fuel prices. So I think speaking for Southwest, I am very reluctant to take
our customers through a rollercoaster ride of fares, and if we're all lucky and energy prices remain low for an
extended period of time, I can assure you that we'll continue to offer low fares and continue to add flights and
grow Southwest Airlines.
So that's where the money is going. It's going back to invest in the infrastructure for Southwest. We're building
new airports, we're building new technology for commercial purposes, for operational purposes, and we're buying
more airplanes. We're replacing our older airplanes and we're also adding growth, so that we can expand in
exciting places like we did last week by launching new international flights out of Houston. ......................................................................................................................................................................................................................................................
Michael Lindenberger The Dallas Morning News Q Thank you. And if I could just ask one quick follow up. You mentioned the legacy airlines. Obviously, you guys
have sort of stayed out of the fight between them and the Gulf carriers, but it does implicate this sort of you're all
in the same competitive mix, not obviously as much on the international carriers. But I'm just wondering if you
think there's any weakness in the legacy carriers' position of arguing against the Gulf carriers' huge gains in the
U.S. market based in large part by lower fares and better service. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A
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Well, I would certainly acknowledge that we're all in the same industry, but I would also be quick to add that we
often take a differing view. And with respect to that particular issue that you mentioned, it is not our priority. We
haven't spent any time on it and therefore we just have not taken a position. ......................................................................................................................................................................................................................................................
Michael Lindenberger The Dallas Morning News Q Thank you very much. ......................................................................................................................................................................................................................................................
Operator: [Operator Instructions] We'll go next to Andrea Ahles with the Star-Telegram. ......................................................................................................................................................................................................................................................
Andrea Ahles Fort Worth Star-Telegram Q Hi, Gary. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Hi, Andrea. ......................................................................................................................................................................................................................................................
Andrea Ahles Fort Worth Star-Telegram Q I heard you talk on the call about the Love Field case with Delta that's in front of the federal judge. Delta was
asked last week if they planned to appeal the ruling if it goes against them, and I wanted to ask you the same
question. Will Southwest appeal the judge's ruling if it goes against Southwest? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, really, I want to honor the judge's order here and comply, first of all. We're looking forward to the decision
and we'd expect that hopefully soon and I think we'll respond accordingly at that time. ......................................................................................................................................................................................................................................................
Andrea Ahles Fort Worth Star-Telegram Q You're not willing to come out like Delta did and say that, yes, we definitely plan to appeal this to the Circuit Court
if the judge ruled against us? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I'm not going to not comply with the judge's order to not comment on this case. ......................................................................................................................................................................................................................................................
Andrea Ahles Fort Worth Star-Telegram Q All right. Thank you. ......................................................................................................................................................................................................................................................
Operator: And we'll take our next question from David Koenig with The Associated Press. ......................................................................................................................................................................................................................................................
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David Koenig The Associated Press, Inc. Q Hi, folks. Two questions, because I think the first one is probably a quick answer, but can you say what your early
load factors are on those international flights out of Houston? And also on the cost side, that labor cost line really
stands out. And even if that includes the pilots' ratification bonus, even if it does, you're still up 14.4% and I'm
wondering if that is going to be a trend that your investor should expect to see going forward? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, David, on the latter that's really profit sharing that's driving that. So I would welcome that kind of... ......................................................................................................................................................................................................................................................
David Koenig The Associated Press, Inc. Q Okay. ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A ...increase. But, yes, that's our variable pay component. When the company does well, our employees do even
better. I talked long enough, I forgot your first easy question? ......................................................................................................................................................................................................................................................
David Koenig The Associated Press, Inc. Q Houston, Hobby load factors on the international? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, I can report this, we've got – by far the majority of our destinations are leisure destinations. Those load
factors are consistently very high. These are brand new markets. I'm expecting us to have periods of time though
when we have pretty light loads. The only markets that we've typically seen softer loads than we would like would
be the more business markets, which is primarily Mexico City and some of the flight times there aren't optimal yet
with the slot controls that they have in place. But I was there on Thursday and virtually every flight going out that
day was full. So I think early returns are pretty much what we would have expected. And I think we'll do very well
in that market. The fares have been very high. We're going to come in with famous low fares and we'd very much
expect to have Southwest effect to kick in. ......................................................................................................................................................................................................................................................
David Koenig The Associated Press, Inc. Q All right. Thanks. ......................................................................................................................................................................................................................................................
Operator: And we have time for one more question. We'll take our last question from Jeffrey Dastin with
Reuters. Mr. Dastin, please check your mute button on your phone. We cannot hear you. ......................................................................................................................................................................................................................................................
Jeffrey Dastin Thomson Reuters Corp. Q Hello, is this better?
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Gary C. Kelly Chairman, President & Chief Executive Officer A We can hear you now. ......................................................................................................................................................................................................................................................
Jeffrey Dastin Thomson Reuters Corp. Q Okay, great, great. I was trying to speak for a couple moments there. Well, thank you for taking the call. Has
Southwest finished its response to the Justice Department's civil investigative demand? And do you have any
other update on where that process stands now? ......................................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I think the only thing that I can appropriately comment on is that we're fully complying with the civil investigative
demand. Certainly, we've worked hard and turned over a lot of information, but as to exactly where that stands, I
can't really comment any further. ......................................................................................................................................................................................................................................................
Jeffrey Dastin Thomson Reuters Corp. Q Thank you very much. ......................................................................................................................................................................................................................................................
Operator: And at this time, I'd like to turn the call back to Ms. Rutherford for any closing remarks. ......................................................................................................................................................................................................................................................
Linda Rutherford Vice President Communication & Outreach
Thank you all very much. Of course, if there's any follow-up questions, don't hesitate to call us, or you can always
reach out at swamedia.com and we'll take care of you. Thanks and have a great day. ......................................................................................................................................................................................................................................................
Operator: And this concludes today's call. Thank you for joining.
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