27-Apr-2017 Southwest Airlines...

Corrected Transcript

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27-Apr-2017

Southwest Airlines Co. (LUV)

Q1 2017 Earnings Call

Southwest Airlines Co. (LUV) Q1 2017 Earnings Call

Corrected Transcript 27-Apr-2017


2 Copyright © 2001-2017 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

Marcy Brand Managing Director-Investor Relations, Southwest Airlines Co.

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co.

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co.

Michael G. Van de Ven Chief Operating Officer & Executive Vice President, Southwest Airlines

Co.

Thomas M. Nealon President, Southwest Airlines Co.

Linda B. Rutherford Vice President and Chief Communications Officer, Southwest Airlines Co.

Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co.

................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Jack Atkins Analyst, Stephens, Inc.

Duane Pfennigwerth Analyst, Evercore ISI

Brandon Oglenski Analyst, Barclays Capital, Inc.

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc.

Jamie N. Baker Analyst, JPMorgan Securities LLC

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC

Savanthi N. Syth Analyst, Raymond James & Associates, Inc.

Helane Becker Analyst, Cowen & Co. LLC

Conor Shine Reporter, The Dallas Morning News, Inc.

Andrea Ahles Business Reporter, Fort Worth Star-Telegram

David Koenig Reporter, The Associated Press

Mary Schlangenstein Correspondent, Bloomberg News





MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Southwest Airlines' First Quarter 2017 Conference Call. My name is Tom and I'll 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, Managing Director of Investor Relations. Please go

ahead, ma'am. ................................................................................................................................................................................................................................

Marcy Brand Managing Director-Investor Relations, Southwest Airlines Co.

Thank you, Tom, and good morning, everyone. Welcome to today's call to discuss our first quarter 2017

performance. Please note, today's call will include forward-looking statements and because these statements are

based on the company's current intent, expectations and projections, they are not guarantees of future

performance, and a variety of factors could cause actual results to differ materially.

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 at Southwest.com for further information regarding forward-looking

statements and reconciliations of non-GAAP results to GAAP results.

Joining me on the call today we have, Gary Kelly, Chairman of the Board and Chief Executive Officer; Tom

Nealon, President; Mike Van de Ven, Chief Operating Officer; Tammy Romo, Executive Vice President and Chief

Financial Officer; and Bob Jordan, Executive Vice President and Chief Commercial Officer.

We will begin with Gary providing an overview of our performance, followed by Tammy providing a more detailed

review of our first quarter results and current outlook. Following Tammy's remarks, all of our call participants will

be available to answer your questions. We ask that you please limit yourself to one question and one follow-up so

that we can accommodate as many questions as possible.

And with that, I'll turn the call over to Gary. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co.

Yeah. Thank you, Marcy, and good morning, everybody, and thanks for joining our first quarter earnings call. It

was another strong performance with an operating margin of almost 13% despite higher fuel prices. For the first

time in a while, the First Call consensus estimate for the quarter was too high by $0.02. However, our revenue

and cost performances were both within our expectations.

Our revenue expectations were reset, of course, in March, down 2% to 3% for the quarter. For costs ex -fuel and

profitsharing, we came in always slightly over our budget and at the high-end of the range, but the quarter

includes a lot of noise with year-over-year union contract increases and settlements as well as our final readiness

for the launch of our new reservation system, which is in 12 days.

Revenue trends were solid for the quarter and that they improved slightly compared to fourth quarter. I was

hoping for more improvement than that, but it appears that first quarter GDP was soft, and we also had a lot of





weather impacts in the quarter as well and that was particularly in California. But at least, we didn't lose any

momentum that was gained in the fourth quarter. But importantly, the second quarter trends suggest a significant

improvement, benefiting somewhat from the Easter holiday timing, but more significantly from a strengthening

yield environment. So I feel like we're experiencing an inflection point between the fourth, first, and second

quarters. We have positive unit revenue trends in April thus far, and we're estimating to be up 1% to 2% for all of

the second quarter on a RASM basis.

Second quarter cost trends are pretty similar to first quarter but better year-over-year. We've had the same cost

drivers in that we have the snap-up in union labor rates and costs associated with our technology

implementations. So these year-over-year trends improved dramatically in the second half of the year. That is the

year-over-year unit cost trends.

And as we said in the release, we are on plan for the year with our unit costs ex fuel and profits haring. So with

improving revenue trends, despite somewhat higher fuel cost per gallon than a year ago, once again, we're

hopeful that our second quarter EPS will compare much better to the year ago than the first quarter did versus a

year ago.

Our goal is positive year-over-year comparisons for EPS in the second half of this year. And, of course, that's

dependent on a lot of things but certainly on the yield environment and fuel prices. But that is our goal is to have

second half EPS growth.

With respect to capacity, there is no change from our year-end report in January. We've got 3.5% available seat

mile growth planned for this year, and we're scheduled out into the third quarter. And that's including less than 1%

year-over-year growth in the fourth quarter of this year.

Following the fourth quarter, I expect the first half next year to come in less than 4% and also each quarter. And

along those lines, there has been no change to our fleet plans for 2017 or 2018 other than the fact that we

exercised five -800 options as planned for 2018 delivery.

So we're still retiring all of the Classics by the end of September of this year. There's 79 of them remaining. We

started this year with 723 aircraft in the fleet. We still plan to end this year, after grounding the Classics, with 703

aircraft. With the firm commitments that we have for deliveries for next year, that will take us to 746 aircraft at the

end of 2018, which is within our fleet growth target of no more than 2% through the end of next year.

We have four unexercised options for 2018. So if we exercised those, of course, that would put us at 750

airplanes, which is what we have in the press release. So we're approaching our 2017 and 2018 growth

cautiously. We're managing the grounding of the Classics, which potentially makes for some comparability noise

in late 2018. But as we said in the release, in any event, our full year growth will be below 2016, as we had

previously indicated. So no new news on any of those fronts.

We're very excited about this year. We're ready to deploy our new reservation system in 12 days. We're on track

to open the new international concourse at Ft. Lauderdale's Terminal 1 in June. We're ready to launch

international flights out of that new terminal, including Grand Cayman as a new destination. And as we reported

this morning, we'll be adding another new destination to Fort Lauderdale. And that will be Turks & Caicos, and

that will be in fourth quarter of this year.

Separately, we're very excited to round out our 48-state route map with new service to Cincinnati cranking up in

June.





And finally, we're excited and on track to launch the Boeing 737 MAX 8 and that's scheduled for October 1. My

thanks and congratulations to Boeing and GE for producing a magnificent airplane and one that we are confident

will be the low-cost leader of the narrow-body market.

Now this is the best start that we've had to a year in my memory, and that's considering our operations, our

customers, and our economics all in the aggregate. I am very proud of our people. They run a great airline every

single day.

Last week, we just celebrated our Annual ProfitSharing Day, and today, we celebrate another strong

performance. So again, congratulations to all of them and thank you to all 54,000-plus Southwest warriors.

So, Tammy, with that quick overview, I'll turn it over to you. ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co.

All right, thanks, Gary, and welcome, everyone. I'd like to start by extending my thanks and congratulations as

well to our employees on a strong start to the year. Our first quarter profits were a strong $351 million and

excluding special items, $372 million.

This produced first quarter operating margins of 13.5% and 12.8% excluding special items, which were very

strong and looks to be among the industry-leading performances and would have been even stronger without our

fuel hedge losses which will burn off by year-end.

Coming into the quarter, we faced difficult year-over-year comparisons. The revenue yield environment, which

was stable but still competitive and the Easter shift to April from March last year created challenging comparisons.

And as Gary mentioned, we were also impacted by the severe weather in California.

On the cost side, last year's first quarter fuel prices were much lower. We also had cost pressures from higher

wage rates associated with our amended union contracts as well as various costs associated with the upcoming

implementation of our new reservation system.

Our balance sheet, liquidity, cash flows, and ROIC were also strong in the first quarter. On balance, I'm very

pleased with the strength of our first quarter results, which enabled the continuation of significant returns for our

shareholders and $99 million of profitsharing for our employees.

We're off to a great start here in the second quarter with encouraging revenue trends. Our first quarter revenue

performance was strong with record passenger revenues and a strong demand environment. Operating revenues

were also a first quarter record and declined 2.8% on a unit basis.

This RASM performance was within our range of guidance and relatively in line on a sequential basis. While the

biggest driver of the year-over-year decline in first quarter RASM was the competitive yield environment, it does

feel like we have hit an inflection point here in April.

Other revenues also had another strong performance, driven by Rapid Rewards and other ancillary sources of

revenues, especially EarlyBird and Upgraded Boarding products. And we expect another year-over-year increase

in other revenues in second quarter 2017.





Overall, as we noted in our earnings release, second quarter RASM is estimated to increase in the 1% to 2%

range year-over-year. Even without the Easter benefit of approximately $10 million, our year-over-year unit

revenue trends are currently positive. Our second quarter RASM outlook is encouraging and represents roughly

four points of year-over-year sequential improvement.

Turning to cost. Our first quarter cost performance was within our expectations. Low fuel prices in first quarter last

year drove challenging year-over-year fuel comparisons and a 10.1% increase in our economic fuel price.

In the current environment of higher fuel prices, our fleet modernization and other fuel saving initiatives are

meaningful, especially as we get to the second half of the year and our Classics are retired. In first quarter, our

fuel gallons increased less than our capacity, resulting in fuel efficiency gains year-over-year.

Based on market prices last Friday and our current second quarter hedge position, we expect our second quarter

fuel price per gallon to be in the $1.95 to $2 per gallon range. Our second quarter fuel cost estimate includes

$0.29 in hedging losses, which is also the amount of hedging loss we expect for third and fourth quarters based

on our current hedge position and market prices.

With fuel hedge losses significantly below where they were last year, we currently expect our economic fuel price

per gallon in second half of this year to decrease year-over-year. So, for the full year 2017, we currently estimate

a fuel price per gallon in the $1.95 to $2 range.

Excluding fuel, our unit costs increased largely due to higher wage rates from labor contracts as well as

approximately $40 million in costs associated with our new reservation system and operational initiatives. Our

second quarter CASM, excluding fuel, special items and profitsharing, is expected to increase approximately 6%

year-over-year, with about 3.5 points of this increase related to the labor contracts amended last year.

The remaining increase relates to costs associated with our technology and operational initiatives as well as the

rollout of our new uniforms. Our full year 2017 unit cost outlook remains unchanged. And excluding fuel, special

items and profitsharing, we expect 2017 unit costs to increase approximately 3% year-over-year, almost entirely

driven, when it's all said and done, by the one snap-up in wage rates from the new labor contracts.

This includes our expectation that unit costs will trend to flat year-over-year in the fourth quarter. Considering our

modest capacity growth plan for fourth quarter, our unit cost outlook is quite notable, and we are not stopping

there. We are very focused on controlling our costs to drive incremental efficiencies and widen our competitive

cost advantage.

Turning to the balance sheet. We ended the quarter with our industry-leading investment-grade balance sheet,

which is strong as ever. Similar to last year's first quarter, we allowed our cash to build as we funded our 2016

profitsharing accruals, as Gary mentioned, earlier this month.

Our strong operating cash flow and manageable CapEx resulted in a record first quarter free cash flow of $1.2

billion. For full year 2017, our cash flow outlook remains strong, and we continue to expect capital expenditures to

be approximately $2.3 billion.

Aircraft CapEx is estimated to be $1.4 billion, and non-aircraft spend is estimated to be in the $800 million to $900

million range, which includes $250 million of technology spend on our reservation system and operational

initiatives.





During first quarter, we returned $673 million to shareholders through buybacks and dividends. Our shareholder

returns increased almost 13% year-over-year and in the first quarter alone we have given back more than a third

of our total shareholder returns for all of last year.

In addition to completing the $300 million accelerated share repurchase launched in fourth quarter of 2016, we

launched and completed a $500 million accelerated share repurchase during first quarter. We also repurchased

$50 million of common stock in open market transactions, which leaves $400 million remaining under our current

$2 billion buyback authorization.

In March, we paid our 162nd consecutive dividend at an annual payout ratio of nearly 11%. Our leverage,

including off-balance sheet aircraft leases, is now just over 30%. And as ever, preserving our strong balance

sheet and cash flows remains a priority, and we also remain committed to returning significant value to

shareholders.

Turning now to fleet and capacity. Our plans continue to support prudent and profitable network growth. We

ended the quarter with 727 aircraft in our fleet and continue to expect our total fleet to decline to just over 700

aircraft by year-end. This incorporates the retirement of the remaining 79 Classics by the end of September and

the addition of 41 more NG aircraft and 14 MAX-8s this year.

We're very excited about the launch of the MAX into service this October, which we expect will bring continued

fuel efficiency gains. Just on the network side, it's performing very well. Our upcoming consolidation of our Ohio

operations, including the launch of service to Cincinnati, is a prime example of how we continue to optimize our

network to meet the needs of our customers.

And with the transformative strategic initiatives behind us, including the May 9 implementation of our new

reservation system, we are well-positioned to consider the exciting growth opportunities ahead. We're monitoring

our new market development closely and we'll continue to add markets at a pace that supports our revenue and

profitability targets.

Our 2017 capacity growth remains unchanged at approximately 3.5% year-over-year.

With this brief overview, I'll just close here again by congratulating our employees on a great quarter and exciting

year ahead.

So, with that, Tom, we are ready to take questions.





QUESTION AND ANSWER SECTION

Operator: Thank you, ma'am. [Operator Instructions] We'll now begin with our first question, comes from Jack

Atkins with Stephens. ................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Hi. Good morning, guys. Thanks for the time. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You bet, Jack. ................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q So, Gary, if I can go back to your prepared comments for a moment, you referenced the 2018 capacity plans. And

I know you don't want to get into those in too much depth because the plan is still coming together. But you said

the plan was to have around 4% ASM growth in the first half, but then you referenced quarterly growth and then I

think you said more challenging comps in the fourth quarter. If you could just expand on that for a moment if you

would, and just to make sure we're all on the same page on what 2018 should look like from a capacity growth

perspective? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I'd be happy to. And I'm just going to repeat what I said, Jack. There is no more than – it will be less than 4%. It

won't be 4%, it will be less than 4% for the first quarter and for the second quarter and obviously for the first half

combined. And I'm comfortable in sharing that with you at this point. And beyond that, I'm not willing to give any

specific targets.

My only reference on the fourth quarter is that because fourth quarter this year may be closer to flat year-over-

year, and once we start restoring the flyings that we were doing with the grounded Classics, we'll see some

growth that is higher than normal in the fourth quarter for sure. However, and I want to be clear on this, we have

not committed to a schedule for the second half of 2018, where as time goes by, we're getting more and more

committed, of course, to the first half. But I think the overriding message is the same as what we've been saying

and that we're still approaching our capacity growth cautiously.

One of the things that we were trying to accomplish in 2017, and if necessary by extension, into 2018, is to give

our developing markets an opportunity to mature and put ourselves in a position where we are confident that

positive unit revenue growth is realistic. So, those will continue to be the guiding principles. ................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Okay. That's really helpful. Thank you for that clarification. And then for my follow-up question, if I could ask about

the new reservation system rollout, just sort of curious what sort of preparations have you guys been making sort

of going into this rollout here over the next couple of weeks? And if you could help us think about the incremental





costs that are maybe flowing through to P&L related to training and that sort of thing that maybe roll off, I guess,

as we get into the back half of the year. And then just the priorities around utilizing the new system, because I

know it will give you significantly increased capabilities once it's rolled out. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I'd be happy to and I'll defer to Tammy to give you some further insights on the cost implications here. But

this is a multiyear effort, Tom, this has been under development for three years. And so it is fair to assume that a

lot of technology construction occurred prior to this year, but they're still in the finishing up phases. So we have a

fairly significant spending in the first quarter related to the technology efforts. A lot of testing, of course, is taking

place at this point.

And then from Mike Van de Ven's perspective, Mike, I think you were training 20,000 employees, weren't you? So

we have a lot of our call agents already prepared to take orders on the first part of the release, which was back in

December, but they still had continued training here this year. And then all of our airport employees, we refer to

as ground operations, are undergoing the training for the new departure systems. So it's very significant. It's all

hands on deck. It's a fairly significant amount of spending.

The other thing that is beyond just – as you can imagine, the training is additional time on our employees' part. So

both the commercial departments previously and our operations departments have increased their staffing to

make sure that number one, we have the time available for the training, and then number two, to be prepared for

a learning curve where transactions might take more time.

So you do note that the employee head count is up roughly 7% – I think it's 7.3% year-over-year. And that's a lot

of that – that's a lot of the cost for that increase.

Tammy, you want to speak more directly to the cost implications of that? ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Sure, I'd be happy, happy to do that. As I mentioned in my comments, we had about $40 million in costs in the

first quarter associated with our new reservation system and operational initiative. And so as I think about our

comparisons in the first half versus the second half, we have probably 1 point to 2 points related to the wind-down

of our reservation system and timing of efficiencies related to our operational investments. So, it is significant and

we'll get some relief here as we move into the second half of the year. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A So, I think to summarize, we definitely staffed up for the effort. And then there's sort of a final push with

technology people, our technology partners. And it shows up in our spending. There's no question. If you look in

the other operating expenses line, you'll see that it's up, don't have it in front of me, I think it's 12 point – maybe

11%. But in any event, there's a pretty large increase in that category. So there are a lot of the technology-related

costs that are hitting in that line item. ................................................................................................................................................................................................................................

Jack Atkins Analyst, Stephens, Inc. Q Okay, great. Thank you again for the time.





Operator: We'll take our next question from Michael Linenberg with Deutsche Bank. Mr. Linenberg, please

check your mute button, we cannot hear you. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Mike, you there? We can't hear you. ................................................................................................................................................................................................................................

Operator: We will go ahead and move on to Duane Pfennigwerth with Evercore ISI. ................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore ISI Q Hey, thank you. Appreciate the question. Sorry for a modeling question, but to get to the full year guide, it looks

like it also implies that the third quarter is going to be a pretty muted growth rate in CASM X as well. Could you

explain what would be driving that? ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Sure. And just to kind of help you as we progress here from the first half to the second half on our unit costs, we

already mentioned that about 1 point to 2 points of the cost pressures were experienced here in the first quarter is

related to our reservation system and the timing of efficiencies related to our operational investments. We have

probably a point related to the timing of our union contracts.

And then also as you move into the fourth quarter, we'll continue to see savings associated with the retirement of

our Classic fleet. So that's about a point, which you'll see reflected in lower depreciation and maintenance costs.

And then that probably accounts for most of it. I'm not ready to give you specific guidance on third quarter versus

fourth quarter. But I do think that by the time we get to the fourth quarter, we should be, call it, roughly flat to year-

ago levels, excluding fuel, profit sharing and special items. ................................................................................................................................................................................................................................

Duane Pfennigwerth Analyst, Evercore ISI Q Thank you. And then just for my follow-up, is there a plan to update your thinking on capital allocation at your

Annual Shareholders' Meeting, or are you going to follow that typical cadence? And if so, any new thoughts or

looking backwards, buyback versus dividends, any new thoughts in that perspective? Thank you. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, we haven't done anything so far. So there's nothing to report today. We have a board meeting in May, and

of course, that is a board-level decision. And we would – we've had discussions, as you would expect, with our

board. We meet every other month, so we meet 6 times a year, so we had a March meeting, but have made no

firm decisions or commitment – made no commitments yet. So, it's something that we'll take up in May, Duane,

it's a very fair question. And I think all I would say is to reiterate what Tammy said and I think I've said, which is

we're very focused on shareholder returns. Those are two key questions and we'll certainly discuss that again in

May. ................................................................................................................................................................................................................................





Duane Pfennigwerth Analyst, Evercore ISI Q Thanks, Gary. ................................................................................................................................................................................................................................

Operator: And we'll take our next question from Brandon Oglenski with Barclays. ................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q Hey, good afternoon, everyone, and thanks for getting me on the call here. Gary, I appreciate the outlook on

capacity here at least through the first half of 2018. But as you're going through your reservation system cutover

and the fleet transition, should we be thinking that this is more an outlook on low capacity growth, because you're

physically constrained? Or should we be thinking that actually, this is what the market [ph] feels (31:09) so this is

where we're growing, and if we saw better opportunities, we'd be growing faster even with those constraints

today? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I've tried to be clear on that. So, you quiz me if I'm not hitting the mark here. I think, first of all, there's a fairly

long cycle between the time that you decide that you want to add capacity and when it finally shows up. So there

is some physical nature to all of this. We are growing 3.5% this year. Some of that admittedly is because we're

accelerating the retirement of the Classics. However, we've been straightforward with you all and said that we did

want to slow our growth this year, so that was – it was a factor in us arriving at the decision to go ahead and

accelerate the retirement of that fleet, if you understand my point.

Said a different way, if we really felt like we needed to be growing faster this year and we just had to have lift, I bet

we would probably have tried to find a way, Mike, to keep those airplanes. So, the stars aligned pretty well for us

there. The other thing that Mike has done a beautiful job of, especially over the last four years to five years, is

creating more fleet flexibility for us. And so I mentioned purposefully with my remarks that right now, we're fully

committed with deliveries that would suggest that we'll end 2018 at 746 airplanes.

We have the option to get four more and we haven't exercised that yet. We haven't made that decision yet. S o the

answer to your question is both of those are inputs, but what we're trying to do mostly is match our capacity to the

demand. We want to grow our route system. We want to grow it in a way that we can sustain positive unit revenue

growth as well as hit our ROIC and our profit targets. ................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q I think it's been articulated, Gary. I think it's helpful for investors to hear that message over and over. I guess, the

fear would be though that as your fuel hedge losses run out next year, is there to be temptations as wow, now

we're just naturally making more money, so maybe we should be growing more than we had? Or is that not really

factoring into the outlook? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, of course, it is. In other words, if you just – logic would say the reverse. If we weren't making money, would

we be going out and growing? Well, of course not. You need to fix what you have first before you think about





growing. But our margins are really good right now. They're near industry-leading margins that everybody here

has worked hard for and is very proud of. So we don't want to extrapolate record returns on capital into infinity and

adjust growth plans to that notion. That would be very imprudent to do.

So we're not doing that. We haven't done that. We've tried to be clear that in particular, the growth rates that we

realized in 2015 and 2016 were unusual, and you should not expect that we think that we should be growing at

those rates going forward. But I think it's mainly a matter of just, we want to grow and we need to grow. We need

to strengthen our route system. It's a very competitive industry out there, and that's one of the key weapons that

we have. But we need to do that in a way that we can make sure that we sustain our profitability, our balance

sheet, shareholder returns, all of those things.

I think we've done a nice job of balancing all that, and there's a 46-year history here and there's no reason to

believe that we're going to deviate from those objectives. ................................................................................................................................................................................................................................

Brandon Oglenski Analyst, Barclays Capital, Inc. Q Appreciate the insight. Thank you. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes, sir. ................................................................................................................................................................................................................................

Operator: And we'll take our next question – actually, we'll go back to Michael Linenberg with Deutsche Bank. ................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q Hey, can you guys hear me now? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A We can hear you now, you can do a telephone commercial, yes. ................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q I got to move up on my phone here. Hey, I guess two quick ones. I guess, Gary, back to your introductory

remarks. You talked about a real strengthening in yields, what you saw coming into the June quarter. And I think,

Tammy, you mentioned about an inflection point in April. And I think if we can move Easter aside, are you seeing

it on the close-in booking side? Is it leisure-driven? Like what's – like this uptick, where are you seeing it, what

passenger segments? ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Happy to speak to that. Yes, I know I'm delighted to speak about revenues because we are encouraged by our

outlook here in the second quarter. And, Mike, we're really seeing – it's pretty broad-based improvement in our

sequential trends. So, yes, so, I think it's really just a broader comment. ................................................................................................................................................................................................................................





Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay, okay. And then just my second question on, Gary, for 2018 first half, you said less than 4% in the March

and June quarter. How do we think about the split between domestic and international? Like what – is it 1/3, 2/3? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Let me just – I'm going to think out loud with you because I don't know, I can give you at least a sense of direction

there. But we're going to end this year with a capacity split of about 96% domestic and 4% – not quite 4%, so it's

about 96%-plus and a little bit less than 4% international. We're growing international pretty aggressively here in

2017. It feels to me like it will grow less aggressively in 2018. And that's an understanding that we haven't made

firm commitments here and we'll debate those as long as we can.

We've decided recently that we were going to go ahead and commit to Turks and Caicos. This relates somewhat

to the previous question about how much of this is fixed versus variable. Well, we're committed to this 5-Gate

Concourse construction in Fort Lauderdale. We obviously want to follow that through with having a decent array

of international flying and so that's a pretty aggressive launch of international for us this year because of that.

And then next year, we're purposefully going to throttle back a bit to again allow these new markets some time to

develop. But we don't have a lot of new flying that we're adding this year. A lot of the year-over-year increase is

simply the full year effect of adding routes last year. So this is a pretty conservative year. And I think next year,

except for some of the comparability issue maybe fourth quarter year-over-year, it's going to be a pretty routine

year, it feels like. ................................................................................................................................................................................................................................

Michael J. Linenberg Analyst, Deutsche Bank Securities, Inc. Q Okay. Okay, very good. Thank you. ................................................................................................................................................................................................................................

Operator: And we'll take our next question from Jamie Baker with JPMorgan. ................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Hey, good morning, everybody. How are you? Gary, last quarter, you referred to potential ATC reform as being, I

take these for your words, I'm paraphrasing here, highly beneficial for your customers and your employees,

something along those lines. My concern obviously is that it would potentially free up airplane time. That would

lead to higher capacity, and we kind of know how that movie plays out. How does ATC reform help Southwest?

And how much capacity would it potentially free up? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, Jamie, let's not make a good thing a bad thing. ................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Okay. ................................................................................................................................................................................................................................





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A ...to be more efficient. The problem that we have today, and I'm sure my colleagues, if you ask them or you may

have already – they may have already made these comments, but we're already seeing increased delays this

year being imposed by the FAA because of staffing shortages. So the on-time performance of the industry is

pretty good and inarguably very good.

Well, all that means is that we've simply adjusted our flight times to be longer, anticipating increasing

inefficiencies. And every year, we get more. So it's as s imple as taking city A to city B and those en route times

are just far greater today or the total block time I should say, far greater today than they were 10 years, 20 years,

much less 30 years ago. So what I would argue for our investors and certainly for the company is that we'll

provide better customer service, which ought to be healthier demand and we'll be able to provide these flights far

more efficiently, which ought to be less cost and more affordable for our customers. So it's a double win for the

customer, but it's just a – what company would choose to operate less efficiently? It's just nonsensical.

So, the other thing I would tell you is that we know that there is a premium part of the day that people want to fly.

And to the extent that we can push more of our flying into the mid of the day, we know that, that will also be more

productive. Will it create the opportunity for more capacity? Yes, but we have that opportunity already, so we

already choose to fly more or less in a given period this year. We could be flying more and we're choosing not to

for a variety of reasons.

So I wouldn't make a good thing a bad thing. I think back to the good thing, it's going to be – it's going to take a

huge effort to realize the benefits of ATC modernization. And right now, it's not being realized whatsoever that

we're getting less efficient, not more. So you don't have to worry about that anytime soon, unfortunately, but that

is the right goal and I think the President is behind that and we've got a long way to go to actually realize it. ................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q Okay, that's helpful. And second, on the res system, I thought, suggested somewhere that it's the current res

system that explains why don't fly red eyes. And that doesn't really make sense to me because you have

something like, I don't know, 75, 80 flights every day that leave on one day and arrive after midnight the next. So I

always thought it was how you've flowed aircraft for maintenance, which explain the aversion to red eyes. Was I

just mistaken all these years? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A No, I don't think you're totally mistaken. But Mike, you want to talk about some of this – the current mechanics and

restrictions that we have? ................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer & Executive Vice President, Southwest Airlines Co. A Yeah, so Jamie on the operating side, we do have flights that go across midnight that our flight planning systems

are designed to take that to a certain point. So let's say, I don't know that I have the hour right in my head, but

let's say, to 2 o'clock in the morning but to go... ................................................................................................................................................................................................................................






Michael G. Van de Ven Chief Operating Officer & Executive Vice President, Southwest Airlines Co. A And after that, our systems aren't set up to go do that. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A And Jamie, you are right. I mean, the airline does have an AM, it has a PM and then that's sort of the third shift of

the day, we do dedicate to overnight maintenance. So once we under – under the assumption that we're going to

undertake a significant amount of 'red-eye flying,' we would have to figure all that out. ................................................................................................................................................................................................................................


Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A We have to negotiate with our flight crews over that other crewing period or... ................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer & Executive Vice President, Southwest Airlines Co. A We have those covered in our contracts, but they're difficult because it's hard to put together three-day pairings if

you don't have a sufficient number of red-eye flying. And you're exactly right, Jamie, it introduces complexity with

respect to the maintenance programs at night. We can navigate through all of those things, but we just haven't

had to do that at this point in time in our lives. ................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q It doesn't sound like it's going to be a priority either? Or is – am I mistaken on that as well? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, again, if you're wondering whether we truly have the capability today, we don't. In our minds. ................................................................................................................................................................................................................................


Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A We don't have the tools that we would need. And then if that would – then if you're concerned that, that capability

now leads to yet more capacity, we've got a lot of discussion that we need to have before we decide to commit to





any meaningful amount of red-eye flying. And it is not, as we sit here in the second quarter of 2017, it is – we've

got a lot other things we're working on and it is not a priority for us. ................................................................................................................................................................................................................................

Jamie N. Baker Analyst, JPMorgan Securities LLC Q All right. Very interesting stuff. I'll let everybody else take it back to RASM and CASM, but I really appreciate that

operational overview. Thanks, both gentlemen. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You're welcome. ................................................................................................................................................................................................................................

Operator: And we'll take our next question from Rajeev Lalwani with Morgan Stanley. ................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Hi. Thanks for the time. This might be for you, Gary. But as far as the new reservation system that's set to come

into place in I guess 12 days or so, can you talk about some of the more prominent features you're seeing

benefits from, whether it's scheduling or something else? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Tom, you want to talk about that? ................................................................................................................................................................................................................................

Thomas M. Nealon President, Southwest Airlines Co. A Yeah. So let me cover that one. So, you guys know December, we rolled out the first release, right? And that was

our last published selling schedule. With R2, which is 12 days away, with the function is there, those are the

functions that are really going to be used by the frontline for check-in, boarding passengers, re-accom, that kind of

stuff. The third release, which is on track for the second half of 2017, that's where you really begin to see the

value come through, right?

So, the kind of capabilities you're talking about there, and this is what gets you the $200 million in EBIT, where

you really get to there are the revenue enhancements, probably two big capabilities, one being controls and

improved fare flexibility and such, schedule optimization with that third release, which is scheduled variation, days

of inventory, things like that. And it also sets the foundation for the international work, right?

So one res sets the foundation for airline codeshare, foreign point-of-sale, language, currency, that kind of stuff,

but that's really the back half of 2017 when that will begin to come out live, the value begins to be really kick in, in

2018 and beyond. ................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Very helpful. And then a quick question on capacity. Gary, would it be fair to say that what you're trying to point to

for next year, that capacity growth will be between 2015 and 2016 levels so that's 3.5% and 5.5%? Or is that

getting too granular at this point?





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A That's too early to say. ................................................................................................................................................................................................................................

Rajeev Lalwani Analyst, Morgan Stanley & Co. LLC Q Okay. Thank you, gentlemen. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Yes sir. ................................................................................................................................................................................................................................

Operator: And we'll take our next question from Savi Syth with Raymond James. ................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Hey, good morning guys. Just on the – just a little bit on the pricing side to go back to that, and Tammy, I think

you mentioned that things are improving and looking very encouraging. How much of that – and you mentioned

competitive pricing still prevalent. What I'm trying to figure out is, is this just a fact of peak season is good and

strong and in the off-peak, we just have too much capacity and thinking through what the implications are close to

summer season then for pricing. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A I don't think so, but I think anything is possible. If you go back to last June, you might remember that we were a bit

surprised at the sort of sudden weakening in demand. And that seemed to continue all the way until the fourth

quarter, at which time we were pleasantly surprised at the strengthening in demand.

I really thought we would do a little better in the first quarter this year. It wasn't bad. It didn't slip, but it didn't

improve as much as we thought. And I made my GDP comment earlier. We've all read about the delay in tax

refunds and the impact that that had on consumer spending. I don't know if that had some impact.

But we're trying to take all those questions, Savi, into account. And taking that into account, we're saying that

there is a trend improvement sequentially. And I'm not attributing that to the seasonality. We've got years of

history here. And we've moved holidays around and take all those kinds of things into effect, our own growth rate,

et cetera, et cetera.

So the yield environment is improving. And in terms of the competition, that's about all we can say at that point,

but it is definitely improving compared to what we were seeing last year. ................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Very helpful, Gary. Thank you and just as a follow-up quickly ask on the hedge assets in 2018 and 2019, just how

much of that is in 2018 and how much 2019? ................................................................................................................................................................................................................................





Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yeah. So on – for 20 – you said 2018 and 2019, Savi? ................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Exactly. Yeah. ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A So 2018 is about $75 million of that. ................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Okay, great. Thank you. ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A So that would leave $33 million for 2019. ................................................................................................................................................................................................................................

Savanthi N. Syth Analyst, Raymond James & Associates, Inc. Q Okay. Thanks. ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A You're very welcome. ................................................................................................................................................................................................................................

Operator: And we have time for one more question. We'll take our last question from Helane Becker with Cowen

& Company. ................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q Thanks so much for squeezing me in Team. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You're welcome. ................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q I hope it's a good question. So I think about your growth on the West Coast in California. Is that more opportunity

out there? Is it kind of defending the market against incursion from Alaska and Virgin? Is it neither of the above

and something else entirely?





Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A It's a very strong market. I would say post-recession, sort of post-2007, there was a kind of a typical recessionary

effect on short-haul travel. And there's a lot of short-haul travel in the Southwest system in California. So we

optimized our route system.

And I'd say over the last several years, we've seen a resurgence in the travel demand there. And we've struggled

a bit to keep up with it. So that's one, the travel demand is quite strong and we see a lot of opportunities.

I would couple that though with real estate challenges. So LAX, we're capacity constrained on the ground. We

have that problem in Orange County. It's just two quick examples.

So we have more opportunities to grow, except that we just don't have the physical capability to do that with some

of our airport constraints there. But where we don't have that, yes, we've had great opportunities and I think that

you'll continue to see us very focused on California.

And it's not just us. There's a handful of competitors that are also eyeing California. But it's a great, healthy

market and we remain the number one share within and out and to. And any way you look at it, so we're very

proud of our position there. And we're going to work hard to stay on top. ................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q Okay. And then can I just follow-up one question on something you said about facility constraints? As we think

about this over the next – or as you think about it, right, your plans for the next three to five years as you think

about the fleet planning and the growth and so on, how should we think about this in terms of infrastructure? How

does the infrastructure keep up with the demand that's out there? And is that going to be a very expensive

proposition for the industry or the government or the industry because the government can't afford to do it? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, great question, and of course, you've known us for a long time. If you go back to 30 years ago, we didn't

have the array of physical constraints on the ground that we face today. Some of that is just because we – from

the sheer fact that we've lowered fares, stimulated demand and we've built facilities, and we've now filled out that

capacity.

It's an issue and it's easy to take LAX as a specific example. LAX has billions of dollars' worth of construction

programs that are planned probably over the next decade and maybe even beyond.

We've got one that – we have two in effect that are underway, and we're hopeful that we'll get a third in order to

create capacity. I want to say that the – over the last decade, don't quote me on this, but I think I'll get this right,

over the last decade, there've been about $100 billion worth of airport projects undertaken.

So the money is there. And I think the – if we can sort of remove some barriers so that we can proceed more

expeditiously at certain airports, that would be very, very helpful. But if you just take a specific – and all of these

need to be taken up specifically, there are a lot of airports where we have plenty of capacity. And we're trying to

take full advantage of that and expand there.





There are airports like Dallas, Love Field, which is at capacity under federal law. So that's sort of off the table in

terms of increasing capacity for the airport because it's limited to 20 gates. And there's every flavor in between

across the country.

The nice thing for us selfishly is because we're a point-to-point network, and we have a very significant position in

dozens of cities, if we're constrained in one market, we've got opportunities in another. And quite frankly, that

helps us prioritize because we have far more things that we want to do than we have airplanes.

But it's just the fact that we live with. We have an airport affairs department that is focused on working airport by

airport and helping to develop master plans that are sensible so that these communities can grow. You'd hate to

live in a city that said no, we're forevermore capped at the current level of travel and tourism.

So you just have to ask yourself as a civic leader, what are we going to do for the next generation? Are we going

to promote travel or not in our community? And again -- but that's the way it works, but the money is there. We

just want to make sure that the money is spent wisely and spent in the right places. ................................................................................................................................................................................................................................

Helane Becker Analyst, Cowen & Co. LLC Q Great. Thank you so much for that. I appreciate it. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A You're very welcome. ................................................................................................................................................................................................................................

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 first like to introduce Ms. Linda Rutherford, Vice President

and Chief Communications Officer. ................................................................................................................................................................................................................................

Linda B. Rutherford Vice President and Chief Communications Officer, Southwest Airlines Co. A Thanks, Tom. Welcome today to the members of the media who are on the call. I think we can go ahead and get

started in our Q&A session. So, Tom if you'll give them some instructions on how to queue up. ................................................................................................................................................................................................................................

Operator: Yes, ma'am. [Operator Instructions] Thank you for waiting. We'll now begin with our first question from

Conor Shine with The Dallas Morning News. ................................................................................................................................................................................................................................

Conor Shine Reporter, The Dallas Morning News, Inc. Q Gary, I wanted to ask you a little bit more about that comment from CNBC today about Southwest ending the

practice of overbooking. How soon do you think that policy will go into effect? And can you talk a little bit about the

tradeoffs? My understanding is that there's at least some revenue implication to overbooking flights? How much

do you guys think you might be giving up by not doing that anymore? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A





Well, what I was trying to convey, and thanks for the question, what I was trying to convey this morning on that is

it's not a topic that is brand new to us. So for quite some time, we have been challenging ourselves to make the

travel experience better for our customers and just make the service better for our employees to deliver. And

that's one of the pain points that I'd like to eliminate.

The issue is the economic effect. As time has gone by, we have been fortunate to have fewer and fewer and

fewer no shows. So the gross amount of the problem is far less today than it was 20 years ago. We don't

overbook much at all already. My recollection, Bob, is that it's about, on a 143-seat airplane, we might overbook

by 1.

And it's hard to generalize but it at least gives you some frame of reference. This isn't a vast issue. And we don't –

I never get complaints from our customers about overbooking. I get complaints about any other variety of things.

I'm not saying there aren't complaints, and don't get me wrong. But it's just not an issue the way the company has

been managing that, and I'm very proud of our folks who are doing that.

But to give you a specific answer, I'm not quite ready to give you an exact timeline, but we're going to move on

this very quickly, so certainly during the second quarter. And it's – we've got Tom Nealon, our President; Bob

Jordan, our EVP of Commercial, are both personally working on this.

It turns out that it's a little more complicated than perhaps we would like. But I think our employees will be

delighted at this, and I know our customers will be. Then, again, understanding that we don't have that many over-

sales in the first place.

The economic effect of it, Tammy, you want to speak to that? ................................................................................................................................................................................................................................

Tammy Romo Chief Financial Officer & Executive Vice President, Southwest Airlines Co. A Yeah. The economic impact is really fairly, fairly small. Yes, there is a little bit of a revenue impact, but that's been

embedded in all the guidance that we've discussed this morning. But there is also some cost savings that will

occur that will offset the revenue benefit. So the net impact is really not that meaningful. So I really don't think

you'll even see it in our results. ................................................................................................................................................................................................................................

Conor Shine Reporter, The Dallas Morning News, Inc. Q If I... ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A One of the other questions I got, Conor, this morning, which might help put it in perspective, well, isn't this going

to cost you money? Well, what we're trying to do is be the world's most loved airline. And we feel like just putting

this in with no change fees, no bag fees, no overbooking, that's who we are. And we're at a point now where we

can do all of that and still stay true to our low-fare brand.

And, obviously, the reason that we do overbooking is because it helps generate revenue on that flight and keep

the rest of the fares lower. So we don't want to do this in a way that would cost our customers more money. And

we think we're at a point now where we can do that, and it just makes sense. So we've been thinking about it for a

long time and feel like right now is the time to do it.





Conor Shine Reporter, The Dallas Morning News, Inc. Q I appreciate the answer. If I could ask one more follow-up, how much did the United Airline incident with the

overbooking have to play in announcing? And now did you guys speed up your timeline as a result of that? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A It was – and I'll be honest with you. It wasn't on my list this month to work on. It wasn't on Tom's. It wasn't on

Bob's list. But it is something that we have had on our list over the last couple of years. But it puts the question

under a bright light. And, hey, why not do it now? I would ask. And we're ready to do it and we're going to get it

done. ................................................................................................................................................................................................................................

Conor Shine Reporter, The Dallas Morning News, Inc. Q Thank you. ................................................................................................................................................................................................................................

Operator: We'll take our next question from Andrea Ahles with Fort Worth Star-Telegram. ................................................................................................................................................................................................................................

Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q Hi, good afternoon. I was wondering, Gary, if you might be able to comment on the pay increases that American

announced yesterday. We've seen some Wall Street analysts say this sets a dangerous precedent or a worrying

precedent, I should say, through the industry. I know you just signed a four-year agreement with your pilot group

in the last year. Is that something you guys ever considered or do you think your pilots group might be coming

back and asking now for additional raises when they're not in the contract negotiation? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, I'm going to answer your question in two ways. Number one is just philosophically, we've always worked

with our employees that way. Contracts are a framework to work together. And that's a true partnership. And

things come up in between contract negotiation dates. We approach union leadership and union leadership

approaches us. And so we make changes historically, quote, all the time. And we've had instances in my

recollection where we felt like we needed to make some change to pay along the way.

And it's just remembering that nothing is simple when it comes to a labor contract or a labor contract negotiation.

So it – we'll just have to see how simple it is for American to actually execute what they want. I read their

communication. I thought it was very well done. But is it a dangerous precedent? No. I mean it is a framework. It's

a living document. The only way that works though is if you have a true partnership where issues can – in a

dynamic way, can continue to be addressed.

At the same time, I think everybody understands that it is a contract. Both parties to a contract want to and need

to honor what's in the contract, and there needs to be very good reasons to contemplate a change. But is it

dangerous? No. And I think it's just part of ongoing negotiations and Herb always said that we negotiate our

contracts every single day, and I agree with that. ................................................................................................................................................................................................................................





Andrea Ahles Business Reporter, Fort Worth Star-Telegram Q Thank you so much. I appreciate it. ................................................................................................................................................................................................................................

Operator: We'll take our next question from David Koenig with The Associated Press. ................................................................................................................................................................................................................................

David Koenig Reporter, The Associated Press Q Hi, thanks. Gary, back to the overbooking issue. One little thing. My understanding is, okay, so you're not going to

do over-sales at some point but you might still have to bump people if you have crews showing up that need to be

accommodated. And secondly, was this change motivated by the fact that last year you bumped -- you had more

IDBs than anybody else? ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A The answer to the latter one is no, and if you want, I can -- again, by my memory, I can talk to that and Bob may

know off the top of his head who, no doubt, knows a lot more about than I do. But the -- and I think overbooking is

different than having an over-sale. So if we have a rule that says we won't take any more bookings than there are

seats on the airplane, that's one thing. But you're right, David, there's other things that can cause an over-sale.

For one thing, we have different airplane sizes. So if, for whatever reason, we took bookings for an 800, which

has more than 143 seats and then that airplane type is not available and we subst itute a smaller airplane with a

143 seats, well, you would have an over-sale in that situation. The flight crew part, Mike, I'm sure we have those

circumstances. But we work very hard to avoid displacing our customers. We have the ability to add an extra p ilot

on the airplane in the cockpit, an extra flight attendant. You want to -- that was David's specific question, you want

to address that? ................................................................................................................................................................................................................................

Michael G. Van de Ven Chief Operating Officer & Executive Vice President, Southwest Airlines Co. A Yes, David. The industry just in general has needs for unexpected crew movements every day. So there's

weather, there's mechanicals, there's diversions. So that need is going to exist and it always has. And generally

speaking, you know, I bet you, we have a lot of customers that when have an opportunity to take a flight an hour

or two later and be compensated for, they like that. We haven't had issues historically about dealing with our flight

crews. We usually know that well in advance. We can talk to our customers as they're getting up into the gate

area and seeing whether or not they're amenable to taking a different flight. And I would say that 99% of the time

they are. ................................................................................................................................................................................................................................

Robert E. Jordan Chief Commercial Officer & Executive VP, Southwest Airlines Co. A Hey, David. This is Bob. Let me just add two quick things. The denied boarding rate is really small. That happens

to about 0.1 -- less, actually less than 0.1% of our customers. So it's a very small number. Now if you're caught up

in that, that's no fun but it's a very small number that are denied boarding to start with. But about 80% of those are

actually from the revenue management practice of overbooking or overselling. So that's what we're going to stop

and so the vast majority of denied boardings will go away because the vast majority of the overbookings are going

to go away. ................................................................................................................................................................................................................................





David Koenig Reporter, The Associated Press Q Okay, thank you. ................................................................................................................................................................................................................................

Operator: And we'll take our last question from Mary Schlangenstein with Bloomberg News. ................................................................................................................................................................................................................................

Mary Schlangenstein Correspondent, Bloomberg News Q Man, I am sorry to say my question's already been answered so I'm going to let you guys off easy today. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Well, actually you worked me really hard already. ................................................................................................................................................................................................................................

Mary Schlangenstein Correspondent, Bloomberg News Q Okay. ................................................................................................................................................................................................................................

Gary C. Kelly Chairman & Chief Executive Officer, Southwest Airlines Co. A Thanks, Mary. Good talking to you. ................................................................................................................................................................................................................................

Mary Schlangenstein Correspondent, Bloomberg News Q Thank you. ................................................................................................................................................................................................................................

Operator: All right. And at this time, I'd like to turn the call back over to Ms. Rutherford for any closing remarks. ................................................................................................................................................................................................................................

Linda B. Rutherford Vice President and Chief Communications Officer, Southwest Airlines Co.

Thanks, Tom. We appreciate your time today. If you guys have any follow-up questions, we can always be

reached at 214-792-4847 or questions through our media portal at swamedia.com. Thanks so much. Have a great

afternoon. ................................................................................................................................................................................................................................

Operator: Ladies and gentlemen, this does conclude our conference for today. We appreciate your participation.





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27-Apr-2017 Southwest Airlines...

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