This summary is based on the fourth quarter fiscal 2008 earnings call conducted by SouthWest Airlines (LUV) on 22 January, 2009.
Management:
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Chairman, President, and CEO: Gary Kelly
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Senior Vice President of Finance and CFO: Laura Wright
Key Investors Issues
- Net loss was $56 million, or 8 cents a share, down from a profit of $111 million or 15 cents a share in the prior year.
- Operating revenues were up 10%, with a 0.8% capacity increase to $2.7 billion.
Full Year Highlights:
- Revenues amounted to $11 billion, up 12% from $9.9 billion in the prior year.
- Net income was $178 million or 24 cents a share, down 72%
Fourth Quarter Highlights
Excluding special charges and other special items, net loss was $56 million, or 8 cents a share, down from a profit of $111 million or 15 cents a share in the prior year due to higher operating costs driven by fuel.
- The firm recently announced a significant reduction in the net fuel hedge portfolio to approximately 10% in each year, from 2009 to 2013.
- The net 10% fuel hedge in each year represents aggregate hedge portfolio combining the original hedge positions that still exist today with the offsetting hedge positions layered on during the fourth quarter.
- Based on current market prices, the firm is estimating the 2009 fuel cost per gallon, including fuel taxes to be less than $1.90, but to exceed the current market price by about 17 cents per gallon.
- The total net liability of the entire fuel hedge portfolio is approximately $1 billion.
Unit cost excluding special items increased 10.9%, largely due to the significant increase in fuel costs.
- Even though the firm realized $32 million in favorable cash settlements from the fourth quarter fuel hedge contracts, economic fuel cost per gallon increased 24% to $2.27 per gallon versus 2007.
- Increased airport and maintenance costs contributed to ex-fuel unit cost increase, although there was about a 1% cost penalty associated with minimal capacity growth, RASM increase from capacity changes more than offset this chasm penalty.
- A 20% year over year increase in maintenance unit costs were primarily driven by increased airframe maintenance costs.
Landing fees and other rentals unit costs increased 18% to $0.65, primarily due to airport rate increases and fewer favorable airport audit adjustments this year.
- Salaries, wages, and benefits increased to 3.23 cents over the same period last year, primarily driven by increased health care costs, accruals associated with the ongoing labor negotiations, and weather related costs.
- Aircraft rents for ASM were flat year over year at 15 cents and due to the recent sale-lease back transactions, it currently expects first quarter 2009 aircraft rent for ASM to be around 18 cents.
- Other operating unit costs, excluding fuel tax increased 2.3% to 1.35 cents, primarily due to revenue related costs.
Despite a very troubled economy, operating revenues were up almost 10%, with a 0.8% capacity increase to $2.7 billion from $2.5 billion in 2007, which was on 8.8% unit revenue, or a RASM increase.
- Passenger revenues increased 9.8%, at $2.62 billion and traffic declined 1.4%, resulting in a load factor of 67.8%, which was 1.5 points lower than last year’s strong first quarter performance of 69.3%.
- Although load factor declined, yield was up 11.4% year over year to 15.19 cents, and average passenger fare increased 14.9%, to $126.12.
- In addition to fare increases, the firm enhanced revenue management capabilities significantly over the past year, both of which contributed to yield and fare increases.
- Business Select revenues was $19 million and on a unit revenue basis resin year over year trends for October and the holiday periods were strong.
- Other revenues increased at 8.7% for $75 million primarily due to increase business partner income and increase military charter revenue.
The firm ended the year with core unrestricted cash and short term investments at $1.8 billion.
- It complete several transactions, the [singular liquidity] of $1.1 billion, drew down $400 million of the $600 million revolving credit facility.
- It raised $400 million through a secured [term one] and raised $173 million from the first five aircraft [tranche] of the sale-lease back transaction and monetized $91 million of offshore rates securities under a new line of credit.
- The value of unencumbered aircraft at year end is around $8 to $9 billion and SouthWest still has $200 million available under the $600 million unsecured revolving credit line.
Strategic Intent:
- The firm has cut fleet growth, and fleet growth plans are suspended indefinitely.
- Coincident with that, it slashed the capital spending for 2009 and 2010, and boosted liquidity.
- It is going to continue to optimize each flight schedule, and will continue to prune unproductive flights, and this is a technique that is unprecedented for Southwest Airlines.
Fleet and Capacity Plans:
- The three remaining Boeing 700s that were scheduled for the fourth quarter of 2008 were delayed as expected into 2009 due to the Boeing machinists’ strike.
- In 2008 in total, the company added 26 aircrafts and returned 9-300 to [inaudible] to end the year with a fleet with 537 aircraft, two more than previously expected due to the delay of the 300 lease returns.
- Available seat capacity increased 0.8% and full year 2008 AMS increased 3.6% year over year.
- The firm also plans to return or retire 15 aircraft to end 2009 with a fleet count of 535 and reduced 2010 aircraft deliveries to from orders and reduced 2011 aircraft deliveries to ten to firm orders and ten options.
Key questions and answers from the fourth quarter earnings call conducted by SouthWest Airlines. (LUV) on 22 January, 2009.
