Southwest Airlines Co. (LUV)
Q3 2008 Earnings Call Transcript
October 16, 2008 11:30 a.m. ET

Executives

Gary C. Kelly – Chairman, President & Chief Executive Officer
Laura H. Wright - Chief Financial Officer, Senior Vice President - Finance

Analysts

Kevin Crissey - UBS
Jamie Baker - J.P. Morgan Securities, Inc.
Ray Neidl - Calyon Securities, Inc.
Daniel McKenzie - Credit Suisse
Duane Pfennigwerth - Raymond James & Associates
William Greene - Morgan Stanley & Company, Inc.
Gary Chase – Barclays Capital
Michael Linenberg - Merrill Lynch & Company, Inc.

Presentation

Operator

Good day and welcome to the Southwest Airlines third quarter 2008 earnings conference call. Today’s call is being recorded. We have on the call today Mr. Gary Kelly, Southwest’s Chairman, President and Chief Executive Officer, and Ms. Laura Wright, the Company’s Senior Vice President of Finance and Chief Financial Officer.

Before we get started, please be advised that this call will include forward-looking statements. Because these statements are based on the Company’s current intent, expectation and projections they are not guarantees of future performance and a variety of factors could cause actual results to differ materially. This call will also include references to non-GAAP results. Therefore, please see our earnings press release in the Investor Relations section of our website at www.southwest.com for further information regarding our forward-looking statements and for a reconciliation of our non-GAAP results to our GAAP results.

At this time I’d like to turn the call over to Mr. Gary Kelly for opening remarks. Please go ahead sir.

Gary C. Kelly

Thanks Tom and thanks everyone for joining us this morning on our third quarter earnings conference call. We are of course very pleased to report our 70th consecutive quarterly profit and that is excluding special items which Laura will cover. While we had a profit, we’re never satisfied to report lower year-over-year earnings.

We were faced with some pretty significant operating cost pressures during the quarter. Our unit cost ex special items was up 16% and of course that was driven by very significant fuel cost increases. Our jet fuel price per gallon increased 44% to $2.44 a gallon. The good thing is of course for Southwest and all airlines that fuel prices have come down dramatically and at least for the fourth quarter we’re expecting around $2.00 a gallon.

Our third quarter results included a very significant hedging gain of $448 million in cash. I think in addition to the fuel story of course the big news is we made very strong progress on the revenue front. We have slowed our capacity growth, we’re growing today at about a 1% clip, and we’re going to slow that further when we get to January. We have continued to prune our flight schedule of unpopular and less productive flights and will pick up the pace with that also in January.

We’ve had for the last year some enhanced revenue management, technologies and techniques. We think that that is producing very well for us. I’m very proud of our revenue management department. I think they’re doing an exceptional job of reacting to a challenging environment. Of course we know that with those kinds of cost pressures that I mentioned, we’ve got to get our fares up. We’re trying to do that modestly, we’re trying to do it gradually, and once again I’m very proud of our marketing and revenue management folks for their success with that. The revenue performance this quarter I think attests to the skill with which they’re doing that.

We have a great opportunity now that again I’m proud that our marketing folks are taking a great advantage of it to blast through the clutter with what we stand for as far as low fares. We love to be different, we love to be customer friendly, and we’re having we think great success, although it’s a little early, but we’re having great success thus far with our no hidden fees campaign.

We have continued to invest in our customer experience. Things that you all know are clearly we want to go past the one-size-fits-all approach that we’ve used in the past and in particular appeal even more to the business customer and while we know that we carry more business customers than any other airline in the world, we think that we can penetrate that market further. So, we’ve upgraded our boarding process, we’ve offered the business select product, and we have some great things coming in terms of an enhanced frequent flier program and also in-flight wireless connectivity for the Internet. So we’re very excited about not only what we’ve done but what we have planned for the future.

Very quickly on some current revenue and cost trends, you have our third quarter results of course where our unit revenues were up for the quarter 9.3%. We picked up the pace after Labor Day, no doubt supported by industry capacity cuts which are huge in our markets. We’re expecting in the fourth quarter capacity cuts in the 15% to 20% range on a seat basis. So, our unit revenues in September were up 11% and our revenue per available seat mile was up month-to-date in October even more, roughly 14%.

I would admit to everyone that it would be very dangerous at this stage to extrapolate those trends for the fourth quarter much less into 2009. The economic environment is far too volatile to make any kind of bold predictions, but I’m very happy to report the facts which are the results that we’ve seen thus far are very, very strong.

Now January through March we have already planned and published our new schedule. In that time period we’ve cut 190 daily departures out of the schedule and that results in a capacity reduction on an available seat mile basis of 5% to 6%. So, if indeed the recession deepens and impacts travel demand further, I think our capacity plans will absorb that shock hopefully perfectly beginning in January. If demand continues to be strong, I think we’ve got the right flights at the right times of the day. We’ll just have very full airplanes and very strong revenues and certainly nobody here will complain about that.