Southwest Airlines Co. (LUV)

Q2 2010 Earnings Call Transcript

July 29, 2010 11:30 am ET


Gary Kelly – Chairman, President and CEO

Laura Wright – SVP and CFO


Michael Linenberg – Deutsche Bank

Duane Pfennigwerth – Raymond James

Gary Chase – Barclays Capital

Bill Greene – Morgan Stanley

Hunter Keay – Stifel Nicolaus

Jamie Baker – J.P. Morgan

Dan McKenzie – Hudson Securities

Glenn Engel – Bank of America/Merrill Lynch



Welcome to the Southwest Airlines second quarter 2010 conference call. Today's call is being recorded. We have on the call today, Gary Kelly, Southwest Chairman, President and Chief Executive Officer and Laura Wright, the Company's Senior Vice President, Finance and Chief Financial Officer.

Before we get started, please be advised this call will include forward-looking statements. Because these statements are based on company's intent, expectations and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially. This call will also include references to non-GAAP results. Therefore, please see the company's financial results press release and the investor relations section of our web site at, for further information regarding forward-looking statements and forward reconciliation of non-GAAP results to GAAP results. At this time, I'd like to turn the call over to Gary Kelly for opening remarks. Please, go ahead sir.

Gary Kelly

Thanks, Mervin and I thank you all for joining us this morning for our second quarter results. We had a very strong performance. We are very pleased with the profit for the quarter x items $216 million, which is $0.29 a share, each of those represents more than a tripling of our year ago results.

Of course, all the credit goes to our people. They've done a marvelous job getting Southwest Airlines to this point. Certainly performed extraordinarily well in the quarter. They've managed a tremendous amount of change, not just over the last couple of years but for the last decade. So, I'm very, very proud of them and very proud of these results. We continued to set a number of company records relating to revenues during the quarter and we placed first in the domestic airline industry in two very important categories.

First of all, revenue growth, revenue growth of 21.1%, is the best in the industry, domestically and, that comes on slightly down capacity growth at Southwest Airlines. And, that means that we also placed first in the domestic industry in terms of year-over-year unit revenue growth, at almost 22%.

Our passenger counts were up, our traffic was up. Very strong yield performance in the quarter, yields were up over 17%, at record low factor of 79.3%, up 2.3 points, compared to 09. And, Laura's going to spend quite a bit of time talking about revenues as well, because it's a revenue story that's what drove our earnings growth and a number of factors are in involved, of course, driving our revenue growth.

All that led to the second best quarterly profit in our history, second only to Q2 of 2006. From this point forward, beginning in the third quarter, our year-over-year comps change a great deal. Last year was significantly off of normal trends based on our current July results. So far, in the bookings, for the rest of the quarter, we don't expect any significant deviation from normal years, seasonal trends, just our continued strong revenue production.

Talking a little bit about Panama City beach, we added to our route system in May, we're off to a great start there. Customers response has been tremendous and, I do want to say that we really appreciate all the support we've gotten from the St. Joe Company but, also the airport and the entire community.

And, again, thanks for helping us to get off to a good start and, hopefully, we're doing a small part to help the community as well. And, I've been there and I can report that the beaches look great, by the way. So, everyone should don their swimsuits and get down there ASAP on a southwest flight. I'll turn it over to Laura to take us through the quarter.

Laura Wright

Thank you, Gary and, good morning, everyone. Our second quarter GAAP net income was $112 million or $0.15 per share. Excluding special items totaling a net of $104 million, relating to mark to market and other items associated with FAS 133, our second quarter net income was $216 million or $0.29 per share. A significant improvement over second quarter last year's earnings of $59 million or $0.08 per share.

Our second quarter operating income, excluding special items, was $414 million resulting in an operating margin of 13% and, our pretax income, excluding special items, was $350 million, resulting in a 11% pretax margin. Overall, it was a very strong second quarter performance, the second best in our history and I'd like to congratulate our employees on these results and thank them for their hard work and their outstanding customer service.

The revenue momentum that started in the second half of last year continues into the second quarter producing another record revenue performance. Our passenger revenues increased over $500 million to $3 billion and our other revenues increased nearly 50% or $38 million, compared to last year.

With both record lows and record passenger yields, we also had a record 20.7% year-over-year improvement in our passenger unit revenues, leading the industry in domestic revenue results. More importantly compared to the second quarter of 2008, our unit revenues grew 14%.

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