Southwest Airlines' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Southwest Airlines (LUV)

Q1 2012 Earnings Call

April 19, 2012 12:30 pm ET


Marcy Brand -

Gary C. Kelly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert E. Jordan - Chief Commercial Officer, Executive Vice President and President of Airtran Airways

Laura H. Wright - Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance

Ginger Hardage - Senior Vice President of Corporate Communications


Duane Pfennigwerth - Evercore Partners Inc., Research Division

James D. Parker - Raymond James & Associates, Inc., Research Division

William J. Greene - Morgan Stanley, Research Division

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

David E. Fintzen - Barclays Capital, Research Division

Raymond Neidl - Maxim Group LLC, Research Division



Welcome to the Southwest Airlines First Quarter 2012 Conference Call. My name is Tom, and I will be moderating today's conference. This call is being recorded, and a replay will be available on in the Investor Relations section. At this time, I'd like to turn the call over to Ms. Marcy Brand, Director of Investor Relations. Please go ahead, ma'am.

Marcy Brand

Thank you, Tom. Good morning, everyone, and welcome to today's call to discuss first quarter results. Joining me on the call today is Gary Kelly, Southwest's Chairman, President and Chief Executive Officer; Bob Jordan, Executive Vice President and Chief Commercial Officer and President of AirTran Airways; and Laura Wright, Senior Vice President, Finance and Chief Financial Officer.

Today's call will begin with opening comments from Gary, followed by Bob providing an update on AirTran. And then Laura will provide a review of our first quarter results and current outlook.

As a quick reminder, Southwest's first quarter 2012 consolidated results include AirTran's results. Prior-year consolidated results do not include AirTran. However, in order to provide what we believe to be more meaningful year-over-year comparisons on today's call, we will also be discussing specified results on a combined basis as defined in this morning's press release.

In addition, outlook commentary will be provided on a combined basis. Please be advised that today's call will include forward-looking statements. Because these statements are based on it the company's current intent and 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 such as combined results and results excluding special items, please reference this morning's press release in the Investor Relations section of for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now I'll turn the call over to Gary for opening remarks.

Gary C. Kelly

Thank you, Marcy, and thanks, everybody, for joining us this morning. We'll jump right in here.

We -- while we had a modest operating profit of $10 million, we had a net loss of $18 million, excluding items first quarter. Better than estimates, it represents a $38 million swing from last year's modest net profit. So comparing to combined with AirTran results from a year ago, our fuel bill was up about $216 million on essentially a flat capacity, and that was the challenge that we had to overcome and with revenues. Our revenue performance a strong. We were up almost 6% on a combined basis year-over-year.

While I am dissatisfied with our earnings results even with the seasonally slow first quarter, I'm very proud of our people. I'm very proud of the revenue performance. On top of all that, our operations turned in the best on-time performance in, I think, 2 decades. So very, very strong operating performance.

So I'm not going to try to rationalize our first quarter net loss. But I will share that it was the January, February problem. If you look at March's results, our profits were better than a year ago. And so far, the same is true for April.

Obviously, our profit outlook has much to do with fuel prices, and we're keeping a wary eye out on that. The real story besides fuel is the construction work that's underway at Southwest Airlines investing in our future. We have a -- a huge amount has been accomplished since 2010, including our All-New Rapid Rewards frequent flyer program, the AirTran acquisition and a major new contract with the Boeing Company.

But since last year, we've made significant progress integrating AirTran, in particular, and I just wanted to run through that very quickly with you. First of all, we have a handful of labor seniority list agreements that are done, and I'm very pleased with the progress that we're making on the ones that are not done yet.

We've consolidated the AirTran headquarters function into Dallas. We've implemented all new aircraft maintenance management technology. We have implemented technology to support multiple fleet types. We've, of course, received our single operating certificate from the FAA. We have also, since then, we've launched conversion lines to move AirTran 737s into that Southwest Airlines livery, that work is underway. We plan to get 11 airplanes converted here in 2012. We made significant changes to AirTran's revenue management processes and also significant changes to AirTran's flight schedule, including the redeployment of aircraft to new markets, hopefully more lucrative international markets.

Related to all that, we've spent months working on the best international solution for Southwest Airlines. As you all know, we're -- our technology is all domestic. I'm very pleased that this morning, we announced Amadeus as our reservations technology solution for Southwest international. Implementing that will be a top priority for us so that we can operate flights in 2014.

It also sets the stage for us to move all of our reservations, domestic reservations that is, to Amadeus if we choose to.

Along those same lines, we see a significant opportunity to serve Houston with international flights out of Houston's Hobby Airport. We have a major campaign underway to obtain the necessary approvals to launch that service in 2015, which is what the Houston airport service would like.

And finally, soon the technology, will be ready to allow Southwest and AirTran's frequent flyers to use their flight awards on either carrier, and that'll be a very nice enhancement for our customers.

On related to AirTran but significant nonetheless, is the addition of the 737-800 to our fleet. This was a significant effort to develop the required technology along with new procedures and certifications. So we have our first 2 aircraft up and flying in revenue service this month, and this whole effort was done on time and on budget.

We've also begun the cabin retrofit of our 737-700s, which not only improves the customer comfort but delightfully, we're able to get 6 more seats onto our 700s. That work has started. And we continue to work the bugs out of our Row 44 Wi-Fi product. I believe we have about 250 aircraft that are -- 210, I beg your pardon, aircraft that are outfitted, and we are anxious to get that rolled out by first quarter next year on our 700 fleet. Notably, the 800s will come delivered with the Row 44 Wi-Fi equipment.

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