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Southwest Airlines Q2 2007 Earnings Call Transcript
Welcome to the Southwest Airlines second quarter 2007 earnings conference call. Today’s call is being recorded. We have on the call today Mr. Gary Kelly, Southwest’s CEO; and Ms. Laura Wright, the company’s Senior Vice President of Finance and CFO.
As a reminder, today’s call includes forward looking statements. These statements are based on the company’s current intent, expectations and projections and are not guarantees of future performance. These statements can be identified by the fact that they are not related strictly to historical or current facts. Actual results may differ materially from those expressed in the forward looking statements due to many factors. For additional information regarding these factors, please refer to the company’s periodic filings with the Securities and Exchange Commission.
This morning’s call will also include references to economic earnings.
At this time, I would like to turn the call over to Mr. Gary Kelly for opening remarks. Please go ahead, sir.
Thanks, Tom, and thank you all for joining us this morning. Our second quarter earnings were better than expected and better than the First Call’s mean estimate. I was pleased about that, of course. Our economic earnings per share, which excludes the SFAS 133 adjustments, was $0.25 a share and that was 24.2% lower than a year ago and we are not pleased with that.
Our financial plans for this year assumed a stronger revenue environment. However, with a slowing domestic economy and softer travel demand, we’re off our first half revenue budget by several hundred million dollars. Thankfully, we are under our cost budget, although our costs are higher than ever before. So the year to date result is an unsatisfactory decline in our economic earnings per share of 29% plus and we needed to make some adjustments to our financial plan to hit our profit targets, and those adjustments were previously announced and they include, on the revenue side, slowing our capacity growth by about two percentage points beginning in the fourth quarter of this year and extending through next year; introducing an enhanced fare structure, rapid rewards program, and revenue management processes and techniques beginning in fourth quarter ’07; unveiling a new boarding and/or seating method in fourth quarter; expanding our GDS participation and corporate account efforts; and then finally, launching a new advertising campaign.
By 2009, we’ll add international codeshare itineraries, we’ll add more cargo capabilities, and also enhanced ancillary revenue opportunities, which we have not announced yet. Our goal is to generate more than $1 billion annually from these new revenue sources,
black cards against humanity, and even with an industry leading fuel hedge, our unit costs in just two years time have gone from under $0.08 a seat mile to over $0.09 a seat mile, and that’s because of fuel. And that’s the essence of our earnings challenge. It’s not new, it’s not surprising, it’s not unexpected and we have been working to transform Southwest revenue generating capabilities to address that challenge and to enhance the low fare Southwest brand.
I am confident in our plans and we are in the process of implementing those.
On the cost side of the equation, I am very proud of the results over the years. We remain the low cost producer and because of our profit challenges though, we’ll need to do more. Our employee productivity has improved 25% over the last five years and that for us is arguably the best level in our history. We will continue to do more on that front. Because virtually all legacy carriers have gone through bankruptcy, labor costs have been slashed and of course, we now find ourselves with higher unit labor costs than our competition. So we must control our salaries and benefits costs prospectively.
This week, as an example, we announced an early departure program for certain senior employees. It is completely voluntary and it is an effort solely to reduce higher labor rates with lower. It is not a program to reduce our headcount, so let me make that clear we will replace virtually all positions that get vacated through this voluntary early departure program.
Today we also announced an agreement with the Boeing company to change our aircraft delivery schedule beginning in 2008, essentially by deferring aircraft from 2008 to 2011, that four year time period,
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black and white card game, is that we’ll grow available seat miles capacity in 2008, ’09, ’10, and ’11 by 5% to 6% per annum, and Laura is going to go over that in more detail in a few minutes.
Our primary goal, of course, is to grow our profits annually and to hit our return on invested capital target. So this year, 2007, we may very well fall short of our targets and certainly that’s not acceptable to us but given the initiatives coming online in the fourth quarter, our 2008 earnings goal will be a minimum of 15% earnings per share growth.
I believe our plans for the next couple of years are very sound. If we continue to fall short of our profit goals, we’ll continue to make adjustments, and especially to our capacity growth rate.
A lot depends on the economy,
cards against humanity review?, fuel prices, and the competitive environment, but we are in a very, very strong competitive position and if the opportunities arise and the right conditions exist, then we can certainly accelerate our fleet growth.
Our balance sheet is very strong. We’ve completed $1.6 billion in share repurchases since 2005, and if conditions continue as they have, I have every intention of continuing our share repurchase program until it is prudent to slow it down. I think the bottom line there is that high leverage in this industry, especially with dramatically higher and more volatile fuel prices, is absolutely suicidal and we won’t create high leverage at Southwest Airlines.
One final thought on our new markets they’re doing superb. We’ve seen tremendous customer response. We believe we’ve got tremendous opportunities to grow with low fares and the admitted challenge, of course, is to get stimulating fare levels high enough to cover our higher cost structure. And that challenge is not unique to our new markets, of course, but once we get adjusted, we have every reason to believe our new service is much desired and very successful. Our employee morale is very high, our operations have remained very reliable. We remain arguably the most productive airline in the world. Our customer service statistics remain at the top and our brand rankings continue to be stellar.
The net of all of that is that we have a preferred product that is destined to get even better with the changes that we have planned beginning in the fourth quarter of this year. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.
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Thank you, Gary and good morning, everyone, including our webcast listeners. In addition to Gary’s comments, I’d like to take a few minutes to cover some additional aspects of our second quarter financial results.
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