Southwest Airlines Co Earnings Call Nuggets: Customer Segment and Higher Load Factors
John Godyn – Morgan Stanley: Gary, in some of your remarks, you kind of mentioned a pattern of sort of economic weakness weighing on results and surprising you. I’m just curious when you think about the customer segment that you serve, the nature of that segment, do you get the sense or do you have the feeling that there are any kind of structural or secular kind of overhangs on that segment, in particular, within the context of the economy because after all we have seen positive GDP growth, it admittedly been sluggish, but it has been positive for the last few years. And we have seen it seemingly way on Southwest a bit more than peers. So, I am just hopeful that you could kind of comment on that and maybe give some perspective?
Gary C. Kelly – Chairman, President and CEO: First of all, I guess, just taking some of your thoughts in reverse. I wouldn’t agree that it is weighing on Southwest any different than anybody else. There is a long string of years, including most of the four year period that I was referring to in terms of the economic sluggishness where we outperformed the rest of the industry. I think Tammy mentioned in the way that you are thinking about how we compare right now. Just make sure that you take into account the increase in the seats per departure that’s going on right now. So, that’s a good 4% to 5% increase and creates at least an arithmetic drag on RASM comparatively. The midpoint of all of that is I don’t see that we have to step at all with the industry if anything over the last five years we have outperformed. With respect to what secular changes might be taking place right now I don’t know that I really see anything going on there. At least what we can report to you is that our trends were very solid and stable on a unit revenue growth perspective dating back to – I would call it September as a starting point, and all the way through most of February and then we were off of our sequential trends taking into account seasonality and the timing of Easter holidays et cetera. Beginning in March, and we really haven’t regained a trend relative to that previous period since. We’ve seen some encouraging signs here in July, but Tammy, I don’t know that I would say that July relative to June is a lot better than a normal June to July trend over history. So, it’s even though we’re seeing a nice comp to a year ago July. It’s not like that June, July trend is spectacular. I think that the weakness is twofold. I think is both in the government/business travel segment as well as consumers. So, we had a record monthly load factor for the month of June at 85%, but Bob Jordan and his team had us on sale quite a bit to drive that traffic. So, I guess the bottom line John is no, I don’t think there is anything that’s all that unique going on here. I think relative to a longer-term comparison maybe 10 or 20 years, there is no question that the traffic in short haul markets is less today than it used to be. So, I think that’s probably the only thought that comes to mind about a secular change and I’m not ready to predict that the short haul markets won’t show improvement in the next decade, but clearly the growth within the airline business over the last decade has been a longer haul trips, which is why we are pivoting more Southwest towards longer versus short trips and the medium haul market sort of around 1,000 miles interestingly enough are relatively flat over the past 10 to 15 years. So, absent that, which I would attribute more to increased fares because of increased fuel cost I don’t really see anything going on right now that it would suggest some dramatic change. We’ve got the federal sequestration and another debt ceiling fight looming. I think we’ve all got to be very mindful of that. And assessing what happens to air travel demand. So all of that uncertainty along with higher taxes this year, I don’t think it’s any shock. As you said I don’t think it’s – actually we weren’t shock that the GDP was weaker, our point was simply that we built an annual plan with – we have to make assumption, so we made an assumption about the economy, we made an assumption about fuel prices and one of those is a good guy and one of them is a bad guy relative to our plan.
John Godyn – Morgan Stanley: I’m curious, I think it’s fair to say that your average customer is bit more price sensitive than maybe the average customer of a legacy airline, do you think that degree of elasticity is potentially kind of a headwind on the margin, when we find ourselves in a situation where the industry price umbrella continues to go higher? Is there kind of a volume drop off that we need to think about as those prices go up that might impact you more than others, just your thoughts there would be helpful…
Gary C. Kelly – Chairman, President and CEO: I don’t know John. Again, I don’t know that I’d buy that at least in 2013. May be that argument made more sense in 1975. But fares aren’t cheap for a lot of Americans and so even though we are a low cost low fare carrier and that could be where a lot of short haul traffic has gone. So we are the largest airline in America by a wide margin. So we have a very broad appeal across the United States and I just don’t see the argument that our customers are more price sensitive. By the definition we, I think you would see a lot more volatility in our traffic. We can get the traffic as we can prove, we grew our available seat miles 3% and we filled them up there in June. So I think bottom line now in a more macro sense. You and we know that we are a low fare brand and we work harder to be lower than everybody else and close to the majority of the time that’s going to be the case, when people shop for Southwest Airlines. But those are still fares that they are just not as low as they used to be for all the reasons that we know.
Higher Load Factors
Helane Becker – Cowen Securities: So just this one question do you prefer higher yields or higher load factors?
Gary C. Kelly – Chairman, President and CEO: I think that one’s easy I think because we are a, we start with serving our customers and think of our sales as a low fare brand. Clearly we want to be the lowest fare. I think all of us would admit if you ask our operator who’s sitting here he would say. It’s certainly easier to manage an operation when the airplanes are quite as full, but I think that’s probably overthinking it a bit and clearly we want to be the low fare brand with the best customer service. So, we like two airplanes.
Helane Becker – Cowen Securities: Then, so then you would prefer higher load factors would be kind of your answer, right?
Gary C. Kelly – Chairman, President and CEO: Yes.
Helane Becker – Cowen Securities: Then, can you speak to, I think your comment that you’re by far the largest airline in the U.S., can you speak to regionally what you’re seeing, is there like, you’re seeing better strength in your maybe core Dallas, Texas, West Coast markets than you’re seeing in the Northeast or other markets? I mean, is there something that maybe you see share shifting or something like that I would account for some of your maybe disappointment on your first half?
Gary C. Kelly – Chairman, President and CEO: No, and again, my disappointment is in the economy. In terms of what I think we would be comfortable sharing for competitive reasons, the markets that are in more of a transition from AirTran through some step process into Southwest, those are the ones that are in more development. So, if you sort of think about the Atlanta, Baltimore, Milwaukee where there’s a lot of change taking place. Those markets are not performing as strong as markets that aren’t affected by that kind of transition, that’s very clear. The other thing that I would mention is that and we’ve shared this before, the government travel which is defined, I’m defining as a customer flying on a government fare. So, it’s something that we can readily identify that traffic is down dramatically. Bob, I think you’ve said as much as 50% at times. So, I think a rule of thumb Helane would be down 35%. So, there are markets where we do see some weakness along the East Coast where you can sense that there is a lot of military or government travels beyond what we can actually track on the fare, and that does seem to support that, but I think we all know that sequestration is real. I spent a lot of time in Washington and they are definitely managing through cuts, and beyond that I would say that the regions look pretty consistent across the country…
Helane Becker – Cowen Securities: The only other question I have is, I think you guys have a $1.5 billion share repurchase program in place, right? I don’t know how far you are on it, but that’s 15% of the market cap of your Company, and yet the market doesn’t seem to care. They don’t seem to react to that maybe, so maybe a dividend or bigger dividend is more of the right answer? I don’t know, what do you think about that?
Gary C. Kelly – Chairman, President and CEO: I’ve got a lot of thoughts on that. First of all, the stock is up nicely in a one year period. So, there has been a move. Pinpointing it to the cause is probably multiple reasons for that, but number one, the stock has performed over the last 12 months. We’re managing our balance sheet, we’re managing our liquidity and if what you’re saying is true, it’s a testament to the strength of the financial strength of the Company, and through the toughest of times, we’ve been able to repurchase how many shares over the past five years? 100 million, I mean, is a significant amount of shareholder value that’s being created. And, Helane, again when you say that you look at our valuation relative to our peers and the valuation is still very strong at Southwest Airline. So, I wouldn’t conclude that we are not being rewarded and it is just a matter of RSU are shareholders are being rewarded enough. We do have $1.5 billion share repurchase. We have done about two-thirds of that, so we got about 500 million to go. I think all that is in the release – maybe it is 525 million or so.
Tammy Romo – SVP, Finance and CFO: We are at 976 million or 100 million shares.
Gary C. Kelly – Chairman, President and CEO: So, we have got 500 million plus to go. As you know, we have increased the dividend in two steps; we’ve been paying a dividend at Southwest since 1970s. I think we doubled it last year and then we quadrupled it this year. So, the yield is very respectable. It is over a point somewhere in the 1.2, 1.3 range. So, that’s just the background to your question. I think the answer specifically is we are going to continue to monitor both of those and with a primary focus being on hitting a return on capital. We are being very aggressive in the way we are managing the invested capital of the company on the denominator side and have some very nice opportunities here to modernize the fleet and still access the pre-owned market which is just a lot more capital efficient these days. Plus we’d love to take new deliveries from Boeing once the max is available. So, all those levers are being monitored and pulled where we can. And like Tammy summarized, I think we are making outstanding progress and I think our folks have done a great job on all those fronts.
Tammy Romo – SVP, Finance and CFO: I’m wanted to make sure, you’ve all the numbers that you were wanting there just to summarize real quickly under our $1.5 billion authorization we’re at $976 million, which is a 100 million shares and over the last five years we’re at 220 million shares.
A Closer Look: Southwest Airlines Co Earnings Cheat Sheet>>