Southwest Airlines Co Earnings Call Nuggets: Row 44 and Checked Bag Fees

Southwest Airlines Co (NYSE:LUV) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Row 44

Michael Linenberg – Deutsche Bank: Just two questions here. You talked about some of the ancillary revenue opportunities, and I saw the press release out not too long ago, that the Row 44 product, I think it’s in 300 or 400 of your airplanes. How is it doing thus far? Or what’s the uptick? What’s the opportunity there, how should we think about it?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Gary C. Kelly – Chairman, President and CEO: Well, I think considering that the installation time has be pretty lengthy and we haven’t had a majority of the aircraft that were installed, as a consequence, we didn’t any marketing awareness or merchandising of that feature behind it in any meaningful way. Considering that that’s about where we’re here Mike in 2012 I think it’s done fine. The reliability of the product was not where we wanted it to be in prior years. It’s now running last statistics I saw were 98% which is not quite good enough, but it’s not too bad considering, the leading edge technology that it really offers. We did last year Tammy, I think we did $5 million or so in revenue from the product. Obviously, we’re looking for a lot more than that. The take rates are escaped me at this hit the moment but I want to say that clearly long-haul has a better take rate than the short-haul does. It’s little bit behind our expectations, but again I would attribute a lot of that to comments that I’ve already made.

What is very exciting that we put in the press release and again our marketing folks are going to get behind the product this year and start promoting it much more heavily is we do have a live television feature. It is really good. They are going to increase the offerings with that and we’ll also be in a position where we can offer some video on-demand and that’s just of course in addition to the straight up Internet access. So, I think it has a lot of potential. I don’t think that history is going to be guide and I’m anxious to see what happens this year. Bob so in terms of your $1.1 billion revenue plan it’s not a material element of that. So, I think that’s just a pure upside for us.

Michael Linenberg – Deutsche Bank: Just my question and Gary this is for you as well. When I look at some of the DOT stats on part-time versus full-time employees one thing that sort of stands out and again this maybe out of constant numbers, Southwest seems to have a lot less part-time than most of other carriers and you have seen a lot of the major carriers. Some of these have been through the restructurings that they have gone through they do have a lot more variable cost element to their business.

They brought a lot more part-time employees and my sense is that that’s going to become – there may be more of a drive towards that direction given the change in healthcare costs and minimum thresholds that people need to work in order to be fully covered versus sort of pay on their own. Is it because Southwest has historically been much more highly unionized than the average carrier is that – has that prevented you from pursuing a lot more part-time type opportunities or what’s behind that number, and again I’m assuming that the DOT sort of treats everybody on an apples-to-apples comparison and how they (count) this data?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Gary C. Kelly – Chairman, President and CEO: They used to try to cut right to the bottom line here. We are more unionized than probably any other U.S. airline but I don’t think the original – the essence of it initially was because we are unionized. Now it is a factor in union contracts, so we don’t have the unilateral ability in all of our union contracts to have unlimited numbers or percentages of part-time. So let me at least acknowledge that this is a constraint. What is different today compared to even 20 years ago, much less 40 years ago is the world has changed and the need for flexibility I think more than trying to avoid healthcare cost is the need for flexibility that’s really driving this, where we don’t have an even flight schedule throughout the day.

And now we are trying to get into markets like Key West, Florida which has two daily departures. So clearly, you can’t have full time headcount complements there. We have a lighter schedule on Saturday as an example and obviously we don’t need as many staff on a day that we have fewer flights. And I think the future is really trying to get the flight schedule matched up better to customer demand and that will – that clearly creates a need for more flexibility in the future than what we had in the past. So for whatever reason, the world has changed, perhaps we didn’t need as much flexibility 30 or 40 years ago. Clearly today, we do. Fuel prices are probably the big game changer there. And it is definitely something that we will need to do in the future to be successful. We will need more part-time workers in our workforce.

Checked Bag Fees

Hunter Keay – Wolfe Trahan & Co.: Gary, is it possible for you guys to introduce checked bag fees without damaging the Southwest brand?

Gary C. Kelly – Chairman, President and CEO: Customers hate bag fees Hunter. So I think that by definition, there would be an impact on the brand.

Hunter Keay – Wolfe Trahan & Co.: I guess as we think about, just a question about your frequent flyer accounting. As your load factors have been driving up over the last couple of years. Is there a thought to maybe changing the frequent flyer accounting from incremental cost to deferred residual, and if so what kind of impact should we expect on the financial statements if you were to make that change.

Gary C. Kelly – Chairman, President and CEO: Tammy, you wanted to answer this.

Tammy Romo – SVP, Finance and CFO: At this point, we’re not contemplating any change in our frequent flyer accounting program.

A Closer Look: Southwest Airlines Co Earnings Cheat Sheet>>