23-jun-2016 southwest airlines co
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23-Jun-2016
Southwest Airlines Co. (LUV)
Investor Day
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CORPORATE PARTICIPANTS
Marcy Brand Managing Director-Investor Relations
Gary C. Kelly Chairman, President & Chief Executive Officer
Tammy Romo Chief Financial Officer & Executive Vice President
Robert E. Jordan Chief Commercial Officer & Executive VP
Michael G. Van de Ven Chief Operating Officer & Executive Vice President
Randall E. Sloan Chief Information Officer & Senior Vice President
Andrew Watterson Senior Vice President, Network and Revenue, Southwest Airlines Co.
Arthur Jeffery Lamb Executive Vice President-Corporate Services
................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Mike J. Linenberg Deutsche Bank Securities, Inc.
Andrew George Didora Bank of America Merrill Lynch
Matt Roberts Raymond James & Associates, Inc.
Dan J. McKenzie The Buckingham Research Group, Inc.
Jamie N. Baker JPMorgan Securities LLC
Joseph DeNardi Stifel, Nicolaus & Co., Inc.
Helane Becker Cowen & Co. LLC
J. Yates Credit Suisse Securities (USA) LLC (Broker)
Darryl Genovesi UBS Securities LLC
Duane Pfennigwerth Evercore Group LLC
Hunter K. Keay Wolfe Research LLC
Michael Wayne Derchin CRT Capital Group LLC
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MANAGEMENT DISCUSSION SECTION
Marcy Brand Managing Director-Investor Relations
We are going to get started. Everyone, please continue to enjoy your lunch, but we're going to go ahead and get
started with our presentations. I'd like to welcome all of our webcast listeners who are joining us today. I'll take
this time to point out that today's presentations will include for ward-looking statements. Because these
statements are based on the company's current intent, expectations and projections, they are not guarantees of
future performance and a variety of factors could cause actual results to differ materially.
Today 's presentation will also include references to non-GAAP results. Therefore, please see the Investor
Relation's section of southwest.com for further information regarding these forward -looking statements and for a
reconciliation of non-GAAP results to GAAP results.
I now have the pleasure of introducing our first speaker, our fearless leader, Mr. Gary Kelly. You all know Gary ,
but what y ou might not know is that he is celebrating a milestone of his 30th anniversary with Southwest Airlines
this y ear. Gary has received numerous awards and recognitions over the years and he would not be very happy
with me if I listed them all right now. But this y ear alone, Gary has been named as the 2016 inductee into the
Texas Business Hall of Fame. He's also the recipient of the p restigious 2016 Tony Jannus Award.
Under Gary 's leadership, Southwest Airlines has grown to become the nation's largest airline and is a mainstay on
Fortune's list of the Most Admired Companies in the World. So please help me welcome Mr. Gary Kelly . ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer
Well, thank y ou, Marcy. I just want to extend my welcome to everybody. Thank y ou all for coming out today and
it's a pleasure to be here with y ou. We're very pleased to be here with you as well. So, we have a couple of
objectives for the afternoon. We want to give y ou an update on how things are going at Southwest, but also give
y ou a briefing on our plans for the next several y ears in particular.
Our primary focus for the last two y ears, 2015 and then the current y ear 2016, has been very much on the basics:
sustain our profitability, we're very pleased with our profit levels; and a renewed focus on the hospitality of our
customer service, the reliability of our operation, and we also have wonderful opportunities to continue growing
the Southwest route network. We have a lot of fans out there who love Southwest Airlines, and we're just in that
fortunate position where they would love to have more of us, so we want to manage that growth and we want to
manage that in a very fundamental and stable way. Of course, we're very – again very pleased with the results that
we're seeing from that so far.
We've managed a tremendous amount of change for the five y ears ended 2014. One of the goals also that we've
had for 2015 and 2016 is to allow our network, our systems, our people all time to mature and stabilize and I think
with any company, there just comes a time where there's change fatigue. So we've had a strong desire to make sure
that things stabilize and indeed they have. In the meantime, we've also been, in the background if y ou will,
investing for the future and preparing for another surge of change that is coming for 2017.
We have a new reservation sy stem. We have a new international terminal that's un der construction where we will
complete that and launch flights at Fort Lauderdale next year. We are prepared to fully retire all of the Classic
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aircraft and that next year will amount to Boeing 737-300s. All the Boeing 737-500s will be retired this y ear, by
the way . And then, of course, prepare to launch the Boeing 737-8, which is the newest member of the 7 37 family
from Boeing.
So this morning, in particular, we want to update y ou on our fleet plans. We've got some new information on the
most recent change that we've made in our Boeing delivery schedule. We have been very, very blessed to have a
great partnership, great business relationship with the Boeing company for the entire 45 y ears of our existence
and very , very pleased with the update that Tammy's going to provide y ou on our fleet this morning or this
afternoon.
We're also going to share with y ou the status of our reservation system project, biggest in our history. It's going
very, very well and along with that, our plans for future releases and then, of course, I know what y ou're all very
interested in, in addition to the status of that project is what y ou should expect in terms of functionality gains
along with what I hope will prove to be conservative estimates of the values that we hope to der ive from this new
technology.
We're also going to give y ou an update on the various facilities and airport projects that we have across the
country. We were talking at our table earlier about some of the constraints that we have in the United States for
future av iation growth at airports, and we believe we've got a couple of cases on how we're going to address that.
And then, of course, we're going to provide an update on the financial and operating trends in those plans as well.
So, I'm really, really pleased with our 2015 performance and first half 2016 has been even better. We're enjoy ing
another excellent year with very manageable growth, very strong demand. Fuel prices continue to be well below
2014 levels. We've modified our hedging program techniques for future years accordingly to take these lower
prices into account. And the results of all the changes that we've made over the last five years, and lower fuel
prices, of course, has been very strong margins, and is also putting us in a position where we can provide
outstanding shareholder returns.
So, if y ou go back five y ears, six y ears, we've made tremendous advances in a short period of time. We have – let's
stop calling it All New Rapid Rewards, but our Rapid Rewards program, I just couldn't be mo re pleased with. That
was launched five y ears ago, and we've seen tremendous value driven from that.
The AirTran acquisition also was consummated five y ears ago. That's all fully completed in 3.5 y ears into 2014 and
I feel that we've more than realized the synergies that we were expecting in 2010, when we were contemplating
that acquisition. We launched the Boeing 737-800 in 2012. We have over 100 of those aircraft in our fleet today.
And again, we've been very pleased with the results in terms of our abil ity to schedule it in the sy stem and match
demand to the larger seat gauge as well as our ability to operate an airplane that's just a little bit different than
what we have been accustomed to.
Of course, we've launched international service in 2014. It's about 3% of our capacity. So it's very modest and that
is the way we want to continue to approach that expansion to make sure that we're doing – adding international
routes in a very measured way, but we're very pleased with the operating performance of t hose routes as well as
the commercial success of those routes.
I did want to put in a big plug finally for fleet modernization, so that was the fifth strategic initiative that we've
been focused on. I think that that perhaps is the one that may be, not th e least understood, but may be perhaps the
least appreciated. And we have really put our prosperity to work through the improvements that we've been able
to make in our profitability and especially in modernizing the fleet.
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Of course, we're launching the Boeing 737-8, but we've also realized significant cost benefits, significant revenue
benefits, operating benefits and then customer experience benefits from this fleet modernization. The used
aircraft market was very supportive of us accelerating the retirement of the Boeing 717s and also the Classics. So,
that's worked very, very well and then Tammy is going to again give us an update on now the changes that we have
put into effect with the future Boeing delivery schedule.
But the fleet modernization efforts have been vast. They have been very successful. I want to thank Jack Smith and
his tech ops team for bringing in, gosh, close to 100 used aircraft and getting them deployed on the Southwest
maintenance program in the Southwest configuration and delivery. It's been a lot of extra work, but it's been very,
very cost-effective for us and works extraordinarily well.
Before I turn it over to Tammy, I just wanted to close my opening remarks here by saying that it is alway s our
people, 50,000 strong that do this hard work and obviously deliver these results and make all of this change
happen, and I do want to thank them again and I want to congratulate them again on these great results.
And with that, Tammy , I'd like to inv ite y ou up to share y our story. Tamm y Romo, our Chief Financial Officer,
Southwest Airlines. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President
Good afternoon, everyone. It's great to be here with y ou all as alway s. It's alway s a lot of fun to be in the room with
a lot of – I'm not going to say old – but friends that I've known in a while as well as new friends. We really
appreciate your interest in Southwest as well as y our investment. Since our last Investor Day , we've – I think it's
fair to say , we have accomplished a lot. We've delivered exceptional results and we are committed to returning
significant value to all of our shareholders.
As Marcy and Gary both mentioned, I'd like to spend some time this afternoon discussing our financial objectives.
The Southwest family has worked together over the last several y ears to build a very strong foundation. We've
transformed our business, so that we can continue to prosper and grow. And our financial performance has been
quite strong.
First quarter margins were at levels we haven't seen in over 35 years, and we have industry-leading revenue
growth, modest cost inflation, a strong balance sheet, and a healthy cash flows, which have all enabled us to
provide healthy returns to our shareholders. As we celebrate our 45th y ear here at the Exchange, we are very
proud of our track record of taking care of our employees, our customers, and our shareholders.
Over the next 20 minutes or so, I'd like to take y ou around the wheel that I have here on the screen. I'll focus in on
four primary objectives: strong profits and returns on capital, a balanced capital structure, top -line revenue
growth, and our commitment to maintain our cost advantage.
Let's begin by focusing on our strong profits and capital. As y ou can see, our profits have grown tremendously
over the last five years with margins expanding over fivefold. We attribute the success in large part to the
implementation of our strategic initiatives and the optimization of our network. We have expanded our ROIC by
26 points over the past five years to a record 32.7% as y ou can see on the chart here.
As Gary mentioned, our strategic initiatives have all come together extremely well to deliver very strong returns.
Our AirTran integration was complete at the end of 2014, which has allowed us to grow our network by 25% and
has also allowed us to begin international service. Our international market, yes, they are 3% of our network and
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growing, and we are fly ing to 11 international destinations in the Caribbean and in Latin America, and we will
begin expanding soon to Cuba, pretty remarkable.
Our network is a significant strength at Southwest and y ou will be hearing more about our opportunities later in
the panel, as y ou'll get to hear a lot from Andrew here shortly. And we've also benefited, as Ga ry mentioned, from
our fleet modernization effort, and of course, that results in significantly lower maintenance costs as well as better
fuel efficiency. And of course, our revamped and growing frequent flyer program, which has exceeded all of our
expectations. And finally, I would certainly acknowledge that we've benefited from low fuel prices, but even on a
fuel constant basis, our margins have been healthy.
This chart speaks to our commitment to deliver superior returns. As you can see on the chart, our 2015 ROIC far
exceeded returns delivered by the S&P, consumer discretionary and transport stocks. And our 2015 ROIC well
exceeded our cost of capital, which will continue to be a long-term focus for us.
Moving ahead on the wheel, let's spend a little bit of time on capital efficiency. Our balance sheet remains strong
at the end of first quarter with $3.6 billion in cash and short -term investments, and our cash flow from operations
has been strong, and capital spending is at manageable levels. And I'll spend quite a bit of time here with y ou
shortly on our capital expenditures. Our focus on strong free cash flow generation has enabled us to keep our
decades-long commitment of returning substantial value to our shareholders.
Including our $1 billion available revolver, our liquidity, as y ou can see in that first chart, was $4.6 billion at the
end of the first quarter, and the middle chart speaks to our strong capital structure. Our leverage remains in the
low 30% range and this includes our off-balance – the net present value of our off-balance-sheet leases. And this
last chart in the slide illustrates how our operating cash flows have increased consistently over the last five y ears
to $3.2 billion in 2015 and half that amount in the first quarter of this y ear alone.
We have preserved our industry-leading balance sheet with the designation as the only domestic carrier with an
investment grade rating from all three rating agencies. Our leverage is in the low -to-mid 30% range, and as y ou
can see here from the chart, we have very manageable levels of debt repayment with $300 million bullets through
this y ear as well as the next y ear.
And as Gary mentioned, we are investing in our future, and we are investing in our business at prudent level. We
are disciplined in our investment decisions and actively manage our capital spend. I can assure y ou we spend a lot
of time on this, and those are alway s fun discussions around Southwest. The investments we are making that we
will share with y ou today provide meaningful returns for y ears to come and will help us sustain our healthy cash
flows and profits through the cycle.
Starting with 2016, total CapEx remains in the $2 billion range, as y ou can see from the bar to your far left. Now, if
I could draw y our eyes to the blue portion of that bar, $1.3 billion relates to aircraft purchases, which I will cover
in great detail here shortly. I first want to cover our non-aircraft CapEx represented by the y ellow, the red and the
gray bar. As y ou can see, technology and facilities spend are significant drivers. Technology spend for 2016, which
is shown here by the gray bar, is estimated to be roughly $250 million. The majority of this spend relates to two
primary bodies of work: our reservation sy stem and our operational initiativ es.
In total, we're estimating the capital spend on our reservation system will be about $500 million with the majority
of that completed by the end of 2017. As our panel will cover, the corresponding benefits of our new reservation
sy stem are significant and we will be able to recoup our $500 million investment by 2020.
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With regards to the operational initiatives, we're investing about $200 million to $300 million there over the next
couple of y ears, which we also expect to recoup that investment by 2020. Facilities is another portion of our
CapEx, I want to point out, and that is the red bar. That spend for 2016 is estimated to be around $150 million,
which is attributable to a number of projects as Gary mentioned, and Jeff Lamb will be sharing a lot mor e detail
about that when we have our panel discussion.
So to summarize, we expect our non-aircraft CapEx to be in the $600 million to $700 million range for 2016.
These investments will carry into 2017, where we expect our non-aircraft CapEx to peak before bending back
down as we move forward.
So now, I'd like to focus on our aircraft CapEx, which is represented by the blue bars. If y ou'll recall on our first
quarter earnings call, we said that we were evaluating our fleet plans, in light of our decision to further accelerate
the retirement of our Classic fleet and to no later than September 2017, and we've completed the analysis of our
order book.
So, with the support of our wonderful partner, Boeing, we are announcing today that we have restructured our
order book to optimize our fleet retirement through 2025. I will rev iew these changes in quite a bit of detail on the
next two slides, but the impact on our CapEx from the changes was to defer $1.9 billion of aircraft CapEx beyond
2020. This resulted in rev ised aircraft spend for the next five y ears, as noted here on the chart.
Our aircraft CapEx for 2016, as I mentioned before, is approximately $1.3 billion, and we expect similar amount in
2017. From there again, we expect our aircraft CapEx to bend down significantly, as y ou can see, very easily here
through 2020. So, now beyond 2020, we believe we have flexibility to keep our CapEx also at very manageable
levels.
So, this supports our desire to keep overall capital spend manageable, especially during t he peak y ears here in
2016 and 2017, on the non-aircraft CapEx side that I just walked y ou through, and we'll walk y ou through in even
more detail when we get to the panel discussion. So, in addition, our restructured order book did not change our
plans to grow the fleet, no more than 2% on average from 2016 to 2018.
So, just one more time to make sure everybody has it, our 2016 CapEx remains at $2 billion. Our 2017 CapEx is
currently expected to be slightly higher at $2.2 billion, which we expect will rep resent a peak and then will bend
down from there. So, everybody got it?
Okay . We're going to keep going. So, I'm going to walk y ou through the changes in our order book. So, I'm going to
next slide here. First, this slide illustrates our order book that we reported to you in April. The blue and gray bars
represent Boeing firm orders and the y ellow bars are firm commitments for pre -owned Boeing aircraft. In total,
we had 328 firm commitments and pre-owned aircraft. We also had 209 options, which are noted b y the year at
the bottom of the slide here.
So, now this slide shows our restructured order book with Boeing. You can see the details of the restructure in the
bullets noted on this slide, but in summary, total firm orders only increased by two pre-owned aircraft to 330 and
total options remain the same. So, the takeaway that I want to leave you here from the restructures is our deferral
of 67 firm deliveries from 2019 through 2022 out to 2023 through 2025. This supports again our no more than 2%
net fleet growth over the next three years, given that we will have no retirements until 2023, which is the first y ear
we will have significant Boeing 737-700 retirements.
Based on this restructured order book and our plan to retire all of our Classics no later th an the third quarter of
2017, we expect to end this y ear with 723 aircraft, just over 700 aircraft in 2017 and then we'll be back up to
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somewhere in the 7 30 and 750 range again depending on our option exercises in 2018, and y ou can see on the
chart, the options at the bottom are 18 in 2018.
So we are very pleased with these changes to our order book because it supports our fleet modernization efforts,
which we think is a big deal, and provide significant flexibility as we manage our strategic growth opport unities
over the long term.
We have a balanced approach to our capital deployment and we remain focused on long -term value creation for
our shareholders. We've put significant effort into our planning and we'll remain diligent in our efforts to ensure
that we're deploy ing the capital that you've entrusted in us wisely .
As we continue to demonstrate, we are making prudent investments in our business, and we're returning
significant value back to our shareholders through a combination of buy back and div iden d. As we announced just
last month, our board authorized a $2 billion repurchase program. And as planned, we did execute a $500 million
ASR at the end of May . So as a result, we have returned $1.3 billion to shareholders thus far in 2016, which is
nearly what we returned for the full y ear last y ear. So, over the last five y ears, we've returned more than $5 billion
in div idends and share repurchases.
While returning capital through buybacks and dividends might be new for many of our competitors, it is not n ew
for Southwest Airlines and this v isual illustrates that we're the only domestic carrier that has had consistent
returns to shareholders every year for more than two decades. And while this chart only goes back to 1990, we had
buy backs as far back as the 1980s. And we have paid consecutive quarterly div idends since 1976, which is
unmatched in the U.S. airline industry.
So, let's keep moving forward on our wheel and we're going to jump into revenues for 2016. Our first quarter
revenues were off to a great start with top-line revenue growth of more than 9%. Our industry leading unit
revenues have been driven by strong demand for Southwest low fares, which has resulted in record load factors
thus far this y ear.
Our bookings and current revenue trends suggest we'll grow our unit revenues in second quarter 2016 y ear-over-
y ear less than 1%. Adjusted for stage and gauge, our unit revenue growth would be even higher. This is likely an
industry -leading performance and quite strong in the current environment.
As we've said, we do anticipate more difficult comparisons when we get in the back half of the y ear relative to the
first half of the y ear, and that again is primarily due to the lapse of the Chase benefit. This will make it a challenge
to achieve unit revenue growth in the second half of the y ear, but overall, our revenue management team is
executing exceptionally well in this weak revenue environment. We've invested in our people, our tools, processes,
and in our revenue management department over the years, and they are doing a fabulous job. And we have even
more revenue management opportunities ahead with our new reservation system as we'll cover in our panel just a
little bit later.
Our investments in our network and brand promise have created tremendous c ustomer loyalty. At Southwest, we
truly do have fans, and our people take great care of our customers. Our Transfarency approach in low fares puts
us in a category of our own. Our Net Promoter Scores are up there with the likes of Google and Apple and
Starbucks along with our ranking in Fortune's Most Admired Companies.
Our brand proposition of everyday, low fares, no fees, and flexible ticketing policy resonates with the leisure and
our business customers. Managed corporate travel has experienced signific ant y ear-over-year passenger and
revenue growth over the last five years as y ou can see on the screen.
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Our corporate sales continues to significantly outpace capacity growth, which is up 91% since 2010. And that's
largely due to our focus in this area, coupled with our robust network. We've grown total revenues from
companies in the Corporate Travel 100, or Fortune 1000, over the past five-year period, essentially doubling our
business in one of the most competitive areas. So, this is really strong perform ance, and kudos our team.
We've been thrilled, as we've said, with the success of our Rapid Rewards program. This program has doubled in
size in just five y ears, exceeding even our own expectations. The chart on the left shows our membership growth,
the majority of which joined Southwest when they purchased their flight on Southwest.com.
The remarkable revenue growth and contribution illustrated in the chart on the right is attributable largely to the
success of our Chase Rapid Rewards Visa Credit Card po rtfolio. So, since the launch, both the number of
cardholders in the program and card portfolio spend has more than doubled. Overall, our frequent fly er program
has been a significant contributor to our top line revenue growth.
Okay , I really like the slide, and I think it's really telling when it ties to revenues. We are the nation's largest
domestic carrier in terms of passengers boarded. And we are the hometown carrier in many of the top metro areas
that we serve as y ou're going to see on this chart. Normally, I won't read the chart to y ou, but I'm going to read
this one.
So, in the L.A. Basin, we have a 30% market share; in Phoenix 41%; in the D.C. Baltimore area, we have 32%; in
Denver, 35%, that's after only 10 y ears; in the Bay Area, we have 32%; in Las Vegas, we have 36%; and in Chicago,
we have 27% with 265 departures today, pretty remarkable. And that just tells y ou how beloved our brand really
is. And our focus on connecting people to what's important in their life has led to our strong market share
contributing to our top line revenue growth.
Our robust network has also been a key contributor to our revenue growth. And we believe we have many, many
exciting opportunities ahead. As we refer to often, we've identified close to 50 potential dots that we can add to
this map with the range of our current fleet today. And the delivery of the MAX beginning next year is a key factor
here with the fuel efficiency it will bring.
Most of these new cities are outside the continental U.S. However, it's im portant to note we still have untapped
growth opportunities through depth in continuing to optimize our network. And Andrew will be talking to y ou
more about that a little bit later. We are very excited to begin service to Long Beach earlier this month, an d
thrilled to recently have received government approval to serve Cuba. For 2017 and 2018, we expect our year-
over-year capacity growth to be less than this y ear, which again remains in the 5% to 6% range.
So, the last section of the wheel I'd like to cover today is to focus on – is our focus on controlling costs. Unit costs,
excluding special items and fuel in 2015, were essentially flat with 2014. As ever, we remain diligent in our cost
control efforts including fleet modernization. Based on current cost trends, we continue to expect our second
quarter 2016, excluding fuel, profit sharing and special items, to increase approximately 2% y ear-over-year. And
for the full y ear, we continue to expect the increase to be approximately 1% y ear-over-year, which again is largely
due to the accelerated depreciation of our Classic fleet. And I'll just also note here that is based on our existing
contracts with our labor groups.
Maintaining our low cost has been the foundation of Southwest since day one. At 45 y ears o ld, yes I'm 45 y ears too
– just kidding, we still have a meaningful cost advantage and we've done it without filing bankruptcy and not on
the backs of our employees. Our strategy hasn't changed. We are committed to our low fare brands while
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maintaining our focus on hitting our financial targets. We wouldn't have low fares without low costs and we are
going to keep our low costs.
Our low cost story can't be told without an acknowledgement of the significant benefit we received from our fleet
modernization efforts as we illustrated here on the chart. So if y ou'll take a look at the chart on the left, we had a
104 -800s, 471 -700s, and 129 Classics at y ear-end 2015. And while the number of aircrafts in 2015 was very close
to 2011, the number of seats per aircraft increased by 12% or 9%. This resulted in a 1 .3 point decrease in CASM
over the last five years, representing a cumulative cost savings of about $200 million in 2015. And these savings
were, again, largely attributable to maintenance and fuel efficiency .
In addition to the fuel efficiency from fleet modernization, what y ou see listed on this chart are some just
examples of fuel-saving initiatives over the past five y ears, and I won't read this one to y ou. Based on market
prices as of June 20 and our current fuel hedge book, we expect our second quarter economic fuel price to be in
the $1.80 to $1.85 per gallon range here in the second quarter. And our current projection for annual 2016
economic fuel price per gallon is in the $1.95 to $2 per gallon range .
So to recap everything that I've shared with y ou today, while the revenue environment remain soft, we're
outperforming the industry with very exciting opportunities ahead. Our non-fuel cost inflation this y ear is modest
with the majority of our 1% growth being driven by our accelerated Classic retirements. With the rise in oil prices,
our estimated fuel cost per gallon have increased since our last guidance due to just rising fuel cost. But we're still
estimated to decline from 2015.
Our cash flows remain very healthy and we continue to tightly manage our CapEx as ev idenced by our $1.9 billion
deferral of CapEx from our restructured order book. We've returned $1.3 billion thus far to our shareholders
through buybacks and div idends, and we have $1.5 billion remaining on our current authorization. All in all, we
are anticipating 2016 to be another y ear of strong margins and our goal remains to produce returns in line with
2015.
And now I'd love to turn it over to my good friend, Mr. Bob Jordan, who is an a ggie, but we'll excuse him for that,
just throw that out there. And we'd like to go ahead and inv ite our panel speakers to come on up and join the fun
at the table up here.
And with that, it's over to you, Bob. ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP
She alway s gets me about this aggie thing. I'm not sure about that. Can y ou all hear, okay? We had a little trouble
on our side. Everybody, okay? All right. Well, thank y ou all again for being here. We really appreciate it and we are
just really excited to be here to not just meet with y ou, but to celebrate our 45th birthday at Southwest Airlines.
It's my pleasure to introduce the panel, and they all asked me to be very nice to them, so we'll see. But y ou're going
to hear from four of our leaders. And I don't know that y ou know all of them, so I want to take just a second and
tell y ou a little bit about them.
First up, we have Randy Sloan, he is our Senior VP and Chief Information Officer. And Randy came to Southwest
four y ears ago from a long career at PepsiCo, and he traveled a lot there. And Randy tells me that over the course
of the last 10 y ears working for Pepsi, he hit more than 50 countries and somehow turned out to be a top 1%
rev iewer on TripAdvisor. So that's a lot of rev iews, Randy. But Randy 's done a lot for Southwest in the short
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period of time. He led the implementation of the international res sy stem. And he's going to talk to y ou today
about the implementation of our domestic res sy stem, which I know everybody has a lot of qu estions about.
Next up is Mr. Andrew Watterson. Andrew? Andrew is a Senior VP, Network and Revenue, and Andrew's just a
tremendous leader for our Network Planning and our Revenue Management groups. He's been here about three
y ears and he came to us from Hawaiian Airlines. And know that is not a hint at the next destination for Southwest
Airlines. He's going to talk to y ou about the commercial benefits of the new domestic res system, and he's going to
talk to y ou a little bit about our network and our points of strength as well.
And I know we have a lot of analy sts in the room. So for those of y ou that are familiar with the analytics tool for
the industry called Diio, everybody familiar with that one? I can see a lot of people saying y es. Andrew is the
number one user of Diio in the world. So that tells y ou a little bit about Andrew's personality, he's a great guy .
Out third panelist is [audio gap] (42:26) Mr. Mike Van de Ven, EVP and Chief Operating Officer. Mike. And Mike's
been with Southwest for 23 y ears in a lot of different roles. He led Financial Planning, Internal Audit, he currently
leads our ops teams. And Mike's going to talk to y ou about the strength of our operations, and then some
opportunities that we have to continue to build on that foundation. And a little not well-known fact about Mike,
Mike sold – other than the fact that went to UT, that's okay , Mike sold Kirby vacuums door-to-door during
college, which I just cannot see. And I'm told that he still has one of the Kirby s at home, which I c an see because
he is very frugal and I can see that he would've kept one for 23 y ears. But y ou still really have one at home? ................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer & Executive Vice President
[inaudible] (43:18) ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP
Good for y ou, man. ................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer & Executive Vice President
[inaudible] (43:19) ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP
He's still selling. So if any of y ou have an interest, see Mike after the panel.
And last but not least, we have Jeff Lamb, our EVP, Corporate Services. And Jeff has been with Southwest for 12
y ears. And he's responsible for hiring all the great people that do such a wonderful job every day. But Jeff also has
airport affairs, technology, diversity, and inclusion and corporate facilities, and Jeff is going to talk to y ou today
about the investments that we're making in our airport facilities and then some key investments in our non -
airport facilities.
And I thought this was – a little tidbit about Jeff. This is something I have never heard before. Jeff went to the
Cisco Junior College to play football and somehow ended up working in a factory that made stick horses. So I
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assume there have to be factories that make stick horses because there are stick horses in the world. But, buddy, I
just can't see y ou working in a stick horse factory.
So there y ou go, just a little bit about this wonderful leadership team. And with that, I am going to turn it over to
y ou, Mr. Sloan. Thank y ou. ................................................................................................................................................................................................................................
Randall E. Sloan Chief Information Officer & Senior Vice President
Thank y ou, Bob. Good afternoon. As you heard from both Tammy and Gary , we are at the end of a five -y ear plan
of strategic investment against many strategic imperatives. And, today, I'm going to talk to y ou a little bit, and give
y ou a little more insight on the last of those, which is the modernization of our reservation system. We call that,
One Res. So One Res essentially is the bringing together of multiple reservation system capabilities onto one
common platform which will then allow us to launch new business capabilities.
We started this journey in 2012, when we chose Amadeus as a reservation systems partner and began the
implementation on the Amadeus Altéa reservation system platform for international launch of the Southwest
international business. We completed that pretty much flawlessly in July of 2014.
And since early 2015, we have been on the second step of that journey, which is to bring our almost 3 0-year-old
SAAS Sabre, highly customized reservation sy stem that we use for our domestic business to the reservation
sy stems that we built to launch our international business. And again, we call that One Res.
So just a couple of facts, this is a fairly large endeavor on our part. We have over 1 ,400 resources engaged in this
effort across every department at Southwest Airlines, as well as a large contingency of resources by the Amadeus
partner themselves.
We will, when we are done, have significantly modified and integrated over 80 Southwest business solutions to
the Altéa reservation sy stems suite. We will have changed over 500 business processes. And the step that is
probably the most important is we will have trained 20,000 of our frontline employees to use these new business
capabilities.
When we finish, we will have a modern reservation sy stem that will allow us to adapt to the changes that are
needed in our business and the changes that occur in this fast -paced industry in a lower-cost, faster-to-market
way because it's an easily configurable solution. And most importantly, it will allow us the foundation to grow this
business forward as our business dictates.
So, we chose Amadeus as our partner back in 2012. In 2014, we reevaluated the marketplace and we continued to
choose Amadeus to move our domestic business, too. Why did we do that? We did that first because, first and
foremost, their solution fit the business needs of Southwest Airlines. But as important, we were very impressed
with the technical strength of the Altéa reservation system suite. And as important, we were very impressed with
the technical strength and skill set of the Amadeus team themselves.
That's important to us because we know our business won't stand still and this industr y won't stand still. And we
need a partner that can move and be agile with us. And they've so far proven to be that partner. I think many of
y ou know, y ou probably follow Amadeus, the airline IT group and the company as a whole, they have successfully
implemented over 100 reservation sy stems across the world. They've got a track record of proven
implementations that are very successful. And we have our own track record of that because they were flawless in
the execution of our international launch.
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They are the market leader. The estimate – if y ou were at the Amadeus Investor Day in London a few weeks ago,
the estimate that I saw there is that they project to support airlines serving over 1 billion passengers by 2018.
That's important to us because you need to be a market leader to keep pace with the industry to have the R&D
capability to fund and move that product forward as we need it to.
I won't discuss our commercial terms publicly, but what I will say to y ou is that our commercial agreement is
completely aligned and very consistent with our low cost, low fare brand, very important to us. But as important,
the commercial agreement also gives us access to all of the products in the Amadeus Altéa reservations suite that
we believe we will need to use to drive the business value that Andrew will actually get up and talk to y ou about in
a moment.
And then, last and, in some way s, very, very important, and may be most important, we have found Amadeus as a
partner to have a very similar culture to the Southwest Airlines. They are fun-loving, but they have a fierce, fierce,
warrior spirit. And they have proven that over the course of the last four y ears as they've stepped up to over – help
us overcome the many obstacles that y ou always face in an effort of this s ize.
Let me back up here. So, our implementation approach is essentially designed to take Release 1 and Release 2 and
move our domestic business to the foundational reservation systems platform. That will allow us then to lay er on
top of that new business capabilities that will drive the majority of the business value that Tammy mentioned
earlier, and then that Andrew will provide more detail on.
Release 1 is – we call it the cell release. It is essentially the re-release that will allow us to publish and sell our
schedule for the latter part of the first half of 2017 in the late 2016 of this y ear in the new reservation sy stem. It
includes scheduled publication, inventory management, and all customer-facing functionality. I'm happy to report
that Release 1 is on track. It is essentially build to complete and we are in certification testing and that is
progressing according to our plan.
Release 2, which will go live in the latter part of first half of 2017, is essentially all of the functions that are
required during the day of operation, all of the functions that our frontline employees will use to check passengers
and to board passengers, to handle baggage, and in case of the regular operations, re -accommodate our
passengers. Release 2 is 50% build complete. Certification testing actually will start very soon. And together, those
two releases will go in and be in by mid-2017. That will form the foundation and it will be essentially the move of
our domestic business to our new reservation system platform.
Later in 2017, the good things start to happen. And the good things are we start to implement new business
capabilities that Andrew will discuss and those new business capabilities will generate at least the business value
that Tammy mentioned before. And then, obviously, we have made a significant investment in this new capability.
So, when the program is done, we won't be done. Our business will move forward. This industry will move
forward. And we have planned ongoing incremental releases for continuous improvement. That will be basically
business capability that is prioritized based on the business value that it will drive for us.
We believe this approach will move our domestic business to this new platform in a manner that limits revenue
loss, limits customer impact, and most importantly, is frontline employee friendly. And why do we believe that?
Well, first of all, most efforts of this time – of this kind fell during large-scale data migration. Well, with this
implementation approach, we don't have any large-scale data migration. We actually begin to use the new sy stem
with the new schedule.
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We're building a solution onto a solution that we actually use today. We use it for a portion of our business, our
international business that has two or three advantages for us. The first is we can meter the technical
implementation over time and we can meter the business process change over time. That allows our frontline
employees to see and use the new capabilities we are delivering on a smaller portion of our b usiness.
It also helps simplify for our frontline employees the transition from the old systems to the new sy stems who will
help them because essentially if they are doing their job for a passenger who is traveling on the day before, they're
using the old sy stem, and if they 're working with that passenger who is traveling on the day after, they're working
on the new sy stem. So, it's a fairly simple execution process for our frontline.
But most importantly, we believe this is the right approach because this is the exact same approach that we used
when we launched our international business. And as y ou all know, that execution was flawless and we stood that
business up in record time and it has continued to progress in a very great fashion for us.
So, with that, I'm going to turn it over to my partner, Andrew, who's going to talk about the business capabilities
that come with this great investment. ................................................................................................................................................................................................................................
Andrew Watterson Senior Vice President, Network and Revenue, Southwest Airlines Co.
Thank y ou, Randy. And thank y ou, Bob, for that introduction. I didn't – I knew I was a heavy user of Diio. I didn't
realize it was that heavy. Part of it I like to think because I'm data driven. But part of it is my boss, Bob, is full of
questions. So, I'm alway s turning the Diio to answer his questions.
So, as Randy said, I'm going to talk about the benefits of our new res sy stem, I have one slide that will kind of give
y ou an overview of that and the benefits, the capabilities that comes with it and the benefit and have a few s lides
after that on our network. It will take y ou through how we at least think about our network.
So, I'll start off with the new reservation sy stem. Since everyone is probably already looking at the numbers
any way, I'll start with the numbers and back in the capabilities. So, if y ou see at the bottom right, we expect the
net benefit from R3, and y ou remember Randy sequencing there R1, R2, R3. At R3, we get those enhanced
capabilities that will generate approximately $200 million EBIT benefit to the busin ess.
And then, we have a series of identified capabilities to come after R3 that will lead up to a run rate of at least $500
million EBIT by 2020. So, now I'll go back to the top of the chart. And there's really five types of capability the new
sy stem gives us that drive these benefits. And they're represented by the five colors around this wheel. And I'll go
through these – kind of each of those segments one by one to give y ou some color on the nature of the benefits to
help y ou understand better how they drive the nature of the capabilities. So, y ou can understand how they drive
the benefit.
So, the top left, y ou have the revenue enhancements. Those are things like O&D controls. You may be aware that
we have an O&D revenue management system, origin and destination that is. That's implemented, that's
generating benefit both for us, to get the full value, y ou need a new res sy stem that can accept the O&D controls
from the revenue management sy stem. So, with Amadeus, we'll then have O&D controls and that wil l generate
substantial benefit for the company.
We have improved fare flexibility. And we have ancillary controls. Ancillary controls, y ou can think of that as
being able to revenue manage y our ancillary products just as y ou revenue manage y our seats today. And I should
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note that the ones in black are the ones that are associated with R3 in that $200 million. And the ones in blue are
the ones that will come after R3 to lead up to the 2020 run rate.
And then, y ou move on to schedule optimization. That will give us the ability to vary our schedule more. So, y ou
may know today that we have six base schedules per y ear where we vary our capacity consistent with the point -to-
point model. Within the base schedule, our variability is modest to best. With the new s y stem, we will be able to
manage supply a little bit more granularly within a base period. It will also give us more days of inventory,
meaning how far out we sell, redeyes, so we choose to fly them, and some improved connection times.
And y ou move down c lockwise in the international growth. The new sy stem will give us the ability to have
interline and codeshare relationships with other airlines. Of course, this is subject to an agreement with our pilot
group. And that's part of the ongoing labor discussio ns with them. The new sy stem sells in foreign currency, which
gives us enhanced capabilities when we're selling outside of our borders.
And it also gives us the New Distribution Capabilities. That's an IATA standard program that's recently launched
that's called NDC for short, which is a standardized way of interacting with third-party channels and being able to
sell y our fullwears. And so, that – the new sy stem will allow us to participate in that to the extent that we desire.
At the bottom, y ou have the foundational capabilities. And that's best expressed by Electronic Miscellaneous
Documents or EMDs. If y ou're not familiar with that, that's a fairly recent last few y ears industry standard way of
selling ancillaries. You can think of this as an e-ticket for ancillary items. In that way , y ou can – when y ou come up
with a new idea for a product or service or bundle, you can very quickly market that and bring it to market and
control it. And that's both associated with the ancillary controls that I had in th e top left there as well as Randy 's
discussion earlier about how this allows for more seamless and rapid go -to-market capabilities.
And the final chunk of the wheel there is the operational improvements. And these will foot to what Mike is going
to talk about later and some of the technology development in the ops side for the new res sy stem will be able to
better manage IROPS or irregular operations where we can – in a more automated fashion, rebook customers in
an optimized way, as well as to improve our standby capability.
So, all five of these in conjunction, we have identified plans for how these ramp up between now and 2020, and
lead from that $200 million from early days in the R3 to the run rate in 2020. So I'll be available for Q&A at the
panel along with Randy . I'm sure y ou'll have more questions to me on this, but that will wrap up my discussions of
the res sy stem.
And now, I'll talk to y ou about our network, which over the last 10 y ears is when we've built a national footprint.
We're already kind of coast-to-coast a decade ago, but then we added in some more dots pre-buying AirTran. We
added in some more dots in AirTran and then, today, we've built out a national footprint and started an
international network.
Now people often focus on dots when they look in a network. However, that can be misleading. It doesn't tell the
whole story, perhaps that's the fall of airlines from having dots in our in-flight magazine. But it's really how y ou
connect the dots that really tells the story. And so, I'd like to take y ou through a series of slides to give y ou some
insight of how we go about connecting the dots and what we're up to.
So, y ou may already know, as Tammy mentioned, that we're the largest domestic airline. We carry more people,
domestic passengers than any other airline, which y ou may not realize is if y ou zoom in and look at just nonstop
passengers, our lead is much greater. We carry a lot more nonstop passengers than any other airline and this is
obviously because we're not funneling three-quarters of our passengers over a handful of hubs, but it generates an
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impact, a natural consequence which is we have at least the larger list of large operations rather than a
constrained set of mega hubs.
So, what I have here is a listing of cities, where each carrier has more than 60 flights per day and for us, 60 flights
would be an Austin, Texas or an Orange County , California. And there's nothing necessarily magical about 60, but
if we get something like a 60, it shows y ou have a meaningful presence in th at town, in that city, in that airport,
that y ou're of consequence there, and proud of the surface which could seem like av iation trivia, which is I enjoy
av iation trivia over some drinks, but really, this is something that gives a powerful business benefi t and that
business benefit is a result in far more market-leading position than any other airline. So, if y ou take the top 50
travel markets in the U.S. and we measure that in terms of origin, destination, passengers, meaning going to and
from that city , not just passing through. Southwest is number one in almost half of them and y ou may have seen in
the press that in March, we're the number one airline in Pittsburgh for the first time. So, I expect by the end of this
y ear, it'll be 25 out of 50 where Southwest is number one.
Now, this is not a market share place. This is not a go by market share at any cost. This is merely a consequence of
our predominantly point-to-point network that has grown out as I've showed before in that logic trail.
However, now that you're there, it gives y ou a great benefit of the v irtuous circle here because as y ou have
passengers in each of those 24, soon to be 25, they buy you and they come back and they repurchase from you. As
their travel purpose changes from business to le isure, either v isiting friends or relatives, they come back again and
again. And when they come back, they buy ancillary products from y ou in a much higher percentage rate. And
then once they do that, they use y our credit card more and more and the benefits we all know that generates.
And then, we offer a new route to them, they are very quick to adopt it. There's a v irtuous circle here that really
propels y ou when y ou have that position already, and that works in markets of all sizes.
Number 50, in case y ou're wondering, Providence, Rhode Island, we're number one there and that works. The LA
Basin, the number two market in the U.S., we're number one and it works there. Right in the middle, 25, Austin,
we're number one and it works there. So all kinds of sizes, this model is really scalable, big and small, and we've
been building this for quite a while, but it really all came together as we got that national footprint and
international destinations, they really had a v irtuous circle built upon themselves.
And I'll illustrate that by going a little bit deeper on one of our cities, Baltimore. You can see over roughly nine -
y ear period of time, in Baltimore, we went from big to bigger. Part of this was through acquisition, and part of this
was through organic growth. And we're using once again O&D passengers, that's just travelling to and from,
because that represents customers' choice, each one of those O&D is the customer choosing y our airline versus
another airline. And 2015 is the last date available for the DOT information, which we're basing this.
And so, a big position that got bigger by adding more and more relevant destinations. And what happens now with
the 61% when y ou layer on additional growth opportunities is that y ou de -risk it. And so, if y ou look at what we've
done in a little bit of 2015 and 2016, which were not necessarily represented in that pie chart, we've added a
balanced portfolio of growth just as we've always done, of connecting dots of depths of new dots.
If y ou look at the blue, those are routes we did nothing. No capacity was needed, no capacity was added. That was
the majority of routes. Yellow, depth, we add a frequency. As GDP grows, it generates demand for air travel, and
as demand for air travel increases on y our routes, eventually gets to the point we need new frequency, y ou plot one
in and it works. And red, y ou connect dots and if y ou look at – one of those is San Jose, San Jose to BWI, un-
served. Who would have known that the Silicon Valley was not connected to Washington DC?
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And y ou might be asking, well, who is number one in San Jose? Southwest Airlines is number one in San Jose.
And so when y ou're number one on one end, y ou're number one the other end, your chance of success is extremely
high, especially when it's an un-served market. Sacramento, the capital of California, is not connected to the
nation's capital on a y ear-round basis. Who would have thought? Who is number one in Sacramento, the 32nd
largest air travel market? Southwest Airlines is number one.
And so, once again number one on both sides, we expect great things and pretty rapid maturity of that soon -to-be
development market. And then the green dots, so everyone focus on the dots. People love dots, adding new dots
brings lots of excitement, even though most of the action I've just described is not the new dots. But when y ou
have a large engaged customer base as a result of this, when y ou add a new dot like we did in these green lines,
customers embrace it. They fill that flight, they make it mature quickly.
And speaking on engaged customers, remember we bought some DC slots two -and-a-half y ears ago. We had a
customer base right there on the DC area. So, those things, those matured very quickly, they're doing very nice
because the customer base is already there, ready to use them.
Now, this is just one market over a slice of time, but y ou take this, y ou go to the other 23 that I didn't cover and
what y ou end up seeing is a business model that has a very long list of opportunities that stretches way into the
future. So, lots of opportunity for the business model of Southwest Airlines and also gives y ou a lot of
diversification because of the Heartland is booming. We got focus cities there.
If it's not the Heartland, if it's the coast that is booming, we have focu s cities there. So, with a point-to-point
model, we can move the capacity to where the strength is, where the demand is without necessarily unwinding a
hub. So, besides of the long list of opportunities, it gives you a natural diversification within the do mestic
footprint.
So, what y ou see here, I think, is a pretty powerful stuff that if y ou just look at the dots I showed you to start with,
y ou wouldn't have appreciated it, but we think is that's a wonderful competitive advantage, a great moat, and lots
of relevance in the far future.
And with that, I'll turn it over to my friend, Mike, and be back with the Q&A. Thank y ou. ................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer & Executive Vice President
All righty . Well, every time I see that network model, it makes me really proud. We have such a strong depth and
large breadth of our network. It's just a great competitive advantage. And I'm really proud of the operating team
that we have because the bigger and bigger that network gets, the more complicated it i s to run. And what we're
try ing to do in the operations is to provide more agility and more flexibility for the network guy s to go do what
they need to do, when they need to do it to help build our great company.
Southwest, we are the largest domestic operator in the U.S. So, on our operating certificate, we operate more
domestic flights than any other carrier out there, 40% more – almost 40% more than the next guy. All the regional
jets that y ou see in the codeshare agreement, they aren't operated by that carrier, they are operated under a
separate operating certificate. So that, certainly, largeness adds a lot to the operating complexity.
As we continue to expand this as Andrew was talking about, that just adds more complexity. So we've added more
seats per airplane. We've got higher loads. We've got more check bags. We've got longer operating days during our
peak in terms of staffing our stations and less time with maintenance overnight. We've got more international
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markets, we're higher – more congestion in some of airports that are more difficult to operate in like the San
Francisco's and the Newark's, in the New Y ork Area. And this expanding point-to-point network, it just increase –
with all these increasing customer itineraries, makes our operation c hallenging to execute reliably. And so, that's
what the focus for our operating team is over the next couple of y ears is to build more and more reliability and
flexibility into our network.
If y ou go look at just – this has happened pretty quickly in terms of our operational complexity over the last five
y ears. Our flight activity with the AirTran acquisition, our flight activity from 2013 to 2016, it's up about 16%.
We've driven our sy stem load factors up, which gives us a little bit more difficult time i nto recovering the
operation and it shines a light on us needing better tools to be able to go do that.
Our enplanements are up almost 30% over that five-year period. So y ou can see our aircraft utilization is up and
we're doing that – if y ou look at our fleet, we've got 111 800s at the end of the quarter, the first quarter. And so,
while that's fantastic in terms of the seat mile efficiency and the revenue potential of the airplane, from an
operational perspective, there are four flight attendants on everyone of those flights versus three on the 700 and,
of course, we've got 119 Classics at the end of the third quarter that we're – excuse me, at the end of the first
quarter that we will be retiring by September of 2017.
Through all of that though, I think our operational teams have done really well and my hat really does go off and
y ou guy s heard the names today, but Craig Drew, who runs our air operations, and Jack Smith, who runs our
ground operations and maintenance department, and Greg Wells who's over our operational performance, they've
done a really good job dealing with that complexity over the last several y ears.
We've been focused on our early morning originating performance. We know that if we start the day right, the day
works very well and we've driven our performance up each y ear and that is 85% of our flight go exactly on time
before. So, if it's one second late, two seconds late, 10 seconds late, it's not in that 85%.
So, we're really trying to focus on the minutes. Minutes matter in the bu siness. When we do that and we focus on
the minutes and we make sure that we had a good networks and operational discussion about the schedules we
put out, we can run a really reliable operation. You can see how our system on -time performance dipped down in
2014. Frankly, we didn't have a schedule that was easy to operate. We should fix that in 2015 and 2016, and I feel
like we are operating as well as we ever have.
When we do that, our mishandled bag rates dropped. That 2.9 mishandled bags per 1 ,000 custo mers is basically,
if y ou look at it on the inverse side, that means 99.7% or 99.8% of our bags arrive as scheduled and we do all of
those things together. You have a good on-time operation, a good bag handling, and y ou have the Southwest
Airline hospitality.
Our net promoter scores are very good; they're as high as they 've ever been with 72%. And the great thing is it can
get better from where it is and that's what I'm really excited about and wanted to spend just a second to talk to you
all a little bit about it. There are some key focus areas and on the fleet modernization, Tammy talked a little bit
about the Classics from a CapEx spend and kind of how we're going to retire those. I wanted to go in a little bit
more detail. For us, the Classics are a very – they are drag on our system in terms of an operational capability.
So, if y ou look at the chart on the upper left is our sy stem on-time performance by aircraft type and y ou could see
that the Classics are at 81%, so they drag the system down. And they drag it down for a couple of reasons. First of
all, on the percentage available time in use, they're in scheduled – out of serv ice for a scheduled maintenance and
out of serv ice for unscheduled maintenance more than the rest of the fleet. So, there is a b enefit to retiring them.
On the block hit rate, they fly slower than the rest of the fleet.
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So, as we're try ing to go make a network and we're try ing to schedule time fly ing between the cities, it's an average
and we know that the Classics are alway s going to fly slower than the 700s and the 800s. And so, we've got 119 of
them to retire between now and the end of the third quarter of 2017.
There are other benefits we get by having the Classics out of the fleet. They 're not RNP-capable, so they don't have
all the precision fly ing capabilities that the rest of our fleet has. There's no Wi-Fi in the airplane. They have
smaller bins, so we end up having to check bags as people are carrying bags on. They have EFIS cockpits instead of
PFD/ND display and that's additional training time that we wouldn't otherwise have because of that. And they
don't have any auto-throttles and so we don't get the same fuel burn performance on the Classics as we do. So,
there's a lot of value in terms of operational improvements and an operational enhancements for the Classics to be
retiring.
As we retire them, the great thing is we're replacing them with these 800s and other airplanes coming in and the
interiors of those airplanes are fantastic. So, we just rolled out this new Hear t Interior. We've got two or three – I
can't remember, Greg, if it's two or three. Four? All right. So, we have four of these airplanes now in operation.
And so these are the new seats in the airplane, they're a little bit wider. They're the widest narrow -body seat in the
marketplace. And so we can actually – because of the seating frames, we can get the seats up closer to the windows
and we've got about a half-inch width in the seat. The seats are lighter. They're 200 to 300 pounds lighter than the
existing interior that we have in the airplane. We've got adjustable headrest. We've got lower profile armrest,
better back support. It's a very, very comfortable product, and I'm really excited about rolling that out into the
operation. So, all of the 800s that we get coming forward will have this interior in it.
There are a variety of other technology enhancements that we're trying to get in place over the next several years
that will give us better agility and better information to recover the operation and pl an the operation, and I know
there are enhancements from the operation by doing that. And I wanted to just talk to y ou guys about a couple of
them today . One of the categories just thinking about how we can improve our customer service and Randy and
both Andrew talked a little bit about the new reservation system that will be nice as new reservation system is
going to give us an opportunity to bulk re-accommodate customers when we have a flight cancellation or a
significant delay, and it will also give us the foundation to push that information out to our customers
electronically, which is very, very difficult to do from an operational perspective in our environment today.
We have another really neat product and it's called The Baker, and I'm just going to show y ou a little bit about The
Baker. We have a lot of our dispatchers, when things go wrong in the sy stem, they are working to try to recover the
sy stem and try to figure out how do I repair along weather delay or a weather incident or air traffic contro l
shutdown or a long mechanical, how do I repair this system in a way that minimizes the impact to our customers,
minimizes the impact to our crews, and our stations, what's the best solution, and we really didn't have any tools
out there before The Baker to do that very well.
And so, we had a group of dispatchers that had been working on this for a couple of y ears, and one of the key guy s
was a guy by the name of Mike Baker. And he passed away a couple of y ears ago, and we decided to name the
product after him, and he would be very proud of us. So, this is a little chart that shows y ou what the impact for
our operations – the impact that Baker has on our operations.
And so, we went over the last several years and took big storms in the winter season, so Hercules, Thor, Jonas,
Oly mpia, Petros, and we looked at ourselves before The Baker, how we've recovered, how the operation worked
and after the Baker, and the red line is Southwest Airlines. And so, y ou can see down in the Hercules period of
time, we were 29% on-time to that period, December 30 through January 5 without the Baker. Even in the next
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y ear, when we tried to add tools to help us recover, process to help us recover faster, we were still down to 60%
on-time in the Thor.
And if y ou go back to the far right and y ou can see where we have The Baker in place, we're at 7 4%, 7 3% on time,
the valleys are not nearly as low, the length of time it takes to respond is not nearly as long. And the great thing
about The Baker tool is its key optimization criteria is how do we get the customers to where they need to be with
the fewest amount of disruptions. It was just a fantastic tribute to Mike and by the way , that technology has won
awards as the best innovative technology of the y ear. So, that's really, really neat and that was all internally
developed.
So, we have other technology initiatives going on like that in various areas of the business. We've got technology
that was surrounding or replacing our infrastructure and improving our productivity. So we have technology,
we're going to put in a new maintenance system. It'll give us new inventory management, new maintenance
planning. It'll give us a platform to be electronic in the maintenance world. We have got staffing tools that we are
building where we can take our staffing, and for every schedule change, optimize the staffing at every airport
based on that schedule change and do that more centrally.
So, today we do that, but we do that very decentralized and some of our stations are a lot better at it than others
and I know there is benefit there. We're working on more tools for our employees. The best thing – the thing that
our employees need more than anything else is real-time information of what's going on at their finger tips, so
they can deal with our customer's anxiety. And so, we've got a lot of different self-service tools out there for our
customers. We also have electronic devices that we've got on our bag transfer agents, with our flight attendants
and with our pilots as we're starting to rollout more mobility out to our employees.
And then lastly , we've got a variety of projects that are about simulating the flight schedule. I showed y ou earlier
that couple of y ears ago, we had a difficult first quarter with our on-time performance, because we have a schedule
that we just – we couldn't operate that well, so that's the purpose of this flight schedule simulation tool.
We have great network tools to talk to us about the revenue generation of the schedule, where we're going to build
tools that allow us to simulate the operational environment and, with that, help us understand what kind of a
gating we need, what kind of staffing we need, we've got tools in there to help us improve our cargo revenue
management, we have tools that are going to assess airplane health and help us proactively build that into our
maintenance programs.
So, I'm very excited about all of those things. But when they all come together and we're working on these over the
next couple of y ears. When they all come together, we're go ing to have some of the best operational platforms out
there. We're going to have an industry-leading fleet efficiency. We'll have a network, any kind of network that
Andrew wants to create and he wants to create a lot of them, let me tell y ou, that we'll be able to staff based on
those needs. We'll have improved cargo revenue. We're going to have real -time information to our employees. All
of that is going to come together with a better customer experience at a lower cost and we believe that our net
benefits over – will be over $100 million EBT run rate by 2020.
So, I'm really excited about the opportunities and I think that at least operationally for Southwest Airlines, the
best is y et to come. With that, I'm going to turn it over to Jeff because he's going to need to build us some
facilities. ................................................................................................................................................................................................................................
Arthur Jeffery Lamb Executive Vice President-Corporate Services
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Thanks, Mike. So, if y ou're a hockey fan, y ou know that part of the game is anticipating where the puck is going to
be and try to be there. That's what our airport affairs and facilities employees do in working with our operations
and commercial teams to prepare our capacity and our facilities in the future.
I'm going to cover several projects, enabling projects that are multi-year efforts, over $1 billion in total. And some
of those are similar to what y ou've seen in the past, where we completed Love Field in Dallas in 2014 and opened
the Houston international concourse in 2015. As a matter of fact, some of y ou commented already at the last
Investor Day , during our new TOPS building, our Training and Operational Support building, where we house our
new NOC, Network Operations Center, it was opened also in 2014.
So part of our efforts to reduce cost and improve our work environment was to remodel our headquarters to allow
for a more dense workforce, but also more standardized and today, functionality -friendly workforce. So we've
moved managers out of offices. We standardized the workstation size, reduced the overall square feet per
employee by over 30%, created some wonderful culture centers, and that's been very successful in helping us
eliminate the need to build more structures like I'm going to talk about soon.
So, I think we added almost 500 people to our headquarters facility without having to c onstruct new office space
for them. And again, we're going to talk about the risk reduction that we have about building hardened facilities
and the picture you see there with the blue light is our network center. It is hardened to withstand an F3 tornado,
200-mile-per-hour winds. It's been highly effective in helping Mike and the operations increased their reliability.
So, we do have a major construction project in Dallas, we call the building Wings, set to open the office space in
first quarter of 2018. You can see there on the schematic, where it would be located right across the driveway from
our current Training and Operational Support building, and across the street from the headquarters.
This new building will have capacity for 18 flight simulators. I think when we open it and install, there'd be 14.
Presently, we have a need for and are installing 12, so we have 10 and we've got two that we're in the process of
installing today. So, we'll go from 12 to 14 with the capacity to grow to 18 within our ha rdened facility, as well as
room to expand beyond that in the future if we need to. We will need to take delivery as this ends earlier than the
building would be complete, so we plan to have that ready by May of next y ear, so that we can take delivery and
begin the certification process.
Fort Lauderdale, as we mentioned several times already today, we're on track and on budget for a new concourse,
5 Gate International with FIS. And we're also doing quite a bit in the way of modernizing the terminal, the
connector, as well as now going back into the existing terminal and expanding the – improving the customer
experience in our hold rooms, restrooms, concessions, as well as all the adjacent needs to expand capacity around
processing our customers there with ticketing, baggage claim, and security checkpoint.
We also have a similar body of work going on in LA to what we did in Dallas, a total modernization of the terminal
there. It's larger dollars, over $500 million. It's set to be completed in 2018, second quarter of 2018. We're in the
process of basically taking the gate out of service and expanding it and changing the hold rooms allowing all the
gates to be 800-compliant, which is happening.
We're about 50% through with the work. We had some major milestones completed with the opening of our west
ticketing lobby I hear this February and baggage claim as well. So another fabulous project and I have to say that
just based on the amount of work that we do is we have great people in our construction management department
within Southwest, they do this a lot, and ty pical estimates from the industry is that we will save 25% to 50% of the
cost over a one-off airport project. So, it helps us both keep our costs low as well as improve the customer
experience and meet the needs of the operations and the network.
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And of course, along with the expansion of the -800s within the fleet in our network, we have to keep up on the
hangar front as well, and certainly, at some of the cities that Andrew went through where we hav e a large presence
are a big part of that. So, we have planned y ears out in advance where we're going to need additional capacity for
our hangars as well.
And with that, I'm going to turn it back to Marcy , and I think she's going to give y ou break. ................................................................................................................................................................................................................................
Marcy Brand Managing Director-Investor Relations
Thank y ou, Jeff, and thank y ou to all our panel speakers. We are now going to take a quick break. For our webcast
listeners, you will hear music until we return for our question-and-answer session with all of our speakers. As a
reminder, again as I mentioned, all of the slides that y ou have seen today are now available for y ou in the back at
the registration table.
We'll see y ou in 10 minutes.
[Break] (01:29:00-1:47:29) ................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Tammy Romo Chief Financial Officer & Executive Vice President A Welcome back, everyone. We're now delighted to answer any questions that you might have, and Marcy and I
think we have someone else, Laura's – they 've got microphones. And so, if y ou'll just raise y our hand and say y our
name for the webcast, so they'll hand y ou a microphone. So let's get started. ................................................................................................................................................................................................................................
Mike J. Linenberg Deutsche Bank Securities, Inc. Q Okay . I'm Mike Linenberg here with Deutsche Bank. Just two questions I guess, one for Tammy and then one for
Andrew. Tammy, when we think about how much of y our free cash flow that y ou've paid out to shareholders over
the last y ear or so, it seems like it's up against the 100% or even above a 100%. And when we think about going
forward, based on where y our leverage is today, do you feel like that y our balance sheet is at the right place and,
therefore, we'll continue to see very high percentages of cash being returned to shareholders, or is there a goal to
get to a higher rating? And I ask that sort of in the context to the fact that, I think back, I don't know if it was 10
y ears or 15 y ears, you used to have a – at least I think an A minus rating and y ou're not there y et. So are we
looking to get to higher levels there or do you sort of feel like that the balance sheet is where it needs to be? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Y eah. Thanks, Mike. Actually, very happy with where our balance sheet is, and I actually think we deserve a higher
rating based on a very strong balance sheet where it is today. But we are comfortable with where our leverage is,
we're managing in that kind of low-to-mid 30% range, including all of our off-balance-sheet leases and that feels
like that's a pretty good range for us to be.
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So as we look forward, we have very manageable capital spending. We've spent a lot of time focused on our order
book over the last, call it, couple of y ears. We've, of course, had to fund the sublease of the Boeing 7 17 aircraft.
Remember we – when y ou go back to the AirTran acquisition, we didn't bring the Boeing 7 17s over. We've also
been using the used aircraft for our Classic fleet.
So I just mention that because we've been working really hard to manage our capital spend. So y ou just can't get
all of that done all at once. So we are in very – we're in great shape with respect to our capital spend, so again very
helpful for the balance sheet and cash flow. So I think our balance sheet is pretty pristine.
In terms of our goals to deliver back to the shareholder, we absolutely want to continue with our very disciplined
capital deployment strategy, and I'll just let the last couple of y ears, as y ou've pointed out, speak for itself, but
that's – we want to continue to have that healthy cash flow and that is our outlook for the y ear. And I'll just
remind y ou as well, we did authorize $2 billion back last month at our shareholder meeting and we've already
kicked off a $500 million ASR and we did that last month as well. So we're in great shape there. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A And, Tammy , if I could just pile on for Mike, y our memory's very good, everybody in the room may not know this
though. If y ou look at our credit statistics, the credit rating is one thing, but the credit statistic s that they do have
control over, I don't know that our credit statistics have ever been stronger than they are today. So those we do
care about, we're very happy with where we are in terms of fixed charge ratios and liquidity and on and on and on.
The ratings have changed and I think everybody in the room knows that, but our credit ratings (sic) [credit
statistics] relative to the time that we were an A -, which I remember well, are far stronger today. And of course,
the company's competitive position is dramatically strengthened today compared to what it was 25 y ears ago. So
that we do – we're happy with where we are there and I agree with Tammy. I think that we do deserve a higher
credit rating, but main thing that we're focused on is managing our credit s tatistics. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Thanks, Gary . And, Andrew, y ou have the second question. ................................................................................................................................................................................................................................
Andrew George Didora Bank of America Merrill Lynch Q Y eah. And to just – when I sort of look at y our network today and I think there was a slide up there, something
like 3,500 or 3,600 flights a day . And yet if we look at the numbers of flights that y ou operate that are transcon,
may be it's 0.5%, even if y ou look at near transcon, maybe it's 1% to 2%, y ou're on track this y ear I think to carry
155 million people. And I'm just curious why Southwest has not been a bigger player in the transcon market, I
mean, is it just optimally given the size of y our airplane, sort of medium haul, or should we anticipate that maybe
as y ou roll up the new sy stem, that we will see more transcon and even longer haul flights in the Southwest
sy stem? Just y our thoughts on that. Thank y ou. ................................................................................................................................................................................................................................
Andrew Watterson Senior Vice President, Network and Revenue, Southwest Airlines Co. A My pleasure. There's no philosophy behind that. It's a consequence of the marketplace decision. So the places
where I discussed where we're the hometown carrier, where we have a large customer base, we look at where those
people want to fly . Both in terms of the government statistics but also because we distribute directly, we
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understand what people are searching for and they come to our website and put in city pairs and they do research
and even when they don't buy. So looking at where the customers want t o fly leads us to put the plane.
And even though transcon looms large in many people's minds, it is not such a large percentage of the overall air
transport market and the cities where we're the hometown carrier that we need to put substantial numbers of
transcons in there. And so we do where necessary, Los Angeles to BWI we got, that's a long one, Oakland to BWI,
that's a long one. And so we have a few of those long ones, they make sense, but really the marketplace – our
customer base hasn't demanded that of us. So that's why they 're under-represented so to speak. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A And, Mike, on that one too, I would just – and y ou know this as well, 15 y ears ago, we were very much oriented
towards short-haul. We've changed a lot over the ensuing 15 years or much better prepared to serve longer haul
markets. So I think that y ou could also interpret that we're still evolving and we have a vast number of route
opportunities and they just have to be prioritized. But I for one think that we do have a lot of long-haul
opportunities available to us that we haven't necessarily taken advantage of in the past, and so that's sort of in the
development stage. ................................................................................................................................................................................................................................
Matt Roberts Raymond James & Associates, Inc. Q Hi, Matt Roberts with Ray mond James here filling in for Sav i. I have one question on capacity plan. It seems like
in 2015 and 2016, Southwest and the industry as of a whole based their capacity growth targets on all sales of
modestly higher GDP forecast than what actually transpired. Then to be fair, fuel drifted lower than probably
any one was expecting, but in today's environment with the higher fuel price potentially going higher, do you feel
the need to be more cautious today in that GDP estimate to base your 2017 gr owth plans around? Thanks for
taking the question. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A I'll start and, Gary or Bob or Andrew, feel welcome to chime in. But, y es, if y ou step back to our growth over the
last y ear or so, we have grown more than GDP, but that was really due to the unique opportunities that Southwest
had to grow, particularly in Dallas Love Field and, of course, we have begun serving internationally.
So we had investments in Houston to begin our international expansion there. And so we would acknowledge that
our capacity was a little heavy. But the reason for that was we did have unique investments that made sense for
Southwest. We had obviously been waiting for the repeal of the Wright Amendment for a long tim e. And so we
were delighted to put that growth into Dallas Love Field. We have 18 of the 20 gates at Dallas Love Field and all
those markets are performing extremely well. So we're delighted with that.
Now, as we look forward into 2017, we do expect our A SM growth to bend down from here y ear-over-year. So we
are working on our schedule for next y ear. I'll just point back to the charts I showed y ou earlier. We've been
restructuring our order book really to just align with our fleet growth needs and that we've got pegged at roughly
2% on average between 2016 and 2018. Just keep in mind, it's a little bit – it's a little bit choppy because we're
going to dip down and then dip back up simply because of the retirement of the Classics, which will be by third
quarter of 2017. So, y es, so we will be bending down that growth going forward. Gary or Andrew, anything y ou all
would like to add? Thank y ou for y our question. ................................................................................................................................................................................................................................
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Dan J. McKenzie The Buckingham Research Group, Inc. Q Hey . Good afternoon. Dan McKenzie here fro m Buckingham. I'll just would like... ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Hey , Dan. I was looking for y ou. ................................................................................................................................................................................................................................
Dan J. McKenzie The Buckingham Research Group, Inc. Q So, a question on segmentation. What we're hearing from some of y our peers is by segmenting a little bit more
aggressively, you can get potentially $1 billion in revenue improvement. Southwest has gone down the path of
segmentation in the past Business Select. Question really is, would Southwest be willing to evolve to the model
that we're seeing from others and that is a get what y ou pay for model, meaning would Southwest be willing to
segment somewhat more aggressively, at least from a revenue perspective? I'll just give y ou an example, the
Wanna Get Away fare, is it really right for someone who pays $69 to spend another $10 and jump to the front of
the queue to get on the plane first. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Well, let me jump in. I think, the answer is a theoretical, but hopefully responsive. I think the answer is y es, in the
sense that we want to be open-minded, we want to be innovative, we want to continue to evolve, understand what
our competitors are doing and how we compare, understand what customers are willing to – what customers'
expectations are and how we're meeting those.
I'll be a little mechanical in my answer and say that, to me, the first step is to do what Mr. Sloan described, which
is we need to get to one reservation system that has vastly improved capabilities for us, that will put us in a more
practical position to truly evaluate the kind of question that you raise. I don't know that we would literally do what
y ou said, but absolutely, as we get more capabilities, I think we want to think through how we mig ht take
advantage of that.
Now, I will quickly add – and Bob Jordan may certainly want to chime in here – we want to protect our brand.
Our brand is really good. And so, we don't want to begin to pull threads that cause the whole thing to unravel. And
many of y ou, of course, are Southwest customers out there and offer up y our own testimonials. So, we have a
wonderful collection of attributes that sum up to a wonderful whole, so we'll want to be careful about that.
We have no thought of charging for bags. I realize that wasn't necessarily what you were pointing out, but I'll just
use that as an example. We'll have capabilities in the future that would allow us to assign seats. Right now, we
don't have any thought that that's any thing that we want to do. But y eah, I think in theory, absolutely, we'll want
to consider that. The forecast that you see pretty much assume the brand that we've got with the kinds of
additional business values that Andrew outlined. So, to the extent that y ou all think and then we are convinced
that there are other things that we could do to drive more value, then that would be added value, but we can do a
lot of good things without tinkering with the brand. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A
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Y eah. I was just wanted to add one thing to that, Dan. So, when y ou think about the benefits that Andrew went
over with y ou, we are really focused, as Gary said, on turning our reservation system on next y ear. That is a big
deal and we're going to be very focused on that. And then, we'll start rolling in those benefits towards the end of
next y ear, and then we'll ramp up in 2018 to that $200 million figure that Andrew did, and then ultimately to
$500 million by 2020.
And I mention that again because – and Gary said this at the very beginning, we are hopeful that those are
conservative estimates. When y ou think beyond 2020, we really – we do have a lot of new capabilities that we just
haven't had in the past. So as we're rolling out our new reservation sy stem, we wa nt to be able – we want to be
thoughtful and measured about that because it is a big deal and y ou want to turn on to see what y ou're doing. And
so, we need to – we will make sure that we roll that out and have that plan in a very measured fashion. So, I ju st
wanted to add that and tie back to Andrew's remarks. ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP A Dan, let me just chime in. Sorry to give y ou a three-part answer from everybody, but I think it's important because
I think a couple of things. I don't want to speak for a competition, but y ou're seeing everybody talk about the
segmentation. I think it's an aspiration, which is not a delivery, right. So, y eah, I think they have y et to prove some
of the numbers y ou talked about too. We talk to our customers all that time qualitatively and quantitatively and do
research and we have lots and lots of ev idence, and that our approach, no bag fees, no change fees, Transfarency is
a winner.
So, a move to something different as a model, whether that's a segmented product or an overall model change is a
loser. And so we want to be very, very careful because we – our brand scores are higher than they've ever been.
Our customer loyalty is higher than it's ever been. So, we want to be very careful about tinkering with the brand.
Where we really see a lot of upside is what Andrew talked about, so we gain momentum and build more of these
loved cities, the Nashvilles, the Austins, for example. And customer engagement goes up as we build the network
and then the penetration of the Rapid Rewards card goes up and then the spend on the card goes up and it's a real
v irtuous cycle that really enhances the customer value and certainly the value to us.
The last thing I would say too is – but we are open to the capabilities that come along with Lone Star. So example
only , as y ou mentioned, is it really fair for somebody, Wanna Get Away fare, paying $10 can go to the front of the
line, which they really can't. So, they're not going to go ahead of Business Select, but they can buy Early Bird.
So, one of the capabilities, and I think Andrew mentioned this, would be the ability to revenue manage our
ancillary. So, y ou got a product that y ou don't have to buy. It's an option for our customer like Early Bird. Could
y ou revenue manage Early Bird? Potentially, you could. Y ou could think about different price points sort of along
the booking curve or along the fare structure. And that's an example only, but I see a lot more potential there as
we gain Lone Star capabilities than I do necessarily really tinkering with the things that are so foundational to the
brand like no bag fees, no change fees. ................................................................................................................................................................................................................................
Dan J. McKenzie The Buckingham Research Group, Inc. Q [inaudible] (02:04:05) ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP A I'm sorry. Y eah, One Res.
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Dan J. McKenzie The Buckingham Research Group, Inc. Q Understood. Thanks for the comprehensive answer. Can I ask a second question or shall we – okay . Second
question, just circling back to the choppy fleet schedule with the fleet dropping next year and then jumping back
up in 2018, suggest that the capacity – the growth potentially could be a little bit choppy. I'm just wondering if you
could clarify return on invested capital. I know this y ear y ou wanted to equal last y ear. How should we think about
that as y ou look in the context of a capacity backdrop that might move around somewhat? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Y eah. I'm not ready to give a specific target on return on invested capital next year. We're actually still working on
our schedule for 2017 other than to say, of course, we've demonstrated that we're very focused on well exceeding
our cost of capital and that will be our focus as we look ahead. So, next y ear on the schedule, just – again, I know
we went through a lot, but we're dropping down because we are retiring our Classic fleet.
So, as a reminder, there are about 50 aircraft that will come out of our schedule all at the same day , and Mike and
his ops team are really good at that. They had practice with the 717s. So, they know exactly how to do that. And so,
it's a very clear v isual. We'll stop fly ing the Classics one day and then we'll start the MAX the next day . And so,
then the deliveries that we walked you through will be ramping backup to where we were.
So, we're in good shape. We'll have to manage through that period, of course, and again Andrew and his team are
experts at doing that. So, we're – we will, of course, as alway s manage to our financial targets. As we'v e always
said, our goal is to grow unit revenues, and we are not prepared to give any specific guidance for next y ear on that
obviously. The revenue environment has been very interesting lately. So, it's alway s tough to give guidance that far
out, but bey ond that, I think we'll continue to control our cost and then, obviously, we'll – based on where fuel
prices are in the futures market, it feels like we can manage that very nicely. ................................................................................................................................................................................................................................
Jamie N. Baker JPMorgan Securities LLC Q Hey , good afternoon. Jamie Baker with JPMorgan. Gary , I respect the desire to protect the brand, but other
companies presumably feel just as strong about their brand, but they still manage to experiment. For example, I'm
assuming y ou've never had a Chicken McGriddle because you'd have to go to one of just a dozen obscure
McDonald's in Ohio, just to give an example.
So, my question is this, why don't y ou charge a bag fee between Baltimore and Nashville, where y ou face no
nonstop competition and presumably the stage is such – the stage and length is such that people aren't going to
take a connection over Southwest and simultaneously charge a bag fee between Philadelphia and Orlando, where
y ou face at least two of the nonstop competitors that I can take think of.
Largely , for your own benefit because if y ou ran that experiment and proved once and for all, think about how
much better your life would be, never having to have me or Hunter ask y ou this question ever again. What would
be harm to the brand of doing y our own Chicken McGriddle experiment? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Jamie, I kind of like y ou asking me that question every y ear because I know the answer to it, which is really good.
And I've never heard of Chicken McGriddle. So, well, I like y our idea in terms of experimenting and we do that. So,
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without giv ing you a specific answer on y our specific proposal, I think that is exactly the way we would love to
approach – we're going to evolve. We will make changes. There's no doubt about that, eithe r to Dan's question or
to y ours and there – to the extent that there are opportunities to test that in a laboratory environment that we
absolutely do that and I think we're pretty good at that. ................................................................................................................................................................................................................................
Jamie N. Baker JPMorgan Securities LLC Q Second question for Tammy, United earlier this week disclosed that there was a step -up in their rev ised
MileagePlus agreement with Chase. I was unaware of that when they first announced that new agreement. Is that
standard practice? You talked about tougher comps in the second half, but is there some other date down the road
when y ou're going to get another bump from Chase in this case? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Y eah. Our – the growth that I was referring to on our Chase really is just the growth in the membership and the
growth of the program. So we're lapsing the benefit y ear -over-year here on July 1 , and the economics I can't
obviously go into because all of those are confidential, but very happy with the economics of the program and we
would expect our Rapid Rewards revenues to continue to grow, but primarily due to the growth of the program.
And I think all of that play s into the strength of our network as well. So, as we're adding each one of those dots and
our customers here in the U.S., they love to go take a vacation on the beach that we would expect as we grow our
network and continue to add dots that we'll also grow the membership there. So, I can't really divulge our
economics, but we're in good shape there. ................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Thanks. Joe DeNardi from Stifel. Tammy , over here. Sorry for another question on capacity, but when y ou look at
next y ear, is the right way to think about capacity growth in 2017 and 2018, the change in the fleet plus a point or
two or three from stage and gauge that would point to flattish growth next year? And is the message that capacity
growth in 2017 and 2018, both y ears are below 5% to 6% or on average, the growth rate is below 5% to 6%? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A That's a good question. So, for the full y ear, our growth rate would be below the 5% to 6% y ear -over-year. And I
think analy tically, you're thinking through it exactly right. We'll have our fleet growth and then we'll have –
there'll be some growth in our gauge, of course, just given what I've already walked you through, but we just
haven't finalized exactly what that is for the y ear. But, y es, it would – we would start out higher and then it would
trail from there, all else equal. So, it'd be higher in the first quarter and will trail from that point, simply because of
what we've invested here in 2016. Does that help? ................................................................................................................................................................................................................................
Joseph DeNardi Stifel, Nicolaus & Co., Inc. Q Y eah, that does. And then, on the decision to defer the MAX, can y ou just explain the rationale behind that? Are
the economics of that aircrafts not as compelling with few where it is or did Boeing come to y ou and say , we can
put those elsewhere? ................................................................................................................................................................................................................................
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Tammy Romo Chief Financial Officer & Executive Vice President A It has nothing to do with the MAX. The MAX is a fabulous airplane and we're going to get it in 2017. It really is
shell of number of aircraft. So just keep in mind that we have been working now for quite some time to adjust our
order book for the retirement of the Classics. So we've added a lot of used aircraft to our fleet order book to
backfill for those used aircraft. So it has really nothing to do with the MAX. We're just – we've had to accelerate
some of our deliveries into the period. We were accelerating the retirement, and now we're just simply
restructuring our order book to align with our growth plan, which here over the next three years is that 2% on
average number that I gave y ou. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A And just to make sure I'm clear on understanding y our question. We'll put the MAX into serv ice, Mike, as soon as
we get the Classics retired. So that is our issue as we don't have a path to being able to operate both aircraft with
the current training protocol that we have. So what we want is for every pilot to be able to fly every airplane and
that is the issue. So the Classics, that's the reason the Classics are being retired early. They can be justified
financially . So the MAX will come sometime next year, Mike, and he'll have work to do to get it ready for service
and then it will go into serv ice as soon as the Classics are retired, roughly October 1 of 2017. So we'll have 27 MAX
or 7 37-8s by the end of 2018. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A 2018. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A So, now what we're doing is because we don't have retirements occurring in 2018, 2019, 2020, 2021, we'd no
longer need that number of deliveries, and they're being pushed out. And they happen to be 737-8s, but we'll get
7 37-8s in 2017, 2018 and then we'll get 7 37-7s in 2019. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A In 2019, that's right. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A And y ou'll have a schedule that shows all that. ................................................................................................................................................................................................................................
Helane Becker Cowen & Co. LLC Q It's Helane Becker with Cowen and Company . I mean, Tammy, can y ou just clarify what y ou said about unit
revenue for the second quarter because during y our prepared remarks, the stock took a pretty big hit, as y ou
talked about updated guidance. So I'm just try ing to make sure I understand exactly where y ou're coming out for
the second quarter? ................................................................................................................................................................................................................................
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Tammy Romo Chief Financial Officer & Executive Vice President A Y es. Thank y ou, Helane. I appreciate that. Yes. The comment that we made on unit revenue for the second quarter
is that we would expect our unit revenue to grow less than 1%. We had given – our guidance previously was that
we would expect our unit revenue to grow modestly, and now we're just providing you with what that narrowing
the range now that we're getting into at the end of the quarter. But our expectation is that we would have modest
unit revenue growth and that we're defining that now for little better now that we're through the quarter, almost
through the quarter, of less than 1% y ear-over-year. Does that help? ................................................................................................................................................................................................................................
Helane Becker Cowen & Co. LLC Q Y eah, I think so. I think so. That's good information. Thanks. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Y eah. Thank y ou. ................................................................................................................................................................................................................................
Helane Becker Cowen & Co. LLC Q And then just a question maybe for Gary , I know at one point you had said that we would know when y ou were
getting ready for service to Hawaii because it would take about a y ear to get ETOPS certification and so on so is
there – can y ou update us on where that stands and maybe within the context of y our still to be negotiated labor
agreement, is that all on the table or do y ou have to have a new labor agreement before y ou could get ready for
Hawaii and are all the new aircraft coming in ETOPS equipped? Thanks. I know there's more than one question in
there. Thank y ou. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Y eah. And I'll get some helpers on some of y our questions. Now, we're ready in terms of our contracts to serve
Hawaii. We have work to do in terms of technology and FAA certification before we would be ready and that's
what y ou would know. That would be public and we couldn't keep that a se cret. So, that's what I meant and that is
all still true. So, y ou don't know of any of that work, so that means it's at least a y ear away.
It then has to fit in with the, in terms of our own internal work construction, which is primarily under Randy, in
that priority. And then it needs to fit with Andrew in terms of its priority with all the other competing
opportunities that we have. So, it is very important to us. It is very much on the list. I will admit to y ou that it is
easier for us to connect some of the dots that Andrew was describing than it is now to create the capability to serve
Hawaii. It's easier for us to go to Mexico. It's easier for us to go to Caribbean. So, all of that factors in and we don't
have a time certain to share at this point.
And in terms of, Mike, whether all the equipment is coming ETOPS capable? Clearly, the 737 -8 is the better
equipment to serve Hawaii with, and we'll be in a position again, Joe, back to y our question. We'll have the MAX
capability that we'll want for service to Hawaii whenever that time comes. ................................................................................................................................................................................................................................
J. Yates Credit Suisse Securities (USA) LLC (Broker) Q
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Tammy , back to y our comments on the RASM trajectory for the second half of the y ear, and y ou mentioned that it
would be tough to see positive growth. We obviously know that the credit card anniversaries in Q3. But is there
any thing that y ou can offer to clarify the underlying trends in PRASM? Comps obviously ease. Your growth is
slowing. Would y ou expect to see sequential improvement in the y ear-over-year change in the underlying
PRASM? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Y es, Julie. We would – based on the trends so far, we would expect a sequential improvement. And just as a
reminder, and I know y ou know this very well, the – to have a positive unit revenue outlook for the second quarter
relative to the industry is quite positive. We would expect in the second quarter that we would continue to
outperform the industry.
What's really different in our outlook for the second half is, as y ou pointed out, the lapse of the Chase agreement.
And that's effective July 1 . But as y ou all know here, the y ield environment has been soft. And that hasn't changed.
So, there are a lot of low fares out there. But we wrote the book there. And we are g oing to continue to be
competitive in that low fare environment.
But really nothing more in what I said than that. But again, just – so, just acknowledging that our comparisons are
going to be more difficult in the second half which does make it more chal lenging to have positive unit revenue
comparison. ................................................................................................................................................................................................................................
J. Yates Credit Suisse Securities (USA) LLC (Broker) Q Okay . And then the second question on the other revenue line, ignoring the Chase piece of it, thinking about your
core ancillary that y ou've seen some pretty good growth there over the last couple of quarters. And I believe y ou
had a price increase on one of y our products. How is that going? And how should we think about the growth in the
other line, excluding the Chase agreement? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Y eah. So, once we lapse the y ear-over-year benefit of Chase, the PRASM and RASM relationship should move back
more in line to what we've seen historically. So – and we'll walk y ou through that as we go here in the second half.
Part of the challenge here between a RASM versus PRASM has just – has also been tied to the accounting of that
program, which has really nothing to do with the economics.
So, with the new accounting of that, which we adopted July 1 of last y ear, just as a reminder, the portion of our
Rapid Reward revenue that gets recorded into other is based – is related to our marketing – the marketing aspect
of that program as opposed to a passenger flight. So, we'll, of course, guide y ou through tha t here in the second
half of the y ear. But I would expect those to go more in line with what we've normally seen historically. It won't be
perfect, but we'll move in that direction. ................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Hi. Darry l Genovesi from UBS. May be I'll start with – I'll just flip back Joe's question a little differently perhaps
and may be I would ask Mike. In terms of the strain on the fleet in the peak summer season, do y ou think there's
any room to take utilization rates – daily utilization rates higher from where you'll be this summer?
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Michael G. Van de Ven Chief Operating Officer & Executive Vice President A Y es. So, I think higher than where we are in the summer – summer is usually our peak utilization. And across the
industry , that's where most of the flight activity is in. So, generally, there's not a lot of need to take the utilization
higher in periods outside of the summer time just because of the demand drop -down. But we can operate at those
summer utilization periods. We've done it for the last couple of summers and we can navigate through that if we
need to. ................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Well, I guess the reason I ask is because Tammy laid out a fleet forecast for the next few y ears and we can get a
sense of what y our fleet will do. But If I'm thinking now forward to perhaps the net summer season, is there a
reason to think that the capacity growth in, say, the summer of 2017 would exceed the fleet growth? ................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer & Executive Vice President A No, I don't think so. ................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Okay . Thanks. And then – I guess, Gary ... ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A If I could just interject right quick though, I think it was back to Joe's question. The utilization – by inference, the
utilization outside of the summertime is less. ................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q All right. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A So there is the opportunity as we're managing through the retirement next fourth quarter of the Classics to boost
the utilization in 2017 compared to what we would be contemplating here in 2016. Now, Tammy has mentioned
several times we haven't made all those decisions y et. But that is at least an alte rnative for us. But I don't see that
we have a lot of wiggle room in terms of boosting utilization during our peak periods. We're running pretty flat
out. ................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Okay . ................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer & Executive Vice President A
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And we just have some natural limiters with respect to that. We've got maintenance requirements, we try to get
done at night. And then, we also have crew staffing and we make plans based on what those utilizations are when
the schedules come out, make sure that we're staffed for that also. ................................................................................................................................................................................................................................
Darryl Genovesi UBS Securities LLC Q Great. Thank y ou. And then, Gary , I think in y our 2014 Investor Day , y ou had set us a time that y ou are going to
try to target cost-neutral labor contract. I didn't believe y ou at the time, but it does seem like over the last couple
of y ears, you have accomplished that in a couple of cases. I'm just wondering if y ou still think that's the realistic
outlook for those labor contracts that you still need to address? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I think that to clarify what I intended to communicate, that was appropriate for that time. So y ou look at the
financial performance that Tammy flashed up there for 2011, 2012, and even 2013, which was pretty good, but still
wasn't quite where we wanted it to be. And that's what we needed to do for that time period. I wouldn't extrapolate
– I would ask y ou all not to extrapolate my comment into perpetuity because I do believe over ti me that, yes, we
will absolutely see inflation in our salaries, wages, and benefits. So that's the way I'd like to answer that question,
if that's okay . ................................................................................................................................................................................................................................
Q
Can y ou give us an update on y our future plans for in-flight connectivity? Will y ou be upgrading y our Wi-Fi, and
will y our future focus remain primarily on passengers, or would also look to have enhanced crew and aircraft
connectivity? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Bob, do y ou want to take that one? ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP A What's that? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I Y eah. ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP A Absolutely. We were exploring the market right now. We hav e an RFP out there. I wouldn't read anymore into that
other than we constantly – with a lot of things, we constantly look at what's available in the market just to make
sure we retest and understand them. I mean, we're perfectly happy with Row 44 and our GEE investment and our
partnership. But we do continue to survey. Our intent is to stay with our IFE approach. I mean, our customers love
the free TV, they love our pricing on Wi-Fi.
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Our Wi-Fi product, I would say, is competitive in the current environment as usage rates go up. And there's a
stronger desire for faster Wi-Fi. That's one of the things that we're looking at with our partners. And so I think
y ou'll continue to see us look at way s to improve Wi-Fi over time, but we don't have any changes planned to sort of
restructure the way we think about in-flight entertainment overall. A couple of the products, movies, the on-board
texting, those have lower take rates as y ou would expect. So we are constantly focused on really the TV, the free TV
offering and then the Wi-Fi offering. ................................................................................................................................................................................................................................
Michael G. Van de Ven Chief Operating Officer & Executive Vice President A I would just also jump in there that just internally for us, there was a lot of opportunities for airplane connectivity,
aircraft health management systems that help us feed into our maintenance programs, we'll have our pilots and
our flight attendants with personal electronic devices that can have information. And so the ability to
communicate to scheduling, to communicate to customers, to communicate to the maintenance department, and
to lay a groundwork where we can have more paperless transactions I think will improve a lot of efficiency we
have in the operations. So we're looking forward to that. ................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore Group LLC Q Hey . Duane Pfennigwerth, Evercore ISI. Thanks. I wanted to come back to the concept of ancillaries. And if y ou
could tell us, are there any new products at all assumed in that $500 million benefit by 2020? And maybe y ou
could opine it. I don't know that we need to beat the dead horse at back. I think, Gary , y ou've been abundantly
clear on that over the years. And y ou've put up some strong revenue results to support y our side of the case, but
are there services or products that are more philosophically aligned with the brand that y ou see? I'm a little bit
surprised to hear you say that assigned seating isn't – have y ou looked at Ry anair's success with allocated seating
in Europe? Any additional detail on new ancillary products behind that $500 million? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A Y eah, the assumption – the $500 million that Andrew presented through 2020 does not have anything different
other than essentially the same current product y ou have at Southwest Airlines. I think the point that we've been
try ing to make actually over the last couple of y ears that we recognize that after 30 y ears, we're going to have an
up-to-date reservation sy stem that will have much more robust capabilities for us to more tactically contemplate
making changes to our business model.
And at that point in time, and we've said this – at that point, not trying to pin us down to a y ear, but after we get to
Release 2 and may be even after Release 3, it might be a good time for us to sit back, reflect, see what's a vailable to
us that we could change and see if it works for us. And I think we would contemplate that in the way the Jamie
was describing. We'll do customer research, which Bob continues to do continually and especially in an intense
way every other year, understanding what customers want and we may want to experiment with some things.
So it's just premature, Duane, for us to spend a lot of effort on that now, and we're busy . So there we are really
busy working on with a single priority of simply replacing our reservation system technology, it is all consuming
and it needs to be done well. Then, we can get to the good stuff, but not until we get that up and running. So
there's a very laser-like focus, which this company is good at.
Number two, and, this is, I'll say in advance, this is not a criticism of our operations group, but our commercial
business model is ahead of operations and it's not a knock on commercial either because quite frankly, it's easier
to change some of the commercial offerings than it is to rewire our airline and actually operate differently. And we
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know that and as both Mike and Tammy have described, there is a significant amount of work that is queued up
for the next several years in operations as well.
So I think it would be a – it's almost like asking us, are y ou considering fly ing transoceanic with a different
airplane? May be one of these days, we want to look at that. But we have immediate and pressing priorities that are
much, much more important. So we'll get to that and look at that someday and, indeed, we'll look at what other
airlines have experienced.
And we will absolutely want our leaders and all of our people to be open-minded and innovative, just again
understanding that we think we've got a really great brand and we wa nt to – I just want to be clear in my
messaging with y ou all that we've got a really good thing here and we need to be really thoughtful about how we
tinker with it.
And right now, as I see it, it is working spectacularly well. And I know, with the work t hat's underway, we'll be able
to perform even better. So I'm very, very enthused about that. And then, to the extent that we want to re -energize
and re-innovate, I think that's all fantastic too. But I don't see any glaring issues at all with the product t hat we
have right now. I am absolutely delighted with where we are. ................................................................................................................................................................................................................................
Duane Pfennigwerth Evercore Group LLC Q Thanks for that. And then, Tammy , just a quick second question, can y ou update us on the magnitude of the hedge
losses in 2017 as we stand today? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Sure. We are – try ing to remember the exact numbers, it's probably about 750 in the mark-to-market give or take.
And with, of course, the majority of that being this y ear. So our hedge loss has been down next y ear. And then, of
course, when we get to 2018, we have no losses in 2018. ................................................................................................................................................................................................................................
Hunter K. Keay Wolfe Research LLC Q Hi. Thanks. It's Hunter Keay , Wolfe Research. [indiscernible] (02:33:00) a couple of questions. Now that we have
some Wright Amendment flying under the belt, have you guys quantified how many passengers that are on y our
Wright Amendment routes are already existing loyal Southwest customers that are waiting for y ou to add those
routes versus share gains in that market?
I'm sure y ou probably are able to track that. Can y ou maybe give us a high level order of magnitude? And if not, if
y ou want to quantify it, can y ou tell us if it was sort of more than y ou've expected it would be in terms of the share
gain in that market versus just some sort of unnatural share that y ou didn't have because of the restrictions on the
Wright Amendment? ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer A I'll give Bob a minute to think. I mean what we do know – I don't know. I will admit to y ou I don't know that
exactly off the top of my head. What we do know is that we've increased our flight activity by 50%, and have filled
those flights up. Bob, we've have also increased our seats more than that. I don't know that number off the top of
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my head, but I can't imagine that that's all existing customers that we had. So, there has to be some fairly
significant increase in new customers. But I don't know off the top of my head. Bob, do y ou? ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP A Well, y eah, it's a – Dallas is a wonderful story. So we're seeing gains basically everywhere. So, we're seeing – we
added a tremendous number of seats obviously. And what we're seeing gains and existing customers who are just
now giv ing us more trips, more share of wallet than they – they just couldn't give us that share because we didn't
fly the route. Or we didn't have a convenient schedule for instance. So, we're getting that.
We're also seeing a high number of new customers that we did not see before. We're seeing a further penetration
of Rapid Rewards. Even though it's a very mature market, interestingly, we're seeing a further penetration of
Rapid Rewards membership in Dallas, even though again, it's one of our oldest markets – or is our oldest market.
And then last, we're seeing a continued penetration of the Rapid Rewards card. So, basically, it's a story of
increases across all customer fronts at this point. So it's just – things in Dallas are just really humming for us. ................................................................................................................................................................................................................................
Andrew Watterson Senior Vice President, Network and Revenue, Southwest Airlines Co. A And I would add on to that that we focus on Dallas, but if y ou think where those lines go, they're going to many of
those 24 places where the hometown I talked about. And they overweigh that as far as the capacity goes. So, the
people coming to Dallas are by and large our current customers in those out cities. And then, within Dallas, y ou
have that subdivision between existing – expanding share of wallet and new customers. So the share of wallet
over-index with the new customers just because the out-markets is all about share of wallet and the in-market,
meaning Dallas, is split between the two. But we don't share the exact split up. ................................................................................................................................................................................................................................
Hunter K. Keay Wolfe Research LLC Q All right. ................................................................................................................................................................................................................................
Marcy Brand Managing Director-Investor Relations A We are going to take our final question here in the back from Mr. Derchin. ................................................................................................................................................................................................................................
Michael Wayne Derchin CRT Capital Group LLC Q Hi. Congratulations on the 45 years and particularly 43 y ears of consecutive profits. And I'm thinking back that
y ou've done it with early 1970s technology, and now y ou're going to be going into the new world of technology is
very exciting. In that regard, I was on a business trip recently and – booked by my corporate travel agent. And
then on a leg, I actually flew [indiscernible] (02:36:26) not knowing that you were fly ing that route and – because
y ou were not in the GDS sy stem. I just wondering as part of y our effort longer term are you looking at GDS as part
of y our distribution system? ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President A Bob, y ou want to take that one? ................................................................................................................................................................................................................................
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Andrew Watterson Senior Vice President, Network and Revenue, Southwest Airlines Co. A Well, we do participate in third-party distribution channels today, but we participate in a very modest way
because we prefer people to come to us. And so, in many situations, if y ou would use your company's self -booking
tool, it saves the company money, but also y ou'll find that our direct connect is heavily present in those direct
booking tools.
So as more and more companies have self-booking tools, our product is displayed very attractively compared to
our competitors. When y ou're talking to a live person, when it's labor involved, sometimes the agent is not looking
for the Southwest flight. As diligently perhaps they should and y ou get the situation like y ou described. ................................................................................................................................................................................................................................
Robert E. Jordan Chief Commercial Officer & Executive VP A Y eah. And the only thing I – the other thing I would add is that's exactly right, Andrew. We don't have any plans
underway to change our GDS strategy, our distribution strategy. We are very happy with our direct distribution
strategy. As was pointed out in the presentations today that we've seen a really strong growth in corporate travel,
and that's a number of things. I think it's expanding route network. We can offer very attractive flight schedules
and fares.
But it's also we have – over the last five to eight years, we've begun to engage some corporate booking tools. We
have added some internal booking tools. So, as we make things more convenient for our corporate – our managed
corporate travel partners, I think that's a part of the increase as well. So, I don't think y ou'll see us have any shift
or dramatic shifts in our GDS strategy. We are continuing to examine our sort of strategies within that around
things like corporate booking tools which have been successful for us. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President
Okay . Well, that ends the Q&A session, and thank y ou for all of the great questions. So, I am going to turn it over –
I'm going to turn it over to Gary for a few concluding remarks. And again, it's been great seeing you everyone. ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer
Okay . Well, thank y ou. I'll be very brief. But the – just to recap very briefly, the revenue environment is still
challenging. I don't know that we have a whole lot new to report today and we still obviously are pleased that we
are outperforming the industry. And again, to confirm Tammy's guidance, we'll still be up modestly, and we're
defining modestly no more than 1%.
We are pleased that fuel prices are still low. That's our assumption for the rest of this y ear, and hopefully into next
y ear, although we are beginning to see some prediction that crude oil may move up more than where we are at
current levels. But nonetheless, that's still a very favorable environment for us.
We've got capital spending that is peaking here in this 2015, 2016, 2017 time period. And it looks like 2017 will be
the peak y ear. Some of that's being driven a bit by some of our facilities projects. But because we've been able to
accelerate retirements, we were not able to accelerate Boeing deliveries to fund those. So, we wen t to the used
market. Now, we don't need all of those Boeing deliveries so that they have been deferred. So, that's what's going
on there.
Southwest Airlines Co. (LUV) Investor Day
Corrected Transcript 23-Jun-2016
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We're very excited about the MAX. I actually would acknowledge that I've gotten a couple of questions from folks
about whether the MAX is still as attractive because energy prices have declined. Absolutely, the MAX is very, very
attractive and we're very much looking forward to doing that – to launching it. It brings a host of benefits for us,
including not just the fuel burn improvement, but enhanced performance. So, we're very much looking forward to
that.
Tammy covered the shareholder value report, which I know y ou all know any way, but very pleased with the strong
margins and our ability to continue to reward shareho lders. We have underway still very significant future value
drivers with our ongoing fleet modernization. The network growth looks – which looks extremely attractive to us,
covered the new reservation sy stem today. And then on top of that, our operations h ave a number of initiatives
underway, which will also drive some value. All told, that's about a $600 million EBIT improvement by 2020.
So, we are pleased to be at this point. And now, we've come a long way in a short period of time. Appreciate all the
support that we have from all of y ou, and especially traveling here to the New Y ork Stock Exchange here to help us
celebrate our 25th – our 45th anniversary. And I noted that y ou said 45 – y ou're really 35, right. ................................................................................................................................................................................................................................
Tammy Romo Chief Financial Officer & Executive Vice President
That's right, Gary . ................................................................................................................................................................................................................................
Gary C. Kelly Chairman, President & Chief Executive Officer
So, thank y ou all very much for coming, and appreciate you being here. Now, I'll turn it back over to Marcy. ................................................................................................................................................................................................................................
Marcy Brand Managing Director-Investor Relations
Thank y ou. And again, I'd like to thank all of our webcast listeners that have joined us today. This concludes the
webcast.
Southwest Airlines Co. (LUV) Investor Day
Corrected Transcript 23-Jun-2016
1-877-FACTSET www.callstreet.com
39 Copyright © 2001-2016 FactSet CallStreet, LLC
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