southwest airlines 2014 investor...
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Southwest Airlines 2014 Investor Day November 10th Training and Operations Support Building
Page 2
Our Investor Day presentations contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on, and include statements about, the Company’s estimates, expectations, beliefs, intentions, and strategies for the future, and are not guarantees of future performance. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include without limitation statements related to (i) the Company’s fleet plans, including its fleet modernization plans, and the Company’s related financial and operational expectations; (ii) the Company’s strategic vision and objectives and its related operational, financial, and competitive opportunities and expectations; (iii) the Company’s network plans and expectations; (iv) the Company’s financial outlook, including its projected results of operations and anticipated liquidity, and (v) the Company’s expectations related to fuel prices. Forward-looking statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) demand for the Company’s services and the impact of economic conditions, fuel prices, actions of competitors (including, without limitation, pricing, scheduling, and capacity decisions and consolidation and alliance activities), and other factors beyond the Company’s control, on the Company’s business decisions, plans, and strategies; (ii) the Company’s ability to timely and effectively prioritize its strategic initiatives and related expenditures; (iii) the Company’s ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; (iv) the impact of governmental regulations and other actions related to the Company’s operations; (v) the Company’s dependence on third parties with respect to certain of its initiatives; and (vi) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Safe Harbor
2014 Investor Day Purpose, Vision, and Objectives Gary Kelly
Page 4
Southwest Airlines’ Purpose & Vision are clearly
defined
Page 5
In 2014, we…
• began flying Southwest branded aircraft outside the continental
United States
• won rights to significantly expand at Washington Reagan and
LaGuardia
• unveiled a new aircraft livery, named Heart
• opened our Training and Operations Support Building (TOPS)
• launched nonstop service from Love Field with the repeal of the
Wright Amendment
• continued modernizing our fleet with new 737-800 deliveries,
while retiring Classic 737s and AirTran’s 717s
• continued to grow our Rapid Rewards program
• delivered a 19% pre-tax ROIC1 – well beyond our target of 15%
• will complete the AirTran integration
1For the twelve months ended September 30, 2014; excluding special items. ROIC is a non-GAAP financial measure. See Appendix for reconciliation to the most comparable GAAP measure.
Page 6
Our major strategic initiatives delivered significant value
AirTran acquisition
& integration
EBIT contribution: 2013: $300mm 2014: $500mm 2015: $700mm
Fleet modernization
& 737-800s
$600mm incremental
revenue since launch of program
All-New Rapid
Rewards Program
Expect hundreds of millions
incremental revenue
International
capabilities & new
reservation system
>$400mm annual pre-tax net synergies
= = =
19.0% pre-tax ROIC4
1 Excluding acquisition and integration expenses. 2 Expected. 3 Expected from inception of program through the end of 2014. 3 For the twelve months ended September 30, 2014; excluding special items. ROIC is a non-GAAP financial measure. See Appendix for reconciliation to the most comparable GAAP measure.
2
2
1
3
Page 7
Financial
• +$2.6B in Revenue1
• >$400M2 in annual net synergies
• Significant contributor to ROIC and
SWA stock price performance
AirTran strengthened financial performance, expanded our
network, and accelerated international entry
Network / Fleet
• Added 52 737-700s3 and 88 717s
• +24B ASMs1 (~25 percent)
• Expansion from 72 to 93 cities
• Gained entry into ATL, DCA, near-international
and added to LGA slots
• Extended SWA Cargo to AirTran network
1As of acquisition date, May 2, 2011 2 Excluding acquisition and integration expenses 3 Expected by yearend 2014
Southwest Cities
AirTran Additions
Page 8
Fleet modernization efforts and the 737-800 lowered unit costs
and improved EBIT
• Improves revenue with more seats
per departure
• Lowers unit costs by adding seats
• Reduces fuel burn & greenhouse gas
emissions
• Enhances customer experience with
updated aircraft interiors
• Perpetuates the common 737 fleet
strategy
CASM1 Benefit
(0.15)
(0.64)
(0.94)
(1.17) (1.49)
(0.99)
(0.49)
0.02
2012 2013 2014 2015
$70
$300
$500
$700
$0
$200
$400
$600
$800
2012 2013 2014 2015
Mil
lio
ns
EBIT Benefit
in c
en
ts
1Excluding special items.
Page 9
Rapid Rewards program delivered significant value and is
recognized as the one of best in the industry
• Best Customer Service
Freddie Awards 2013 & 2014
• Best Affinity Credit Card
Freddie Awards 2013 & 2014
Incremental Revenue1
~$600mm
2013 2012 2014 2011
1 Incremental revenue since inception of the new Rapid Reward program.
Since launch:
• Over 50% growth in membership
• Over 150% increase in Tier
Membership (A-List & A-list
Preferred)
• Co-brand credit card portfolio and
spend has significantly
accelerated
• Over 70% growth in partners
Award-winning frequent flyer program
• Best Airline Rewards Program
US News & World Report 2014-2015
• Best Award Availability
SwitchFly Worldwide Report on Airline
Award Availability 2012 - 2014
Page 10
International reservation system enabled Southwest Airlines
flights beyond the Lower 48
AUA
SJD CUN
SJO
NAS
SJU PUJ
MBJ MEX
Page 11
New daily non-stop service to Puerto Vallarta, Mexico from
Orange County, California
AUA
SJD
MEX
CUN
SJO
NAS
SJU PUJ
MBJ PVR
Operate Date1: June 7, 2015
1 Pending government approvals.
Page 12
Wright Amendment was repealed in October 2014
Page 13
Same Heart, New Look
Page 14
Our vision: to be most flown, most loved, most profitable airline
Unparalleled
Domestic Network
Superior Financial
Position
• Significant cost advantage vs network carriers
• Highly competitive costs with low cost carriers
• Aggressive management of invested capital and disciplined capital
deployment strategy
• Managed capacity growth with commitment to strong earnings and
ROIC
• Low Fares and More
• Exceptional relationship with Customers - Fans
• Passionate Employees delivering friendly Customer Service
• Industry-leading frequent flyer program
• Carry the most passengers in the U.S.
• Most daily departures in the world
• Serve 79 of the top 100 domestic cities1
• Significant growth opportunities, including near-international
Compelling
Brand Appeal
1 Based on domestic origin and destination passengers; sourced from the Department of Transportation for the twelve months ended March 31, 2014.
Page 15
OPERATIONAL
EXCELLENCE
EXPERIENCE OF
OUTSTANDING
CUSTOMER SERVICE
SUPERIOR FINANCIAL
PERFORMANCE
MANAGED CAPACITY
GROWTH
Annual Objectives support our Purpose & Vision
Page 16
2014 Investor Day 2015 Objectives Tammy Romo
Page 18
We are focused on 4 objectives in 2015
HIGH QUALITY
GROWTH
OPPORTUNITIES
CONTINUED REVENUE
MOMENTUM
LOW COST LEADER
SUPERIOR FINANCIAL
POSITION
Strong
Return on
Investment
Page 19
2015 Available Seat Mile growth is driven by more efficient
flying of our existing fleet through increased gauge and stage
length with a modest increase in trips
YoY
Trips +1%
Seats per Trip +2%
Stage length +3%
ASM Growth +6%
Majority of 2015 ASM YoY growth is funded through integration-
related tailwinds
Seats Flown +3%
Page 20
2015 growth is targeted on compelling, high quality
opportunities
1 Numbers are summarized and approximate.
Expect these development markets to ramp up quickly
3%
2%
1%
0%
1%
2%
3%
4%
5%
6%
2015
International
Slot acquisitions
Dallas Love Field AS
M g
row
th (
Yo
Y)1
6%
Page 21
Underutilized fleet during periods of transition and upgauging
Opportunity to regain utilization with existing fleet
560
580
600
620
640
660
680
700
720
2011 2012 2013 2014
Aircraft on property Aircraft available for service
Air
cra
ft
1 Aircraft in Company’s fleet at period end, including Boeing 717-200s not yet transitioned out of the Company’s fleet.
1
Page 22
Operating revenues are estimated to grow over 50% since 2010
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
2010 2011 2012 2013 2014E
To
tal o
pe
rati
ng
re
ve
nu
e
(in
millio
ns
)1
Operating margin,
non-GAAP 9.6% 5.4% 4.9% 8.2%
Revenue momentum is expected to continue, as is margin expansion
12-13%
Operating income, non-GAAP Operating revenue +
1 Includes AirTran as of May 2, 2011.
Page 23
We are benefitting from the significant drop in fuel prices
$2.39
$3.19 $3.28
$3.12
$2.90 - $2.95
$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
2010 2011 2012 2013 2014E
E
co
no
mic
fu
el co
st
per
gallo
n
(in
clu
din
g t
axes)1
,2
Based on the current forward curve and assuming today’s hedges,
2015 economic fuel price per gallon would be in the $2.60-$2.70
range, including fuel taxes
1 Economic fuel price per gallon is a non-GAAP financial measure. See Appendix for a reconciliation to the most comparable GAAP measure. 2 Includes AirTran as of May 2, 2011.
Page 24
68.5 68.3
69.4
71.7
72.8
66.0
67.0
68.0
69.0
70.0
71.0
72.0
73.0
74.0
2010 2011 2012 2013 2014E
Consolidated Fuel Efficiency
Fuel efficiency has improved since 2010
+6.3%
A
SM
s p
er
ga
llo
n1
We expect continued fuel burn improvement in 2015
1 Includes AirTran as of May 2, 2011.
Page 25
Excluding fuel, our cost trends are benefitting from our diligent
cost control efforts
Un
it c
ost
gro
wth
(Y
oY
)
(exclu
din
g f
uel, p
rofi
tsh
ari
ng
, an
d s
pecia
l it
em
s)1
,2
Excluding fuel & oil, profitsharing, and special items, 2015 CASM is
currently expected to decline 1% to 2%, as compared to 2014 1 CASM excluding fuel, profitsharing, and special items is a non-GAAP financial measure. See Appendix for a reconciliation to the most comparable GAAP measure. 2 Includes AirTran as of May 2, 2011.
6.7%
-1.1%
4.1%
1.3%
~2.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2010 2011 2012 2013 2014E
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41%
18%
59%
82%
2010 2015
CL/717 NG 700/800
Fleet Modernization provides ongoing unit cost benefit
Substantial CASM benefit as seats increase.
134
12.9 134
147
2010 2015
Baseline Addl. Seat per Trip
Lower operating expense from more modern fleet.
Aircraft Mix Seats per Trip
Absent the Fleet Modernization initiative, 2015 CASM would be
approximately 10% higher
+13 seats
+23pt
100%
Page 27
Southwest’s CASM is among the lowest in the industry
Source: DOT Form 41 and DOT T100 domestic mainline data for the 12 months ended June 30, 2014. Stage-length adjusted for Southwest’s average stage length.
0.0
5.0
10.0
15.0
20.0
25.0
United
Delta
Am
erican
Vir
gin
Am
eri
ca
Ala
ska
JetB
lue
Haw
aiia
n
Fro
ntier
South
west
Alle
gia
nt
Spir
it
U
nit
co
sts
Page 28
We have maintained our historical industry cost advantage
Source: DOT Form 41 and DOT T100 domestic mainline data for the 12 months ended June 30, 2014. Stage-length adjusted for Southwest’s average stage length.
2010 YE 2Q 2014
32%
13%
(4%)
28%
14%
(8%) -10%
0%
10%
20%
30%
40%
Network LCC ULCC Network LCC ULCC
Rela
tiv
e c
ost
ad
van
tag
e / (
dis
ad
van
tag
e)
Page 29
$0.4 $0.7
$1.0 $1.4
$1.3 $0.8
$1.1
$1.4
$2.3 $1.9
$1.8
$1.7
$0.8
$0.8
$1.0
$1.0
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
2011 2012 2013 3Q14 4Q14 2015 -2016
2017 -2018
Beyond2018
Undrawn revolving credit facility
Short-term investments
Beginning cash
Free cash flow
Sources of liquidity and long-term debt maturities
1 Free cash flow (FCF) is a non-GAAP financial measure. See Appendix for a reconciliation to the most comparable GAAP measure. 2 2011, 2012 and 2013 debt maturities consist of payments of long-term debt and capital lease obligations, and payments of convertible debt per the Company’s cash flows from financing activities ending December 31, 2013; 2014 and
beyond include future long-term debt principal payment obligations and capital lease commitments as of December 31, 2013. 3 Total maturity from 4Q14 and beyond is calculated based on future long-term debt principal payment obligations and capital lease commitments as of September 30, 2014. 4 For the nine month period ending September 30, 2014. 5 2014 includes $68 million associated with the Company’s convertible senior notes due 2016.
1
Long-term debt maturities2
$4.8B
$4.2B
$4.9B
Total long-term debt maturity of
$2.7B3 from 4Q14 and beyond
$5.5B
4 5
(in
billio
ns)
1
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$388 $716
$1,030 $1,358
$968
$1,348
$1,447
$1,340
2011 2012 2013 3Q14FCF Capex
$2,698
$1,356
$2,064
$2,477
Strong internally-generated cash flow C
as
h flo
w fro
m o
pe
ratio
ns
(in m
illion
s)
1
1 Free cash flow (FCF) is a non-GAAP financial measure. See Appendix for a reconciliation to the most comparable GAAP measure. 2 For the nine month period ending September 30, 2014.
Ca
pe
x
FC
F
2
Page 31
Southwest has led the industry in returning capital to
shareholders
62%
$0
$200
$400
$600
$800
$1,000
2011 2012 2013 3Q14
Dividends Share Repurchase
59% 59% 66% % of free
cash flow
(in
millio
ns)
$239
$422
$611
$893
Our goal is to continue to return significant value to our Shareholders
1 For the nine month period ending September 30, 2014.
1
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10,900
12,600 12,700 11,700 ~11,500
(4.0)
(2.0)
-
2.0
4.0
6.0
2010 2011 2012 2013 2014E
0
3,000
6,000
9,000
12,000
15,000
Adjusted Average Invested Capital ROIC vs WACC
Southwest’s ROIC1,2 (after-tax) vs. WACC Improvement (in
millio
ns)
Po
int
ch
an
ge
We have increased our ROIC to WACC spread, while aggressively
managing our invested capital
1 ROIC is a non-GAAP financial measures. See Appendix for a reconciliation to the most comparable GAAP measure. 2 Includes AirTran as of May 2, 2011.
Page 33
We will continue to focus on ROIC to WACC spread in line with
best sectors within the S&P 500
Source: Third party investment firm.
Median ROIC & WACC for S&P 500 companies over the last decade.
Data for S&P 500 firms from 2004 to 2013.
0.0
2.0
4.0
6.0
ConsumerDiscretionary
Industrials S&P 500 SouthwestAirlines
2014E Ten-year average
Po
int
ch
an
ge
Page 34
HIGH QUALITY
GROWTH
OPPORTUNITIES
CONTINUED REVENUE
MOMENTUM
LOW COST LEADER
SUPERIOR FINANCIAL
POSITION
ATTRACTIVE RETURN
ON INVESTMENT
Funded by low cost growth
Driven by better utilization with increased seat gauge
Strategic initiatives provide strong foundation
Goal to grow revenues at least in line with capacity
Benefitting from lower fuel prices
Expect unit costs, excluding fuel & oil, profitsharing,
and special items to decline compared to 2014
Strong Balance Sheet and strong cash flows
Manageable capital spend and debt maturities
Aggressive management of invested capital
Continued margin expansion
Pre-tax ROIC1 expected to match 2014’s pre-tax ROIC1
Continued return of significant value to Shareholders
Our 2015 objectives
1 ROIC is a non-GAAP financial measures. See Appendix for a reconciliation to the most comparable GAAP measure.
Page 35
Non-GAAP Reconciliation
(1) Net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of acquisition and integration costs incurred from
April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
2009 2010 2011 2012 2013
Fuel and oil expense, unhedged 2,577$ 3,296$ 5,580$ 5,963$ 5,645$
Add (Deduct): Fuel hedge (gains) losses incuded in Fuel and oil expense 467 324 64 157 118
Fuel and oil expense, as reported 3,044 3,620 5,644 6,120 5,763
Deduct: Net impact from fuel contracts (222) (172) - (32) (84)
Fuel and oil expense, non-GAAP (economic) 2,822$ 3,448$ 5,644$ 6,088$ 5,679$
Total operating expenses, as reported 10,088$ 11,116$ 14,965$ 16,465$ 16,421$
Deduct: Net impact from fuel contracts (222) (172) - (32) (84)
Deduct: Charge from voluntary early out program, net (56) - - - -
Deduct: Charge for Acquisition and integration costs, net (1) - (7) (132) (183) (86)
Deduct: Asset impairment, net - - (14) - -
Total operating expenses, non-GAAP 9,810 10,937 14,819 16,250 16,251
Deduct: Profitsharing (42) (158) (99) (121) (228)
Deduct: Fuel and oil expense, non-GAAP (economic) (2,822) (3,448) (5,644) (6,088) (5,679)
Total operating expenses, excluding fuel, profitsharing, and special items 6,946 7,331 9,076 10,041 10,344
Costs(in millions)
Page 36
Non-GAAP Reconciliation
(1) Net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of acquisition and integration costs incurred from
April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
(4) Cost of Equity is determined using the Capital Asset Pricing Model (CAPM) assuming a 6% Equity Market Risk Premium (EMRP), the 10 year risk free rate, and the historical adjusted beta for Southwest Airlines. Cost of Debt is
determined using historical cost of adjusted debt, which includes net present value of aircraft leases.
(2) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).
(3) Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.
2010 2011 2012 2013
Operating Income, as reported 988$ 693$ 623$ 1,278$
Add: Net Income from fuel contracts 172 - 32 84
Add: Acquisition and integration costs, net (1) 7 132 183 86
Add: Asset impairment, net - 14 - -
Operating Income, non-GAAP 1,167 825 838 1,448
Net adjustment for aircraft leases (2) 84 129 117 143
Adjustment for fuel hedge accounting (134) (107) (36) (60)
Adjusted Operating Income, non-GAAP 1,117 847 919 1,531
Average invested capital (3) 10,431$ 12,439$ 12,575$ 11,664$
Equity adjustment for fuel hedge accounting 434 184 145 50
Adjusted average invested capital 10,865 12,623 12,720 11,714
ROIC, pre-tax 10.3% 6.7% 7.2% 13.1%
ROIC, after-tax 6.3% 4.1% 4.5% 8.1%
Weighted average cost of capital (4) 6.7% 5.6% 6.2% 7.8%
Net cash provided by operating activities 1,561$ 1,356$ 2,064$ 2,477$
Capital expenditures (493) (968) (1,348) (1,447)
Free cash flow 1,068$ 388$ 716$ 1,030$
ROIC and Free Cash Flows(in millions unless otherwise noted)
Page 37