Southwest Airlines Earnings Call NUGGETS: Capacity Growth, Wright Amendment Update

On Thursday, Southwest Airlines Co (NYSE:LUV) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Capacity Growth

John Godyn – Morgan Stanley: I just want to follow-up on your comments about third quarter RASM likely being solid. It definitely helps put some boundaries on it to know it won’t exceed the second quarter, but I think investors are still a little bit confused to how to interpret it just given the tough comps throughout the quarter. If July isn’t as good as June and comps get a lot tougher in August and then again in September it seems plausible that PRASM might go negative in September. Is this the sort of ramp throughout the quarter that would be reasonable or am I missing something about how the months shape up from here?

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Laura H. Wright – SVP Finance and CFO: Yeah, I think I’m looking for the comps, John, but certainly we think July, the fact that we had July 4th on a Wednesday produces a tougher year-over-year comp than what we expect in August and September. I think we also have July as just a very optimal month, and I think we’ve noted in the past that some of the sub-optimal months, we just have more room to grow revenues than we do in the peak, peak periods like July. But overall our bookings for the quarter look solid, and we don’t see anything for August or September, but we would admit that July is impacted by 4th of July.

John Godyn – Morgan Stanley: Gary, when we think about Southwest historically, capacity growth, demand stimulation, solid returns have gone hand in hand, but as you’ve gone through this tougher phase here, the answer has been slowing capacity growth until returns improve and that makes sense, but as we look forward and you mentioned that you’re going to keep 2013 capacity flat, is flat or minimal capacity growth sort of a new normal or do you envision getting back to a world where we see capacity growth demand stimulation as again sort of line with maintaining solid returns from here?

Gary C. Kelly – Chairman, President and CEO: Well, we definitely have some opportunities to stimulate demand, but I think that we’ll be perhaps a bit more tactical in the future that it has been in the past, and it also had to be at a revenue production level that hits our 15% return requirement. So, I think step one is just restoring our profitability to those level, number one. Number two is to make sure that we have the capabilities in place to pursue expansion opportunities which we’re doing that’s adding the 737, 800, that’s investing in international capabilities, those kinds of activities. We’ll have access to airplanes to be able to grow the airline. So, all of those necessary pieces will be in place and then it’s just a matter of again making tactical decisions about what new markets we might want to add. Because it’s tactical, I think we just have to wait and see when we’re ready to add aircrafts, what opportunities are available and that will be a function of capacity in the market and the price in the market. So Bob Jordan and I both highlighted Houston Hobby in the international opportunity there, which is a perfect example to your question. I’m hopeful that we will be hitting our return requirements so that we can add aircraft because there is significant opportunity to lower fares and grow the market in Houston Hobby internationally, as one example. There are plenty of more examples like that, but I think we just don’t want to get the cart before the horse. So, the first thing is we need to hit our profit targets, and then we’ll be in the position to make those kinds of choices.

Wright Amendment Update

Helane Becker – Dahlman Rose: So, my first question Laura is my usual Wright Amendment question, can you just update us on the Wright Amendment revenues year-to-date and then the other question that kind of goes along with that as I’ve noticed that some of other airlines are adding service to Love Field from their hubs, using 50 passenger jets. So, can you just talk about the opportunity that you have to as 2014 approaches to – do a lot of that service with larger aircraft and the potential for revenue benefit?

Laura H. Wright – SVP Finance and CFO: Okay. I’ll take the first one. So, in the quarter, Wright Amendment revenue was $74 million that was versus $63 million a year ago, year-to-date, its $134 million first and second quarter, so very strong. Gary, I’ll let you talk about.

Gary C. Kelly – Chairman, President and CEO: Well, Helane, I’ll try to answer your question here. I think first of all by federal law Love Field will be limited to 20 gates. I guess it is limited now, but certainly the new airport construction will be 20 gates. We have ample access to those 20 gates to support our operation. We’ll be able to grow from here. We have a very strong business in Dallas, as Laura just reported to you; that is very nice growth in what is a pretty tough economic environment. So we are very pleased with our business here out of Dallas. We always take the competition seriously, but I think we would be delighted to compete head-to-head against regional jets every day. So in the grand scheme of things our big competition out of Dallas is coming from DFW Airport, not Love Field.

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