Highlights of 3Q'04 SWA Webcast

[chase]

I've posted the meat of the 10K listings & conversations from the webcast earlier today...my observations & notes;

- Cost per seat mile are decreasing, last qtr 8.09c per mile, first time above 8c...that was an increase of 8.4% from 2Q'03...this qtr it came in at 7.61c per mile, only a 1.3% increase from 1 year ago...costs are coming under control despite higher fuel costs...take away fuel increases & the ASM costs were 6.81 cents & that is flat from last year...very good cost control

- Flat revenues for the qtr...Feb-Jul revenue increases...Aug-Sep slower...lost $15-20m over hurricanes, this would improved the numbers if we hadn't had those loses...FL operations are back to normal with no loss apparent

- Profitsharing of $32m this qtr vs. $34m a year earlier

- 59% of bookings go through the web...big savings for company...fewer full fare tickets sold this qtr than last...troubling but indicates the revenue pressure of too many seats chasing too few folks...seat excess by competition according to Kelly & others

- 21.7% gain in freight revenue...mail is still on the rise & adding to the bottom line; other revenue increased by 25.9% increase to include charter operations, particularly military charters

- Leasing costs for aircraft are declining...less than 40%, we own over 60% of aircraft outright...we still pay cash for delivery of new aircraft...10 more for the rest of the year, 8 -200 retirements, 417 at the end of the year...net of 29 for next year (more on that later), same as this year

- Kelly remarked the goal is open a new city next year under their current plan...no hint at where it would be..much depends on other airlines futures I suspect

- Regional numbers on percent of SWA flights
- NE - 14% - 12% increase since last year
- SE - 15% - -1% decrease since last yr
- SW - 16% - -1% decrease since last yr
- MW - 15% no change
- West 39% - no change

- lots of revenue pressure in the east due to Indy Air, USAir, JB keeping those numbers low...mostly demands for discount fares. we have increased fares on "selected routes" $1-3 depending on competition & length of route

- Kelly specifically addressed the question, "what happens if USAir folds?" He said they would respond when/if it happens & they do have plans...he quoted Kelleher as saying much earlier they would entertain the thought of having 20-25 gates at some point there if the conditions were right...PHL is at their max by late Oct with 41 flits (4 gates).....optimisitic we can get some more in the shorterm...new airplanes in '05 would go to fuel new city & PHL expansion if it is called for....lots of "ifs" & SWA has plans to move in any direction in which a revenue opportunity presents itself...4-5% overlap between USA & SWA...the impact in Kelly's words would be "huge"...no one asked "how many planes could SWA absorb in one year above the 29 you are currently taking?"...that would be very interesting to know & pertinent to many folks on here

- reducing costs has been effective...17% of operating costs are fuel...winglets saving 3% (all modified by Mar 05), fuel hedging reduced fuel costs by $130M...fuel hedging numbers below
- >80% this yr at $24
- >80% next yr at $25
- 60% '06 at $31
- >40% '07 at $30
I believe this demonstrates clearly that SWA believes higher oil prices are here to stay...those are huge bets to make on such a large part of your operating costs

- encouraging news...capital expenditures are actually predicted to be declining over the next few years; $1.8B total this year; $1.4B next year, $1.3B '06...those costs from '06 back to '04 are a reduction of over 30% savings....frees up that money for the bottom line profit, profit sharing, share buyback

-7.9M shares repurchased this qtr, part of overall strategy to reduce the number of outstanding shares...this has been a long range plan all year, on track...fewer outstanding shares...more value to remaining shares (if we can keep the costs down & raise revenues that is!)

- 30K+ folks on property now, end of last qtr 32K+ on property...employee to aircraft ratio has declined from 4Q03 of 85 to 74 folks per airplane at 3Q04...huge cost savings...hope to get that number down to 70 sometime within the next 2 years...will have added 29 airplanes this year with a net decrease in folks, not bad.....2 classes of FAs were 100% internal hires...lower salary costs as they move from higher paying jobs to entry level FA jobs...expect our costs to continue to decline slightly in 4Q

- Cost savings in closing of res center are still being felt...however 3q showed increase in salaries & benefits overall of 3.3%...some of that was the retro checks for FAs along with pay raises granted this qtr...

- Operational efforts to cut fuel costs; costs per flying block hour was 2% this year than last year even with an increase in flying block hours...pilots & dispatch are working to optimize altitudes & route selections...retiring inefficient -200s (all gone by mid Jan '05), more fuel efficient -700s

- ATA...what's up with that Mr Kelly? Who controls the gates? Can you say "preferential gates"...term used by Chicago to say they control the gates, no ATA...we have 19 gates, fly 145 flights...we have current capacity growth there without having to buy anymore gates..not needed at this point...no one asked about the airplanes which was unfortunate...he didn't allude to that issue at all

- Question was asked of Kelly what mark does he wish to leave? international flying? Assigned seating? He said the focus was to maintain low cost advantage, have focus on operational excellence, improve customer service...that will lead to superior cost performance...he wishes to simplify the approach versus complicating it..."no plan to change the product, add different type, fly international routes"...Kelly's words...he wants to address the 75% on time performance, much too low in his opinion & directly related to customer satisfaction...will work hard next year to fix that

- Currently no restrictions placed on SWA by Love Field or city of Dallas in moving to DFW if so desired...question was asked & Kelly answered it...Kelly quoted on CNBC by this reporter as saying he didn't have plans to go to DFW at this point but the weekly msg on 1-877-IFLY737 he talks about the pros & cons of it...interesting discussion & very frank

- Kelly said this was time of weak revenue environment...SWA is designed to survive this type of environment, others aren't but that doesn't mean SWA will grow like it has during other downturns in the market...different environment...

- Profit of $119M...good but not where we want to be in terms of return on investment for shareholders.
___________________
I'm sure there is much I missed or misinterpreted so don't hesitate to correct. I've attached the 10K summary in the subsequent post. I believe the bottom line is that SWA is ready to move in which ever direction the market forces allow it to make the most money. The outlook for hirings next year would appear to be very good based upon these numbers as the company is poised to fully utilize all 29 airplanes we are receiving & are prepared to get more if the situation is right....good luck to all.

 

[chase]

10K Narrative

DALLAS, TEXAS -- October 14, 2004 -- Southwest Airlines' net income for

third quarter 2004 increased 12.3 percent to $119 million, compared to $106

million in third quarter 2003. Net income per diluted share was $.15 for

third quarter 2004, compared to $.13 in third quarter 2003.

"Despite the weak airline industry revenue environment and higher fuel

prices, Southwest achieved a double-digit improvement in earnings," stated

Gary C. Kelly, Chief Executive Officer. "Our third quarter operating cost

performance was excellent, which significantly contributed to these results.

I am extremely proud of our Employees and their enormous efforts to lower our

cost structure and raise our productivity. Even with average fuel prices up

over 10 percent, third quarter 2004 unit costs increased only 1.3 percent.

Our hedging program greatly mitigated record-high fuel prices, which resulted

in a reduction in operating expenses of $131 million (or $73 million net of

profitsharing and income tax effects) for third quarter 2004.

"Excluding fuel, our unit costs were flat with the year ago quarter and

well below first half 2004, which represents a significant improvement in

cost trends. We are on track with our cost reduction targets and expect

fourth quarter 2004 unit costs, excluding fuel, to decline from fourth

quarter 2003's performance of 6.51 cents.

"In today's airline industry, low costs are imperative to remain

profitable. Low fares are our most important competitive weapon and what

Customers demand. We are determined to maintain our position as the low cost

producer and the Low Fare Airline in America.

"Although we were impacted by airline industry capacity increases,

pricing pressures, and hurricanes in the Southeastern U.S., our revenue

growth managed to keep pace with our capacity growth. The revenue

environment has softened since July, and recent trends, along with more

competitive capacity, suggest fourth quarter 2004 unit revenue may decline

from fourth quarter 2003 unit revenue of 8.29 cents. Although bookings for

October are fine, our passenger revenue yield per revenue passenger mile

continues to fall below year ago levels. While the current revenue

environment is challenging, Southwest is pleased with its competitive

position in the airline market place and plans to continue to press the

development of its route system."

Southwest will discuss results on a conference call at 11:30 a.m.

Eastern Time today. A live broadcast of the conference call will be

available at www.southwest.com/jp/luvhome.shtml?src=IR_071404





Operating Results

Total operating revenues for third quarter 2004 increased 7.8 percent

to $1.67 billion, compared to $1.55 billion for third quarter 2003.

Operating income was $191 million, compared to $185 million in third quarter

2003. Revenue passenger miles (RPMs) increased 10.4 percent in third










quarter 2004, compared to a 7.0 percent increase in available seat miles

(ASMs), resulting in a load factor of 72.7 percent versus the third quarter

2003 load factor of 70.5 percent. The passenger revenue yield per

RPM decreased 2.8 percent to 11.38 cents from 11.71 cents in third quarter

2003. Operating revenue per ASM (RASM) increased .7 percent to 8.59 cents

from 8.53 cents in third quarter 2003.

Total third quarter 2004 operating expenses were $1.48 billion, an

increase of 8.4 percent, compared to $1.37 billion in third quarter 2003.

Operating expenses per ASM (CASM) for third quarter 2004 increased 1.3

percent to 7.61 cents from 7.51 cents in third quarter 2003. The Company's

hedging program resulted in an offset to fuel and oil expense of $131 million

in third quarter 2004. The Company is over 80 percent hedged for fourth

quarter 2004 with prices capped below $24 per barrel; over 80 percent in 2005

at $25 per barrel; 60 percent in 2006 at $31 per barrel; and over 40 percent

at $30 per barrel in 2007. Excluding fuel, CASM for third quarter 2004 was

6.34 cents, which was flat with the year ago quarter.

Net cash provided by operations was $1.21 billion and capital

expenditures were $1.37 billion for the nine months ended September 30, 2004.

We ended third quarter 2004 with $1.88 billion cash on hand plus our fully

available unsecured revolving credit line of $575 million. In September

2004, Southwest issued $350 million of senior unsecured Notes due 2014. In

November 2004, the Company will redeem $175 million of Aircraft Secured

Notes.

The Company repurchased approximately 7.9 million of its common shares

during third quarter 2004, bringing the total to 17 million shares, or $246

million, pursuant to the Company's previously announced $300 million

repurchase program.

During third quarter 2004, Southwest exercised one Boeing 737-700

option for 2006 delivery. This change brings our 2006 firm orders and

options to 23 and 11, respectively.

Total operating revenues for the nine months ended September 30, 2004

increased 10.3 percent to $4.88 billion while total operating expenses

increased 9.7 percent to $4.44 billion, resulting in operating income in 2004

of $435 million versus $372 million for the nine-month period ended September

30, 2003. Excluding the profitsharing impact of last year's government

grant, operating expenses for the nine months ended September 30, 2004

increased 10.8 percent, resulting in a 5.3 percent increase in operating

income. Net income for the nine-month period was $258 million in 2004 versus

$376 million in 2003. Net income per diluted share for the nine-month

period was $.32 in 2004 versus $.46 in 2003. Excluding the impact of last

year's government grant, net income for the nine months ended September 30,

2003 was $233 million.

The results for the nine months ended 2004 included $41 million (or $22

million net of profitsharing and income tax effects) for costs associated

with the consolidation of the Company's reservation operations; the pay, per

diem, and benefit increases retroactive to May 2002 related to the agreement

reached with our Flight Attendants; and our company-wide early out offer.

Prior Schedule Current Schedule

Firm Options* Firm Options*



2004 47 - 47** -

2005 34 - 34 -

2006 22 12 23 11

2007 25 29 25 29

2008 6 45 6 45

2009-2012 - 177 - 177

Total 134 263 134 263



*Includes purchase rights

**37 aircraft were received during first nine months of 2004, including one

leased aircraft

 

[Falcon Jet 1]

Chase, I'm sure that everyone appreciates all of the good info, but one question, why are you giving the 800 number for Employees on a public internet forum. It could possibly cut into your profitsharing since it does cost money to call?

 

[chase]

Falcon,

Thanks for your comments. I will consider pulling it but quite frankly allowing folks to hear the vision and clarity in the words of the CEO & our other leaders I believe is well worth any pennies spent for "outsiders" to listen. I write my posts primarily to folks who are interested in coming to Southwest, folks who are qualified or nearly so. I emphasize to folks that it is important to understand as much about the company as possible. I believe this piece of the puzzle allows that to happen.

I believe the more one hears these folks speak the more folks will understand why this company is successful. Who knows, investors may listen to it & decide to buy the stock. It costs us money to spend recruiters out to various arenas also but it is done to get the best folks and educate folks about SWA. You're right, I may have stepped over the bounds, if so I'll remove it. I'll ask for some feedback from some insiders and see what they have to say. If you're concerned as a stockholder, so noted. Regardless, I hope it helps some folks get the proper picture of Southwest.