Last month, Gary Kelly and crew conducted an Investor Day. The transcript and slide presentation associated with their presentation is available at southwest.com. At that presenation, Gary Kelly and Tammy Romo walked investors how they get to 15% ROIC in 2013.
First, Tammy walked through Southwest's expected 2013 unit revenue performance. Historically, Southwest has been able to produce unit revenue increases approximately 2-3 times what the United States experiences in GDP growth. For 2013, Southwest is expecting unit revenue growth of 4-5%.
Second, you must know capacity and fuel consumption. Tammy stated that Southwest intends to grow 2013 capacity by 2%. Gary stated that unit fuel consumption is getting better in 2013. This due to 2 reasons, the addition of 6 seats in all 737-700s and some 737-300s and the continued addition of 175 seat 737-800s. So even though capacity will grow by 2% in 2013, Gary is not expecting total fuel consumption to grow by 2%.
Third, you must make a fuel price assumption and non-fuel cost performance assumption. Gary Kelly is expecting 2013 all in fuel prices to be about the same as 2012 ($3.25-3.30/gallon). Tammy stated that Southwest expects non-fuel unit costs to increase by 1% (again the increased seats per departure helps ease the unit cost pressures associated with rising labor, maintenance, and airport costs).
So using the above information you can get to the following numbers:
2012 Capacity: 128 billion ASMs
2013 Capacity: 131 billion ASMs (up 2%)
2012 All in Fuel Price: $3.28/gallon
2013 All in Fuel Price: $3.28/gallon (flat)
2012 Fuel Consumption: 1.85 billion gallons
2013 Fuel Consumption: 1.87 billion gallons (up 1%)
2012 Non fuel CASM: 7.93 cents/ASM
2013 Non fuel CASM: 8.01 cents/ASM (up 1%)
2012 RASM: 13.34 cents/ASM
2013 RASM: 13.94 cents/ASM (up 4.5%)
Putting these numbers together:
2013 Total Revenue: $18.3 billion
2013 Non Fuel Costs: $10.5 billion
2013 Fuel Costs: $6.1 billion
2013 Operating Profit: $1.7 billion
2013 Interest Expense/Taxes: $700 billion
2013 Net profit: $1.0 billion (excluding special items)
2013 Net profit per share: $1.35/share
2013 ROIC: 14-15% range
As you can see, Gary Kelly laid out a road map to over $1/share profits for 2013 back on December 14, 2012 at the Investor Day presentation. Over the last 30 days, 6 analysts have upped their LUV earnings estimates while 1 analyst has lowered their estimate (out of 18 total analysts).
What will affect the results we see published 1 year from today? Every 10 cents per gallon change in Jet A affects the operating profit by approximately $185 million. Every 1% RASM change affects the operating profit by approximately $180 million. Every 1% change in non fuel CASM affects the operating profit by approximately $105 million.
With respect to furloughs, remember Paragraph C to the LOA to the AirTran CBA included with SIA #2 prevents furloughs unless there are "prohibitive conditions outside the company's control" or "extreme economic conditions". Given the current profitability and forecasting for 2013 done by Gary Kelly at last month's Investor Day presentation, I am sure JM would love to unleash DK if Gary Kelly decided to try and furlough on this side of the partition.
