西南航空 (LUV) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Southwest Airlines fourth quarter earnings results conference call.

Today's conference is being recorded.

At this time, for opening remark remarks I'd like to introduce Mr. Gary Kelly, Chief Financial Officer.

Please go ahead, sir.

Thanks a lot, and thanks folks for joining to us talk about the fourth quarter earnings.

This morning's report includes forward-looking statements about future events, actual results may differ for additional information, please refer to our filings with the Securities and Exchange Commission.

Today we are very pleased to report earnings, this is the 31st consecutive annual profit and I our 51st conservative quarterly profit, considering the effect from the war with Iraq, and security alerts that we've had throughout the year, we're very proud of the 2003 results.

Annual results for the year we had net income of $442 million, which is an earnings per diluted share of 54 cents.

If you exclude approximate items that we discussed in the press release, which are the federal grants that were received in 2003, and 2002, and the related effects, our net income after those special items was 298 million, which is 36 cents a share, and that's a 51% increase from the comparable number in 2002.

That represents an operating margin of 8.8% for the year, and a net margin of 5%.

So all things considered, we are very proud of the progress that we're making, and recovering our profits in all that our employees accomplished in 2003.

Turning to the fourth quarter, our net income was $66 million, which is an earnings per share of 8 cents a share.

That matched the first call mean estimate of 8 cents.

Our net margin for the quarter was 4.3%, operating margin was 7.3%.

Our revenues increased a 8.3% to 1.5 billion, or 4% on the unit basis.

During the quarter we added three aircraft, we grew our availability seat mile capacity by 4%, traffic grew faster than that at 5.3%, resulting in a slight increase in our load factor, up to 63.8.

Even though we have steadily added capacity we've been able to consistently outperform the industry in revenue production.

RASM growth up over 5% in the month of October, and for the two months combined, November/December roughly up 3%.

RPM yields increased not quarter, 2.6% to 12.57 cents, we had some modest fare increases that were realized, we've seen some improvement in the mix of our discount fares, and then we've also seen an improvement in the overall mix of our full fare passengers, the full fare mix in the fourth quarter improved to 37%, that's versus 35% last year, and up just a tick from 36 in the third quarter of 2003.

So while overall revenue trends are slowly recovering, overall demand and especially business travel remains below our levels in 1999 to 2000, which were the last years where we had records.

Load factors continue to fall below those levels.

We don't believe that the recent code orange alerts had much impact on our fourth quarter holiday travel.

Our even early January.

But future bookings suggest that there could have been some carry I don't have effect from the code orange alert.

We've had modest unit revenue growth in the first part of January, but at this point, bookings suggest that for the full month of January, our load factor will fall or may fall below last year's 58%.

Demand is always seasonally weak, in January, it's typically the weakest month of the year, we're not reading too much into current trends.

Bookings, though, need to pick up to generate stronger than year-ago load factors.

For 2004, we're obviously hopeful that the economy continues its strong growth and that we continue to see a recovery in our revenues.

Freight revenues were up nicely at 9.1 9.1%, we're installing installing -- at 9.1%, our other revenues were up 18%, due to increased business partner commissions, and also due to increased charters.

Turning to our cost performance, our fourth quarter 2003 operating expenses were up 7.1%, to 1.4 billion, unit costs for the quarter increased 2.9%, to 7.69 cents.

While not great, that was at least better than we expected.

Excluding fuel, our unit costs were up similarly, up 2.8%, driven primarily by higher labor, higher maintenance, and higher airport cost.

Although anticipated we're not happy with cost inflation, and we are very aggressive in implementing measures to improve our productivity.

During fourth quarter 2003, we announced that we will though longer pay travel agency commissions effective December 15, that will save us about $40 million here in 2004.

We also recently announced a consolidation of our reservation operations from nine to six locations.

We are installing blended winlets on our 700 fleet no reduce our fuel burn with jet fuel prices over a buck a gallon, the savings we'll realize from those winglets will be very significant.

On our reservations, restructuring in the first quarter, reestimates charge in the $20 million range, we expect annual ongoing operating cost savings of course to exceed that amount.

And virtually no costs were incurred in the fourth quarter, so the vast majority of that $20 million estimate should be incurred here in the first quarter.

We also have a number of customer service initiatives underway, and they have the added advantage of also proving our productivity.

So we're continuing to streamline.

Ticketing, we're continuing to streamline boarding through the use of Southwest.com and self-service kiosk.

So the overall net effect of this is a reduction in our headcount per aircraft.

If you look at our statistics in the fourth quarter of '03, it was 86 versus 91 in the year ago period.

We are continuing to expect unit cost pressure in the first half of 2004.

It will ease in the second half.

Our goal is to keep the full year 2004 unit cost at least flat with 2003.

And that's either with our without fuel cost.

Whatever your pleasure.

On fuel cost, we've obviously got a successful hedging program in place.

That resulted in savings of $41 million in the fourth quarter, and 171 million in savings for the full year.

Higher market prices hurt us some, of course, because we are thought 100% hedged.

We were 87% hedged in fourth quarter and that limited our jet fuel cost per gallon increases to only 4.7%, or 74 cents a gallon.

For this year, 2004 we're over 80% hedged each quarter, at prices below $24 a barrel.

Based on this position, we would expect our average jet fuel cost to fall in the 75 to 80 cents per gallon range in first quarter, which compares to 74.8 cents last year.

So we're probably up some here in the first quarter.

For next year 2005, we're about 70% hedged in the $24 a barrel range, so we're in pretty good shape for the next couple of years.

So based on the current outlook, and excluding any restructuring charges for the consolidation of reservations, we expect an overall year-over-year unit cost increase in first quarter similar to the increase you saw here in the fourth quarter, which was up 2.9%, and that's again assuming fuel prices stay in this 75 to 80 cents per gallon range.

If you include the restructuring charges which again we're estimating at about $20 million, the unit costs increase will obviously be higher and probably closer to 4%.

Turning no nonoperating costs our interest expense declined about 26% due to lower effective interest rates, and also the October fourth quarter redemption of $100 million of senior unsecured debt.

Capitalized interest is up to $10 million versus four last year, due to higher aircraft progress payments with Boeing.

Our fourth quarter income tax rate was 34.9%, up slightly versus last year at 34.4, reflecting lower overall effective state income tax rates, the full year our tax rate was 37.6%.

Down slightly from last year.

At this point, we expect the full year 2004 rate to be in the 38% range.

Turning to the balance sheet, we ended the quarterly with cash of 1.9 billion, we still have our line of credit of $575 million fully available.

Long-term debt was 1.3 billion, with about $200 million in current maturities for 2004.

We do plan to do some additional financing in 2004, but at this point, our plans are pretty modest.

We ended the quarter with stockholders' equity of 5.1 billion, which translates to a balance sheet leverage even including all the offbalance sheet leases of under 40%.

So we're very, very pleased with how our -- strong our balance sheet has remained.

We've been authorized by the board to use a portion of our future stock option proceeds towards the repurchase of $300 million of Southwest common stock.

From time to time in the open market.

But our financial priorities remain to maintain high liquidity, maintain a strong balance sheet, keep an A credit rating, grow the airline, and obviously drive value for employees and shareholders.

Based on the options outstanding, we're expecting substantial proceeds from future exercises, and also from future tax deductions.

Turning to the fleet, during 2003 we added 17 new-700s to the plast and retired four, 200's.

We ended with 888 (phonetic) aircraft, which translated into a 4.2% available seat mile increase for the year.

As far as fleet changes for 2004, by quarter, in the first quarter we will net one aircraft we acquire five and retire four.

So that's a capacity change in available seat miles of 5.4%.

In the second quarter we'll net 15 additional aircraft, which is four.5% increase, in the available seat miles.

In the third quarter we'll net seven, which is up 9% available seat mile growth.

And in the fourth quarter, we'll net six, which gets us up to the full-year effect of all these airplanes gets us up to a running rate of over 11% available seat mile growth in the fourth quarter.

So the full year we're netting 29 airplanes to the fleet, which is a gross addition of 47 less 18 retirements, and that is an annual ASM growth rate of 7.7%.

We recently exercised options to acquire-to-more 700's for next year so that brings our 2005 position to 28 firm orders and six options.

So assuming we exercise those six options, we would add a net of 29 aircraft to the fleet again in 2005.

So a net 29 in '04 and also a net 29 in '05.

That translates into an available seat mile increase in '05 of about 11%.

Capital spending for 2004, we're pretty much in the same range that we've been talking about for the last several quarters.

We're planning to spend 1.8 billion in '04, and then that trends down in '05 to 1.4 billion, and then in the 1.3 billion range is what we had planned currently for 2006.

Turning to our route expansion, we recently announced the first new city since Norfolk, Virginia was added in October of 2001, we'll begin service to Philadelphia in May with 14 daily non-stops.

That's to Chicago, Las Vegas, Orlando, Phoenix, Providence, Rhode Island, and Tampa bay.

So we're very excited to bring our product and our low fares and friendly service to the Philadelphia area.

The airport has been extremely accommodating.

The response we've seen by the community thus far has been terrific.

I'll give you a quick update on our capacity by region.

The eastern region now constitutes 410% of our system, and -- 14% of our system.

Southeast is 16%.

The heartland markets, Texas, surrounding states is 11.

The Midwest is 15%.

And the western region is 44%.

So not significant changes from what you've been hearing from us for the last year or so.

So to summarize, you know, our -- especially our outlook for 2004 for the first time in three years, we're starting a year with an improved outlook.

We're obviously hopeful that 2004 will be a great year with a great rebound in load factors and, therefore, revenues.

But fortunately we've emerged from very difficult three years, very stable.

We've been able to manage our costs.

We've been able to manage our capital spending and our cash flow.

So that the balance sheet and our liquidity are in superb shape.

We are well-prepared financially to resume our more traditional capacity growth rate, and tackle a major new market like Philadelphia.

So we're very excited.

I guess you could say about Philadelphia, that we're prepared to pull out all the stops and to win over the Philadelphia customers.

We have some work to do on the cost side.

It's not good enough for us to main in a a huge advantage over our major competitors.

We know that our brand is low fares and we certainly intend to remain the low-cost producer to thrive in this industry.

We remain the low-cost producer in the airline industry all these year for a reason and we're confident in our ability to maintain that position in the future.

Our customer service remains outstanding, we will continue to focus on the things that customers want, friendly, helpful employees, low fares, lots of flights and great execution in terms of things like on time performance and passage handling.

In summary, we think we're ready for a great year.

With that, I'll be happy to open it up for any questions.

Thank you.

The question-and-answer session will be conducted electronically.

If you do wish to signal for a question, press the star key followed by one on your touch-tone phone.

Once again, star one on your touch-tone phone to signal for questions.

Please limit yourself to one question, and one follow-up.

Allowing everyone a chance to signal.

Once again, that is star one on your touch-tone phone to signal for questions.

We'll pause for a moment to assemble the roster.

Our first question today will come from Ray Neidl with Blaylock.

Hey, Gary how doing?

Great.

Two quick ones for they, it's a pretty simple story you're telling here, no major changes.

One thing you lost me on, I think you said that your unit costs were going to be flat for the year with fuel and without fuel because of your heavy hedges but then you said CASM up 3% in the first quarter.

Does that mean you see CASM declines in the second half of the year?

Yes, yes, that's exactly right.

We'll see, you know, we've got a pretty good bead on the first quarter, we'll see a similar performance to what you're seeing here in the fourth quarter.

But by the time we hit midyear we should be seeing declines in unit cost and obviously that has to happen for us to hit that flat target.

Okay.

Great.

Second question is: Any further progress, any further developments on your review of doing assigned seeing or video or satellite radio on your planes?

Nothing to report there.

There's nothing active at all in terms of the assigned seating, so that is not under consideration.

And has not been.

We -- with the onboard technology, that's different.

That's new, there's a lot of things that have come to market recently.

There are a lot of things that will be coming to market and we'll continue to monitor those.

But I think it's very safe to say that for 2004 you won't see anything different on our airplanes.

But, you know, stay tuned, we'll continue to monitor that and see if it fits with our idea of low cost, and high productivity, and if it's something that customers want.

So but there's no -- nothing new to report on that front.

Okay.

Great, thanks.

Yes.

We'll take our next question from William Green, Morgan Stanley.

Hi, Gary.

Good morning, Bill.

I was wondering if you can give us an update on the negotiations with flight attendants, I'm surprised they're still going on given your historic good relations with all employee groups.

They are going on, they're under the watchful eye of the federal need area.

We've had regular meetings, including meetings this month.

I'm not intimately involved in any of the discussions but as I understand it we have meetings scheduled for early next month.

So they -- the talks continue and obviously we're hopeful that we can reach an agreement here very quickly.

And what are the stumbling blocks, is it just pay?

Well, I mean, pay is obviously the primary thing in any contract, but I'm just not in a position to discuss any of the issues publicly.

And those are things that we just need to obviously hash out at the bargaining Tampa Bay.

They're hard at work at it.

Okay.

And then Gary can I ask about your impressions of your pricing power in the markets given your dominance in so many different markets.

Your guidance about yes, he did may go up in January, float factors are coming down, how are you able to do that?

Are you able to get a couple of dollars here or there or how are you approaching that?

I think the fundamentals are pretty much what you know.

We have tried to generate some additional revenue with very modest fare increases.

Throughout the spectrum of our markets, and throughout the spectrum of the fare structure.

As you know, most of the demand over the last three years has been for discount fares, and so that's where we've had some opportunity.

Business travel has been much more sluggish so we haven't had as many opportunities I would say with full fares to nudge them up.

But we have seen a strengthening of the mix.

There's an array of discount fares and we've seen more demand for the higher-priced discount fares which have less restriction, if you will, and then we've also seen customers moving out of the discount category up into the full fare category.

Really all three of those things are sources of yield growth for us.

I think our point in our report to you right now is that the good news is that fare environment is stable.

The bad news is that the bookings are a little bit soft.

So as you know, there's a direct correlation between the two.

At least at this point we're not seeing any yield pressure but, you know, we need to see the booking momentum pick up a bit or else we might see some yield pressure.

At least for the time being we're looking at a little bit lower load factor for the month and again as I said, stable yields.

Okay.

Great, thanks for your help, Gary.

Now we'll take a question from Jim Parker with Raymond James.

Gary, good morning.

Good morning, Jim.

Just you guys are carrying more passengers domestically than any other airline, and more than half, and I don't know if you said how much of the bookings are on your website?

Did you indicate that?

Jim, I did not.

But it is 57% for the quarter, and 54% for the year.

So we're assuming that that number will suspect to grow.

But --

Right.

But yeah we're near 60% at this point.

In that context, so you're booking more than half your passengers on the web, and is there an opportunity, and are you seriously considering it, of merchandising other travel services like hotels and cars much more aggressively and maybe credit cards and a lot of different things like Ryan Air does in Europe?

Well, we -- and I know you know this, we do offer cars and hotels.

And there is a revenue model for us in doing that.

I think the straight answer to your question is that I don't believe we're considering anything right now that is dramatically different than what we have been doing.

We are continuing to focus on growing that business, and I do think that there are some opportunities there.

Yeah, we're -- as you know, we haven't approached it like Ryan Air has.

I think to summarize our approach, we are really focussed on the other 96% of our business, and very focussed on the overall cost structure, and really interested to grow our route system.

So while we do have efforts in those other revenue categories, you know, 99.9% of our time is occupied on the passenger side of the business.

Okay.

Thank you.

We'll go now to Michael Lenenberg with Merrill Lynch.

Hey, Gary good morning.

Hey, Mike.

I guess just two questions.

I guess if you want to book a Southwest ticket today you can book something out to the middle of I couldn't be the way your booking window is.

When you look at the Philadelphia service you're starting it in May.

I think at this point, you know, the flights and fares they're not yet available.

Is that typical when you move into a big market, you have a shorter curve there?

Yes.

Yes.

And, in fact, you know, many years -- probably prior to the 1996, we wouldn't announce a new market until just the last possible moment to give our competitors as little advance notices a possible.

But yeah, it's not unusual for us to be about 90 days out to start up a new market.

It sound like it's obviously strategic.

Uhm, yeah.

I don't think it will take us long to build up to a good start and we just like to keep our powder dry until the last reasonably possible moment.

And I don't know if we've actually published a date yet for when we will be releasing the schedule and the fares but again, I've given you some idea had it should be coming along here pretty soon.

And my second question, when you look at the commissions line objections does that actually go to zero this year or are there going to be some small amount of commission-like expenses?

Or do they just roll into another category?

Just for modeling purposes.

I'll just give you a straight answer to all that, the answer is it will go to zero, but there's a burnoff.

You know, you have prepaid tickets that will earn a commission in the first quarter.

I guess in theory, you could -- I don't remember when the schedule is open out into the second quarter but you could have had folks purchasing in December, say December 14, they could have purchased a ticket in theory for May and that would have faced a commission, for example.

Expense-wise to us.

So except for that, it will go to zero.

Now, at some point we may roll that line item and group it into others.

I just haven't given much thought to that at this point.

But we'll probably carry that line item at least through 2004.

There's always the possibility of course that we could reach some sort of other arrangements and decide to pay some commissions in the future.

But at this point, our plan is that that would go to zero.

Okay.

Very good, thanks.

Gary Chase with Lehman Brothers.

Morning, Gary.

Hi Gary.

Just wanted to see if we could span the a little bit on the cost issue and the declines you anticipate in the second half.

You know, just as I think about how the quarters are going to lay out, it looks to mes a though the comparisons get tougher in the second half, not easier.

And you know, I know you've got a pilot raise coming next September or at least I think that's the case, I want to see if you can give us a sense for what's kind of kicking in, and how we should think about how those savings are phasing.

The main reason I'm asking is if it's true that the declines are going to exist in the second half, shouldn't we think that 2005 is another, you know, pretty significantly down year on CASM?

I just want to follow through from those initiatives.

I think that's a very good question.

I'm obviously less certain about 2005 but I think the first question, in dealing with 2005, is just to make sure that we understand what kind of events that we have that will drive cost in that year.

Maintenance type events as an example.

Because that moves around pretty significantly.

You see that here not fourth quarter, where our maintenance costs were relatively low last year, it appear Tuesday that edits a large increase and we're really just getting back on a more normal level of spending.

I don't know exactly what the maintenance calendar will look like for 2005, that's a pretty good variable.

The other real source of cost pressure we have are with the airports.

So I'm a little bit reluctant to give you real definitive outlook for '05 until we get a better handle on that.

The April pressure, landing fees and terminal rentals.

The source of pressure is really twofold.

One is the industry has shrunk around us and that gives us a larger share of the airport costs to bear.

And in the other issue we have, which is actually a good thing, that's not such a bad thing either, but the other thing that we find is that we go into a market, we lower the fares, the traffic increases dramatically, and all of a sudden the airport needs to expand.

So that of course is also a source of a cost pressure for us.

And I don't know exactly what airports we'll be serving in 2005.

So relative to our average airport costs that could be a plus or a minus.

So long story short, there's a couple of wild cards about that.

In terms of the costs that are more controllable for us, the 40% that is our salaries, wages and benefits that's where we have some momentum.

We're seeing nice productivity increases literally throughout the company, reservations is obviously one that you're very familiar with, with our consolidation into six centers, that is a source of cost savings.

The elimination of the travel agency commission will not provide yet another source of cost savings in '05 but it will be something that we'll be able to retain.

So I don't think there's much risk there of us bouncing back to some higher cost level.

But the opportunities to control our costs are in our hands.

Internally.

And we'll need to be more productive to offset some of the cost pressures like with airports.

I mentioned the blended winglets, we're seeing wonderful improvement in fuel efficiency, that's a combination of factor, more fuel efficient aircraft like the 700's being a larger component of our fleet but it's also things that our employees are doing every day.

It's our dispatchers, it is our ground operations personnel, under the circumstances our flight operations group.

They are operating with the view to save fuel.

And it's working.

And the blended winglets with auditment that.

The corporate overhead is a relative simplistic idea but essentially we're well watching the headcount closely and at corporate headquarters if we can add a net 29 airplanes two years in a row and have the image here of not creating a lot of headcount growth, I think that's pretty powerful.

So we have the good fortune at Southwest of being a growth company where we can help smooth out some of these cost pressures by simply slowing our headcount growth where it is controllable.

And that's it's just that simple.

That's what we're doing.

You see even in our 2003 results, you can see the effectives of that as our headcount for aircraft is declining.

Well, thanks for the detailed answer, I'll take that as a yes. [ LAUGHTER ] Just I guess one other quick question about the first quarter.

Don't your booking comparisons get easier as we move through February and March or are you taking account of that already?

Wasn't there sort of a slowing in the momentum as you moved to the first quarter last year?

You are right on point.

The comparisons, all else being equal, should be easier as we get into February and certainly in larch and April.

Because of the buildup to the war and ultimately the war itself.

So I agree, I am not taking that into account in describing the softness in the bookings.

So again, I'm hopeful that -- we're hopeful that this is just sort of a typical sluggish economy, at least as it pertains to the airline industry, where we see some soft patches from time to time.

And January is not a great month.

We all know that.

So but the bookings need to pick up for us to produce better load factor comparisons in February and March.

Understanding that they're easy comparisons, they still need to pick up from where we are.

Our next question will come from Jamie Baker with JP Chase.

Good morning Gary.

Hey, Jamie.

Do the difficulties at U.S. airways play into objection second fleet type decision at all?

Second fleet type as in the evaluation we're making of --

Yes, that's correct.

-- seaters?

I don't -- well, first of all we're early on in that study, you can tell by my answer that we're taking our time with this.

At this stage, I would say no.

I mean, the motivation at this point is really no different from the way we viewed regional jets for the last 15 years, which is if we can operate a smaller aircraft and deploy it in smaller markets, at the same kind of cost structure that we enjoy with our 737 fleet, we're interested in that.

So the new news here is that there is a new airplane, and it does sort of internationally fit the profile of what we're interested in, so we're looking at it.

And it is obviously with the thought of introducing that service in smaller markets than we served today.

Weather that will work for us, you know, we don't know.

We have openly admitted that we're looking at that, but again, it's probably the fourth time in 15 years we've looked at a smaller airplane.

And it's very premature to give you any indication of whether it will work for us or not.

Thank you for that.

As a follow up, Philadelphia itself may ultimately satisfy your near-term growth appetite here in the east, but to the extent that slots at la guardia or DCA suddenly come up for sale, would there be an interest from Southwest there?

I don't know.

I would admit that as we have admitted in the past, that we have to look at all these hinges, but that's also premature to tell you whether or not that would provide something interesting for us.

What we do want to confirm is that our focus is on being the low-cost producer.

And on offering outstanding service.

So those are the basic principles that we are continuing to operate from.

And as we look at all of these things as we evolve, it's going to have to fit within that criteria.

Unless we make a change.

And obviously we could, but at this point what we're confirming is that we've made no change in our basic approach.

Okay.

Well, then I guess I can keep looking forward to my flight next week.

Please do.

Thanks a lot, Gary I appreciate it.

Thank you, Jamie.

And our next question is from Sam Buttrick with UBS.

Hi Gary.

Hi.

I guess I'm trying to reconcile your clear concern about revenue trends earlier -- early in the year with your enthusiasm for the prospects for the full year.

I mean, I know it's all tough, it kind of sounds to me like you're keeping your fingers crossed.

But I guess we always do that in this business.

Along the same lines, I guess I'm also a little puzzled as to why the company is taking fare increases, albeit modest ones while running the lowest factor in the business, it seems counterintuitive, what it seems what you'd want to do is flex and reassert your low fare leadership.

I think the enthusiasm for 2004 is based on -- there's infaith there, it's based on a belief that the economy will continue to improve and that we'll continue to see increasing numbers of business travellers.

We've had a lot of coveraging signs, but it's just not been a straight lineup and it just so happens as we're reporting to you, it looks like the second half of January is a little soft.

So the implication of that is that we -- that I think that we think that we'll still have a good year.

It will get back on track, and we'll see some strong periods.

If we don't have a strong March, I think that that would be more of a cause for concern.

Having a soft January or second half of January, I think the point earlier was in and of itself, I don't know that we should worry too much about at that.

Uhm-hmm.

But it is an indication that we're just not clearly out of the woods, and we just don't have great revenue performances every single week, and we're still having to work very hard to frustrate revenues.

So your point about low terrorist, our -- fares, our fare increases have been equate modest and really what we're explaining or what I'm explaining here for the fourth quarter is sort of the accumulative effect over a four-quarter period.

So throughout 2003, where we could, we did take some modest fare increases.

The net effect of that I'll bet is less than a percent.

So it's not -- I don't want to give you the impression that we're really moving fares up aggressively and certainly not right now.

That wouldn't be true.

It's a low-fare environment, we tweaked things where we could, it good generate a little bit of yield growth.

We have not been as aggressive in 2003 with really hot fare sales and promotions. 2002 was extremely aggressive there for all the reasons that you know, so that's just a reflection of a -- an improving revenue environment.

But I think we're still very much true to our low-fare brand, and not doing anything that aggressive, certainly, in moving fares up.

The environment just doesn't support that either economically or competitively.

Uhm-hmm.

And lastly, quickly, with more than 50% of your revenue coming off of Southwest.com, why do you still need 6RES centers?

That's still more than some of the larger carriers have.

It is.

We certainly need that number of res centers and that number of phones, if you will, to deal with the current and really at least in thener term, the anticipated volumes.

And we're expecting to continue to grow.

So even if Southwest.com grows, at a fairly rapid clip like it has been, if the overall business grows, it's -- we just have to -- we have to put a stake in the sand, so to speak, and we don't want to cut too deep because the last thing we want to do is go through a lot of turmoil there and find we have to add back a dramatic amount.

So you know, we definitely need the six centers right now.

I think -- and I think again the business will continue to grow such that we'll need them for rank years.

Okay, thank you.

Our next question is from Glenn Engel with Goldman Sachs.

Hello, Gary.

Hi, Glenn.

A couple of questions.

One, the aircraft you're going to be financing this year, you've generally been ownership the last couple of years.

Is that still going to be the case versus lease?

Yeah, I think of the 47 airplanes that we're adding, 46 are coming new from Boeing.

One is a new aircraft, but it's coming to us via another owner, so we're leasing that aircraft.

So except for that one, I'm virtually certain that the other 46 that we will own, and take advantage of the tax depreciation and the benefits we get there that.

You talked about the winglets.

Can you talk about what that will be completed and what had that do to fuel burn?

That is for retrofitting the 700s in the fleet.

We should have that done in about a year.

And I don't know if we've released any fuel-burn improvement statistics or not, but we're looking -- I'll at least give you a dollar effect.

We're looking at certainly a buck a gallon, we're looking at 10s of millions of dollars once we get audit of the 700s outfitted on an annual basis.

So it's several percentage points.

Can you, if the fourth quarter, tell me what the profit sharing was in the matching comp 401(k) match?

42.9 million.

And although bookings are soft, are you -- does it still look like, from the booking curve, that you're still seeing a better business mix in early 2004?

Yes.

Yes.

Although again, I'm not necessarily trying to paint that as a real bullish point to you, but yeah, I mean, our full fare mix is definitely holding up.

Sort of under scores the point we were making earlier, the bookings are a little soft, would suggest the loads may fall, but at least the yields are remaining firm or stable is probably a more accurate way to describe it.

Finally, can you give any forecast of just how much headcount should go up this year?

You know, I think that if possible, that headcount will be flat for the year.

It was actually down last year, versus '02.

And just depending on the progress we make, we may actually see our headcount fall again here in 2004.

We're not laying off people of course, but we have natural attrition just like other companies do, and we're -- you know, especially with the consolidation of our reservation centers, you know, that department is shrinking from where they were in 2003.

So I don't see any substantial headcount growth in any event.

And we'll likely be flat and maybe evened out.

Thank you.

Our next question will come from Susan Donumfrio with Deutsche Banc.

Hi Gary.

Hi, Susan.

One outstanding question, that is, I know your other revenues were very strong this quarter.

Should we trend that for modeling purposes?

Could you break down charter and what's going on there?

I wish we could trend that one.

That would be trick.

You know, I look back at the third quarter before this morning's call and the third quarter other revenues were flat year-over-year, but the real swing item here, since 2001, has been our charter revenues.

And we have a great charter department.

There's just been a lot of competition with all of the available aircraft.

And as you know, we schedule our airline very tight, and we have charter aircraft available only in off-peak times, primarily weekends.

So they had a very strong quarter, they had a lot of military charters that they did and a lot of commercial charters.

So that's really the swing item.

It makes it very difficult to forecast.

Maintenance did make an aircraft available, more available, if you will, to the charter folks.

So that the issue is matching up the aircraft when folks want to buy charters.

So typically for us that's really Saturdays and Sundays.

The rest of our other revenues are very strong, and very stable, and but the charters were up probably, oh, gosh, several million dollars at least year-over-year.

So it's a fairly significant swing item.

So here for the first quarter, you know, we do have an advantage when we're growing the airline faster.

We have more new airplanes coming in, they don't instantly go into scheduled service, so that does potentially make more aircraft available for selling charters.

So I think for '04 it's pretty reasonable to expect that we'll be able to at least sustain something close to those levels.

But as long as you're sort of on notice that it's one -- the charter piece of it is very difficult to predict.

Great.

Thanks for the color.

And now, our next question will come from Daniel Hemy with Prudential Equity.

A follow-up on a prior question.

The growth of aircraft in '04 and '05, 29 each year, is it fair to assume then that with the ASM increases, you would not be adding another city into the network?

Well, in '04, we're -- we're not actively working on a new city speak -- as we speak.

What I say that, our schedule planning department is always looking for new city opportunities.

Those folks are doing what they would normally do.

But you know, right now, we're focussed on Philadelphia, and I wouldn't be surprised at all if that's only new city we add in 2004.

But we'll just have to see how the -- you know, how the environment unfolds.

It's just so unstable in this business, and you know, we've always said that we approach our expansion tactically, so if there are cities or gates or whatever to become available during the year we might need to respond to that.

Right now we've got the focus solely on Philadelphia, we're enthusiastic about that, as I said earlier, we're pulling out all the stops.

So now when you get into 2005, again, I just don't know.

I think we'll add a city or two again in 2005.

But we'll have the airplanes, I think, to do that.

Just again, the -- it depends on what is happening in the environment.

Americans draw down in service in St. Louis is a real time example of where we have to react, so we're -- we are putting more airplanes into St. Louis as a direct result of Americans drawn-downs.

So we'll have to see.

Thanks very much.

Yes, sir.

And we have time for one more question.

And that final question will come from Jim Higgins with Credit Suisse First Boston.

Hi Gary, thanks, can we talk a bit about Philadelphia, 14 flights a day is what, two gates for you?

Yeah, yeah, and we've got four.

You're right, we won't be utilizing the four to begin with.

Do you have a sense of how many gates you have available, assuming status quo at U.S. airways, et cetera, at this point?

How many more than --

How many more than four?

No.

Well, I have a sense of it.

And along these lines, we feel like if we need capacity to grow --

Right.

-- that we'll be able to access more gates.

What I don't have a firm answer on is exactly where and how and how many.

Right.

But it does look like we've got some pretty decent options and we are approaching this new city start-up along those lines.

I.e. that we're going need more than 40 dates.

That will be good news for us and for fill physical if it all comes to pass.

At this point, we're going to start with four.

They seem to be very happy with it so far, thanks very much.

Thank you, Jim.

And this will conclude our question-and-answer session.

I'd like to turn the conference back to our speaker for any additional or closing comments.

Okay, well thank you, and I think we're pretty much done for the call.

Appreciate everyone joining us today, and as always, Tammy and I are available for any follow-up questions you have.

Have a great day, thank you for your support.

Thank you for your participation on today's conference call.

You may disconnect at this time.