西南航空 (LUV) 2013 Q4 法說會逐字稿

Welcome to the Southwest Airlines fourth-quarter 2013 conference call.

My name is Tom and I will be moderating today's call.

This call is being recorded and a replay will be available on Southwest.com in the investor relations section.

At this time, I would like to turn the call over to Ms. Marcy Brand, Senior Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Tom, and good morning, everyone.

Welcome to today's call to discuss our fourth quarter and full-year 2013 results.

On the call today is Gary Kelly, our Chairman, President, and CEO; Tammy Romo, Senior Vice President of Finance and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer, and President of AirTran Airways; Mike Van De Ven, Executive Vice President and Chief Operating Officer.

We will begin with opening remarks from Gary followed by Tammy providing a review of our results and our current outlook.

We will move to the Q&A portion of the call following Tammy's remarks.

Please be advised that today's call will include forward-looking statements.

Because these statements are based on the Company's current intent, expectations, and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially.

As this call will include references to non-GAAP results, excluding special items, please reference this morning's press release and the investor relations section of Southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

I will turn the call now over to Gary for opening remarks.

Thanks, Marcy.

And, thanks everyone for joining us this morning.

We are very happy to report our fourth quarter and full year 2013 results; a lot of records for this period.

First of all, I want to start out and thank all of our people.

They are working very, very hard to get us to this point and they are justly rewarded.

We had the strongest profit-sharing contribution that we have had in many years -- $228 million, which was up 88% from a year ago, so just very pleased for all of our people, all of our shareholders, with these numbers.

There were a number of accomplishments in 2013 and they are delineated in the press release, but I thought there was a couple that were worthy of at least highlighting for you all at the outset here this morning.

First of all, it was our 41st consecutive year of profitability.

And, of course, that is a record that is unmatched in the airline industry, and remarkable considering how difficult the industry is and how difficult this last decade has been.

This year, we achieved a 13.1% return on invested capital.

That is pretax and a little bit short of our 15% goal.

While I am very happy with that performance, we are not satisfied until we match and then exceed this 15% return goal.

It is very important to do that, of course.

I would also note that that is ahead of our weighted average cost of capital.

We were able to return significant amounts to shareholders during the year.

We had share repurchases of $540 million, and that is as it relates to non-GAAP net income of $805 million.

So, a very substantial percentage of our earnings were returned to shareholders, and also, $71 million in dividends.

On top of all that, we were able to reduce our long-term debt and capital lease obligations by over $300 million, just very strong free cash flow for the year.

And on the operations side, for the first time ever in 2013, Southwest launched service beyond the 48 states with San Juan, Puerto Rico.

And, very importantly, got the AirTran and Southwest route networks connected.

We completed the evolved retrofit of our -700s.

We converted six of the AirTran 737s into Southwest Airlines and began the transition of 717s to Delta Air Lines.

Finally, towards the end of the year, we were successful in acquiring, through a bidding process, 12 slots at New York's LaGuardia Airport.

Through that process, we also secured permanently 10 slots that we were previously leasing.

And, of course, we have a bid in for additional slots and gates at Washington's Reagan airport.

And then, finally, a real customer service enhancement.

We turned on the TSA's pre-check expedited screening program towards the end of the year.

Turning to 2014, this is an historic year for Southwest Airlines.

It is tremendously exciting.

We are within days of launching international sales for Southwest service.

Later on this year, 38 weeks to be exact, to go until the Wright Amendment -- a repeal is in effect.

And, of course, this is the biggest year of the physical integration of AirTran into Southwest, where we will complete all of the conversion of 737s into Southwest and complete the integration of the remaining AirTran flight crews and dispatchers into Southwest Airlines.

So this time next year, the AirTran brand will be retired and it will be all Southwest.

I am especially happy with these results considering that there is such a drag associated with integrating another airline.

And to have record results, knowing that there is a lot of work and inefficiencies underlying that, again, I think is a huge accomplishment.

We have a number of aircraft that are out of service going through conversion, which is not normal.

We have multiple systems still in operation, which has a lot of inefficiencies associated with that, like multiple reservation systems.

So once we get clear of all this, we will have a lot of tailwinds, I think, and certainly looking forward to that.

Our outlook right now for the economy is very stable.

Hopefully, the uncertainties that we had a year ago, hopefully they won't return.

And that would be, obviously, a real good thing.

And then fuel prices have been remarkably stable for, now, three quarters in a row.

And at least our outlook, as it stands today, is for yet another quarter of stability there.

So the environment to run our business is pretty darn good.

We have got a lot of work to do at Southwest in 2014, but it will unveil a significant number of opportunities for us post 2014.

So, with that very quick overview -- and, again, another thanks to all of our people for all of their great results and very hard work -- turn it over to Tammy Romo.

Thank you, Gary, and thank you, everyone, for joining us today.

2013 was a year of great accomplishment capped off with record earnings.

And I would also like to congratulate all of our employees on these spectacular results.

Our full-year 2013 GAAP net income was a record $754 million, or $1.05 per diluted share.

And ex- special items, our 2013 net income was a record $805 million, or $1.12 per diluted share, which is a substantial increase year over year.

Our pretax return on invested capital, excluding special items for 2013, was 13.1%, which covered our weighted average cost of capital and is just superb progress against the -- a little over 7% ROIC that we produced in 2012.

We ended the year strong with record fourth-quarter performance.

Our fourth quarter 2013 net income excluding special items was $236 million, or $0.33 per diluted share, which exceeded First Call consensus of $0.29.

Our operating income, excluding special items, was also a fourth-quarter record at $418 million, which produced an operating margin of 9.4%, just an outstanding performance.

Our fourth quarter operating revenues increased 6% year-over-year to $4.4 billion on a 2% increase in capacity.

Our operating and unit revenues were both record fourth-quarter performances.

And our passenger revenues -- our unit revenues grew 4.2%, which was better than we expected, and that was led by an exceptional December PRASM performance up in the 15% to 16% range.

While November was negatively impacted by about 5 to 6 points from the Thanksgiving shift, December received the benefit, finishing the year strong.

We recovered nicely from the impact of the government shutdown in early October.

And we ended the quarter with a combined November/December PRASM increase year-over-year in the 5% range, and we are seeing similar year-over-year growth thus far in January.

Based on January's strong revenue trends and current bookings for the remainder of the quarter, we expect year-over-year PRASM growth again in first quarter.

As you think about PRASM trends for the remainder of the quarter, just keep in mind, please, that the timing of Easter, which falls later this year.

And also note that our year-over-year capacity comparisons become a little more difficult as the quarter progresses, with March ASMs up slightly.

We are, as Gary mentioned, our developmental markets, we are pleased with the development of our new markets.

And, while they did create about a 0.5-point drag year-over-year on our fourth quarter PRASM results, which is what we expected, they performed much better in fourth quarter than in previous quarters.

So they are developing very nicely.

And approximately 16% of our ASM capacity was in some form of development.

Turning to our strategic and other initiatives, which contributed significantly to our fourth quarter and full-year results, we realized approximately $400 million in net synergies for full-year 2013, which is right on target with our goals.

[Business] Select revenues for the quarter were $27 million, also a record performance, bringing our 2013 Business Select revenues to approximately $100 million.

For the full year 2013, we recognized $100 million in incremental passenger revenues from our Rapid Rewards program, which was in excess of our expectations.

Our Wright Amendment revenues were also terrific, contributing $75 million in fourth quarter and approximately $300 million for full-year 2013.

Our no-show policy, which we implemented in September, contributed $23 million in incremental revenue in the fourth quarter.

And, finally, our fleet modernization efforts contributed $300 million, as we expected, in 2013.

Turning to our fourth quarter freight and other revenues, we saw a decline, as we expected, largely due to the decrease in ancillary revenue from a reduction in AirTran capacity.

And as our AirTran customers continue to book through southwest.com, we currently expect first quarter freight and other revenues to decline from first quarter of last year.

Our EarlyBird revenues in fourth quarter were $46 million and $195 million for the year.

Taking a quick look at fuel, our fourth quarter 2013 economic fuel price per gallon was $3.05 per gallon.

The 8% decline from last year was driven by lower fuel prices and a $0.03 hedging gain for the quarter.

Our fourth quarter fuel burn improved about 2.5%, 2.6%, reducing our fourth quarter fuel costs by approximately $25 million.

Our hedging premiums, which were included below the line, and other expenses were $22 million versus $3 million in the prior year.

Based on market prices as of January 17 and our current hedge position, our first quarter 2014 economic fuel price is forecasted to be in the $3.05 to $3.10 per gallon range.

Our net premium cost for first quarter is currently expected to be close to $20 million.

I am very pleased -- just moving now to nonfuel costs, I am very pleased with the improvement in our fourth quarter nonfuel cost performance.

Overall, operating expenses declined year-over-year and, excluding fuel special items and profit sharing, our unit cost declined 0.4%, which was slightly better than we were expecting.

We have benefited, of course, from stable fuel prices, our fleet modernization and rigorous cost control efforts across the Company, including the cuts we made in overhead spending for the year.

Based on current trends, we expect first quarter unit costs excluding fuel, special items, and profit-sharing to increase year-over-year in the 4% range.

And I will just note that this year-over-year increase includes over a point -- probably a 1 to 2 point cost impact from the January winter storm.

For full-year 2014, we are expecting our unit cost excluding fuel, special items, and profit-sharing to increase in the 2% to 3% range.

As we complete the AirTran integration, as Gary mentioned, we will have further opportunities to improve operational efficiencies and G&A costs, which will continue to be a focus for us.

On the nonoperating cost side, our net interest expense was down slightly year-over-year and we expect our first quarter 2014 net interest expense to be comparable to fourth quarter.

Our 2013 effective tax rate was 37.6% and we are currently projecting our 2014 to be in that 38% range.

We ended 2013 with $3.2 billion in cash and short-term investments.

And our 2013 cash flow from operations was $2.5 billion.

And our CapEx was $1.4 billion, as we guided, and that resulted in very strong free cash flow for the year of $1 billion.

During 2013, we returned $611 million to our shareholders through repurchasing $540 million of stock and distributing $71 million in dividends.

Since August 2011, we have returned over $1.2 billion to shareholders through share repurchases and dividends.

We have $335 million remaining under our $1.5 billion share repurchase authorization, which we intend to complete in 2014.

We made $313 million of debt and capital lease payments in 2013 and our leverage, including off-balance-sheet aircraft leases, was 38% at year-end.

Based on the current 2014 outlook and manageable cap spending, we expect another year of healthy free cash flow.

Our 2014 CapEx is currently estimated to be in the $1.5 billion to $1.6 billion range.

And the other item I wanted to mention, regarding our cash flows, is scheduled debt maturities and capital lease obligations, which are expected to be in the $550 million range in 2014, with a $350 million bullet due in October.

Overall, I remain very pleased with our strong financial position and a balanced capital structure that supports an investment grade rating, and our focus on enhancing shareholder value.

I will close with a quick recap of our fleet and capacity plans.

We took delivery of 18 -800s and two pre-owned -700s during 2013.

We retired 12 Classic aircraft and transitioned 13 -717s to Delta.

All in, we ended the year with 680 aircraft in our active fleet, which excludes additional -717s removed from active service in preparation for transition to Delta.

For 2014, we are contracted to take delivery of 33 -800s from Boeing and 12 pre-owned 700s.

And we are managing a significant amount of fleet activity in 2014 with 717 transitions, Classic retirements, and AirTran -700 conversions to Southwest.

However, we intend to keep our capacity for the year relatively flat on a year-over-year basis.

To conclude, I am very pleased with our stellar 2013 financial performance and the enormous progress we have made on our strategic initiatives.

I am very thankful to our employees who worked extremely hard to deliver our 41st consecutive year of profitability in a year full of great accomplishments.

2014 will be another huge year for Southwest with the upcoming launch of international service and the repeal of the Wright Amendment.

And looking into first quarter, January unit revenue trends and first quarter bookings thus far are strong.

And market fuel prices remain below year ago levels.

We improved our cost performance in 2013 and we will continue our diligent efforts to control inflation in the year ahead.

Our financial position remains very strong and we are generating healthy free cash flows, allowing us to deliver on our commitment to return value to our shareholders.

Our 15% pretax ROIC goal hasn't changed.

We came close in 2013 and, based on our current outlook, we are well-positioned to hit it here in 2014.

And, with that overview, Tom, we are ready to take questions.

Thank you, ma'am.

And this will begin our question and answer session for analysts.

(Operator Instructions) Hunter Keay, Wolfe Research.

Gary, why do you think PRASM has been so choppy, and not just for you, but for the industry?

The swing we saw from November to December was, I think, one of the biggest sequential changes in the year-over-year growth rates in more than 10 years.

And it's happened a few times over the last couple years at an industry level.

So I would love to get your perspective, given your experience in the industry and your size.

What are we seeing here?

Are you guys and others still experimenting with peak/trough scheduling?

Is still a lot more room to go on that?

Is it the consumer that is kind of getting squeezed out on trough periods and are concentrating their vacations around holidays?

What do you think is going on here?

Hunter, I think the primary thing going on in the fourth quarter this year are just macro issues.

So, coming into the fourth quarter, our demand was strong.

It was consistent, unlike the first half of the year where we saw some chop.

That is where I thought you were going to go, was back to maybe second quarter.

I think the issue in the fourth quarter was primarily the government, in that where we were constantly see seeing July, August -- and, Bob, I want to say even getting into September -- we were constantly beating our forecast.

And the forecasts were continuing to improve.

So it felt very consistent, until we got into that uncertain period with the government shutdown, and then that strength sort of evaporated.

It wasn't weak.

It just wasn't continuing to strengthen like we have seen really since the end of the second quarter.

That seemed to work its way out by November.

And then you had -- I would have to go back and check the calendar.

My recollection is this is the first time in a while where a Sunday of Thanksgiving was December 1. So you just had that odd calendar thing.

So that is why I think Tammy has been consistently trying to put the 60-day period together.

It does have a little government hangover there that is not all contained in October.

But December looked pretty clean, free of all that noise from the government shutdown, benefited early on from the return traffic of Thanksgiving.

It sort of shortened the window in December of the dead time in between the two holidays.

So it is about -- well, I think it is literally as short as it could be.

So -- now, last year we saw a very strong Christmas.

We saw a strong early January.

I think that that repeated itself here again this year.

So, going back to the second quarter -- or, rather, the third quarter, and then just blowing out those two items -- the government and the timing -- I think it looked pretty consistent to us.

Was it better than we expected?

Yes.

Can I put my finger on exactly what that was?

No.

We did have very strong consumer travel during that time period.

I think that is a fact, as opposed to seeing something that surprised us on the strong side with business travel.

So, business travel looked okay.

Consumer travel looked real good.

Okay.

Yes.

Thanks for that.

And some of your competitors this year raised their change fees.

And some of the domestic change fees we are seeing are really high -- $200.

(multiple speakers)

Pardon me?

We love that.

I know you do.

So I guess that leads to my question.

Are you seeing any measurable share gains from that?

And, I guess more broadly, more specifically, I should say, what percentage of your passengers take advantage by changing their tickets now?

And how has that trended over the last couple of years?

And, thanks very much.

Yes.

Thank you.

Well, yes, in the middle of the firefight, it is kind of hard to tell exactly what we might be gaining or losing in any given point in time, to our competitors.

We are working really hard, because we are so different, to make sure that our message is clear with the value that we believe we offer our customers.

I said this morning on an interview that, yes, we love it when our competitors raise their cost to their customers.

It just creates a better low-cost advantage for Southwest.

So we know that customers hate the fees.

We know that the fees are getting higher and higher.

I think that's all very good for us.

And, is that part of our success right now?

It might be.

It probably will take us a while to survey that, ask customers, and look back and evaluate exactly what our shares look like.

But, if anything, it feels like we are gaining ground, certainly not losing ground.

And, Bob, on the percentage of customers that actually make changes, do you have that top of mind?

Yes.

It is in the 10% kind of range, and so maybe a little bit more than that.

And it has been historically very consistent.

The other thing that we see, we, like everybody, we conduct brand monitoring all the time.

And we see that customers absolutely hate the change in bag fees and that's a consistent theme.

And so it is a consistent win for us and a loser for everybody else.

Savi Syth, Raymond James.

Just on the -- is the international market startup this year -- how much of your ASMs will be dedicated to international?

I think it is about 1%, I think.

So it is very small.

And the other point to reiterate right now is that, for purposes of 2014 and the way you are thinking about us, we are pretty much going to take the AirTran international route system and simply move it gradually into Southwest.

That is not literally true, but at the same time, we are not anticipating any bold moves here with new international markets and a lot of additional capacity in 2014.

I think this sets the stage once we get through 2014 and the final integration, get the Wright Amendment repealed, it sets the stage for us to think about doing more with international in 2015, and especially when the Houston Hobby international terminal comes online in late 2015.

But, what you see right now is pretty much what you should expect for 2014 in terms of that international footprint.

Understood.

And just along those lines, with the [ex-field] CASM increase that you're looking at, how much of that is being driven by just the transitioning of the AirTran aircraft over to the Southwest system, and maybe some of the pilot rate increases that go with it?

This is Tammy.

The -- I think we have given you the -- when it is all said and done, the impact of moving the AirTran employees to the Southwest wage scale is probably about $150 million.

And, of course, that is included in the -- those synergy numbers that we have provided for you.

So if you are looking at our increase, our 2% to 3% increase year-over-year, that is going to drive maybe a point, maybe a point to 2 of that increase.

And we have got -- there are some other things driving that as well.

If you are looking at our -- just airport costs, we are continuing to see some pressures in our airport costs.

So that -- you should factor that in.

And then, also, if you are looking specifically at our first quarter guidance, some of that is just timing of our advertising spend year-over-year.

So, as Gary mentioned, I think the good news here is that I think we do have some pretty meaningful opportunities to improve our cost performance as we get on the other side of the integration, just as we optimize and we are operating one network.

But, you know, it feels to me like, if it's not most of it or all of it, it is certainly going to be a lot of it.

And some of it is hard to tease out.

We are going to have, from this point forward, until we finish the integration, 10 to 15 more aircraft out of service than we normally would, as one vivid example.

So these are airplanes that have been pulled out of service to go through a physical conversion, either 737s into Southwest or 717s into Delta.

And that is pretty inefficient.

I mentioned in my opening remarks, just the ongoing inefficiency of managing two airlines.

So there is a hangover for that.

But the training cost associated with our flight crews is quite substantial.

So not only do you have airplanes that have a higher number out of service, but you also have a lot of employees that are, in effect, not in revenue service.

So our cost trends last year were quite good.

I agree with Tammy's highlight on the airport cost.

We are seeing some inflation there that we are trying to combat.

But I think most of the cost pressures that we are seeing here in 2014 are attributable to the integration.

Michael Linenberg, Deutsche Bank.

Just a couple here.

Gary, if you could go over the timing on the Houston international terminal opening up, I heard you say late 2015.

What is the date there and then the timing on the res systems?

I think, for international, you were working on adopting the Amadeus platform, but I think, for domestic, it is a separate platform or maybe Amadeus was doing the work for you.

Can you just update us on the timing of those initiatives?

Yes, sir.

Mike, the date for the Houston terminal has not changed.

So I am going by my memory.

We may have to fine tune this, but I believe it is fourth quarter of 2015.

Okay.

And I don't know if I can be more specific off the top of my head than that.

But, we did break ground back in September.

The project is still relatively early on.

It is on track so far and I feel pretty confident that we will be able to hit those timelines, so hopefully, early fourth quarter of 2015.

On the reservation system, Amadeus, you have got that right.

That is our international solution.

We are days away from revealing on that.

So that is a multi-year, multimillion dollar technology project.

It is exactly on schedule.

I could not be more proud of the work that our folks have done.

So that is about to be unveiled.

And then the follow-on, which, Mike, we don't have a schedule established.

We have a commitment to follow on the international with the complete replacement of the domestic reservations system.

So you could describe that as we are in the planning stages right now, but there is a lot of work underway.

We have not selected a vendor yet and, until we do, we won't have a specific project plan.

But it is going to take us well beyond 2014 and maybe all the way through 2015.

So it is just a little premature to give you a timetable on that.

With respect to us making a decision on that, that should be in the first half of this year, easily.

So our focus, as you can tell, is to get international up and running first.

That will pave the way to then move directly into the complete replacement of that system.

Okay.

Great.

And then just a second on the Wright.

The Wright revenue, $300 million, it would seem reasonable to assume that a lot of that is a less attractive itinerary for a business traveler, given that a lot of those city pairs that are in that $300 million bucket are on a one-stop -- maybe on a two-stop basis.

And so, as you get to that point where you can roll nonstop service in some of those markets, what is the potential upside here?

And -- or maybe how you think about it.

And, Gary, maybe your experience when you launched service to Kansas City and St.

Louis, although I realize that prior to that you didn't have the right to offer those markets on a one-stop basis.

So maybe the uptick was much more significant.

But, this -- how should we think about it?

How are you thinking about it?

What is the potential ramp up here?

It seems like a huge opportunity.

Well, I guess all of us have to define huge.

Yes, we are very excited about it and I agree with you, Mike, everything you said.

I think it is a huge opportunity.

I am not ready really to give you a number today on exactly what that would be, but I can guarantee we are going to add new itineraries and new flights once the repeal is in effect on October 13.

And I agree with you.

I think that, just by virtue of the fact that we are doing so well on -- in fairness to your question, it is essentially customers flying us on a one-stop basis.

I doubt that there is very many two-stop customers out there.

But, yes, there is a bunch of people flying us already, and that is traditional Southwest expansion techniques.

We look for one-stop customers where we see significant demand in an O&D market.

That is where we go put point-to-point nonstop service in.

So we have got the roadmap.

We know where the customers are.

I think it is a terrific opportunity.

Jamie Baker, JPMorgan.

First, just a housekeeping item for Tammy.

Does the 2% to 3% ex- your CASM guidance for the full year include any labor accruals?

Or should we assume that if any labor announcements do occur later this year that they would potentially further pressure this metric?

Also, capacity by quarter, if I missed that from earlier in the call.

Yes.

The 2% to 3% is based on our current -- our contracts, our current contracts with labor.

So no, it does not include any accruals.

Okay.

On our capacity, yes, I just mentioned during my remarks that we expect our capacity to -- maintain capacity relatively flat.

And that guidance -- that is our intention pretty much throughout the year for -- we have got our schedule published out through June.

And our first quarter will be, again, roughly flat, maybe (technical difficulty) a little bit.

Okay.

And our second-quarter ASMs also down slightly.

Okay.

Fair enough.

And then for Gary, as we think about the airline business models in the US, the industry seems to be bifurcating into traditional legacies on one side and ultra low-cost carriers on the other side.

And then you have the handful of airlines that are trying to sort of bridge the middle.

I would certainly put JetBlue in that category, and I think, increasingly, Southwest.

And, at the same time, obviously both operating extremes are far more profitable today than they have been in the past.

So it just isn't clear to me if this means you will be competitively left alone or competitively seized upon from both sides, potentially.

And you and I haven't necessarily agreed in the past as to what sort of industry health presents the most opportunity for Southwest.

And you cited the opportunity for growth earlier in your comments, but I can't help but wonder whether this potential identity crisis, trying to straddle the middle -- does this work against you as your model isn't quite as easy to define as it was in the 1990s?

Any thoughts on this?

Sure.

I don't see that there is an identity crisis at all.

I would certainly concede that that world is very different today than it was at the beginning of the last decade.

So the difference between just the cost structure that we have to the legacy carriers has narrowed.

I think it remains to be seen whether that will widen again.

What we can do is control what we do at Southwest Airlines, of course, and we are devoted to being the low cost producer in the industry.

We are attacking very close to the ultra low-cost carriers as they are called.

So we are not significantly higher than they are, and certainly have a much wider cost advantage relative to the legacy carriers and Southwest than the ultra low-cost carriers have as compared to Southwest.

So we are going to attack to low-cost and we will continue to make enhancements to the customer experience that we think makes sense through that filter.

We are still very different, as you know.

We are very different than the ultra low cost and we are very different than the legacy carriers.

And again, customers vote and they vote for Southwest.

So I think it will continue to be a very successful model, particularly if we control our cost and live up to that low-cost producer mantle.

The fact that we have the best compensation in the industry and are still among the lowest cost producers, is pretty remarkable.

And we haven't hit our stride yet on our cost.

So the fleet modernization is paying huge dividends on the cost.

And we have this -- as everybody understands, we have got a lot of inefficiencies baked in right now because of this integration that will be behind us once we clear 2014.

So that is the way we see ourselves.

And that doesn't mean that we can't adjust in the future, but there are no plans to deviate from who we are, which is America's leading low-fare airline.

Duane Pfennigwerth, Evercore Partners.

Just wanted to ask you about slots.

Does winning slots at LaGuardia make you less likely to win additional slots at DCA?

And why is DCA a good thing for Southwest, given your presence at BWI?

And then, lastly, if you do win, would it impact your growth guidance for this year?

Thanks.

Okay.

So you just give us a course correction if we don't hit all of your points here, Duane.

But I think the first answer is no.

There is no issue with the fact that we got what amounted to six trips a day at LaGuardia, so, very hopeful that we will get some additional slots here at Reagan.

The Reagan opportunity is pretty straightforward.

It is among the most constrained airports in terms of supply versus demand.

We have a lot of customers that love Southwest Airlines.

We serve more people in the United States than anybody else, by far.

And a lot of them want to go to Reagan.

So we are finding that it is a very nice complement to the service that we provide to BWI.

Reagan, in terms of its daily operations for Southwest, will never rival BWI.

There is enough distance between the two airports where we can make it work, and there is a fair amount of connecting inflow traffic also that goes through BWI that I would not expect at Reagan.

So it's -- we do the same thing in the Boston area.

We do the same thing in the Bay Area.

We do the same thing in Southern California.

So in some places, that works well.

And geography, distance, and traffic, and other things have a lot to do with that.

I don't think that would make sense for Dallas, Houston, or Chicago, but it certainly has proved to make good sense for us in the Baltimore/Washington area.

And I forgot your last question; sorry.

Yes.

Just if you want a big block there, would impact your growth guidance this year?

And then, when do you expect an answer?

Thanks.

I think, and Mike is here with me, our fleet plans are pretty set here for 2014.

I don't see us bringing in -- other than the sort of sliding on the calendar near year-end, I don't see any change from what Jamie reported, which is 33 firm from Boeing.

I don't see that changing.

And then 12 on the used market, I don't see that changing.

Now, we have not decided on our fleet plans yet for 2015.

So I think that is still -- I think all of you understand that that is something that we will make up our minds with as we go through 2014.

The only variable here is whether we retire any airplanes faster.

And, of course, we have got a plan for the year and if the year goes well, we wouldn't want to do that.

If we get the slots, we will have to take aircraft capacity from somewhere, depending upon what we get and when we have to fly it.

So it is a small enough amount of capacity that I just don't get is going to be difficult for us to do that.

But, no, we don't have any plans to change our fleet for 2014.

Thomas Kim, Goldman Sachs.

Gary, I had a question on pricing.

Given where load factors are and expected relatively flat capacity, should we see pricing [minimum] improve with the economy?

Or to what extent do you feel like leisure passengers are beginning to feel a little bit of fare hike fatigue?

Understanding that I can't really comment on pricing strategy going forward, we want to be the low-fare airline.

That is dependent on us continuing to be among the low-cost producers, if not the low cost producer.

So those are always factors.

It also, obviously, is impacted by cost and with the fuel being foremost in our minds.

So I think all of those are factoring in.

It is very difficult to price one's way out of a recession, as we all know.

It does feel like the economy is improving, so hopefully the revenue environment is improving.

If demand improves, then it puts all of us in a position where we can manage our revenues and cost better.

But, beyond that, I can't really tell you what our specific plans are.

Bob, I think it's true, if you look back in the mirror for the last 12 months our fare increases have been very modest, very infrequent, and very judicious.

So I think that is also helpful in thinking about what happens next.

But, otherwise, I can't tell you what our plans are.

Yes, I would just add that there are always two components.

There's prices and then inventory management throughout the price structure.

And I think we worked hard, as we've talked about, to get better and better every year at the way we revenue manage and inventory manage.

And that continues in 2014 as we bring some of the new techniques online.

But, yes, we have been extremely modest in our price increases, looking back into 2013, and that is the plan continuing as well.

And so just, again, to recap, we are not sitting here hoping that we can raise fares.

We are sitting here hoping that we can maintain our position as the low-fare leader in the country and bring more competition in a shrinking industry.

Okay.

Great.

That's very helpful.

And Tammy, if I could ask a separate question, just given where your leverage ratios are and strong free cash flow generation expected again this year, do you see scope to be a bit more aggressive on buybacks and dividends?

We have -- not going to comment specifically on that question other than to say we do have what -- we intend to complete our current repurchase program.

So we will get that completed in 2014 and, beyond that, just not ready to comment on that today.

Okay.

Can I just ask a follow-on question?

Is there an upper end of the leverage ratio that you are comfortable with?

Historically, we have -- we feel pretty comfortable around that 40% mark.

And I think that is a good point for us to manage to.

It might go up and down, but I think 40% is a pretty good target for us.

And I would just add on -- and Tammy mentioned this in her remarks, but maintaining our investment grade credit rating is very important to us.

And while the rating agencies are not so focused on leverage, it is more coverage ratios, obviously they all work together.

So I think we will definitely want to manage our balance sheet in a conservative way, so that we cannot just keep the current rating, but improve it and certainly maintain that investment grade rating.

David Fintzen, Barclays.

Gary, and maybe a bit for Bob, obviously there has been quite a bit of reallocation of flying within the network, particularly with some of the fleet initiatives.

Particularly, as you start to get towards that 15% pretax Wright target, how should we think about where the network is at in terms of where aircraft are deployed?

Is there a fair amount of more change to come or do you feel like you are kind of getting airplanes in the right places now?

Well, just to recap what we have said so far, at least in recent times, the percentage of our route system that is, quote, under development, is very high.

So I think we shared that it is 16% of our available seat miles.

That is going to be sustained throughout this year.

And then, when we have the final retirement of AirTran and integration into Southwest, it will actually step up.

So you are going to see a lot of, quote, optimization taking place, certainly this year.

And then next year, we will have a lot of opportunities that unfold and Bob will have a lot of choices to make about where we might want to add new routes.

But I think we are still in pretty heavy optimization mode, wouldn't you say, Bob?

Yes.

I think I would say to 2014, obviously is a big year.

We have the completion of the integration, which means we are going to continue to move Atlanta from a still somewhat hub structure, much less with the November schedule change to a more traditional Southwest structure.

I don't think it will have a big impact on capacity in Atlanta, but it will have a continuing impact on the flight schedule there.

Of course, you have got the additions at Love Field coming in 2015; obviously Houston.

So I think those are really the drivers of the change in the network.

In a typical year, without integration and big capacity choices like Dallas, the amount of the network under significant change would be really sub-5%.

So I think that's pretty typical and we will see that after we see some of these.

But we are constantly optimizing at a flight level, moving flight timings and market timings, and then moving flights from markets that just don't make sense from an ROIC perspective to markets that do.

So that will continue, as Gary said.

You know, if I could just add one more quick point, one of the things that we -- and Bob and I totally agree on this, that we want to do prospectively is not churn the entire network as much.

So, in other words, if there is 25% of our route system that needs work, what we have been doing is re-racking 100% of it.

And, therefore, in a stable market -- I mean, you picked it with, say, Dallas/Houston, Dallas/Austin, whatever, the flight times move around and customers don't like that and neither do our employees.

So we would like, to the extent that we can, to stabilize the route network going forward, understanding that there is still a lot of optimization to be done on a minority of the route system.

That is easier said than done, as you well know, because it is a network and everything is all connected together.

But we do have a desire to begin to stabilize the network.

The only thing that argues against that is we are all forced -- this is a question earlier.

We are forced to deal with seasonality and peaks and valleys a lot more today than when fuel prices were $20 a barrel.

So it's just with the understanding that some of our cities may see a very significant change in their flight activity, depending on where they are in the off-season.

So that is relatively new for Southwest.

We weren't doing that kind of thing a decade ago, but it is a fact of life today and a necessity.

So, good question, and it is something that I think we are continuing to try to perfect.

No.

That is very helpful.

Maybe just a quick one just in terms of the January RASM.

Obviously, Tammy you mentioned the storm impact on the CASM side.

Was it prolonged enough of an impact that you lost revenue?

Or is that -- or is there a RASM bump in there from the weather?

Yes.

On that, there was a RASM bump due to the weather.

But if you are just looking at revenues, we were able to recapture most of that revenue, so it wasn't a material impact.

John Godyn, Morgan Stanley.

Gary, as we continue to see ROIC improve, and as we, at least by my model, project out you hitting your target at some point in the future, I was hoping that you could offer a framework for thinking about capacity growth as we think about 2015 and 2016.

I am not trying to lock you into any guidance, but just trying to understand -- I mean, should we be thinking sub-GDP capacity growth, mid-single digits?

In broad strokes, what can you tell us?

I think it is premature to provide that kind of guidance yet.

First of all, I think we need to decide what we want to do, and then I think that that will help fine tune that logic.

I think it makes sense for us to walk before we run and we want to sustain returns on invested capital that are sufficient to support that growth.

So I think, before we go off and take a whole lot of risk here, we want to make sure that any new flights that we add, we want to make sure that it can still -- allows us to achieve our return criteria.

It may almost be better to think about it in terms of units or numbers of airplanes.

We would love to grow the fleet next year.

But I think relative to the base in our fleet, right now we have 680 airplanes that are in service, if you will, or available for schedule.

And we are not looking at a 10% increase in our fleet growth or anything like that.

So, tying it to GDP is a little bit too mechanical.

We live within the GDP and obviously have macro effects, but I don't see that we are going to be growing double the GDP rate or triple the GDP rate or anything like that.

So, again, I think all this is a little premature.

One thing to point out, with our capacity in 2015, is that we are going to half have capacity growth next year, simply because we will have a much higher percentage of aircraft out of nonproductive status.

So even without adding any airplanes next year, we will be able to add some capacity.

And we will have to factor that into whatever choices that we want to make for next year.

Could you help us quantified what that percentage could be, even without fleet growth?

Probably not yet.

I don't think we are ready to do that.

It would be relatively modest, but I don't think we are able ready to commit even to that because we have some flexibility as to how many airplanes we want to retire.

So I think all of those would be premature at this stage.

Said a different way, we just don't -- we don't have our plans set for 2015.

And, until we do that, I don't think I can give you any better guidance.

Okay.

Fair enough.

And, if I could ask a cost-related question, Tammy, just in terms of the labor negotiations out there, I mean, given that you are currently -- though, of course, trends have improved, currently still below your return target, it seems difficult to be able to sign a contract that doesn't put your return target at risk, simply because you are not there yet.

Does that kind of suggest that, perhaps, it might still take some time before we see a contract?

And, in that vein, would we need to hit our return target before we see a lot of these contracts kind of actually get negotiated?

Thank you.

Our goal on our cost, as we have discussed, we have got a 2% to 3% increase next year.

We are obviously not happy with that.

With respect to our labor contracts, really what we are trying to do across the board is just squeeze out waste and be just as efficient as we possibly can.

So with respect to our labor contracts, I think a goal would be more cost neutral and (technical difficulty) so that, ultimately, as we get on the other side of the AirTran integration, our overall goal is to stabilize our cost performance.

With respect to labor, Mike, is there anything you want to chime in on the labor side?

We are actively working with all of our labor groups that are in section 6. And we want to contact with them.

So we are not trying to slow play that at all.

We have a lot of opportunities.

Our labor contracts are built on operating models that existed at Southwest Airlines 10 and 15 years ago.

So there are a lot of avenues in that labor contract where I think that we can find flexibility and ways that we can improve our operating performance and improve our cost, and come to a contract with our labor groups that doesn't put cost pressure on the Company.

Yes.

And I would just add on, in other words, the implication of your question is that whatever we do is going to increase the cost to the Company.

And that is not the way we are thinking about it at all.

And it is not -- and you might quibble with this a little bit, but it is not necessarily tied to the 15% return requirement.

The issue with our cost structure is much more strategic, because we want to continue to be a low-cost producer in the industry and have job security and prosperity for our employees over a long period of time.

And it is much more important for us to work hard together to retain that competitive advantage as opposed to making sure that that fits into a near-term 15% return requirement.

We want to be the low cost producer.

We want to be America's low-fare airline and we want to take our low fares to North America.

And the only way we can do that is to make sure that we are, in fact, low-cost.

What Mike was pointing out is there are -- we can do very good things for our employees and, at the same time, eliminate waste and eliminate inefficiencies that currently exist.

And it is just a wonderful place to be.

We have wonderful opportunities to win on both counts and keep Southwest Airlines job-secure and a low-cost producer.

That is our (multiple speakers).

Helane Becker, Cowen and Company.

Just a quick question with respect to the 717s.

I noticed that Delta announced that some of them are going to be flying right back at Love Field, just in a different livery.

And I am just, you know, what is the thought there?

You are giving -- you know their competitive capacity.

How does that impact your own operations there?

I think it is irrelevant.

There are plenty of airplanes available in the world.

And, when we struck the deal with Delta, they were either going to get airplanes for us or get airplanes from Brand X. So they will make their own decisions about how many airplanes they want, and where they want to fly them, so it really has nothing to do with us.

Likewise, we will have the same number of airplanes with or without the 717 deal that we did.

So the other thing I would point out is that the city of Dallas has not awarded the gates, much less the flying that you are speaking about.

So the DOJ has required that American divest two gates, and it remains to be seen who will get those two gates.

Okay.

I know you guys had applied to get them as well.

Didn't you?

I don't think I am speaking at a school here, but there is no process underway yet for the divestiture of those two gates.

So I assume when that happens, that will be public and there will be an auction or a bidding process.

Again, I don't know exactly how that is going to take place.

I do know that it has not taken place.

What is currently being focused on, of course, is the Reagan gates and slots that have been bid upon.

And so that is the only thing that is in play right now.

Okay.

Fair enough.

And then, just on the cost guidance for the full year, does that include the impact of the runway closings at San Francisco?

Yes, it does.

And we have time for one more question.

Dan McKenzie, Buckingham Research.

I guess either Tammy or Gary, I wonder if you could help peel back the onion on CapEx this year.

Specifically how does non-aircraft CapEx in 2014 compared to 2013?

And, with respect to the aircraft CapEx, what percent of the planes would you consider financing?

Or are you going to pay cash?

And then, thirdly, tying that to liquidity, now that we are in an economic recovery that seems well underway, does the level of liquidity that is needed to run the airline change?

Yes.

Sure.

I can give you a little more color on the CapEx.

Our aircraft CapEx for 2014 is $1.1 billion, out of the $1.5 billion to $1.6 billion.

And, of course, the rest of that represents investments.

We have got elevated levels of technology spend related to our projects, the implementation of our international reservation system.

But the aircraft portion is $1.1 billion.

So in terms of the liquidity, we feel we obviously have ample liquidity.

I think we could manage our cash position down, certainly from the levels that we are at today.

And so somewhere in that $2.5 billion to $3 billion range, I think, in terms of cash and short-term investments, I think we feel really comfortable at those levels.

We haven't laid out our plans for how much of those would be financed or not.

Obviously, with the very healthy cash flows that we are generating, we have some options there.

So we don't necessarily need to do any financing to pay for those.

That is obviously a choice that we have ahead of us.

Understood.

And then, if I could peel back the onion a little bit on corporate travel, simply because there is a lot of noise in the fourth quarter, given the government shut down and a lot of noise in January, at least so far, given the weather-related cancellations, how do we think about that trend in the fourth quarter heading into the first quarter, based on what you are seeing so far?

Actually, our corporate sales for the fourth quarter increased very nicely.

We had a double-digit increase in the fourth quarter.

Our business traffic, just overall, I would characterize that as stable and I don't see any reason for that to change here in the first quarter.

With the improved economy, hopefully we will see some pick up there.

But, we have been encouraged by the trends that we have seen so far.

At this time, I'd like to turn the call back over to Ms. Brand for any additional or closing remarks.

Thank you, Tom.

And thank you all, again, for joining us today.

Ladies and gentlemen, we will now begin with our media portion of today's call.

I would like to first introduce Ms. Linda Rutherford, Vice President, Communications and Strategic Outreach.

Hello, everyone.

Tom, if you could give the folks some instructions to queue up and we will be able to take your questions.

(Operator Instructions) Terry Maxim, Dallas Morning News.

You have got 120 to 130 flights today at Love Field, about, I think.

How many flights should we expect once the Wright Amendment goes away in October?

Well, we are chuckling more.

I think we will probably ask you to stay tuned on that one.

More to come.

Well, can you give us some idea of the timetable for when you are going to announce that?

Because you are right in that window where you typically would extend your schedule.

And I presume, perhaps, the international announcements are tied up in that as well?

So I guess I'm going to have to just repeat that, yes, we are getting closer and not ready to reveal a date or what our plans are just quite yet.

All right.

And, if you might, wouldn't mind restating your plans for international, I took it from your comments to the analysts that, as Southwest takes over, we shouldn't expect more international service from the Southwest umbrella in 2014.

We would likely see any expansion starting in 2015.

Correct.

And that is as we see it today, understanding that the world is somewhat dynamic.

Of course, the new things that have emerged for 2014 are the additional slots at LaGuardia and hopefully at Washington Reagan.

So we will have to manage those.

The current plan is to essentially take the AirTran international footprint and gradually move it over to Southwest.

And, on that announcement, yes, sir, we are days away from revealing what our international plans are.

So we would like to expand our international flying in 2015.

It is premature yet to make that commitment.

Obviously, we are building five gates in Houston with the expressed intent of adding flights there.

So if we are going to -- we need to follow through and add flights at least in late 2015.

What we might do before that, again, we just haven't made a decision yet.

But, we will have ample opportunities to add international flying as we go forward.

So I am very excited about that.

David Koenig, The Associated Press.

Gary, you and Bob addressed fares in the analyst part of the call, but I wonder if you could explain a little bit more about what is behind the increase in the average fare.

It looks like some of that could be due to longer average stage lengths, but not all of it.

With demand pretty strong, are you just selling fewer seats and Want to Get Away prices?

And, also, what percentage of seats are you selling at full fare?

Is that going up?

The main thing going on there, David, is just what you said.

It is that we are flying longer distances.

The mix changes constantly in terms of how many people are buying seats on sale versus not.

So that is -- it is a fact that there were fewer sale seats sold in 2014, at least in the fourth quarter, Bob.

So that mix strengthened.

My recollection, Tammy, is that the full fare traffic was roughly flat year-over-year.

So it didn't change.

I don't know if you all released that statistic or not.

But you are right, David.

That is some of it, but the primary driver is that the distances are longer and that is what is driving the largest percentage of the fares up.

David, that is exactly right.

The other (technical difficulty) benefits that you have in there is that we are costly working on our revenue management techniques.

So we have some improvements to our forecaster.

We have some fare restructuring, so not on increasing and changing prices, but just restructuring the way we look at inventory.

So we have had a contribution -- a pretty significant contribution from our revenue management techniques in 2013 as well.

The other thing happening, of course, is the literal transition from (technical difficulty) to Southwest.

And Southwest does not charge fees and they do, and their fares are just different.

So that has an impact on the average fare as well.

Okay.

And anything on the percentage of full fare?

Do you have a full fare percentage, Tammy, that you released, that is published?

I sure do.

For fourth quarter 2013, it was hovering right around 20%.

I'm sorry.

What do we compare that to?

Say, what was that in the year ago quarter or even the previous quarter?

(multiple speakers) fourth quarter.

It wasn't significant.

Yes.

It wasn't significantly different.

Jack Nicas, The Wall Street Journal.

So labor cost increased by 6% or nearly $200 million in 2013.

How much of that was AirTran employees coming over to Southwest pay scale?

Can you give us a little more color on that?

Most of it was profit sharing, I think, by the way.

Yes.

That is right.

Probably, if I had to, it is probably about half of our -- as mentioned in the analyst call, that the total impact of bringing the AirTran employees over to Southwest is about $150 million.

And it was probably about half of that, I would say, that came over this year.

Okay.

Great.

If I could have one more quick follow-up question.

As you lose the AirTran brand in 2014, that means losing the bag fees from the full Southwest system.

Is there any estimate on the potential lost revenue from losing AirTran's bag fees in 2014?

We are expecting our unit revenues for 2014 to be better.

That is our plan, at least, to be better than 2013, understanding that we will be rapidly losing bag fees from AirTran.

We have already been losing bag fees from AirTran and we are fine with that.

But it is all factored in to our revenue guidance.

I don't recall off the top of my head what the bag fee revenue was in the fourth quarter.

It was tens of millions of dollars, but perhaps you have that.

Yes.

I do.

For the AirTran -- I have the AirTran bag fees.

Those were about $16 million for the fourth quarter.

And for the --

So you know, it's a $60 million annual revenue stream that will not be in place in 2015.

And we will cover it through other means.

So again, that was anticipated when we acquired AirTran back in 2011.

And we are generating $400 million more earnings as a consequence of buying AirTran, even with these bag fees gradually going away.

So we don't need the bag fees and don't want them.

So we can't unravel what AirTran does until it completely is retired and comes over to Southwest.

And, obviously, they move to Southwest, they participating in Early Bird, upgraded boarding, Business Select, a lot of ancillary revenue production that we have on the Southwest side as well.

And just a stronger overall brand.

So it is just an interesting contrast between two businesses and how different they can be.

Of course, it is hard to find an airline that is more different than Southwest, and we think our differences are good.

Andrea Ahles, The Fort Worth Star-Telegram.

Gary, I was hoping you could talk a little bit more about the labor situation.

I know that you gave some guidance that your costs, your unit costs going up, but you didn't include any anticipation in contract changes.

Can you talk a little bit about the labor picture and if there is a particular group that you might be focusing on in trying to get their amendable contracts taken care of this year?

Well, we are -- again, there is nothing unusual about our situation with our contracts.

We are always negotiating contracts and we are giving equal emphasis and attention to each one of them.

So I don't think we are trying to get one done versus the other at all.

We are trying to be fair and consistent amongst all of our employees, so it is actually helpful to be talking with them simultaneously.

And -- because, you know, circumstances change over time and their needs change; our needs change, so actually having them all together is very helpful in that regard.

But, our folks -- the main thing is our people are terrific.

They do a wonderful job.

They are very hard-working.

They have Southwest Airlines on top.

I am delighted that they are so well rewarded with the great results this year with a near doubling of the profit sharing.

It will be over 6% of their compensation.

Most of them are stockholders and have seen a very nice appreciation in their Southwest stock and a very handsome increase in the dividend.

So there is more that we can do and, Mike Van De Ven said earlier, that we are anxious to get contracts -- get updated contracts with our employees because there are things that we want to do differently.

And there are things that we can do for our people.

In the meantime, as you know, all of our employees have contracts and they continue until they are ultimately amended.

And we are working hard to get that done.

So what are some of the things that you want to do differently?

Mike mentioned it.

It is more flexibility.

Our world has changed since the 1970s.

Then, we had the same schedule every day, every month, year in, year out.

Now we have significant variability from the season, from day a week, our -- one of our days that needs the most attention, for example, is Tuesday.

So there is any variety of things that we could address to give our people a lot better resources, time to when they -- when the means exist with our customers.

So that is the primary thing and I think, again, there is opportunities with those kinds of efficiency gains.

There is opportunities to do good things for our people.

Dawn Gilbertson, The Arizona Republic.

Gary, I have a couple of quick questions.

I'm a little unclear on the announcement on international flights that's days away.

How much of that will play out in a city like Phoenix?

You said we are not going to see any new destinations.

Right now, we have a mix of the AirTrans today that we can get to.

You guys are a combination of both and some we can't.

So how might that change in Phoenix?

And my other question has to do with Hawaii, if you have any updates on Hawaii.

I think it is -- and I don't want to speculate right now, but Phoenix doesn't have any AirTran international service today.

So obviously, once we convert all the international flying into Southwest, then Phoenix would be eligible for Southwest to consider launching nonstop international service.

So that (multiple speakers).

So it's nonstop, which could be a difference.

Yes, ma'am.

So you could have flights to Mexico as an example, ultimately, on Southwest out of Phoenix.

I am not predicting whether that will happen or when it might happen.

I am simply saying that, once we do that, it very well -- well, it could happen.

So -- and that is something that Bob Jordan and his team will look at very carefully.

So what will be announced in the next two days?

I mean, what will that release look like?

I mean, will it say -- I guess I am a little unclear on what exactly you will be announcing that day.

Will it be routes or --?

Yes.

It will be routes.

It will be flights.

It will be seats for sale, prices, the whole bit.

So it is, as a general image, all we've said is that we are simply going to take the current AirTran international route system and move it into Southwest.

You just can't take that literally.

Right.

Yes.

So it will be -- whatever we do will be a little different than what AirTran is currently doing.

And so -- and I don't -- I am not ready to reveal yet how Phoenix might fit into even that, because the Southwest network, Phoenix could very well have international itineraries, even though it is not on a nonstop basis or over the Southwest network.

So that is all, again, to be revealed.

And then, of course, we are just getting started here in 2014.

So it is our hope and desire that we are going to grow it from here.

Okay.

And then, Hawaii?

Well, I have heard of Hawaii.

It sounds really exciting and (multiple speakers) (laughter).

You guys have been talking about it.

Someday Southwest might fly there.

Well, the only thing that we have said is that we are investing in Southwest capabilities so that we will have the option of flying to Hawaii at some point, whereas if you look in the rearview mirror, in prior years Southwest really didn't have the capability.

So you need additional technology.

You need additional equipment.

And those investments have largely been made.

It is somewhat analogous to this whole international discussion, that in 2000, Southwest couldn't fly international.

We also couldn't fly to Hawaii.

Now we will have those capabilities in place.

We have a wealth of growth opportunities to choose from and we will be very circumspect, of course, as to which ones we are most seriously considering at any given point in time.

If we could have created all of the Hawaiian flying capabilities and kept that a secret, we would have.

It is just impossible to do, because it just plays out with so many people and it is so high profile.

But, that is why you have heard about it.

Otherwise, you wouldn't know what we were up to.

And that's the way we like it.

If I can just ask one more quick one on the fee front, last year you did the no-show policy, you upped the EarlyBird fee.

I believe that within was in 2013.

What can travelers expect, if anything, this year in terms of new fees or -- I don't expect you are going to announce you are going to increase any fees, but what is your thinking this year on that front?

There is absolutely no change in our bag fees.

In terms of charging for the first or second bag, there is absolutely no change in our change fees in that we don't charge them.

So I think that is pretty much what customers can expect is bags fly free.

And I am delighted with what Bob and our marketing team got accomplished here recently.

They have also extended the onboard television for free for another year.

So we love the word free at Southwest.

And, ladies and gentlemen, due to time constraints, we have time for one final question.

Richard Velotta, The Las Vegas Sun.

I am kind of piggybacking -- I'm going to piggyback on Dawn's question and just substitute Las Vegas for Phoenix.

I know we have had some discussions with -- me and Mr. Jordan had spoken about the possibility of international from Las Vegas with our international emphasis here.

Any change or any updates that I can report regarding anything new with international with Southwest and Las Vegas?

Well, again, we can just lift -- the answer is the exact same.

But Phoenix is very important to Southwest.

Las Vegas is very important to Southwest.

We will reveal what the itineraries are soon, and then everybody can see how they fit in, in the meantime.

But, in terms of the specifics as to whether or when we will have nonstops out of Vegas, again, I can't speak to that today.

At this time, I would like to turn the call back over to Ms. Rutherford for any additional or closing comments.

Thank you, Tom.

Thanks for being with us on the call today.

If you have any follow-up questions, please do contact the communications department, 214-792-4847, and thanks so much for your time.

This does conclude today's conference.

Thank you.