西南航空 (LUV) 2015 Q2 法說會逐字稿

Welcome to the Southwest Airlines second-quarter 2015 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'd like to turn the conference over to Ms. Marcy Brand, Senior Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Tom.

Hello everyone, and welcome to today's call to discuss our second-quarter 2015 results.

On the call today we have Gary Kelly, Chairman President and CEO; Tammy Romo, Senior Vice President of Finance and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer; Mike Van De Ven, Executive Vice President and Chief Operating Officer; and Ron Ricks, Executive Vice President and Chief Legal and Regulatory Officer.

Please note today's call will include forward-looking statements, and 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 in the investor relations section of Southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

At this time, I'll turn the call over to Gary for opening remarks.

Thank you, Marcy, and thanks, everyone for joining us for our second-quarter 2015 earnings call.

We had an outstanding quarter.

We're looking forward to another strong revenue performance in the third quarter, at least from our current perspective.

I want to start by paying tribute to where it's due, which is to all of our 47,000 employees.

These are terrific results, they worked very hard to deliver them.

They've also worked very hard to build Southwest Airlines, and of course, they work hard every day to serve our customers and each other.

They are superb, and these results attest to that.

It's no secret that this was easily an all-time quarterly record.

The last 12 months, return on invested capital is all but a record.

You have to go all the way back to 1980, which was 29.2% performance.

Fuel prices were down 33% to a little over $2 a gallon, and of course, that was a huge driver in our year-over-year earnings increase, and we assume that fuel prices will continue to be moderate for at least the next several quarters, and hopefully long after that.

Our revenue production was very solid, and especially considering a softer economy than we were planning for, and also considering the industry's growth in seats, and our own 7% available seat mile growth.

Our traffic was strong.

We had record load factors.

Our passengers grew 5.6%, which outpaced easily our modest 2% seat growth.

Our unit revenue comparisons year-over-year were somewhat deceiving.

Our RASM declined 4.7%, but a point of that is attributable to a year-ago $47 million accounting estimate change.

In addition to that, there was a 2.6% effect for increased stage lengths and gauge.

So you take all that into account, it really leaves a year-over-year decline of only about a little over 1%, due to the somewhat softer demand environment, or softer economy.

We have a large percentage of new markets, or markets in development.

That's around 18%.

This will decline as we go forward, and especially into next year, and almost all of the 7% capacity growth in second quarter was in Dallas, Washington Reagan, and LaGuardia, and a small amount in some new international markets.

Dallas alone was up 150% year-over-year.

Its load factors and profit margins and return on invested capital all exceed system average, and in that statistic, I'm talking about the new Dallas markets, not just Dallas in total.

And in Dallas, we've lowered fares, we've added flights, we've stimulated demand, and we've created meaningful competition for the first time in decades, which is exactly what we said we were going to do.

We've added capacity in the second quarter in other domestic markets, but those have essentially been funded by cuts in other preexisting markets that we had served.

So looking ahead, we are delighted to announce this morning an amendment and extension of our co-brand credit card agreement with Chase.

They are absolutely a terrific partner.

You've heard a lot about our strategic initiatives over the last five years, and in particular, our all new Rapid Rewards program.

So this updated deal is a testament to the enormous success of our new program, and the new Chase deal amounts to what is a stealth sixth initiative, or at least an extension of the current all new Rapid Rewards.

So as we reported this morning with our release, we'll recognize an additional $250 million in revenue for the second half, which will continue on in future quarters.

And then, of course, we'll also recognize an additional one-time benefit in July of $150 million.

So with that, along with some improvement that we've noted in our core business, our sequential revenue trends will improve significantly from second quarter to third.

So this is an interesting year for us.

We have the AirTran integration behind us, we're continuing to optimize the large number of converted, or I would call them developing markets.

Secondly, we're following through with the secular opportunity to expand Love Field.

Third, we're seeing the full-year effect of our significant expansion in Washington Reagan and LaGuardia as a consequence of buying slots from American, upon their merger with US Airways.

We're following through gradually with our commitment to launch Southwest International service in July of last year, and follow through with the launch of new international service at Houston at Hobby for the first time since the 1960s, and it has Love Field-like opportunities to lower fares, add flights, and stimulate the market.

Obviously, the scale there is much, much smaller, and admittedly the risk is greater, so we'll take all of that into account with our expansion plans.

We are also gradually returning aircraft from an out of service state to an in service state, as the integration of the AirTran fleet or its replacement fully completes.

So we're able to grow this year without adding any net aircraft, and again, start the year with around 700 units, and we plan to end the year at about 700 units.

For next year, our fleet plans are unchanged.

Tammy will give you some updates as to some of the pluses and minuses within that, but we're still targeting to grow the fleet around 2%.

Our ASM plans, which of course are always -- our available seat mile capacity plans, which are always subject to change for next year will be at least 5%, and that's driven almost all by 2015's growth, but no more than 6%.

And again, that's all based on our current outlook.

I would just summarize all of those thoughts by just reminding everybody that we will very carefully manage our growth so that we can sustain our operational excellence, our outstanding Customer Service, our strong profit margins and returns on capital, and maintain our strong balance sheet.

I believe in our people, and I'm confident in our ability to manage all of those things.

So Tammy with that quick overview, I will turn it over to you.

Thanks, Gary, and welcome, everyone.

We're very pleased to report all-time high quarterly earnings, excluding special items of $691 million or $1.03 per diluted share, which is a 43% increase from second quarter last year.

Our GAAP net income was $608 million, including $83 million in special items.

Second quarter operating income was a record $1.1 billion, and our operating margin was a strong 22.5%.

Our pretax margin grew by 6 points to 21.7%, and our 12 months trailing pretax return on invested capital grew to 28.2%.

We've generated $1 billion of free cash flow for the first half of the this year and in May, we announced a $1.5 billion share repurchase program.

During the second quarter, we repurchased $380 million in shares, and we announced today that we plan to launch another $500 million accelerated stock repurchase program soon, which will bring our share repurchases to this year to nearly $1.2 billion.

Once the new ASR, accelerated share repurchase, is launched, we will have completed more than half of our $1.5 billion repurchase authorization in just under three months time.

We also announced a 25% increase in our dividend in May.

Our dividend yield is currently just under 1%.

Revenues for the quarter were up 2% on a 7% capacity increase, and as Gary noted, we are extremely pleased with the development of our new markets, which represented about 20% of our available seat miles.

Our second-quarter results also benefited substantially from lower fuel prices, and our continued focus on non-fuel costs, particularly our fleet modernization efforts.

Our economic fuel cost savings in second quarter were almost $500 million, and without fuel, our unit costs were flat year-over-year.

And when you exclude the record $182 million profit-sharing earned by all of our hard working employees this quarter, our unit costs decreased nearly 2% year-over-year.

And I would remind you all that in order to fully understand our results, you need to keep in mind the impact of increased stage length and gauge to both our revenue and costs.

I'll take you through our revenues and costs in more detail, but the takeaway is that our network is producing strong margins and returns, with or without the help of fuel.

I'd like to congratulate all of our hard working employees on these exceptional second-quarter results, which marked our ninth quarter of consecutive record profitability.

Diving more into revenues, we reported our record revenues of $5.1 billion, and on a unit basis, passenger revenues were down 4.6%, which is right in line with guidance for the last couple of months.

Total revenue per available seat miles was also down in a similar range.

Demand for our low fares remained very strong throughout the quarter, resulting in record load factors for each month and the full quarter.

Aside from softer yields experienced in May and June, our second-quarter year-over-year unit revenues were impacted roughly 2 to 3points from higher gauge and flying longer distances.

As Gary walked you through, the unusually high increase in stage and gauge is largely due to our growth in Dallas.

Our year-over-year unit revenue comps were impacted by about a point from last year's revenue adjustment for spoilage.

Our new markets are maturing in line with planned demand, and our new Dallas market in particular has just been tremendous, with load factors over 90% for the quarter, and margins exceeding system average performance.

International is also developing as planned, which took into account the potential for a slower rate of ramp-up than a market like Dallas, which clearly had lots of pent-up demand for our legendary low fares.

Our Rapid Rewards program, as Gary said, is a huge success, and continues to contribute significantly with nearly $80 million in incremental revenue year-over-year in the second quarter.

We're very pleased with the growth of our frequent flier program, including the growth in credit card program, and we were thrilled to announce today that we recently amended and extended our credit card agreement with Chase.

The terms of the agreement are confidential; however, the amended agreement includes improved economics over the life of what is a multi-year contract.

For accounting purposes, this amendment triggers the requirement to follow the valuation methodology prescribed by the 2009 update to the Accounting Standards versus the residual accounting methodology that we previously followed.

This new methodology will put us on a more comparative accounting method to the industry.

The effect of the amended contract and applying the new accounting methodology is that we will be able to accelerate a portion of our revenue recognition associated with points sold to Chase.

In addition, under the new accounting methodology and amended agreement, we will allocate a portion of the revenues to other revenue, versus the 100% being allocated to passenger revenues, as has been the case over the past couple of years.

As a result of the new accounting methodology, our year-over-year comparisons on PRASM will be distorted for at least a year's time, and the more relevant measure of our unit revenue performance will be RASM.

With this in mind, we are providing a RASM guidance for third quarter 2015, and will provide updates to our third-quarter RASM outlook in our monthly traffic releases, and we'll continue to evaluate whether this will remain our practice beyond this quarter.

Our preliminary estimate of the year-over-year benefit from the amended agreement, combined with the effect of the new accounting methodology is approximately $400 million for the second half of 2015.

Included in that $400 million is approximately $150 million that will be recorded in third quarter as a special revenue item, and this will result, this will result from the deferred revenue liability being revalued using the current estimated selling price for transportation, resulting in a liability reduction and corresponding non-cash one-time increase to GAAP operating revenues.

As this amount will be recorded as a special revenue item, it will be excluded from our reported RASM, and thus is excluded from our third-quarter RASM guidance today.

However, as a reminder, when you're modeling third quarter, you will want to keep in mind the profit-sharing impact of special items.

The remaining approximately $250 million of the $400 million estimated impact to the second half of the year will benefit our reported unit revenues.

Our preliminary estimate of the year-over-year benefit to each -- the third quarter and fourth quarter RASM is roughly 2 to 3 points.

One additional note is that in conjunction with our amended agreement with Chase, we are very excited to announce that we have also extended our long-term exclusive co-brand network agreement with Visa.

So with our Chase agreement and corresponding change in accounting methodology in mind, and based on our current bookings of revenue trends, we are estimating third-quarter RASM will decline approximately 1% year-over-year, and while the economic indicators have been somewhat mixed, the economy overall being fairly solid and our revenue trends appear to be stabilizing and improving, with or without the Chase-related benefit, July is currently trending better than average sequentially, and third quarter is also trending up sequentially from the second quarter.

Overall, considering the estimated 2 percentage point impact of more stage and gauge, as well as or estimated 18% of our network under development, we are very pleased with our third-quarter revenue outlook.

So turning to freight and other revenues, we're also pleased with our performance there.

We currently expect third-quarter 2015 freight revenues to be comparable to second quarter 2015.

Other revenues declined slightly year-over-year from the elimination of AirTran fees, with the integration completed in December last year.

This was largely offset by continued strength in certain ancillary revenues is such as Early Bird check in and upgraded boarding, so a very good performance there, and other ancillary revenues were approximately $46 million.

We expect third-quarter 2015 other revenues to increase significantly from third quarter 2014 due to the change in accounting methodology I just walked you through, regarding the amended Chase agreement.

So now, I will turn to our cost performance.

Our second-quarter unit cost, excluding special items, decreased almost 12% on a year-over-year basis due to lower fuel prices, good cost control, fleet modernization, and improved aircraft utilization.

Our economic fuel costs were approximately $400 million lower year over year, largely driven by a 33% decline in fuel prices, and approximately 2% improvement in fuel burn.

We are expecting significant fuel savings again in third quarter relative to a year ago, and based on our hedge position and market prices as of Monday, we expect our third-quarter fuel price per gallon to be approximately $2.20, which is well below the third quarter of last year's $2.94.

We made adjustments to our hedge book last Fall, as you might remember, when crude prices collapsed, and we continue to actively manage our hedge book to balance exposure with our desire to have some upside protection.

Since last Fall, we participated in the vast majority of the market decline, and we currently expect our total 2015 economic fuel costs to decline approximately $1.3 billion from last year.

On the non-fuel cost side, excluding special items and fuel, our unit costs were comparable year-over-year, and again, this includes a 43% year-over-year increase in profit-sharing.

Excluding profit-sharing and special items, our non-fuel unit costs decreased 1.8% year-over-year, driven largely by the fleet modernization benefits.

Maintenance unit costs declined 4% year-over-year, and our aircraft rentals unit costs declined 27%, primarily due to the retirement of the 717 fleet.

So based on our current cost trends, we expect total third-quarter unit costs, excluding fuel, special items, and profit-sharing to decrease year-over-year approximately 1%, and I'll note that we are still on track for full-year 2015 unit costs excluding fuel, special items, and profit-sharing to decrease approximately 2% year-over-year.

Moving now to the balance sheet and cash flow, we ended the quarter with $3.1 billion in cash and short-term investments, and our operating cash flows for the first half of 2015 was $2.1 billion, and our free cash flow was $1 billion, of which we have returned approximately 80% to our shareholders thus far this year.

Our balance sheet is strong with leverage of 33%, including off balance sheet aircraft leases as of the end of the quarter and we continue to hold the distinction among US airlines of having an investment grade rated balance sheet by all three rating agencies, and we're very pleased to receive an upgrade by Moody's to BAA1, with a outlook positive during the quarter.

We continue to estimate our 2015 capital spend to be approximately $1.8 billion, and that excludes assets constructed for others, which is estimated to be in the $50 million to $100 million range net.

This includes, as a reminder, approximately $1.1 billion in aircraft spend.

We're still finalizing our 2016 CapEx plans, but continue to estimate our aircraft spend will be in the $1.3 billion to $1.4 billion range, and total spend less than $2 billion.

Overall, our balance sheet and cash flows have remained strong throughout this year, allowing us to continue to invest in the business and return significant value to our shareholders, employees and customers.

And that brings me to a quick recap of our fleet plans.

Gary went through those pretty fully, so I won't go into too much detail here, but because I'll just reference you back to the earnings release, but we ended the quarter with 689 aircraft in our fleet, and again continue to expect our fleet to reach roughly 700 by the end of this year.

Regarding capacity, our third-quarter ASMs are estimated to increase year-over-year approximately 8%, on year-over-year seat growth of 3.5%.

For the full year, our 2015 capacity growth remains on pace to increase approximately 7% year-over-year, and that's with seats growing just under 3% year-over-year.

And again, this year's plans are targeted largely on Dallas with a smaller portion on Washington Reagan, New York LaGuardia, international, and other regional market opportunities.

Gary walked you through the annualized impact of our 2015 capacity additions, which again will contribute approximately 4% to 5% of our 2016 year-over-year capacity.

With a continued focus on optimizing our network, we currently plan to grow our 2016 ASM in the 5% to 6% range versus 2015.

And as you think about our 2016 year-over-year ASM growth, keep in mind that the timing of our 2015 AOI growth will create a higher year-over-year rate of return, or rate of growth in the first half of 2016, as compared to second-half 2016.

So in conclusion, these are very exciting times at Southwest.

Demand for our low fares and friendly service is strong, and we're delighted with the overall performance of our network.

And in closing, we've received a lot of questions regarding our historic 15% pretax goal, which we've acknowledged is too low with today's fuel prices.

Over the long run, our goal is to consistently deliver healthy profits and returns that are in excess of our cost of capital, which is currently under 8%.

Given where we are today, simply referring back to our historic goals isn't meaningful, and we will be providing annual financial goals moving forward.

In 2014, we delivered a strong 21.2% ROIC, and for 2015 our goal is to exceed 21%, and we are well on our way to achieving that goal.

For the 12 months ended June 30, our pretax ROIC is 28.2%, which is almost 18% after tax, and our current outlook for the second-half 2015 is strong.

While it's too early to provide guidance for 2016, again, our goal is to sustain healthy margins and returns on capital, in line with 2015.

With that overview, Tom, we're ready to take questions.

(Operator Instructions)

Thank you for waiting we'll now begin with our first question from Andrew Didora with Bank of America.

Thank you for taking my question.

Tammy, just wanted to ask you a question around your prepared remarks, in terms of your revenue trending up sequentially.

What is driving this?

Is it better volumes, or have you been able to push price more than you had been able to over the course of May and June?

Thanks.

Oh, sure.

We're seeing some softness in our yields, but again we are seeing that tick up, and just a continuation of healthy demand.

So the economy feels pretty good now, and of course, we're expecting a tremendous benefit from Chase, and their accounting related to that new contract.

If I could just follow-up to that, I know corporate is a much smaller part of your business, but just curious, in terms of what your corporate customers are telling you about potential future demand out of that channel, and if you're seeing any sort of slowdown on the corporate side?

Thanks.

Sure.

Our corporate sales grew pretty much in line with capacity, and our business mix is still roughly a third of our passengers, so no meaningful change there and when you factor in the mix of our development markets and just the trends that we had on the yield side in the second quarter, we're very pleased with those trends.

Our corporate sales, again on the revenue side also, we saw a nice increase there year over year, and our business mix continues to run in the low 30% range.

You can see some year-over-year declines in some of the oil patch, so I think that's pretty consistent with all of the headlines that you would know.

But, Bob, I don't know if you have anything to add.

I don't know in fairness to your question, that corporate accounts are, quote, telling us, anything, but if you just look at the recent trends, I agree with everything Tammy says.

I don't think you're necessarily hearing anything.

I think the corporate business is in line with the base business generally.

As you mentioned, we're seeing points of modest weakness that you would expect like oil and gas.

In some cases manufacturing related to that, but we're seeing offsetting points of strength like healthcare and consulting and other sectors, so net-net, I think it's about a wash.

But Gary on the oil-related route, I didn't note it in my remarks, because although it's true there was an impact, it really hasn't been that significant.

It's very small.

That's great.

Thank you very much.

We'll take our next question from Tom Kim with Goldman Sachs.

Great.

Thanks very much.

Gary, can you just help me understand how you think about the mix between pricing and load factors?

I guess, just beyond stage and gauge, it does seem like pricing is generally softer, and not necessarily weak, but softer for yourselves and the industry.

I'm just wondering, you've got load factors up, pricing isn't necessarily softer.

I'm just wondering, how do you think about that balance?

I want to be fair to your question.

If you look at our reported results here for the second quarter, and despite the fact that passenger trip lengths are longer, the average fare is down, as a fact.

You are right, average fares are actually down year over year.

So there is -- it's a very competitive industry and some of that is, of course, a function of us adding capacity in new markets which are under development.

So I think in terms of the way we think about it going forward, we want to be the low fare carrier, we're working hard to support that by being the low cost producer, so we love keeping our fares low, and would prefer to have more full airplanes.

Our load factors are the highest in our history, and the differential between Southwest now and legacy carriers is very small.

So we like that, and obviously, if we can drive revenue through sources other than fares, like our new Chase agreement, we're very, very pleased with that.

So in the end, we just need to manage revenues, and it needs to provide a sufficient margin over our cost, and hit our capital returns.

So I think in that sense, we're somewhat agnostic, but perhaps biased towards higher loads and lower fares.

I appreciate that color.

Thank you, Gary.

Just as a bigger picture question, can you share your thoughts about the ability to still expand the market?

Do you think that there's still opportunity within the US to be growing the overall demand pie?

Well again, all politics are local, so I think it just depends on the market.

I was asked earlier this morning about why the industry isn't expanding faster, given oil prices.

There are physical constraints in some places, Love Field is a perfect example, where you can't continue to grow Love Field.

Reagan is another example.

So you just have to go market by market.

As I think about Southwest Airlines, we have tactical opportunities to continue to grow our domestic market, which is maturing every year, but we still, interestingly enough, have very exciting opportunities to do that, to add frequencies, to connect dots.

I'll just highlight a recent one that we've done which is Austin to St.

Louis, and it makes perfect sense for us to do that, and it's off to a great start.

Memphis is another one that we've highlighted over the course of the last year.

It was an AirTran city, we decided to open it on Southwest.

We did not replicate the AirTran network.

We plugged it in, in a way that we thought made more sense for Southwest, and we're doing gang busters out of Memphis.

Contrast that now to what I would call more pure expansion, which is us flying trans border, and that's different.

That's adding higher risk capacity to cities that don't know Southwest Airlines.

Fortunately the ones we're adding right now are mostly dependent upon US traffic when we added San Jose, Costa Rica as an example.

But nonetheless that is a higher risk flight as compared to adding Dallas to Chicago, so we just have to do this from the bottoms up.

It's not a top down exercise, and the nice thing that we've reported consistently is that we that we have a significant number of very handsome and deep opportunities to continue to grow.

And in most cases, that means that we're able to go into a market and add some value by bringing lower fares.

So how much stimulation is left in the US overall, obviously a lot less here in 2015 than 20 years ago, but nonetheless, you still have opportunities.

Dallas Love Field is the poster child, which is just an incredible success story, and there were a lot of critics that did not feel like there was much opportunity to grow, and they were wrong.

So we'll just look for those kinds of opportunities across the country, and where they are available to us, we'll put in service, where they are not, we won't force it.

Gary, thanks a lot for that detailed discussion.

We'll take our next question from Savi Syth with Raymond James.

Good afternoon.

Just a quick question on the hedging side, now that you're -- has anything changed on your strategy there, or what you're attempting do with the hedges?

Yes, Savi.

We did, I'll just walk you through what we've done since the third quarter -- since the second quarter, rather.

So in the second quarter, if you'll recall, the energy market started to trend upwards, and with the decrease in the recount and increase in market demand, we were concerned market prices would continue to escalate.

So we did add some positions for the second half of this year, but so far supply, as you know, has continued to out weigh demand, which has depressed the market prices.

0 So we are continuing to actively manage that.

For the second half of the year, the guidance that we gave you for the third quarter includes roughly $0.40 of losses per gallon, and but that's embedded in the $2 estimate that we gave you for the quarter, the $2.20 estimate.

So, I'll just point you to, Savi, just as a reminder, really the best way to help guide you for our fuel prices is just using sensitivities and as always, we've included that in the earnings release for you -- to help you along with your modeling.

So that's the change that we've made since second quarter.

I think the last guidance that we gave you for the full year, as a reminder, when we unwound our hedges back when the market collapsed back in the Fall, I think at that time, we guided you to about $0.20 of penalty for the quarter.

We got out of the way of that largely in the second half, so our penalty is a little bit greater than the second half of this year.

But on average, I've got $0.25 average in my head for the full year.

So up a little bit from what we reported to you previously.

The only thing I'd add, Savi, is that from a program strategy, with prices lower, and with a more comfortable cushion in our profit margin, and you just layer in the very expensive nature of trying to hedge, I think it just argues to be less hedged, if that's where you're headed, as opposed to more hedged.

And I think we're mostly focused right now in working our current position off, burning that off, in the most cost-effective way.

But we've got a business that's built for substantially higher energy prices, fortunately, and the direction of energy prices right now seems to be a bit clearer than it was 90 days ago.

That's always dangerous, to think we know where energy prices are going to go, so we don't.

But we have to have a view, and we have to have some kind of behavior accordingly, and right now, that's what we're managing to.

And Savi, just one last note.

We're currently participating in a large percentage to the downside here in third quarter 2015.

It's not as great as we were, but it's still substantial, and it's producing net fuel prices well as below year ago levels.

Great, that's all very helpful.

So just on that I'm assuming the 2016 hedge position going from 10 to 40, is that really kind of balancing some of the locked in losses that you have in 2016?

We're still working on our 2016 and 2017 hedge book, and as Gary said, our bias at this point is to lower jet fuel prices, so we're working to balance that, as best we can.

Got it, and if I could ask another question not related to hedging.

On the 18% of markets under development, could you remind me again what the drag is on net revenue currently, and maybe using a portion of that will continue next year, as you continue to open new markets.

So what's the drag that we can look forward to maybe being eliminated next year?

Yes so for the drag for the second quarter, just to help you out, I think we reported back to you in the first quarter it was 0.6 roughly, and for the second quarter, the drag was a little over 1%.

All right, great.

Thank you very much.

You're welcome.

So you know, it's obviously a pretty big number, but the other thing I would just reinforce to your question, is we've shared great results for Dallas.

And Dallas, in other words, is a whatever that revenue percentage is of our total, but Dallas would have been better, I think, had the economy been stronger.

So even though it's really good, even it has a drag.

So I think that there is, if the economy improves, our markets develop.

Obviously we're hopeful of some significant upside there.

Can't promise that, but it's just common sense that tells you if you've got this many new markets, that they are creating some drag.

So it's tough for us to estimate that, but however you want to estimate it is fine with me, but I think there's a pretty significant opportunity, and that's what we're going to be managing to.

Fine, thank you.

We'll take our next question from Julie Yates with Credit Suisse.

Good afternoon.

Thanks for taking my question.

Tammy, any change in how you're planning to report PRASM?

I noticed you didn't give the June actual unit revenue growth with traffic a few weeks ago, and today, you guided to a 2.2 RASM instead of July PRASM, as you normally would have done.

So is there any change in thinking there?

You are fading in and out, but I think I got your question.

But please redirect me, if I'm not answering it fully.

Yes, we are planning to change, at least for the third quarter, what we're reporting in our monthly traffic releases.

We're going to be providing you updated guidance on RASM for the full quarter, and that's really due to the Chase agreement that we just executed here this month.

We provided you our estimates, but there is some noise between passenger revenues and other.

We will be recognizing more of that revenue recognition and other than we have historically.

So PRASM year-over-year trends are not going to be all of that meaningful until we lap, until we get probably a year down the road.

So at this point, I just think it's more meaningful to provide you all RASM, to help you with your modeling.

And so we'll get through this quarter, and then we'll evaluate if we want to continue with that practice.

So just to clarify, there will be no monthly numbers?

It will be no monthly numbers, but we do intend to provide you, if there are any updates, to our third-quarter guidance for the full quarter, in other words.

Okay, great.

And then I think you filed your schedules through early March.

When will you file again for your capacity plans, a little further out into 2016?

Our plan is to extend the schedule, as normal, which would be oh, say about a month from now.

Okay and that will be for a few months?

That's right.

Okay, and then just lastly, on your goal of maintaining the 2015 ROIC levels in 2016, what are you assuming on fuel?

We haven't given you our fuel numbers, but I think using something we're looking at market numbers just like you are, but with or without fuel, we are managing to continue to deliver strong returns and very healthy returns above our cost of capital.

So we haven't really given you a forecast yet for fuel for next year.

Julie, in fairness to your question, it's a conceptual goal.

So a change in fuel price assumptions that's material is obviously going to impact what we would ultimately target as a number next year, but on a fuel constant basis, it's pretty easy to think about that.

We want to sustain the current level of operating margins from year to year or grow them, and then by implication, we would want to sustain or grow our return on capital.

What we ultimately adopt as a plan is going to be dependent upon more variables than just fuel prices, but those are our goals.

Okay, thanks Gary.

We'll take our next question from Jamie Baker with JPMorgan.

Good afternoon.

Tammy, just a housekeeping item.

You quantified a Chase impact in the second half.

You also talk about it providing value over the life of the contract.

I suppose that means that it does imply, at least, there's revenue upside associated to the relationship in 2016.

Any additional color there?

Yes, Jamie, if I'm tracking your question correctly, what we provided you is just the second -- the benefit for the second half this year.

So if you annualize that, that should get you in the ballpark, and again, I'm talking about the $250 million of the $400 million.

Okay, that's helpful.

Second question, considering you took the $55 million charge in the second quarter relative to ratification bonuses, is it safe to assume that your third quarter ex-fuel ex-profit-sharing CASM guide assumes the attendance ratify tomorrow?

Jamie, with either way, we're going to be roughly in the hunt of the guidance that I gave you.

Okay, fair enough.

Thank you very much.

We'll take our next question from Helane Becker with Cowen.

Thanks very much, Operator.

Tammy, you used to provide revenues from Wright Amendment routes.

Are you willing to do that still?

No, well Helane, we have stopped that, and it's a lot.

It's tremendous, but no, I don't have it, Helane.

We are not providing that break out.

Okay, thank you for that.

And then I think Gary, you mentioned that Houston was going to open the international terminal later this year.

Do you have actually a date for that at this point?

We do and if I trust my memory to be correct, I believe it's October 15.

We are constructing a five-gate terminal, and that is required for us to operate, and that construction is right on schedule.

So its been a fantastic project, and we're obviously looking forward to launching service.

We've got the schedule produced, all of those seats are out there for sale.

What is included is also a launch of service to Belize, and then, Bob, I think, in November, you follow-up with a launch of Liberia in Costa Rica.

That's correct.

So it's very exciting for us, and I think the potential of the terminal is roughly 25 daily departures, and we're starting out much more modestly than that.

And other airlines can use the gates if they sign up to the lease.

But we're looking forward to it, and we're on schedule with that.

Could I just ask a question about Dallas gate?

I think you had to buy actually the two gates from United that you're adding, and now Delta, I guess, is interloping on that one gate, so when you increase the schedule on August 9 to 180 flights, how will you accommodate those other 14 flights?

Well, you ask a very good question, as you always do.

Yes, we are sub leasing the gates that United is leasing directly from the City of Dallas, and we bid for those gates, we were awarded the bid.

We obviously entered a contract with United, and we received the consent of the City of Dallas to proceed with that transaction, and the approval of the Department of Justice.

When we add the flights that we -- after paying good money for two gates, obviously we intend to use them, and to their fullest.

And we have published our schedule, we'll move to 180 daily departures, and to accommodate the court and its desire to maintain the status quo, we have extended, I believe, the term is a license to Delta to continue to operate their five daily departures, and it will be difficult, because there is no room at those gates.

If we do find that there's room, then we want that room.

So in any event, we all know there's scarce capacity at Dallas Love Field, but that is the status of it, and we'll work hard to is support the court in their review of what is a complex issue.

We don't see it as complicated, but we've been dealing with it for 34 years, but that's the status.

Okay, well thanks very much.

We'll look forward to tomorrow's vote from the flight attendants.

Yes, indeed.

We'll take our next question from Joseph DeNardi with Stifel.

Gary, I just want to clarify on the ROIC target, is the plan to no longer provide a longer term target, and if so, why is the year to year the right way to handle this?

And then is the business being run to, ex-fuel, to hold margins flat, or to grow them?

I think obviously there's a difference between the two?

Well, not sure how to answer your question.

I think, this isn't complicated.

I think, given the current fuel price environment, and the current industry environment, we are generating substantial shareholder value, well in excess of our long term 15% target.

I think Tammy's only point is it's, in the short-term, it renders the whole 15% discussion moot, because we're not targeting down to 15%.

We won't do that for next year.

And with a little bit of good fortune here, it will be many, many years of above-average returns on capital, which is what we're striving for.

So last year we had a 21.2% return on invested capital, and our goal for 2015 was to beat that, and thus far, we are well ahead of that.

So as we enter the Fall planning process for 2016, we will be straining to do the same thing again in 2016, to meet or beat wherever we think we're going to end up in 2015.

We think that's the best way to grow shareholder value, if we can grow the business, and on top of that grow the returns, it just provides very, very substantial shareholder returns, and that is our goal, plain and simple.

If fuel prices double between here and next year, it will make that an unrealistic goal in the short-term.

It took us obviously a number of years to get adjusted to $100 crude oil, so hopefully that won't happen.

We're trying to take steps so that we don't see that shock from fuel prices, back to the hedging discussion.

Our goal for next year will be to continue to sustain very strong returns on capital.

Tammy, can you just give us what the no show fee revenue was in the quarter?

Sure, if you'll give me one minute to pull that.

I'll come back, if we have another question.

We'll move on to Duane Pfennigwerth with Evercore.

Thanks.

Wanted to come back to an earlier question about better than sequential revenue trends, or better than normal seasonality.

I forget the exact term.

Can you just walk us through that again, ex the deal, and maybe playback the second quarter?

Do you feel like there was yield softness in weekend and close-in yields, and if so, when did that recover, and is this something that you're seeing based on revenue that's booked in July, or bookings for the rest of the quarter?

Any additional commentary you can give us kind of ex this very accretive credit card deal would be great.

Well, let me make a comment, Tammy, and then you clean all this up.

But Duane, I assume you've been on the call the entire time.

I know it's a busy morning for you all, but where I net it down the second quarter was there was, quote, softness, for us to the extent of about 1%.

Whether it's 2%, whether it's 0%, it sometimes is a little hard to tease out, because there's a lot of noise in Southwest Airlines in 2015.

There's a lot of things going on, there's a lot of change.

So we've tried to tease all that out.

The comps versus a year ago in the second quarter, at least to me, appear to be harder versus 2014, than the third quarter.

So you have that going on as well.

But just pure sequentially, I think it was our feeling before the deal that things were beginning to improve, perhaps a little bit.

I just don't feel like you can necessarily take that to the bank.

So whatever improvement it is I think is rather modest, and the majority of the improvement sequentially that we're reporting to you is the Chase deal.

The good news in at least what I was trying to explain with my remarks, my opening remarks, is that to the extent that there is some softness, it doesn't feel to us like it's getting softer still.

If anything, it feels like we've seen a bit of the, quote, the bottom, and things are beginning to improve.

But 90 days is a long time in our world, so a lot of things can change between now and September.

But that's the way things feel right now, and obviously the Chase deal is pretty material.

We've given you the numbers, so you can do your own arithmetic if you want, but I think, Tammy, you already said it's $125 million a quarter.

Roughly.

So you can -- I just can't do all the math, Duane, in my head sitting here, but Tammy, anything you want to add?

Duane, the only thing, just to give, as I mentioned earlier the third quarter is trending up, and if I had to -- it's probably about a point sequentially from the second quarter.

And we are continuing to see very strong demand, as Gary mentioned, for low fares.

And thus far in July, including the Chase benefit, I would say our July RASM is trending pretty much in line with last year So while it's a little difficult to tease all this out, I think it's fair to say there is -- the way I'm thinking of it is we had some, a bit of yield weakness in the second quarter, but trends have stabilized, and I think improving a bit.

And again, so what do I mean with a lot of noise?

And Tammy just said the same thing.

These are all trends without us doing deep analysis.

So as our improvement because the economy is improving, is it because our developing markets are improving, is it Dallas, is it Washington Reagan, are we seeing more improvement in international?

All that has to be, it takes awhile to understand, and now we're talking about predicting trends in the future, where we don't have that in-depth understanding necessarily.

So I think it feels to me like the economy is strengthening a bit.

We keep up with it, just like you do, and all the weekly reports are mixed.

They are continuing to be mixed.

I just read one this morning before our call, and it was yet another mixed report on current trends.

So it could be that it's just our own developing markets are improving, which would be welcome also.

But in any event whatever it is, we are definitely seeing an improvement in our sequential trends, and certainly because of the Chase contract.

Thanks for the commentary.

And I was just going to jump in with the no show revenue, that was $18 million for the quarter.

That does conclude the Analyst Q & A portion of today's call.

At this time, I'd like to turn the call back to Ms. Brand.

Thank you, Tom, and thank you all again for joining us today.

And as always, I'll be available if there are any follow-up questions this afternoon.

That does conclude the analyst portion of today's call.

Thank you for joining.

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

I'd like to first introduce also Linda Rutherford, Vice President of Communications and Outreach.

Good day, everyone.

Tom, if you could go ahead and give our members of the media instructions on how to queue up for questions, we'll go ahead and get started.

(Operator Instructions)

Thank you for standing by.

We'll take our first question from Terry Maxon with the Dallas Morning News.

Good afternoon, everybody.

Good afternoon, Terry.

Tammy set off a great deal of excitement on May 19 when she gave the capacity estimates for your 2015 and 2016.

Your numbers today, instead of 7% to 8%, you're now at 7% for this year, and 5% to 6% for this year, instead of 6% to 7%.

My question is, did you actually dial back capacity, or is that more just a refinement of your estimates?

Terry, yes, I think that it's both, really.

We are always working our schedule as we look forward, and what we were simply doing at that time, I think, we had our schedule out, and I was simply reporting on the schedule that we had published at that time.

And given the weakness that we saw in May and June, and particularly on the yield, and as we're getting closer to publishing our schedule, we are dialing back our capacity a bit, just based on the trends that we saw on the yield side in the second quarter.

And then also, as we're thinking about next year, what we do know is that the carryover impact of this year's capacity is in the -- for next year is in the 4% to 5% range, and then above that, as we told you, we're expecting to grow 5% to 6%.

So we've grown a lot here over the past couple of years, so we want to certainly digest that growth, and as we're thinking about our international expansion, while what we're seeing so far, is in line with the expectations, it does take a little bit, what we're experiencing, is it does take a little bit longer for those markets to mature.

So we factor all of that into our capacity plans, and just based on our current outlook, and where we've dialed that back, just a bit.

But Terry what I'd also point out too at that time, as always, we tweak our schedule and react to our current business outlook.

The only thing I would add is it's not really a macro discussion.

It's really more of a bottoms-up discussion.

So we have airplanes that are available for us to put to work in the fleet, which is the source of our capacity increase, really both years, 2015 and 2016, although we're adding a few airplanes next year to the fleet.

And as we were publishing the schedule, we have pushed the utilization in the first part of this year, which has squeezed some flights into what I'll describe as a non-peak time period, and they are sometimes less than desirable flights, so there's some opportunities to cut those back as we are beginning to restore more and more aircraft back into flying, so we have some things going on like that.

Secondly and I mentioned this on the analyst call, our international is a true expansion, and it carries risk, and so our folks are monitoring very carefully the performance of those markets, and we do not want to grow those new expansion markets too fast.

So those are, we're managing the business as opposed to reacting to the May 19 scenario, and we want to continue to turn out strong profits, strong margins, and grow the airline at the right pace.

Whether it's 5%, 6%, or 7%, we'll figure out what that right pace is, and we'll try to make that as dynamic as possible, knowing that the airline is fairly set in concrete for awhile.

It's tough for us to turn on a dime, but we certainly are continuing to evaluate our opportunity in 2016, and haven't made final decisions about the capacity yet.

And Terry, one thought as well, because I think what you were referring to was the capacity for this year.

Really, we're talking decimal points, and so it is a lot of attention for rounding.

2016, our thoughts have moved more.

They've moved up, we've moved down.

Mike Van De Ven has operating needs some airplanes, so we are not fully baked with our plans for 2016 yet, but those are the parameters that we're operating under.

Well on the capacity, I wondered whether in fact you just rounded it a little bit differently, but when you're farther out you are, the vaguer the future is.

But if I could follow-up on a question that came up toward the end of the conference call with the analysts, the Delta Southwest situation, do you anticipate operational issues once you do your August 9, and you've got 180 flights and their five folded into one of your gates?

Well it's not going to be easy, and our people are planning as best they can, and they will work really hard to serve our customers well.

So I think it will be incumbent upon all parties to be cooperative and level headed, but yes, it's going to be crowded.

Thank you.

We'll take our next question from Jack Nicas with The Wall Street Journal.

Good afternoon folks.

Hi, Jack.

So I've got to ask this question.

The DOJ is investigating Southwest and three other large airlines for possible collusion on capacity.

So what's your take on this probe, and how are you cooperating?

Well, we're cooperating by doing what they told us to do, so we're good at supplying information, and we know how to do that, and we're busy complying with that request.

There has been a lot of talk by some, and we don't want to continue to perpetuate that, but you'd have to ask the Department of Justice what's actually spawned their desire to investigate, but we're fully compliant.

We comply with all of the anti-trust laws, and we comply with all laws for that matter, and certainly the Federal Securities laws.

At the same time, we are, if you go back to Terry's question of Tammy and the May 19 conference, we're doing our best to be transparent with our investors and answer their questions, but our focus is on Southwest Airlines and managing our business, and not commenting or making comments about our competitors.

Okay, thanks.

And one other quick follow-up.

I guess some of the analysts that have been on this call before over the past several months have criticized the industry, and in some cases, Southwest for growing too quickly, and there's concerns among analysts, concerns among investors that capacity growth has been too rapid, and cheap fuel has been fueling that.

Obviously, you've got a unique situation with Dallas Love Field, but what's your response to that criticism, that you may be fueling too rapid of growth to be sustainable, and we may be going back into this boom and bust cycle at the airline industry?

It's incumbent upon us to manage our business, and Southwest Airlines has competitive strength, and we want to take full advantage of those.

We're a low cost carrier, we have substantially lower costs than our legacy competitors do, and I think what people miss is that we have opportunities to grow that many of our competitors do not, and Dallas Love Field is a perfect example of that.

Houston Hobby International is another perfect example of that.

So we have not grown Southwest Airlines in three or four years, so we have a history of being prudent and measured in how we approach our business, and certainly would want to continue that into the future.

But we have opportunities to grow like we haven't had in years, and we absolutely will grow this airline.

That is in the best interest of our shareholders and we have a fiduciary duty to create shareholder value and take care of our shareholders, as well as our employees, for that matter, and that's what we intend to do.

Thanks very much.

We'll take our next question from Andrea Ahles with Fort Worth Star-Telegram.

I was wondering if could you talk a little bit more about Love Field.

You had mentioned in the comments that the market is doing really well, and obviously you're adding more in August.

You'd previously said you were at load factors about 90% on some of those routes out of Love Field.

Are you still seeing that sort of yield, or did the softness in May and June also affect Love Field?

And also, do you think fares are going to start going up on some of the Dallas routes that you've added in the past year post Wright?

Andrea, I can report this to you.

You're right.

Things have changed since I told you that load factors at Love are 90%.

They are now about 94%.

Okay.

They're very, very full and very, very popular, and our folks are working very hard at Love Field, and they're doing a great job.

So very pleased with the results.

I can't talk about any future pricing as usual, but we've got very strong results.

We've stimulated the market.

We've lowered fares, we've provided a competition that we promised, and I don't know how it could be any better.

Well I do know how it could be better, and hopefully it will be better soon because we'll have even more access to our gates that we have paid for, so that we can add even more low fare flights.

Do you expect Houston to, do you expect to grow Houston as quickly as you have Dallas in terms of the opportunity with the international gates in October, or are you going to be more measured because there's more risk with the international?

Not expected to grow anywhere near as quickly.

The potential is probably not, well the potential is not nearly as great in terms of just sheer traffic and flights that you have, compared to Dallas, but the theme is very similar.

It is a market that is monopolized by one competitor with very high fares, and we will be able to go in finally and add some competition, and significantly lower fares, and no doubt, will stimulate the market.

Now it is one thing for us to add flights between Dallas and New York, or Washington, or Chicago, that are cities that we currently serve, where the customers know us.

As opposed to Houston, where we're now going to be adding Belize, which is not only a city but a country, that is not familiar with Southwest Airlines, and probably doesn't drive an equivalent amount of traffic to the United States.

So the risks are different, and we'll have to take that into account, and we will have more measured growth, as an example, with these international markets.

Having said all that, we're still starting off with a nice bang, so I think we start off with nine daily departures.

We're quickly adding a couple more this year, and we'll just continue to monitor the performance of those flights and evaluate whether we want to add more.

Contrast that to Dallas Love Field, and Bob, I think we will have added about 60 daily departures in one year's -- less than a year's time to Dallas, so we're not talking about 60 daily departures in Houston, ever, most likely, just to put it in perspective.

Thank you.

We have time for one more question.

We'll take our last question from Dawn Gilbertson with The Arizona Republic.

Good morning.

Gary, I wondered if you could revisit for a minute the website meltdown back in early June.

What you learned from it, what the root cause of it was and give us a sense of, if you can quantify any financial impact from being down for a couple days?

Dawn, good to hear from you.

I think the headline there, it was just an extraordinarily successful sale.

But Bob, Bob by the way, did a tremendous job of managing through that challenge.

So Bob, any thoughts you want to share for Dawn's question?

I think it shows you the power of a low fare.

So we plan for these, we test, but we were just overwhelmed with the demand the first couple of days.

We did uncover some technical things that were fixed rapidly, but you just can't test everything.

But really it was just the demand coming to the site.

At the end of the day, we decided to extend the sale by a day, which is a little abnormal for us, and in totality the sale performed better than we expected despite those two days that were an issue.

So that last day, in other words, made up -- more than made up for all of the issues and the bookings that we couldn't take those first couple days.

So at the end of the day, despite the challenges, we know we caused our customers a lot of issues, not being able to get in to the website, and we really apologized for that.

But at the end of the day financially, the sale was really good, despite those issues.

Okay, thanks.

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

Thanks Tom.

Thank you for being with us today.

If the media have any follow-up questions, please let us know.

You can call 214-792-4847, or of course, send an inquiry through SWAmedia.com.

Thanks so much.

This does conclude today's call.

Thank you for joining.