Southwest 2nd Quarter
07-30-2010, 08:50 PM
#41
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Joined APC: Apr 2008
Position: Light Chop
Posts: 23,286
Southwest Airlines chairman, president and CEO Gary Kelly touched on many subjects during Thursday's earnings call. Here are some of them:
• The possibility that Southwest Airlines will start international routes: "We are pondering whether we want to prepare ourselves to fly international. And I would expect a decision on that sometime this year...."
"For us, built as a domestic carrier, if we want to pursue international opportunities, it's a multi-year effort for us. ... You won't see us flying to international markets any time soon."
• Why Southwest plans major changes to its Rapid Rewards program in 2011: "We don't get our fair share of frequent flyers relative to our seat share if you will. The frequent flyers that we have, we don't get our fair share of their flights. And then of the frequent flyers that we have, we also don't get our fair share of credit cards. ...
"When we've surveyed business customers over the last decade, the single biggest point they've made with us is they want a different frequent flyer program. Single biggest issue. And we believe them, so we've been in design and construction for some time now. ... We're obviously hopeful that we can make it a game changer."
• Adding Wi-Fi to passengers cabins through vendor Row 44: "We're working on this effort. We have various certifications that we have to sort through in terms of installing new equipment on the fleet. We have, in essence, from that perspective we've got a couple of different fleet types. We've got the next gen equipment, we've got classics. So we're in that process and it's been slower than I would like.
"On the other hand, as you know, the take rate among customers on this product has been slow to take off. So I don't think we're missing out on anything yet.
"But our target is still to have the fleet implemented in the 2013 timeframe, and I'm very comfortable with that."
• On whether the high load factors mean that Southwest Airlines is losing customers during peak hours and peak days: "I don't know. I feel very firmly is that we're losing some.
"We've stabilized our finances. We actually will have a healthy profit this year, absent some crazy event. It allows us that opportunity now to come back and do some fine-tuning, which it feels like we're doing in the fourth quarter for sure. ... "
"I don't have a number to share with you. But at the margin, it could be a couple of percentage points' worth of business."
• On whether Southwest thinks Boeing will re-engine the current generation of Boeing 737s with more fuel-efficient engines: "Our near-term fleet plans, certainly '10, '11, and '12, are not dependent upon the question that you posed. However, we have enormous interest in the topic that you raise.
"We're engaged deeply with Boeing on the retirement of our classics [Boeing 737-300s and Boeing 737-500s}, on the replacement of the classics, on the re-engining opportunity, and then the complete next generation airplane opportunity.
"We're deep into that with Boeing. I'll defer to them to tell you where they are in that process.
"First of all, we're huge fans of Boeing. They're great partners with us, have been for four decades.
"Secondly, we are in need of a more efficient, cost-effective aircraft and that is our mission. We're obviously very hopeful that Boeing can meet our needs there going forward."
• About early returns from Panama City Beach, where Southwest began service on May 23: "We're off to a great start there. Customer response has been tremendous. ... "
"I've been there and I can report that the beaches look great, by the way. So everyone should don their swimsuits and get down there ASAP on a Southwest flight."
---
WSJ on Airline 2Q Earnings:
Delta Air Lines, the biggest carrier, had the biggest earnings with profits of $467 million. In terms of net profit margin, US Airways Group Inc. had the highest at 8.8% profit margin among majors, and also the least passenger traffic growth of any of the big U.S. airlines.
• The possibility that Southwest Airlines will start international routes: "We are pondering whether we want to prepare ourselves to fly international. And I would expect a decision on that sometime this year...."
"For us, built as a domestic carrier, if we want to pursue international opportunities, it's a multi-year effort for us. ... You won't see us flying to international markets any time soon."
• Why Southwest plans major changes to its Rapid Rewards program in 2011: "We don't get our fair share of frequent flyers relative to our seat share if you will. The frequent flyers that we have, we don't get our fair share of their flights. And then of the frequent flyers that we have, we also don't get our fair share of credit cards. ...
"When we've surveyed business customers over the last decade, the single biggest point they've made with us is they want a different frequent flyer program. Single biggest issue. And we believe them, so we've been in design and construction for some time now. ... We're obviously hopeful that we can make it a game changer."
• Adding Wi-Fi to passengers cabins through vendor Row 44: "We're working on this effort. We have various certifications that we have to sort through in terms of installing new equipment on the fleet. We have, in essence, from that perspective we've got a couple of different fleet types. We've got the next gen equipment, we've got classics. So we're in that process and it's been slower than I would like.
"On the other hand, as you know, the take rate among customers on this product has been slow to take off. So I don't think we're missing out on anything yet.
"But our target is still to have the fleet implemented in the 2013 timeframe, and I'm very comfortable with that."
• On whether the high load factors mean that Southwest Airlines is losing customers during peak hours and peak days: "I don't know. I feel very firmly is that we're losing some.
"We've stabilized our finances. We actually will have a healthy profit this year, absent some crazy event. It allows us that opportunity now to come back and do some fine-tuning, which it feels like we're doing in the fourth quarter for sure. ... "
"I don't have a number to share with you. But at the margin, it could be a couple of percentage points' worth of business."
• On whether Southwest thinks Boeing will re-engine the current generation of Boeing 737s with more fuel-efficient engines: "Our near-term fleet plans, certainly '10, '11, and '12, are not dependent upon the question that you posed. However, we have enormous interest in the topic that you raise.
"We're engaged deeply with Boeing on the retirement of our classics [Boeing 737-300s and Boeing 737-500s}, on the replacement of the classics, on the re-engining opportunity, and then the complete next generation airplane opportunity.
"We're deep into that with Boeing. I'll defer to them to tell you where they are in that process.
"First of all, we're huge fans of Boeing. They're great partners with us, have been for four decades.
"Secondly, we are in need of a more efficient, cost-effective aircraft and that is our mission. We're obviously very hopeful that Boeing can meet our needs there going forward."
• About early returns from Panama City Beach, where Southwest began service on May 23: "We're off to a great start there. Customer response has been tremendous. ... "
"I've been there and I can report that the beaches look great, by the way. So everyone should don their swimsuits and get down there ASAP on a Southwest flight."
---
WSJ on Airline 2Q Earnings:
Delta Air Lines, the biggest carrier, had the biggest earnings with profits of $467 million. In terms of net profit margin, US Airways Group Inc. had the highest at 8.8% profit margin among majors, and also the least passenger traffic growth of any of the big U.S. airlines.
07-30-2010, 08:51 PM
#42
veut gagner à la loterie
Joined APC: Apr 2008
Position: Light Chop
Posts: 23,286
(highlighted 2 nuggets I thought were interesting, increased CASM?)
Fitch Affirms Southwest Airlines at 'BBB'; Outlook to Stable
CHICAGO, Jul 30, 2010 (BUSINESS WIRE) -- Fitch Ratings has affirmed the debt ratings of Southwest Airlines Co. /quotes/comstock/13*!luv/quotes/nls/luv (LUV 11.98, -0.07, -0.58%) as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Senior Unsecured Debt at 'BBB';
--$600 million Unsecured Revolving Credit Facility expiring 2012 at 'BBB';
--Secured Term Loan due 2020 at 'BBB+'.
Fitch has also assigned a 'BBB+' rating to LUV's $320 million secured term loan due May 2019 and $124 million secured term loan due July 2019.
The Rating Outlook for LUV has been revised to Stable from Negative. Fitch's ratings apply to approximately $2.5 B of outstanding notes and loans.
The ratings reflect LUV's solid liquidity position, its long track record of industry-leading profitability and free cash flow (FCF) generation, and management's continuing commitment to low balance sheet leverage. The revision of the Rating Outlook to Stable reflects the airline's improved margin and cash flow generation prospects for 2010 and the significant turnaround in the industry revenue environment witnessed during the first months of the economic recovery. After two years of operating challenges, when fuel price volatility and the recession-induced collapse in air travel demand pressured margins and FCF generation, LUV is delivering stronger operating results, and is well positioned from a liquidity standpoint to undertake meaningful balance sheet de-levering through the end of 2011.
At the bottom of the industry demand cycle in 2009, LUV's credit metrics were stressed as the carrier was forced to borrow in a period of extreme credit market tightness. Following the whip-sawing effects of fuel price volatility in 2008 and the subsequent outflow of fuel hedge cash collateral, management focused on liquidity enhancement at the expense of leverage in a highly uncertain operating environment. Since last fall, however, the recovery of demand and passenger yields has driven a notable improvement in operating margins and cash flow generation while capital expenditures have been cut as a result of slower fleet and capacity growth. LUV's operating margin of 13% (excluding special items) in the second quarter represented a continuation of the margin expansion trend that began to emerge in the third quarter of 2009.
For the second half of this year, Fitch expects passenger unit revenue growth to slow as comparisons with year-earlier periods become more difficult. Looking ahead to 2011, modest capacity growth is likely to resume on a relatively flat fleet count, and Fitch's base case forecast calls for weaker revenue per available seat mile (RASM) growth rates as a shallow U.S. economic recovery keeps a lid on full-fare demand and passenger yield growth. FCF, however, will likely be quite strong (in excess of $700 MM this year and again in 2011).
Although LUV converted four Boeing B737 delivery options to firm orders for next year, a relatively light aircraft order book will constrain capex and boost FCF over the next few quarters. LUV now plans to take 14 new B737-700 aircraft next year, with accelerated B737-300 retirements largely offsetting any impact on scheduled capacity.
In light of strong FCF generation and solid liquidity ($3.1 billion of unrestricted cash and investments on the balance sheet at June 30), cash deployment will likely be targeted toward debt reduction over the next two years. Scheduled debt maturities of $514 million in 2011 and $493 million in 2012 can be funded out of FCF without materially weakening LUV's liquidity position. Assuming low single-digit unit revenue growth next year and relatively stable fuel prices, a resumption of modest share repurchase activity could also occur without delaying significant leverage reduction. On a balance sheet debt to EBITDA basis, LUV's leverage could fall to below 2 times (x) after maturing notes are paid down in late 2011.
Fuel price volatility remains a major risk factor for LUV and the entire industry. Rising jet fuel prices over the last year have eroded some of the revenue-driven cash flow improvements. For the second quarter of 2010 (2Q'10), economic fuel costs (excluding non-cash hedge accounting effects) were 32% higher year over year. LUV has continued to deepen fuel derivative positions going out as far as 2014. In particular, a catastrophic protection hedge position (approximately 70% coverage at equivalent crude oil prices above $105 per barrel in 2011) safeguards against a 2008-style 'super spike' scenario in upcoming quarters. For all of 2010, LUV now estimates that fuel prices will average approximately $2.40 per gallon, compared with $1.97 per gallon in 2009.
Other concerns center on rising non-fuel unit operating costs, a trend that has been exacerbated by the slowdown in capacity growth rates since 2008. Excluding fuel and special items, cost per available seat mile (CASM) increased by 6.4% in 2Q'10. Significant pressure on airport costs continues to be a problem for LUV as airport lease rates climb and other airlines' scheduled capacity at some airports falls. Unit labor costs have also been driven higher year-to-date, in part as a result of increased profit sharing accruals in a stronger operating environment. LUV is likely to face continuing challenges with regard to cost inflation in spite of numerous productivity-enhancing initiatives undertaken over the last few years.
Stronger RASM growth, however, is countering the unit cost pressure as LUV focuses more attention on schedule optimization, yield management and ancillary revenue streams as key drivers of improved margin performance in a better air travel demand environment.The launch of new business markets over the last year, coupled with schedule adjustments aimed at trimming many less profitable frequencies, is supporting better relative yield, load factor and RASM results. RASM in 2Q'10 grew by 22%, with 17% higher yields, on essentially flat capacity. LUV led the industry in terms of domestic passenger unit revenue growth in the second quarter, and it grew the 'other revenue' line by 47% as product initiatives introduced last year supplement core passenger revenue streams.
LUV's healthy balance sheet cash and investments position is supplemented by an undrawn $600 million revolver that matures in October 2012 and over 300 unencumbered Boeing B737 aircraft (estimated book value of $5.4 billion).
Positive revisions to LUV's Rating Outlook are unlikely in the near term as the carrier deploys FCF to pay down maturing debt and reduces leverage to levels more consistent with a 'BBB' IDR. A negative Outlook change could result if an extreme demand or fuel price shock leads to an extended period of minimal FCF generation and weakening liquidity. In such a scenario, LUV could be forced to refinance upcoming maturities rather then pay them down out of internally generated cash flow.
LUV's ratings reflect the application of Fitch's current criteria, which are available at FitchResearch and specifically include the following reports:
--Corporate Rating Methodology (Nov. 24, 2009);
--Liquidity Considerations for Corporate Issuers (June 27, 2007).
Fitch Affirms Southwest Airlines at 'BBB'; Outlook to Stable
CHICAGO, Jul 30, 2010 (BUSINESS WIRE) -- Fitch Ratings has affirmed the debt ratings of Southwest Airlines Co. /quotes/comstock/13*!luv/quotes/nls/luv (LUV 11.98, -0.07, -0.58%) as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Senior Unsecured Debt at 'BBB';
--$600 million Unsecured Revolving Credit Facility expiring 2012 at 'BBB';
--Secured Term Loan due 2020 at 'BBB+'.
Fitch has also assigned a 'BBB+' rating to LUV's $320 million secured term loan due May 2019 and $124 million secured term loan due July 2019.
The Rating Outlook for LUV has been revised to Stable from Negative. Fitch's ratings apply to approximately $2.5 B of outstanding notes and loans.
The ratings reflect LUV's solid liquidity position, its long track record of industry-leading profitability and free cash flow (FCF) generation, and management's continuing commitment to low balance sheet leverage. The revision of the Rating Outlook to Stable reflects the airline's improved margin and cash flow generation prospects for 2010 and the significant turnaround in the industry revenue environment witnessed during the first months of the economic recovery. After two years of operating challenges, when fuel price volatility and the recession-induced collapse in air travel demand pressured margins and FCF generation, LUV is delivering stronger operating results, and is well positioned from a liquidity standpoint to undertake meaningful balance sheet de-levering through the end of 2011.
At the bottom of the industry demand cycle in 2009, LUV's credit metrics were stressed as the carrier was forced to borrow in a period of extreme credit market tightness. Following the whip-sawing effects of fuel price volatility in 2008 and the subsequent outflow of fuel hedge cash collateral, management focused on liquidity enhancement at the expense of leverage in a highly uncertain operating environment. Since last fall, however, the recovery of demand and passenger yields has driven a notable improvement in operating margins and cash flow generation while capital expenditures have been cut as a result of slower fleet and capacity growth. LUV's operating margin of 13% (excluding special items) in the second quarter represented a continuation of the margin expansion trend that began to emerge in the third quarter of 2009.
For the second half of this year, Fitch expects passenger unit revenue growth to slow as comparisons with year-earlier periods become more difficult. Looking ahead to 2011, modest capacity growth is likely to resume on a relatively flat fleet count, and Fitch's base case forecast calls for weaker revenue per available seat mile (RASM) growth rates as a shallow U.S. economic recovery keeps a lid on full-fare demand and passenger yield growth. FCF, however, will likely be quite strong (in excess of $700 MM this year and again in 2011).
Although LUV converted four Boeing B737 delivery options to firm orders for next year, a relatively light aircraft order book will constrain capex and boost FCF over the next few quarters. LUV now plans to take 14 new B737-700 aircraft next year, with accelerated B737-300 retirements largely offsetting any impact on scheduled capacity.
In light of strong FCF generation and solid liquidity ($3.1 billion of unrestricted cash and investments on the balance sheet at June 30), cash deployment will likely be targeted toward debt reduction over the next two years. Scheduled debt maturities of $514 million in 2011 and $493 million in 2012 can be funded out of FCF without materially weakening LUV's liquidity position. Assuming low single-digit unit revenue growth next year and relatively stable fuel prices, a resumption of modest share repurchase activity could also occur without delaying significant leverage reduction. On a balance sheet debt to EBITDA basis, LUV's leverage could fall to below 2 times (x) after maturing notes are paid down in late 2011.
Fuel price volatility remains a major risk factor for LUV and the entire industry. Rising jet fuel prices over the last year have eroded some of the revenue-driven cash flow improvements. For the second quarter of 2010 (2Q'10), economic fuel costs (excluding non-cash hedge accounting effects) were 32% higher year over year. LUV has continued to deepen fuel derivative positions going out as far as 2014. In particular, a catastrophic protection hedge position (approximately 70% coverage at equivalent crude oil prices above $105 per barrel in 2011) safeguards against a 2008-style 'super spike' scenario in upcoming quarters. For all of 2010, LUV now estimates that fuel prices will average approximately $2.40 per gallon, compared with $1.97 per gallon in 2009.
Other concerns center on rising non-fuel unit operating costs, a trend that has been exacerbated by the slowdown in capacity growth rates since 2008. Excluding fuel and special items, cost per available seat mile (CASM) increased by 6.4% in 2Q'10. Significant pressure on airport costs continues to be a problem for LUV as airport lease rates climb and other airlines' scheduled capacity at some airports falls. Unit labor costs have also been driven higher year-to-date, in part as a result of increased profit sharing accruals in a stronger operating environment. LUV is likely to face continuing challenges with regard to cost inflation in spite of numerous productivity-enhancing initiatives undertaken over the last few years.
Stronger RASM growth, however, is countering the unit cost pressure as LUV focuses more attention on schedule optimization, yield management and ancillary revenue streams as key drivers of improved margin performance in a better air travel demand environment.The launch of new business markets over the last year, coupled with schedule adjustments aimed at trimming many less profitable frequencies, is supporting better relative yield, load factor and RASM results. RASM in 2Q'10 grew by 22%, with 17% higher yields, on essentially flat capacity. LUV led the industry in terms of domestic passenger unit revenue growth in the second quarter, and it grew the 'other revenue' line by 47% as product initiatives introduced last year supplement core passenger revenue streams.
LUV's healthy balance sheet cash and investments position is supplemented by an undrawn $600 million revolver that matures in October 2012 and over 300 unencumbered Boeing B737 aircraft (estimated book value of $5.4 billion).
Positive revisions to LUV's Rating Outlook are unlikely in the near term as the carrier deploys FCF to pay down maturing debt and reduces leverage to levels more consistent with a 'BBB' IDR. A negative Outlook change could result if an extreme demand or fuel price shock leads to an extended period of minimal FCF generation and weakening liquidity. In such a scenario, LUV could be forced to refinance upcoming maturities rather then pay them down out of internally generated cash flow.
LUV's ratings reflect the application of Fitch's current criteria, which are available at FitchResearch and specifically include the following reports:
--Corporate Rating Methodology (Nov. 24, 2009);
--Liquidity Considerations for Corporate Issuers (June 27, 2007).
07-31-2010, 11:06 PM
#43
Gets Weekends Off
Joined APC: Mar 2008
Position: DAL Pilot
Posts: 1,133
Originally Posted by Herkulesdrvr
Name a company that has made a profit every year since 1971, not just an airline but any company? Certainly no airlines, except one, Southwest. You cant deny the facts.
08-01-2010, 06:29 AM
#44
Gets Weekends Off
Joined APC: Mar 2008
Posts: 712
Originally Posted by Cycle Pilot
Just because they turned a profit does not mean they dominate an industry. This is a HUGE industry. If you wanted to say that SWA dominates the low fare domestic airline part of our industry, you'd have no argument from me. Like I said, I think Southwest is a great company and they run a tight ship, but they do not dominate this industry. Sorry.
08-01-2010, 07:32 AM
#45
Moderator
Joined APC: Oct 2006
Position: B757/767
Posts: 13,088
Originally Posted by Herkulesdrvr
Your right, a profit one quarter out of the last few quarters doesn't mean dominance. Turning profits since 1971 doesn't mean dominance either, instead it PROVES dominance. Thanks for pointing that out.
They have one fleet type, & you have to pay to get a job there. They fly in the USA, & that's it. They aren't directly affected by SARS, volcano eruptions, H1N1 breakouts, acts of God in Haiti, Honduras, Europe, etc. The fact that SWA has maintained a profit in their little domestic niche is impressive, but it does not compare to other airlines. They aren't even on the same playing field, & in no way dominate the industry.
08-01-2010, 08:39 AM
#46
Gets Weekends Off
Joined APC: Mar 2008
Posts: 712
Originally Posted by johnso29
When SWA starts flying multiple fleet types all over Gods Green Earth, & starts dealing with the same problems that other airlines face, then maybe they will be comparable. Until, they can not even be compared to Legacy's.
They have one fleet type, & you have to pay to get a job there. They fly in the USA, & that's it. They aren't directly affected by SARS, volcano eruptions, H1N1 breakouts, acts of God in Haiti, Honduras, Europe, etc. The fact that SWA has maintained a profit in their little domestic niche is impressive, but it does not compare to other airlines. They aren't even on the same playing field, & in no way dominate the industry.
They have one fleet type, & you have to pay to get a job there. They fly in the USA, & that's it. They aren't directly affected by SARS, volcano eruptions, H1N1 breakouts, acts of God in Haiti, Honduras, Europe, etc. The fact that SWA has maintained a profit in their little domestic niche is impressive, but it does not compare to other airlines. They aren't even on the same playing field, & in no way dominate the industry.
08-01-2010, 08:47 AM
#48
Moderator
Joined APC: Oct 2006
Position: B757/767
Posts: 13,088
Originally Posted by Herkulesdrvr
Time for a history lesson boys and girls. Lets just pretend its 1975.....Pan Am, TWA, Braniff, Western, Eastern dominate the industry and Im probably forgetting someone too. Anyhow, if you had said SWA was the only one left in 2010 people would have thrown you out of the room. Facts are facts and I guess some just dont want to admit it.
When they start playing on the same field as Legacy's, then maybe we can compare. Until then, they're just another domestic LCC.
08-01-2010, 08:57 AM
#49
Gets Weekends Off
Joined APC: Jun 2007
Position: Legacy FO
Posts: 4,096
Originally Posted by johnso29
Ummmmmm......ok. Your point? You failed to address ANYTHING I brought up in my post. SWA only flies domestic. They only fly 1 fleet type. They aren't even comparable to Legacy's...PERIOD.
When they start playing on the same field as Legacy's, then maybe we can compare. Until then, they're just another domestic LCC.
When they start playing on the same field as Legacy's, then maybe we can compare. Until then, they're just another domestic LCC.
I partly agree with you. Southwest is a very good airline with an impressive financial and growth record ... all be it domestic only to 35 states and 69 cities.
However, I do have a beef with you giving them free advertisement. They are not an LCC. I refuse to use those words and SWA in the same sentence from now on.
Now, if we can get the Press from doing the same thing.
08-01-2010, 08:59 AM
#50
Moderator
Joined APC: Oct 2006
Position: B757/767
Posts: 13,088
Originally Posted by KC10 FATboy
Johnso29:
I partly agree with you. Southwest is a very good airline with an impressive financial and growth record ... all be it domestic only to 35 states and 69 cities.
However, I do have a beef with you giving them free advertisement. They are not an LCC. I refuse to use those words and SWA in the same sentence from now on. Now, if we can get the Press from doing the same thing.
I partly agree with you. Southwest is a very good airline with an impressive financial and growth record ... all be it domestic only to 35 states and 69 cities.
However, I do have a beef with you giving them free advertisement. They are not an LCC. I refuse to use those words and SWA in the same sentence from now on.
Now, if we can get the Press from doing the same thing.
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