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Executives

Marcy Brand

Gary C. Kelly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert E. Jordan - Chief Commercial Officer, Executive Vice President and President of AirTran Airways

Michael G. Van De Ven - Chief Operating Officer and Executive Vice President

Ron Ricks - Chief Legal & Regulatory Officer, Executive Vice President and Corporate Secretary

Tammy Romo - Chief Financial Officer and Senior Vice President of Finance

Jeff Lamb - Chief People & Administrative Officer and Executive Vice President

Analysts

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

John D. Godyn - Morgan Stanley, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Hunter K. Keay - Wolfe Trahan & Co.

Kevin Crissey - UBS Investment Bank, Research Division

Mark Streeter - JP Morgan Chase & Co, Research Division

Michael W. Derchin - CRT Capital Group LLC, Research Division

Daniel McKenzie - The Buckingham Research Group Incorporated

David E. Fintzen - Barclays Capital, Research Division

Southwest Airlines Co. (LUV) 2012 Investor Day December 14, 2012 8:30 AM ET

Marcy Brand

If you'd like to take your seats, we will get started. Good morning, everyone. Welcome to the 2012 Southwest Airlines Investor Day. My name is Marcy Brand. I am the Director of Investor Relations. We have a great morning planned for you.

Before we get started, I'd like to make a few introductions of the Southwest team that's joining us today. You will be hearing from a number of our officers this morning, including Gary Kelly, our Chairman, President, Chief Executive Officer; 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; Ron Ricks, Executive Vice President and Chief Legal and Regulatory Officer; and Tammy Romo, Senior Vice President of Finance and Chief Financial Officer.

I would also like to introduce other members of our leadership team that have joined us here today: Jeff Lamb, our Executive Vice President and Chief People and Administration Officer. Thank you, Jeff. Randy Babbitt, Senior Vice President, Labor Relations; Ginger Hardage, Senior Vice President, Culture and Communications; Brian Hirshman, Senior Vice President, Technical Operations; Chris Monroe, Treasurer; Dean Jenkins, our Assistant Treasurer. And we also have Beth Harbin and Brad Hawkins joining us from our communications team as well.

In addition, I'd like to recognize the Investor Relations team for a fantastic job putting together a great morning for you, Hayley

Lester and Melissa Curl, who you guys probably saw on your way in, and Ryan Martinez here down in front.

A couple of notes regarding this morning's agenda. I'd like to point out that we have allotted time for a question-and-answer session. We have a lot of information to share with you today. Therefore, we'd like to ask that you hold all of your questions until we get to that Q&A session that will follow the last presentation. All speakers will be made available up here at front actually at that time for the Q&A, and I assure you we've allotted plenty of time to take your questions.

Allow me to also point out that today's presentations 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.

Today's presentations will also include references to non-GAAP results. For further information regarding these forward-looking statements and for a reconciliation of non-GAAP results to GAAP results, please reference the slides that will be made available on the Investor Relations section of southwest.com following the conclusion of this morning's event.

And with that, I will hand it over to Mr. Gary Kelly.

Gary C. Kelly

Thank you very much, Marcy, and I also want to extend my thanks to our Investor Relations group. They do a fantastic job, and I appreciate all the hard work for today's event. And good morning, everyone, and thank you all for joining us.

Southwest Airlines is America's most flown and most popular airline. Southwest is America's best value for air travel. I would tell you that, in my opinion, Southwest Airlines is America's favorite low-cost airline. There are a lot of ways to describe Southwest -- best, favorite, most popular -- but it is, in fact, a great company. And that is so because for over 4 decades, our people have built an airline that has enduring competitive advantages. We have low costs, we have a very strong culture, we have outstanding customer service, and we have excellent operations and integrity. Those are enduring, those are sustainable, those are competitive advantages, and we intend to retain those.

Financial performance, like safety, is not negotiable. Both of those are imperatives. And of course, for over 4 decades Southwest Airlines has taken great care of our people, and in turn, our people have taken great care of our customers with award-winning service. We have a long list of awards that I would be pleased to share with you. But our people have also served our shareholders extraordinarily well. Southwest has an unprecedented string of profitability extending 39 years.

During that time, we have honored and we have met every obligation. During that time, we have compensated our leadership modestly, and of course, there have been significant shareholder returns in terms of share buybacks and dividends. And I would also say that employees' and customers' and shareholders' interests are not mutually exclusive, and in fact, all have to be served and served well to have a sustainable company, to have a company that is built to last.

The world has changed a lot, especially this past decade. If you look at what's happened since 2000, despite all of the challenges in our economy, the economy has grown over 20%. But if you look at passenger growth, it is virtually flat with the year 2000. And of course, the number of seats correlates with that. The number of seats offered on a daily basis is actually down compared to 12 years ago.

You get a little bit different story when you look at the economy compared to traffic. So interestingly enough, the revenue passenger miles have more or less kept pace. The available seat miles offered are virtually flat. So compared to 12 years ago, we have much higher load factors, and of course, the implication of this disparity between traffic and passengers is that there are fewer passengers and they're flying longer trips.

And this chart on shorthaul pretty much bears that out. If you look at the total number of shorthaul customers that flew in year 2000 and compare that to the year completed in 2011: 38 million passengers 12 years ago, only 31 million shorthaul passengers today. That is true across the country. That is not unique to Southwest Airlines' routes.

In that same time period, you can see the share that Southwest enjoyed of the shorthaul market, which has gone up 5 percentage points. So we've more than maintained our share, but it is of a shrinking pie, a very different air travel market today than in the year 2000.

If you look at what's happened to fares, pretty much a similar story in respect that it is very, very different. It is a low-fare game. We recognized that a long time ago. Clearly, the legacies have all gone through bankruptcy or disappeared. They have all gotten their costs down. They all charge lower fares than what they were accustomed to charging in 2000. At the same time, you've seen the growth of low-cost carriers, especially Southwest, who has grown significantly during this time period. But if you'll notice, fares are up significantly from a low in 2009, largely in response to increasing fuel costs.

Put all of that together with traffic, fares and look at what revenues have done over this time period. It sure doesn't surprise anybody here, but the revenue growth for the industry for the first time in a cycle has lagged the broader economy significantly, whether you look at it on a total revenue basis or a unit revenue basis. So it is a very different world than what we saw in the year 2000, and we've had to adjust.

We've been describing to you since 2006 how we intend to transform Southwest Airlines and, in particular, improve our revenue production, and we have done that. One way to look at that, since 2007, is just our share of RPMs compared to our share of available seat mile capacity, and I'm very pleased that our traffic growth has outpaced our capacity growth.

Looking at it on a revenue basis compared to 2007, we've also outperformed the industry and on a consistent basis, and this just simply shows Southwest as a percentage of the industry on a RASM basis, all adjusted for the same stage length.

Pretty much get the same story compared to year 2000 as well, where you see an even greater gain over that 12-year time period. So that has been our objective, to recognize the challenges, which are multiple: increased competition; a significant change in the shorthaul market; and a very significant increase in fuel costs, which I'll get to in a minute.

At the same time, we've been able to maintain our cost advantage. It is not as great as it was in year 2000, but it's still very significant and, in particular, compared to all of the legacy carriers. This is critical for our past success, and of course, critical for our future, to maintain our cost advantage. And again, it's our vision to remain and to be America's best and most popular low-cost airline.

Everyone knows this story, of course, with fuel cost per gallon up dramatically. We had a significant hedge advantage most of this 12-year time period and a modest penalty for the last several years, which is pretty much behind us with 2013, and Tammy is going to talk about our fuel hedging position here in a couple of minutes.

So let me go back to what we told you all in 2010, the last time we had an investor conference here in New York. In 2010, we were completing a 5-year strategic planning cycle that had begun in 2006. We had seen significant success with the initiatives that were underway during that time period, and it was an appropriate time for us to think about what we were going to do for the next 5 years. And this is what we showed you at that time, and we've put green checkmarks next to the items that we feel like we have completed, and let me just speak to that very quickly.

First on the list, of course, was to improve our frequent flier program. Our old program was very much geared towards shorthaul traffic. You all know the world has changed. We see that, too. We need to make that change. That's all in place. Bob is going to report on that shortly. We've had tremendous success with the introduction of the All-New Rapid Rewards program. So that's, of course, implemented in 2011, March 1, 2011, up and running and doing very, very well.

The second initiative that we have is the 737-800. We have significant technology challenges at Southwest Airlines in the year 2000, as we look back. One of the things that we have overcome is we have built the capability within the company to handle multiple aircraft types, so the 737-800, along with the technology that was introduced with the new frequent flier program, was an enormous amount of work. It was done right on time. It was done exceptionally well. We are seeing tremendous success with the 34 737-800s that we have up and running in the fleet. So very pleased with that, right on track.

AirTran, of course, in December of 2010, when we were last briefing you all, we had not closed on that transaction yet. We had announced the deal in September of that year. We are very much on track with our AirTran integration. As I think about it, there are 6 or 7 major things that have to be addressed in a merger like AirTran, and all of those boxes are checked off. The long pole in the tent for us is technology. The remaining technology challenges that we have at Southwest are related to our reservation system and very, very pleased with the progress that we've made over the past several years, as well as the last decade with our technology. We have a very solid plan to have AirTran completely integrated into Southwest Airlines by the end of 2014, which is a shorter time period than what we showed you in 2010.

The fourth initiative that we shared at the time was we made a decision in 2010 to tackle the replacement of our reservation system, and it's something that we've long desired to do. We made enough progress with our other systems related to revenues and reservations that we're in a position where we can seriously consider that. Southwest, again, is one of the largest airlines in the world, and I can assure you that replacing our reservation system will be a very, very significant undertaking. And we'll be ready for that.

The first phase of that began in earnest in 2012, with our announcement that we had signed up with Amadeus to implement international reservation systems capabilities. That is on track for implementation in 2014. So that's why we're -- I'm showing you a yellow bar there after 2014, because we will still face the complete replacement of our reservation system after that date. But I still chose to put a green checkmark on that item.

The other initiatives, I won't spend a lot of time with. Bob is going to take you all through some more detail. But there is a significant amount of work, of course, going on beyond just those 4 initiatives, and all of those have gone quite well. So if you all have questions on any of those, we can tackle those during our Q&A session.

The fifth initiative that we've since added, that will show up on our -- of course our updated chart, is our fleet modernization, and we'll be talking quite a bit about that. So that is retiring the 717s, launching the Boeing 737 Max, accelerating the retirement of our Classic fleet, making the decision to add 6 seats to the next-gen 700 aircraft. All of that combined was decided after this 2010 presentation, but it's very, very material to our strategic plan here between now and 2015.

Let me turn to 2012. The other thing that we told you in 2010 is that our goal was to hit our 15% return on capital target in 2012. That is not happening, of course. Nonetheless, 2012 has been a year of very, very significant progress. We essentially faced higher fuel costs in 2011 than we were contemplating when we spoke to you in 2010. That threw us off of our plan a bit.

And at this point, we've had an interesting 2012 in terms of our profit performance. We had a very, very strong second quarter, over 5% unit revenue production. We had an all-time quarterly record income, followed by some economic weakness in the third quarter and, I would say, a suboptimal performance on our part with our network. So we'll talk to that in particular with respect to our 2013 plans. Very, very excited about 2013, very excited about the progress here that we've made on 2012. I'm not going to go through this entire list. But it is very, very, very meaningful and puts us in a very good position, again, for 2013.

So our immediate priorities are pretty straightforward. We have a great company. We have a -- we make the FORTUNE Magazine Most Admired Corporations in the World list every single year. You all know that; we know that. Our employees are extraordinarily proud of Southwest Airlines, so we want to maintain the strong brand, the strong culture, the outstanding customer service and the excellent operational performance that we have. We want to retain that -- we want to maintain that.

We want to regain our financial prosperity. That is important to us for a number of reasons: certainly to serve our shareholders, but also to maintain the financial health of Southwest Airlines; to put us in a position where we can remain competitive; and then finally, to put us in a position where we can grow. We have significant opportunities to grow. Obviously, we can only do that if we're hitting our financial targets.

Another thing that we're going to be very focused on as an element of that is we want to work very hard to increase the efficiency of the capital that we deploy, and there are certainly some things that we can do on the denominator side of return on capital to improve. We've paid down $1.2 billion in debt since the AirTran acquisition, and I'm very pleased with that. We've also had share repurchases of over $600 million since the AirTran acquisition, and I'm very, very pleased with that.

So those are going to be our immediate priorities. Let me just speak to the 2013 outlook. Tammy is going to go through our 2013 plan, and our plan that she's going to share with you is going to show that we hit our goal of 15% ROIC in 2013. And here's a couple of highlights:

2013, we're planning for $1.1 billion in revenue gains from the 2012 baseline, and $300 million of that will be from new initiatives that we'll announce this morning. The second aspect, I would say, important to the plan is that our costs are very much under control, and with today's fuel prices, we are looking at flat unit costs for 2013.

We're expecting another strong year of operating cash flow and free cash flow, and I would just remind you that while we may have fallen short of our goal to hit our return on capital target in '12, we've had exceptionally strong operating cash flow and of course, free cash flow. And the plan, again, would be to repeat that in 2013, and the plan would be to continue our share repurchases in 2013.

Of course, we are and have been and will continue to manage our capacity very carefully, and that's also affected by the up-gauging of our fleet. So we know that we're adding seats per departure and again, very carefully managing the overall available seat mile change so that we don't flood the market with too many seats.

We'll be increasing our aircraft utilization in 2013. Our network optimization next year will be very aggressive, and it will be supported by new technology. The technology to connect our networks, Southwest and AirTran, referred to as code sharing, is ready. The technology is being tested as we speak. The testing is scheduled to be completed on December 26. We'll begin a soft rollout -- assuming that all tests as planned, we'll begin a soft rollout of that functionality in January, followed by a Phase 1 more full rollout in February, a Phase 2 in March. And again, assuming all goes as planned, we'll be full up in early April with connected networks.

That will put us in a position where we can very aggressively optimize the network on a combined basis. As you all understand today, they are completely independent and have to be written in a way so that each is sustainable. So that will be a very powerful move forward for us next year.

Our fuel efficiency per unit is improving already here in 2012 yet again. We're planning for increased fuel efficiency, measured on a per-available-seat-mile basis for 2013. Very, very pleased with that. You'll also see that other -- as part of our fleet modernization plan, other fleet-related costs in 2013 will begin to recede, and that is in particular maintenance, materials and repairs, and depreciation expense.

Earnings per share, according to our plan, is a handsome benefit compared to earnings simply because of the share repurchases. They're working very effectively, and again, that will show up very well in 2013. Our capital spending in 2013 will be down, compared to 2012, $100 million or $200 million. Leverage will decline and invested capital will decline. And then, of course, strategically on the technology front, we're allocating a significant amount of capital to our technology initiatives, mainly our reservation system replacement, and we expect to make very significant progress in 2013 towards our RES system replacement.

So I think Bob Jordan is going to talk about our commercial plan. Mike Van De Ven is going to talk about our labor and operations plans. Ron Ricks is going to discuss a little philosophy about Southwest's airport approach and how we intend to regain and further our airport advantage, which are both key components of our operational excellence. And then Tammy is going to wrap a bow around all of this and share with you our financial plan for 2013. And then we'll open it up for questions at that point.

So I'm going to turn it over to Bob Jordan.

Robert E. Jordan

Good morning, everybody. How are you all doing? First, thanks for being here. I really appreciate you doing that. I'm going to cover a couple of things. First thing, we're going to look back at the last 5 years, a little bit about our revenue performance there. Second, I'm going to focus on key initiatives, as Gary talked about. And then third, I'm going to look at several new initiatives and opportunities that will be coming online in 2013, and some of those you're familiar with and some of those will be new this morning.

Looking back, our revenue improvement at Southwest since 2007 had been very substantial, and I'm very, very proud of them. Our operating revenues have gained over $5 billion on fewer trips, and that has come through a number of actions: first, the aggressive optimization of our network to cut unproductive flying and redeploy that to better opportunities; second, a very careful management of our capacity and timing of flights for better connections, which actually drove a 7-plus percent -- or point increase on load factors; three, improvement on our revenue management and pricing techniques; four, new products like EarlyBird and Business Select; and five, of course, modest fare increases as we dealt with fuel. And as a result, Southwest RASM in that period since 2007 actually grew 33%, which far outpaced the industry x Southwest, which was a growth in RASM of about 20% in that same period.

As Gary talked about, we have been focused on 5 key initiatives that will deliver value not just for our customers, but for our shareholders, and those are All-New Rapid Rewards, launched in March 2011; the integration of AirTran, where we achieved our Single Operating Certificate in March of this year, which was a record in terms of timing; the addition of the larger 737-800 in the 175-seat configuration, which started in March; fleet modernization efforts, which include the conversion of our 737-700 fleet to the new 143-seat Evolve interior; and lastly, replacement of our RES platform, which, as Gary noted, began with the selection of Amadeus to implement international capabilities beginning in 2014. And I would tell you that all of these initiatives are progressing very nicely and are going to add substantial revenue growth in 2013. I'm going to cover just a few of those.

Looking first at All-New Rapid Rewards. The All-New Rapid Rewards implementation is a fantastic story of success, not just success but very measurable success. The program launched in March 2011 and I would tell you it's exceeded all of our goals for membership growth, member spend and partner revenues. In particular, partner sales and commissions are up substantially. And compared to 2010, prior to the program launch, annual partner sales and commissions are expected to be up over $500 million annually by the end of 2013, so just a fantastic financial story.

Second, and on top of that -- or as a part of that, I expect that our partner sales and commissions will grow about $80 million incrementally in 2013 as compared to 2012. On top of that, the program has been extremely successful with our members. And our membership, total membership in terms of our loyalty members, is up over 30% in 2012 as compared to 2010, so just a fantastic result in terms of the new program launched in March of 2011.

Gary touched on our fleet initiatives, and I'm going to cover just a little more specifics there. The fleet initiatives, like Rapid Rewards, will contribute significantly in 2013 as well. In 2012, we've taken delivery of 34 737-800s, all again in the 175-seat configuration. And we expect to deliver 20 in 2013 to end 2013 with 54 -800s in service. The aircraft are delivered in the Evolve seating configuration, and in addition to that, the very, very popular Boeing Sky Interior. I don't know how many of you have had a chance to experience that, but it's just a very, very nice interior.

Financially, the 800s have exceeded our revenue and load factor expectations. And in fact, we're seeing the 38 incremental seats filled at a rate equal to or better than the system average so far. So the -800 fleet actually is experiencing a higher load factor than the overall fleet x the 800s. So again, just a very great story.

The retrofit of our existing -700 fleet, the new 143-seat Evolve interior, I would tell you, has gone just as well. To date, we have converted 243 of our 737-700 fleet, and we plan to convert the remainder of that fleet by the second quarter of 2013. The new interior is another just fantastic story. It's lighter, it's brighter, it has a new -- a completely new seat, the Evolve seat. It's a more durable seat, a more comfortable seat. In addition to that, it is easier to maintain, a new carpet that's easier to maintain. And one of the best aspects of the story, the new interior is actually lighter than the old. And the incremental 6 new seats and incremental passengers that we fly on those 6 seats are about offset in terms of weight -- in terms of the weight savings of the new interior. So we end up being able to fly that aircraft with 6 additional seats at about the same fuel burn. So again, just a wonderful story.

To date, the converted 700 fleet has exceeded our expectations as well, like the -800. And in total, our fleet modernization efforts through the 800 and the 700 retrofit are on track to contribute hundreds of millions of dollars in incremental revenue in 2013, so another fantastic story.

Turning to the AirTran integration, and a lot of that is about the network, we remain on track to hit our goal of $400 million in run rate synergies in 2013. A lot of that, of course, comes from the network, and I would tell you that I would characterize our moves with the AirTran network as aggressive to date. Changes include closing 17 AirTran locations, a partial -- a full conversion of 8 additional cities from AirTran to Southwest, expanding AirTran's international network and the conversion of AirTran's San Juan flying to Southwest beginning in April of 2013. So there's just a lot of work going on to transform the AirTran network, even ahead of full connectivity and codeshare.

Now I'll tell you that the signs -- the numerous signs in terms of what we have done so far are very encouraging. In the overlap markets, where we've been able to rationalize capacity across AirTran and Southwest, I'm seeing double-digit RASM increases year-over-year. So I think that bodes very well for when we have codeshare and we have the ability to continue to really push and rationalize the network. The new international markets are very significant contributors, and we've see meaningful gains in AirTran's local traffic, particularly in Atlanta.

Of course, significant optimization will occur once full connectivity or codeshare is in place between Southwest and AirTran. And we have had teams working very, very hard on that codeshare work for quite a period of time. And I'm very pleased -- as Gary noted, I'm very pleased this morning to be able to report that the technology work to enable codeshare between Southwest and AirTran is complete. It's in test, and we'll deploy that codeshare connectivity into select markets over the next 60 days. And we will have full connectivity across Southwest and AirTran in place and rolled out in the first quarter of 2013. And given what we have seen in terms of the markets where we've been able to rationalize capacity, I'm just very encouraged about the benefits that the network connectivity and further optimization will provide in terms of our revenue performance across AirTran and Southwest.

So with that, that's the key update -- or an update on our key initiatives, and I want to turn to some new revenue initiatives for -- and opportunities for 2013. Some of that you will be familiar with and some of that are new in terms of what I'll announce today.

The first is our move from a segment-based to an origin- and destination-based revenue management system, and this is very complicated, and we've been working to build this complex technology for several years. Essentially, what it allows you to do is rather than manage the demand on an aircraft basis, so manage the demand in terms of where the aircraft is literally flying, it allows you to manage the demand in terms of where our customers want to fly, regardless of how they route, how they connect, and it just basically allows for a much more precise management of our demand and our inventory.

This new capability -- excuse me, there. This new capability will begin rolling out in the second quarter of 2013, and I expect it to contribute nearly $100 million in 2013 on an annual run rate of $150 million to $175 million. So again, I expect this new O&D system to contribute $100 million in incremental revenue in 2013. And this is just the first phase of a much larger suite of revenue management tools that are coming online over the next several years.

The next set of improvements in 2013 that I want to talk about come in the form of what I would call deeper network optimization. We optimize our schedules every single time they are produced. What I'm going to talk about here is a much deeper level of optimization, and it really is a -- primarily a tightening of our operational network efficiency. We have demand, and we know we have demand, and we spill demand in the heart of the day in particular. So flights sort of after 8:00, before 5:00, we know we have demand, and we simply don't have the aircraft to cover some of that demand. What we are planning on doing is really, through the tightening of our scheduled block and turn times, we're going to recapture commercial aircraft time that can then, rather than being redeployed to new capacity, incremental capacity, is going to be deployed to cover our -- these demand options that we have in the heart of the day.

We plan to introduce that with the schedules published in the fall of 2013. And should -- those changes in terms of further optimizing our operation, and they really come through tightening our turn times and tightening our block times. Those will -- those changes will free up commercial aircraft time. And rather redeploy that time -- rather than redeploying that time to excess capacity or new capacity, that freed-up aircraft time, again through tightening turn and tightening block times, will be redeployed to very good revenue opportunities that we have in terms of better market timings and demand.

And in total, I expect these new incremental network optimization initiatives to contribute approximately $100 million in 2013. And that is an additional to the normal optimization techniques that we employ schedule to schedule to schedule. So again, this new tightening of turn and block to allow us to redeploy that time to demand that we have in the heart of the day, I expect to contribute approximately $100 million in 2013.

Finally, we're focused on several new or improved ancillary revenue opportunities. The industry and consumer behavior has changed substantially over the past 10 years, and we know that. At Southwest, we realize that we cannot sit still as things change, and I would tell you that we have not. We've added numerous new sources of revenues, new products, and we have changed as warranted as our consumer and our customer demands changed.

One of the best examples of that, to me, is our new Rapid Rewards program. The old program for years rewarded our customers based on simply how often they flew. Regardless of what they paid, regardless of the distance of the trip, they received 1 credit; it was very uniform. Our business changed. We -- and as our business changed, the new program, which is I described before and has been highly successful, an incremental $500 million per year in new revenues compared to 2010 and a 30-plus percent increase in the membership base, has been very successful. And it rewards our customers based on what they spend and the type of fare that they buy, so like changing the program really to match consumer behavior, and it's been very, very successful.

We also recently conducted a series of consumer research. And as customer needs and behavior changes, we will of course be responsive to that. At the same time, I would tell you, Southwest will respond, as we always have, aligned with the core brand attributes that have made us so successful. And those are delivering excellent customer service; providing value; being open and honest with our customers; and of course, flying them when and where they want to go.

And finally, in the ancillary revenue area, I've got several things that I want to announce this morning. First, we are increasing our current ancillary fees. That includes AirTran's fees, Southwest third and -- third bag and overweight bag fees, our EarlyBird charge and a number of other fees. Those increases will be effective in the first quarter of 2013, and they're being announced tomorrow.

Second, building on the success of our revamped and very popular boarding process and our very popular Business Select and EarlyBird products, we are testing a new revenue stream enabled by selling open and premium boarding positions, so that's the A1 to A15 position, and selling those open positions at the gate. This provides not just another early-boarding choice for our customers, but should drive, of course, incremental revenue for Southwest Airlines. And this will roll out system-wide in the first quarter of 2013.

And finally, we have made a decision to tighten the flexibility around our most restrictive tickets. Specifically, we will implement a no-show fee for reuse of funds associated with restrictive tickets that are not flown and not canceled by our passengers prior to flight. This should add ancillary revenue and promote customer behavior that allows us to resell the open seat prior to departure. So you have a double win there. We're still working through the change. It's complicated, and we're working through the timing very carefully. But I'll tell you this, we have made the decision to do it and this change will roll out in 2013. I'm just not ready to give you the exact date on that.

So the combination of those 3 changes -- the selling of open boarding positions; this no-show fee; and the increase in our existing ancillary fees -- I expect to contribute an additional $100 million in 2013 and on an annual run rate of approximately $150 million to $175 million, so a number of very new activities.

To recap -- so that's a lot. I gave you a lot of information there in a relatively short period of time. But to recap, I'm just very excited about the opportunities and plans that we have at Southwest for 2013, not just to continue to advance the brand, but to advance our revenue plan. I'm very excited about initiatives like Rapid Rewards that continue to pay off and pay off substantially. I'm very excited about our fleet modernization efforts that will contribute hundreds of millions of dollars in 2013 incrementally. I'm very excited about our AirTran acquisition and integration and the significant value that it adds, allowing us to hit our $400 million in run rate synergies in 2013. I'm excited about the implementation of Southwest and AirTran network connectivity in early 2013 and the value that, that will drive.

We expect to continue driving value from an even greater level and deeper level of network optimization. We have wonderful new tools coming online in revenue management as we move to O&D revenue management. We have a number of significant ancillary opportunities that will deliver incremental revenue, and a lot of those will deliver incremental revenue at very low incremental cost. And I expect all of these things to contribute handsomely in 2013.

As the Chief Commercial Officer, I talked a lot about revenues today, but of course, my charge, in my mind, is to sustain and grow the brand at Southwest. And it's wonderful to be able to work with a brand that is so, so successful. But I'm just very excited about the continued strength of the Southwest brand. Southwest is America's largest domestic carrier. And as Gary talked about, we carry 1 in 4 passengers in the United States today, and I look forward so much, not just to building our revenue plan, but to continue to build not just America's favorite, favorite airline, but to really build and continue to build America's most trusted brand.

And with that -- that's a lot of information in a few minutes, but with that, I'm going to hand it off -- thanks for your patience. I'm going to hand it off to Mr. Mike Van De Ven, who is our Chief Operating Officer.

Michael G. Van De Ven

Thanks a lot, Bob. When I think about Southwest Airlines, I think first and foremost about our people. And literally, without a doubt, I think they are our most valuable asset. And from the front line to our headquarters building and all of the airports and the cargo facilities and the provisioning facilities, the maintenance locations, the crew bases, the call centers, everything in between, our people have performed superbly over the last 12 months, 12 to 18 months really. They are so proud of Southwest Airlines, and they deliver exceptional customer service every single day.

Gary ran through a list of things that we've accomplished, and I just would like to reiterate on those. We have obtained a Single Operating Certificate for Southwest and AirTran this year. We've introduced the 800 to our fleet. We've put seniority list and transition agreements in place for every work group. We have reached an agreement to sublease the 717s back to Delta. It will put us back into a single fleet type in terms of type rating. We opened a crew base in Denver. We've expanded our ops spec to be a flight carrier, which is something I want to talk to you a little bit more about today. And we've accomplished all of that, which is a tremendous amount of work, and still we've managed to produce some of the best operating performance that we've had in years.

I wanted to walk through a little bit about our operations, talk a little bit about our operational execution, kind of our maintenance programs, talk a little bit about our turns and block times, put that in context to what Bob talked about a little bit, and then talk more about our use of our people and our facilities.

But from a people perspective, I've always thought of our people out on the front line as our promise keepers. So as customers, you go out; you buy a ticket; you know you where you want to go; you know when you want to go; you want to go with your bag; and hopefully, you're treated like family in the process, and that's what our frontline people do. They show up out there every day. It doesn't matter what the weather conditions are, it doesn't matter what things that -- they face each day, but they're out there delivering superb customer service to our people.

And our on-time performance this year really reflects that. We've got -- we're on track to be somewhere between 83% and 84% here in 2012. That's a 5-year high for us, and we've done that on high load factors. What has been hard on the on-time performance perspective is that -- the number of connecting passengers that we've had. So 5 years ago, we had less than 1/4 of our passengers connecting somewhere in the network. And over the last 5 years, given some of the revenue initiatives and scheduling initiatives, we have about 1/3 of our customers connecting.

And so along with customers connecting come bags connecting. And I've been very impressed with our bag handling. We delivered 99.5% of the bags exactly on the right fight. The other 0.5%, they're usually on the next flight. We lose virtually 0 bags to customers. But we do that in connecting bags across our entire network. So most of the legacy guys, they'll connect the bags mostly in their hubs. We connect in every single airport. And it's just a great tribute to our ramp agents and our ops agents to go deal with all of that and still deliver such great on-time performance.

A couple of years ago, when we started doing the connecting passengers, we didn't have all the tools and all the visibility into the connections and the amount of them. And as a result, to protect our on-time performance, we did build in a little bit of cushion in terms of our turn times and our block times. Today, we've got much better tools to see where that connection activity occurs, and it's visible to us. So we can get the right people at the right place at the right time. And so I think it's not that risky for us to be able to recapture some of that aircraft investment, because we've made some of that investment over on the technology side.

As far as the Net Promoter Scores go, we focus on that every day. And so most of you all are familiar with Net Promoter Scores. But we send out maybe around 10,000 surveys to our customers each day. Every day they fly, we send surveys out. And we get somewhere between 1,000 and 2,000 of them back every day. We ask a variety of questions, but one of the questions is, "Would you recommend Southwest Airlines to your family and friends?" Somebody -- and they rate on a scale of 1 to 10. So if you rate a 9 or a 10, you're a high promoter of the company.

Our 67.7% reflects about 77% of our customers surveyed rank us a 9 or a 10. We have about 10% of them rank us somewhere between 1 through 6. And you net those 2 together, and that's how you get to 67%.

We've got about 10% of customers ranking us an 8. And as we've delved into them and talked with them about that, the things that we hear are just probably the same things you would tell an airline is, that when you get to the gate, it's really important for me for the bag to get to the bag claim carousel quickly. When I'm in the gate area, it's nice for me to have ability to charge up my cell phones and wireless devices. I'd like to have some information displays up there that gives me access to information. But most importantly, when things go awry, like they seem to do every single day in the airline industry, when you get off your schedule, please communicate with me.

We've got a lot of training and a lot of focus and a lot of information that we're delivering out to our fields to identify that kind of information. And I -- we hope to drive our Net Promoter Score even higher. And that score, by the way, is very, very high. That's along the lines of a Google or a Starbucks or just iconic brands in the United States, and we're part of that. So that's been very, very good.

In terms of the airplanes, Bob mentioned a little bit about just making sure that we get -- have great use of our airplanes. We really focus on, from an operational perspective, trying to give the network planning groups as much access to the airplanes as it possibly can have. And one of the things we do is monitor what percentage of our fleet is in scheduled maintenance each night, and that's grown over the last 5 years. It's grown from about 4.4% of our fleet up to 5.2%.

And that growth is really a function of 2 things. First of all, we do have a significant number of airplanes that are in conversion lines with air -- so making white AirTran airplanes blue. So they're not in the scheduled service. But the other part of that is a little bit about our aging fleet. And airplanes are really no different than most of us and our bodies. As they age, things go wrong with them. And when you go try to fix it, it takes just a little bit longer to fix it than it did when you were 20 years old.

So we have the same issue with the airplanes. That's one of the reasons that the fleet modernization program is so important for us. So some of the Classic airplanes that we can retire them, accelerate the retirement of them, replace them with 700s or 800s or Maxes, we're going to get better airplane utilization out of that. We're still flying -- when the airplanes are in the scheduled service, we're still flying them over 11 block hours a day. So that ebbs and flows, but our aircraft utilization today is right in line with the trends it's been over the last 15 years probably.

Lastly, I'll just turn into the very bottom. We allocate a certain number of people out there to go do the work, and we want to try to give them the right airport facilities to go do that. So our station hours paid per departure, the 19.2 in 2008, that had went up to 22.9 in 2009, what that reflects is we pay 22.9 hours for every departure at Southwest Airlines. I would love to see that shrink, but there are challenges as we grow. As our load factors grow, as our connecting passengers grow, as our activity grows, we've had to put more people out there to go do that work. And I want to talk to you all about our cargo business by way of example.

One of the nice things that we've seen, though, with the staffing level, it has been really probably -- I'm not sure if it's -- it's probably been cost neutral, if not down a little bit, because while we're paying more hours, we're seeing a reduction in fix and in OJI and in premium pay, and it's offsetting those extra people. Lastly, we just do a really good job, I think, in the airports of using our facilities at the airports. We're putting almost 800 customers through a gate a day. I'm certain that's an all-time record for Southwest Airlines. And so we try to really utilize the airport space that we have.

So just in summary, I've been very, very impressed with our operational performance.

I do want to talk about cargo a little bit. It's kind of one of the unsung heroes, I think, at Southwest Airlines. But we're on track to exceed -- be north of $160 million worth of cargo revenue this year, and that's a 15% growth from 2011. And I think we have good plans in place to have a similar type of performance as we move into 2013.

We've got 72 locations that we do charter out of. 41 of those 72 locations have had double-digit cargo growth year-over-year. Our national accounts, they're up 20% in terms of revenue year-over-year. And we just opened Atlanta as a cargo facility this year. And we're only doing cargo on the Southwest side of the network there. Our gross revenue for Atlanta should be slightly over $3.5 million this year. That is 12% of the market there on 3% of the flights. So we feel like we've got a lot of opportunity to grow our cargo network in places like Atlanta through organic growth and just through the network connectivity.

You may be interested to know that our top 5 cargo products produce about 25% of our cargo revenue. And those products are uniquely fit for our network. They are things like live tropical fish, seafood, fresh-cut flowers, fruits and vegetables, and crabs. So those 5 products deliver 25% of our cargo revenue. And our network, because of its point-to-point service and its frequency, is -- it's kind of a competitive advantage because you don't have to send everything through a hub and you're not for sure how long it's going to sit there. And we win awards every year for our cargo service.

I did want to take a second to talk about being a flag carrier. A lot of airlines, a lot of people don't have an opportunity to go through and get flag carrier status. If you've been a legacy carrier, they've had that forever. We had about 200 people this year spend the better part of the year getting Southwest Airlines ready to be a flag carrier. And what a flag carrier means is -- and we have that as our operating specification to date, that means that we are regulatory-approved and ready internally to fly international travel. And we're going to start that with San Juan next year. So we are ready to go.

But prior to that, we had what was called a domestic op spec, an A013, and that is the yellow shaded area. And basically, what that allows you to do is, if you have life vests on an airplane, which we have on every single airplane, every airplane could do every mission inside of that containment area.

When we wanted to become a flag carrier -- that means that you could fly anywhere outside of the U.S. If you fly within 950 miles of the border, you can use the same operating rules as you have domestically. As you get past that, there's a couple of other different operating rules. Mostly that deals with fuel planning and crew rest, so they aren't significant. But that's the operating specification that we have today.

So Southwest can fly anywhere we want to in the world. When we take an airplane to go do that outside of the United States, it has to have an emergency locator transmitter on that. So that's where we are today. And we're not going to put an emergency locator transmitter on every single airplane. So we'll have a subset of airplanes that will be able to do that mission.

One of the things we're going to do between now and the middle of the year is we're going to add to our ops spec to have some extended overwater and some Class II navigation procedures, and that's going to give us better direct routing, improve our fuel burn and our market timing. And for the flight across those shaded areas that you see in front of you there, across the Gulf and into the Atlantic, you need to have life rafts on the airplane. And that way you can get out and you can be further than 50 miles from the near shoreline and just keep on going. So we'll have some airplanes that have life rafts on it.

And then in addition to that, for Class II navigation, if you want to go down from the East Coast, really down towards San Juan and to that area and fly through that green-spaced area, you'll need to have some long-range communication systems on the airplane. And so we'll have a subset of airplanes that will have all of those things on. And I think it will be a very competitive and exciting expansion opportunities for us.

Bob already talked a lot about the 800s, so I won't add very much to any of that. I would like to add a couple of things. Of the 34 800s that we get, 29 of them are coming ETOPS equipped, are provisioned, and so they are ready to do even additional longer-range missions overwater if we so choose to do that.

On the 800s, on the turn time side of the business, I wish we could turn them as fast as we could turn a 143-seat airplane, but you can't, because people just won't board faster. But we're really trying to focus on a turn time of somewhere around 45 minutes. They were north of that right now. It depends on what type of customers are boarding. Wheelchairs -- a lot of wheelchairs or something like that will slow the boarding process down. But I think that we'll be able to turn the 800s somewhere between, say, 45 and 55 minutes as we get better at it. We've only got 34 of them in the fleet right now. We don't have -- it's not an airplane that a lot of our people see every single day. And once they do, I know that they will get better and better at it.

The Evolve seating, I think Bob has already talked about also, but as he mentioned, we're going from 137 to 143 seats. The faster we get that done, the better for the operational guys, because it's hard to switch planes out between one another when they don't have the same number of seats in there. So we've got -- we're on track to have the Southwest fleet completely done on the 700s by, I think it's May of 2013, and we'll be very excited to have that done. And as Bob said, they are lighter seats. It's just a very refreshing look in the airplane. We do all of that work on the Evolve seating overnight and I've got a video that I thought I'd just show you all real quickly to kind of see what our maintenance guys do. It's a time lapse video, so we don't have to spend all night watching it.

[Presentation]

Michael G. Van De Ven

I really do mean it when I say that we have the best employees in the industry. That is a tremendous amount of work and to have an airplane roll in the maintenance hangar after a long day's work and roll out like that the next day is just a great tribute our mechanics. They do a fantastic job.

The last thing I wanted to spend a little bit of time talking about is labor. We have -- our 5 largest unions represent the majority of our workforce and we're going to be in contract negotiations with all of them on May of 2013. All of them will be, and that's about 99% of our workforce. And I don't think it's any shock or surprise as that -- while we still have a cost advantage to the legacies in the industry, that cost advantage, that gap has narrowed over the years. And one of the reasons for the narrowing is their labor cost restructurings in bankruptcy. And so we just have a -- the facts in front of us are that we've got some labor cost challenges that we need to figure out how to overcome. And we've got a group of employees on our negotiating teams, both at the company and at the unions, who are very focused on that and they understand the challenge and they understand the issue, and how we go approach that with them is going to be very, very important.

One of the things that just I was blessed with, was having the opportunity to hire Randy Babbitt at Southwest. And I really do think that we are in a position where we've got one of the top experts in the industry. We've got a guy that has spent 25 years flying as a front-line pilot. He's spent an inordinate amount of time on the union side negotiating labor contracts. He has been in the consulting world. He's ran a large government organization from the management side, really improved the union relationships there. And we've got that resource for us at Southwest Airlines and I'm excited about how we're going to walk through those challenges.

And so what we plan to do is just be as transparent as we can and make sure that we're aligning on the challenge. Our challenge is, is we need to go back and recapture as much of that cost advantage as we possibly can. And you have to do that with a set of facts that you all agree on. And so we're going to sit down with them and we're going to make sure that we agree on what our competitive challenges are. We don't want to have a -- we don't want to be caught up where we don't all agree on the set of information in front of us. We'll look at those and agree on that fact base, go through the entire and set some specific targets.

And then once we understand what we're trying to do, I think we'll be very fluid at exchanging very creative ideas with our unions. And so I'm hopeful that we will be able to navigate through that well. I've always said that I think Southwest Airlines does the very best when our backs are against the wall and I think we have a big challenge in this area and I'm very confident that our people, with their pride at Southwest Airlines and what it stands for, I think we'll work through that well. So with that, I think I will close and, Marcy, do you want to come up?

Marcy Brand

Thank you, Mike. Hello, thank you, Mike. We're going to take a quick break. We'll come back at around 9:50 and we'll continue with the second half of our morning.

[Break]

Ron Ricks

Thank you, Marcy. Southwest Airlines is America's shorthaul, high-frequency, point-to-point, low-fare carrier, specializing in service to close-in, un-congested, convenient, low-cost airports. That is what you have heard if you attended Investor Relations Day in 1979, 1989 and 1999. But today that equation has changed. I will speak to the airport component of that equation.

When that model prevailed, Southwest Airlines chose specific airports because we believe that they conferred a competitive advantage to Southwest. Close-in airports meant that we could take business passengers closer to the business centers where they wanted to be. Un-congested airports meant fewer delays and better customer service. Un-congested airports also had better asset utilizations in terms of turn times, more turns per gate, better aircraft utilization. A low-cost airport meant that even though a competitor at a higher cost facility charges the same fare, our margins were higher.

Back when that model prevailed, the exemplars of that airport strategy were Dallas Love Field and Houston Hobby Airport. Dallas Love Field was shorthaul by law. As a result of federal restriction imposed be a law known as the Wright Amendment in 1979, Southwest Airlines was restricted to the destinations it could serve from Dallas Love Field, and all of the destinations were shorthaul in nature. Houston Hobby Airport was shorthaul by choice but, as I will discuss later, is also subject to facility limitations that meant a constraint on Southwest Airlines growth.

All of you are familiar with the precipitous decline in shorthaul traffic following 9/11. To illustrate the extent of that decline, at Dallas Love Field today, we have fewer flights than we had 25 years ago despite a doubling of the Texas population. The flights at Houston Hobby Airport are flat only because there, we could shift shorthaul flying to medium and longhaul flying, an alternative that was unavailing to us at Dallas Love Field because of the Wright Amendment restrictions. So we were confronted with a choice. We could either let a historical airport advantage wither, or we could reinvent those airports. We chose the prize behind curtain #2.

In 2004, we launched a massive and ultimately successful political campaign to repeal the restrictions of the Wright Amendment. President Bush signed the repeal law into law in 2006. The complete restrictions of the Wright Amendment do not disappear until October 13, 2014, but the restrictions on limiting travel to the point where we could not even sell a ticket on a through or connecting basis to a passenger to fly beyond the restricted territory were repealed immediately upon passage of the law in 2006. Since 2006, the incremental revenue just from flying passengers on a through and connecting basis out of Dallas Love Field is $1.1 billion. And today, the annual run rate on that incremental revenue is $250 million.

The result of that experience over the last 6 years proves the thesis that there is enormous pent-up demand for longer haul travel to and from Dallas Love Field. There's only one challenge presented with that opportunity, is that the old facility we have at Dallas Love Field would not accommodate a significant increase in passengers. In short, we needed a completely new airport.

The slide you see is not an artist's rendering. It is a photograph of the new front door to Dallas Love Field. If you walk through the front door, you will be in a new lobby area adjacent to a brand new ticket counter area, a new security checkpoint area. And soon, that would lead to a brand-new terminal beyond that.

You will see on the slide right now labeled the West Concourse. Southwest has 15 gates and a very old facility, tiny passenger hold rooms, outdated concessions, very small spaces for passengers. We have 15 gates. Then on the far east side, there are 5 gates shared by 3 other airlines. That is what the airport looks like today.

What it will look like soon is this, a 20-gate with all 20 gates combined. Is this working? All new terminal area -- ticket hall, terminal area, brand new concession space in here and 20 contiguous gates here.

All of this -- if I could have the next slide please. All of this space is open. This is open. In April of 2013, in 4 months, this will be open with all new concessions, and 12 of the 20 gates will be open for use by Southwest Airlines.

At Houston Hobby Airport -- that's the new ticket counter space, by the way, thank you, Ryan, which is in use today. We had that open in time for Thanksgiving.

Houston Hobby's reinvention will look a little bit different. Houston Hobby is far different from Love Field today, with over 140 daily flights connecting Houston Hobby to the Midwest and both coasts on a non-stop basis. Houston Hobby is uniquely situated geographically in that it is a superb jumping-off point to points south. The challenge for us at Southwest Airlines is that points south are outside the United States of America.

Houston Hobby today is relegated to domestic traffic only because it lacks an international facility and a customs FIS facility necessary to process inbound international passengers. So we launched another political campaign to free Hobby from those restrictions, also successful. In May of this year, the Houston City Council approved a Southwest plan to construct a 5-gate international terminal permitting service on an international basis for the first time for Houston Hobby. We believe the opportunity there is enormous because many of the markets south of Houston are underserved and overpriced. The current slide shows that of 54 United Airlines markets from Bush Intercontinental Airport, 51 are monopoly routes with very high fares.

When both the Houston Hobby and Dallas Love Field projects are complete, they together will represent significant revenue growth from low-cost airports, much lower on a per passenger basis than most of the airports served by our competitors at their primary facilities. And perhaps most importantly, of all, airport dominance. At Dallas Love Field, Federal statute restricts the total number of gates to 20. Of those 20, we have 16 and we can use the remaining 4 on a preferential basis when they are not in use by a competitor. At Houston Hobby Airport, we have 18 of the 25 domestic gates, 4 presently unleased and available to us on short notice if demand presents a need for them, and we will have 4 of the 5 international gates and can use the remaining 1 international gate, again, when it's not occupied by a competitor's airplane.

To further illustrate the potential we feel in this airport advantage, I'll give you a few more numbers. When the Love Field modernization project and the Houston Hobby international terminal projects are complete -- focusing on Love Field just for a second, when the Love Field modernization project is complete and the Wright Amendment restrictions are gone on October 13, 2014, Southwest Airlines will increase its gates by 6%, but we will be able to increase flights based on proven demand up to 40%. And if you assume a 50-50 mix of 143-Evolve-seat 737-700s, and 175-seat 737-800s, that represents an increase in seats available for sale from Dallas Love Field versus today of 60%. Those new flights will be operated with a higher revenue per flight because they're longer haul in nature and, again, from an airport that offers a significant cost advantage over most competitors, especially those in the nearby region.

The opportunity at Houston Hobby, we believe, equals or exceeds that of Love Field, primarily for 2 reasons. When the Houston international project is complete, the total number of gates at Hobby will be 50% more than those available at Love Field. And Houston Hobby represents the international potential, which we believe is an enormous area of growth for Southwest Airlines, both in terms of revenue and in terms of profit.

In conclusion, airport advantage Southwest. This advantage we believe is so significant for us going forward that it comes close but does not quite equal an even bigger advantage, and that's our next speaker, the Senior Vice President and Chief Financial Officer for Southwest Airlines, Ms. Tammy Romo.

Tammy Romo

Thank you, Ron. I'm happy to be here with you this morning. And I'm very excited about the information that we are sharing with you this morning. And as you can tell, we are not standing still. And we have a plan to deliver on our 15% pretax ROIC goal in 2013 and I'm excited to share that in a little more detail with you this morning.

So as you can see from the chart, we had a 7% ROIC in the third quarter of 2012. And we intend to grow it to 15% and achieve our 15% goal by the end of 2013. And just to walk you through some of the key assumptions here, we have a unit revenue increase of 4% to 5% that we are assuming and I'll walk you through that in more detail here shortly. And we are basing that on a market fuel price of $3.25 to about $3.30 per gallon. And we are anticipating a unit cost or CASM, x fuel, profit sharing and special items, increase of approximately 1%. And on our -- on the capacity side, we are expecting an ASM growth of about 2%. And also importantly, we plan to aggressively manage our invested capital.

Now before I jump into 2013, I just want to spend a few minutes talking about our current revenue trends. As you can see from this chart, we outpaced in August and October and we were in line with the industry in July and September. Our October PRASM, as you all know, was up about 5% year-over-year and we reported November was up 1% year-over-year.

While we expected November's year-over-year PRASM performance to be less than it was in October, it came in a little lighter than we had anticipated primarily due to the impact of Hurricane Sandy, which dampened, as you all know here, demand in the Northeast. So we estimate that Hurricane Sandy penalized our November PRASM by about 1 point and if you combine that with the October impact, that resulted in an estimated $15-million to $20-million reduction in operating profit for the fourth quarter.

Based on bookings and as you well know, we have a tough comparison in December because of the mismatch in the holidays. We expect December's unit revenue to be flat to up about 1%. However, if you look at the combined holiday period for December and January, bookings at this point look quite strong.

So our 2013 revenue plan, just to give you a quick update on January, based on the current booking and revenue trends, we do expect January's PRASM growth to outperform December. A little premature to give you guidance at this point, but we do expect that to outperform December.

For the full year 2013, Bob already walked you through the significant contributors to our revenue plan, but in quick summary, we are on track with our strategic initiatives to contribute, as Gary mentioned, $800 million in 2013 incremental to 2012. And Bob also reported on our new and other revenue streams that will augment our already strong plans with an incremental $300 million in 2013. All this gives us confidence that our 15% ROIC goal is realistic and achievable, and certainly gives us the comfort that our unit revenue increase of 4% to 5% is very reasonable.

So further, just to give you a little more insight as to how we are thinking. We believe our plan is reasonable when you compare it against the last 5 years of PRASM growth. Historically, we've been able to grow our unit revenues 2 to 3x real GDP growth, and so certainly, that 4% to 5% would fall in line with that. And you can see that we've consistently been able to deliver on that, outside of recessionary periods.

A quick update for fourth quarter fuel. We currently expect our economic fuel price per gallon to be in the $3.30 to $3.35 per gallon range. Looking forward to 2013, we have modest fuel hedging protection in place, and that's based in Brent crude and that primarily provides catastrophic protection in a rising fuel environment. Beyond the first quarter, we expect to pay market prices for the rest of the year, as we are no longer impacted from the locked-in losses from our legacy hedge position from 2008. So I'm very happy to have that behind us.

Our 2013 plan assumes a market price in the $3.25 to $3.30 per gallon range. And that reflects, just so you all know, a Brent crude of $108 per barrel. As always, we will continue to actively manage our fuel hedge and, again, we primarily look to that to provide us catastrophic protection when fuel prices rise.

As I mentioned earlier, our plan calls for 2013 unit -- non-fuel unit cost, excluding profit-sharing and special items, to increase year-over-year about 1%. And just a few items I would like to note. Our labor unit cost increases do ease year-over-year as we go throughout the quarter. And of course, we will -- just a reminder, we will continue the -700 Evolve retrofits in the first half of 2013, but we will also begin seeing more year-over-year unit cost benefit increase from the 800s and the Evolves as we go throughout the year into the second half.

And as we mentioned in our last conference call, this plan incorporates our efforts to reduce overhead by $100 million. So all -- and that, that improved our -- which is reflected here. That improved our non-fuel outlook by about 1 point.

And we continue to aggressively focus on cost-cutting opportunities. And if you look at the 3 big components of our cost structure, of course, you can see here that fuel and salaries make up about 70% of our cost structure. Our fuel, as Mike mentioned earlier, is our fuel -- and I think it was Gary. Our fuel conservation efforts are ongoing and we've been very pleased with the results of our efforts thus far, and we have more opportunities ahead. And of course, we will continue to focus on improving our productivity, as was mentioned earlier.

One measure of our employee productivity that we keep track of is just our employees per aircraft. And as you can see, year-to-date level is back up to about where we were in 2008. And I do believe we have opportunities to improve that over the next several years. As Gary mentioned, we expect our 2013 headcount to be down slightly from this year. It's better in line with our level of operations. But keep in mind that 2013, as you all know, is a heavy integration year for us. And so I know that even beyond 2013, we can even become more productive and have lots of opportunities to do that.

Now, and Mike -- I'm sorry, go back one more time. I know Mike mentioned this earlier, but I think it's important to note that our load factor has increased pretty dramatically over this period of time. It's up about 9 points. So taking into consideration the fact that we have implemented a new frequent flyer program, which was a huge effort, and we are in the midst of integrating AirTran, I think this is quite an accomplishment.

Further, we compare very favorably to the industry on employee productivity. And again, as Mike mentioned, our labor groups do absolutely a fantastic job each and every day delivering outstanding customer service. And we will continue working with them to ensure that we remain the most productive in the industry. And we can't reiterate this enough. We must not only maintain our low-cost position in the industry, but we must find ways to widen our cost advantage and we are determined to do that.

Just turning to our capacity plan for 2013. We expect our 2013 available seat miles to increase about 2%. And as you can see, the main driver is the incremental seats from the Evolve and the 800s. And as you can also see from this chart, we intend to continually -- to continue aggressively optimizing our network in 2013, and that's reflected with the -- in the trip reductions there. We continue to be very disciplined in our fleet growth, and as we've said a number of times, we have no plans to grow our fleet until we achieve our 15% return on invested capital goal.

On just a quick update on the orders, really no change here. We have 20 -800 firm orders in 2013, and we expect to transfer 16 717s to Delta in 2013. And as you know, when you combine that with our planned Classic retirements, we expect our fleet to be down just slightly.

Okay, I always love showing this slide and delighted to report that we continue to have just a very strong financial position. We expect to end the year with somewhere between $2.5 billion and $3 billion, so it'll be shy of $3 billion. But that seasonally is normal for us. We typically see our cash fall in the less peak demand times. But of course, we see it rise above $3 billion in our peak periods like in the summer.

And we continue, as we mentioned, to repurchase stock this quarter. And just a quick update, we recently completed another $75 million in share repurchases since the third quarter. And so that brings us to $400 million in repurchases this year. And that's about -- that equates to about 46 million shares. And if you are tracking against our $1-billion authorization, that is a total of $625 million, and that's about 73 million shares. And that's been repurchased since the board authorized the program in, I think, that was August of 2011.

We also paid $22 million in dividends this year, and we have a current annual dividend of $0.04 per share. Over the past 2 years and just want to remind you all, we've had -- and Gary mentioned this too. We've had very, very strong cash flow generation. And over these 2 years, we've returned approximately 20% of our operating cash flows back to our shareholders in the form of share repurchases and dividends, which is by far more than any of our peers. And the 73 million shares that we repurchased during this period also reflects about 10% of our outstanding shares.

And just to conclude, we are obviously very focused on increasing our capital efficiency, and I am very pleased with where we stand today with regard to our financial position and cash flow generation. As I mentioned, we have the highest return of cash flows to shareholders in the industry. And from here, we have a focus to continue to return value to our shareholders. As I've shared today, we believe we have a solid plan for 2013 aimed at achieving our 15% ROIC goal. And we are aggressively managing our invested capital base, and I'm so -- so I'm very excited about our 2013 plan.

And with that overview, I'm going to turn it back over to Gary for closing remarks, and then we will open it up to answer all your questions. Thank you.

Gary C. Kelly

Okay, well, thanks, Tammy, and I just want to thank all of our leaders who presented this morning. And of course, it gives me -- as you all can see firsthand, it just gives me great confidence in what we're doing today and what we're planning on doing tomorrow. They are absolutely superb. And I was pleasantly pleased to see that we were all pretty well-coordinated and said basically the same thing as well, so that's always a good thing.

But they're like my family. We've worked together for many, many years. All of our Executive VPs are here. Jeff Lamb -- -- where's Jeff? At the back of the room, is our other EVP, so he's not a presenter today. He's our Chief People Officer. He's got technology as one major accountability and so if you all have questions, he's here in addition to some of our Senior VPs that are up here. My point in just sharing this with you is that the whole senior team essentially is here for you today. And hopefully, you'll take advantage of that.

So let me try to wrap us up here. I think we have served all of our constituents extremely well. It has been a very difficult decade. We've seen fuel price changes, the competitive landscape has changed, and the whole shorthaul market is radically different. So we've had to retool. On top of that, we did not have flexible technology platforms in place to allow for the kinds of either strategic or tactical changes that we needed to make. There was a comment during the break that I thought was very insightful, which is, "Wow, it seems like you have delivered a lot of technology here recently."

So in choosing what to share with you all this morning, we didn't go back to 2001 to show you all the deliverables that have taken place. But it is absolutely enormous and heroic. So please don't confuse our technology people from the technology stuff, because our technology people have overcome a mountain of challenges to get Southwest Airlines to this point. I'm very, very proud of them. We have one major mountain remaining, which is our reservation system. And I look forward to the day when we have that replaced, because that will allow us to make much more speedy tactical choices as compared to what we've been faced with over the last 10 years.

And I'll just say one more time, despite all the challenges of the last decade, this company has served all of its constituents very well. We've taken care of our employees, we've taken care of our customers and we've taken very good care of our shareholders, far better care than any of our peers. So our immediate priority is just to repeat again or to maintain the excellence that we have built over 4 decades in the company. That is with our culture, with our brand, our customer experience and certainly our operational excellence.

We are on the verge of regaining our financial prosperity, and as I mentioned early, I just want to repeat again: like safety, our financial performance is not negotiable. It is an imperative. And we will hit that target, barring unforeseen circumstances in the world, in the economy, with fuel prices, all the things that are outside of anyone's control. That is a top, immediate priority.

And then correlating with that, as Tammy has a very well articulated, we'll continue to focus very hard on our capital efficiency. Again, like -- unlike our competitors, we have a very strong balance sheet, we've been reducing our debt and returning value to our shareholders. It's not a promise. It is happening and it will continue to happen.

One more time on our strategy through 2015, I hope we can get all of our reservation system technology complete by then, but that is not a commitment that we are giving you today. It is simply saying that once we get our international reservations technology complete in 2014, then we will turn our focus on the remainder, or the domestic system, if you will, and we'll give you a time line once we have a plan for that. But clearly, we will get to work on that in earnest after 2014.

So the Rapid Rewards is pretty much in place. The 800s are up and running. Mike gave you a very good outline on how that's going. The AirTran integration, actually, we've got virtually everything done except for some technology.

And then, of course, Brian Hirshman, who leads up our maintenance and engineering department, has a very good plan to get the remaining aircraft converted from AirTran into Southwest Airlines. As you all know now, that will only be the 737s. 11 airplanes were converted this year, 8 more will be converted next year for the San Juan service, and then the balance of the 52 700s will be converted in 2014. The 717s go straight to Delta. So there's a lot of work yet to be done on AirTran but the long pole in the tent is bringing up the international Amadeus technology. And again, that's 2014.

Fleet modernization, of course, is going to go on over time. And I'm delighted with the progress there. It feels like it is very much within our control. A lot of the front-end investments will be behind us next year and you'll begin to see those cost pressures easing as well.

I believe that this strategy through 2015, with the complete replacement of our reservation system, will essentially complete the transformation that we've needed in our capabilities. It won't necessarily mean that Southwest Airlines is done with what it wants to do with customer experience and operations, but we'll have much better capabilities in place as compared to the way we started this century. And we're all very much looking forward to that. So I would just add to that, that in addition to improving our own capabilities, we are managing as aggressively as we dare to evolve the Southwest Airlines brand and customer experience and operations to be successful in today's environment.

So here's our 2013 plan. We'll continue to tune our plan in the future, so that we meet customer needs but also hit our financial targets. So I think it's important for all of us to know that we're going to continue to manage this business.

We are America's favorite airline. A component of that, of course, and an important one, is our low fares and our low costs. But we walk that fine line of having an inexpensive price but also coupled with great service, and we don't want to lose that. So we envision that we can, in the future, pursue the opportunity to be North America's favorite airline. And I think it's important for companies to grow. I think it's important for people to grow. But of course, we know that we can only do that if we have the financial performance to go along with it. It's no different than having the right operational performance.

Said a little bit different way, we can only grow if there is a reason -- if we have a reason to give new customers to change to another airline. We must have a competitive advantage and clearly, if we want to grow this airline, the single most significant competitive advantage we can bring to the market is lower costs and lower fares. And that will continue to be our vision going forward.

So with that, why don't I ask our officers to come on up? And Marcy will open it up for questions until you tell us to stop.

Question-and-Answer Session

Marcy Brand

That sounds great, and if I could just ask that you guys wait to get a microphone, so that our webcast listeners can hear the questions as well. We'll give it a minute to let everybody get up front.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

This is Jamie Baker at JPMorgan. A question for Bob. You talked about the Rapid Rewards program, increased partners sales, membership up considerably. But -- how should we be thinking about the cost of that program? With load factors at record highs, it seems that it's more likely a redemption is going to displace a paying passenger. There's also the liability side of the equation. I think other airlines are becoming a little bit more aggressive in terms of managing that liability. As a passenger, I certainly expect to start having the option at kiosks to upgrade with miles going forward at the industry level. Obviously, that's not an option for Southwest. How should we be thinking about how that liability is going to be managed at Southwest?

Robert E. Jordan

Well, a couple of things. I'm going to let Tammy, if you don't mind, talk about kind of the accounting side. There's a mix because you have -- obviously, you have a sales and a commission side and how that ultimately turns into revenue. I think the biggest story on Rapid Rewards is that we -- a couple of things. Number one, we had a program that was really geared to the old model of Southwest Airlines. It was geared to point-to-point, one base -- one reward base for however you flew, whatever you paid, and so the change is really geared at adapting the program to what our customers are really doing today. And it's been hugely successful, as I mentioned. So we're membership up 30%. I can't give you the percentage of revenues and sales and commissions that were up because we don't reveal the total value of the program. But up $500 million in the span of 2 years is just incredible and the program continues to grow. The way I think about the $500 million, it is a net advantage, so we think about displacement, we think about the cost of filling the seats, all of that. So that is a -- it takes all of that into account. I'm going to let Tammy, if you don't mind, and talk a little bit about the accounting side. But we have -- we spent a lot of time thinking about the seats that are displaced, particularly because one of the advantages of the program that you know that is completely different than every other carrier is that we carry no blackout days. So you can take any seat that's available. Now the way that we get away with that is that a way that it makes sense for Southwest Airlines and for our customers is that rather than a typical program where it's 25,000 miles to go any way, or any particular place where it's fixed, the cost to our member really is based on the price of the -- the cash price of the ticket at the time. So if -- so in other words, if there's a $69 or $79 seat, then you can spend far fewer Rapid Rewards points to take that seat. If it's a very last minute and the price of that seat is now $259, it's going to cost you a lot more in terms of your Rapid Rewards points to grab that seat. But it is available, and that matching of the value that we would have charged a cash customer for the seat, and what we're charging a Rapid Rewards customer for the seat in terms of points, enables all that to wash out because the airline is basically taking in the same effective amount of cash for that seat that's being given up, whether it's sold or whether it is ultimately used for a Rapid Rewards redemption. Tammy, you may want to add a little bit on this.

Tammy Romo

Just real quickly on the Rapid Rewards, our revenue, as I think you would imagine, is deferred until the points are redeemed. And then we bring it into revenue.

Gary C. Kelly

Jamie, I think we -- as a leadership team, we agree with your questions. So in other words, this is new. We'll need some experience. I'm trying to find an easier way to assess the cost, just in the way you asked the question. As a baseline, one of the things we're going to be monitoring is, well, just how many seats are being flown on a reward, which is at least a way to think about it. But conceptually, dealing with displacement and the cost of that is a lot of theoretical mess in my opinion. So the hard dollars that Bob's describing in theory do take that into account, but it is something that we'll want to continue to monitor. And back to my tuning point, if we need to tune this in the future, I think we're very willing and open and able to do that.

Michael Linenberg - Deutsche Bank AG, Research Division

Gary, Mike Linenberg, Deutsche Bank. Gary, from where we sit, to go from a 7% ROIC to 15% in 5 quarters seems very aggressive. In fact, I think some would say heroic. But then from your -- where you sit, there's things that you see and things that you have in the works that will play out over the next 12 months that may get there, that may be able to refute some of those doubts. Are there any tricks up your sleeve? Or is that 15% target by the end of 2013, is that -- do you view that as a reach? Or is that sort of within -- reasonable? Is there sort of a realm of reasonableness that you can get there? I mean, what [indiscernible] sort of characterize about that target?

Gary C. Kelly

I would just give you just a little color, and we shared with our third quarter earnings that we weren't satisfied with the third quarter performance. I was very pleased with the second quarter and a little bit surprised to find how things have turned so quickly in just 90 days. And that's just not acceptable. So we had agreed and shared with you all at that point that we were going to bring some new and improved forward on revenues and costs for 2013. In October, we felt like a lot of things were going to converge in 2013 already. So I think Tammy and I both view $800 million of the incremental revenue performance in 2013 to be in the pipeline. What is interesting to me at this point, again looking back at the 2012 performance, is how many opportunities we really have to drive improved revenue just by dealing with the network. That feels really good. That feels like it's pretty much within our control. I think we always have to admit to you all that we're making major assumptions about the economy. And of course, we all know that we have to put some stake in the ground on fuel prices. So it's not a guarantee; it's not a promise. But we are sharing with you our plan. It is literally our plan. We did work the plan continually until we got to 15%. I wouldn't say we just stopped there. But yes, it did take some effort to get from an initial pass in October to the numbers that you see today. We worked a variety of questions. One was, let's just reaffirm the 5 initiatives that we have. Are we sure we want to stay the course? Now most of those, of course, are pretty well done. We did give a little nod to Jamie's question and tried to reconsider whether there are some things maybe we wanted to relook at with our Rapid Rewards program. But for the most part, we came back and said, no, the 5 initiatives are good. We want to carry on. They're going to work. Let's get those done. What now can we do on top of that and perhaps take advantage of work that's already been deployed? So you see no-show fee clearly is a new idea and will take some work for us to implement that on top of the 5 initiatives' work, but we're confident that we can get that done. But the real -- the O&D revenue management, that's been in the works for a while, as you all know. That's a significant technology effort that's within our sights. Getting the networks connected, of course, is really the catalyst for enabling really aggressive network optimization. And that will -- again, that will roll out schedule-by-schedule. So long answer. I think it is a very viable revenue plan. And at least in my estimation, 4% to 5% unit revenue growth, given the economic forecast that we all know, does not seem unreasonable. Now we've built it from the ground up. We just want to make sure we're not missing something from kind of a top-down look. We haven't talked a whole lot about the cost. Our main focus right now, in addition to the fleet modernization initiatives, which is a cost initiative also, is to really focus on trimming our overhead, which is both at headquarters and around the system. And so we do have cuts that are taking place in next year's budget with overhead cost, some capital, mostly operating. But it's not business as usual. There's a very aggressive approach there but all again pretty much within our control. As an example, our plan includes 300 headcount -- authorized headcount cuts from our overhead headcount categories by the end of 2013. So that doesn't translate to layoffs. I don't mean that, but we will definitely be trimming our headcount authorization and be able to fulfill that number just through attrition or just not hiring. No, it's a good plan. It's a solid plan. The costs are easier to attest to at this stage than the revenues, but most of the revenues have been in the works for a long time, and we're just anxious to make it happen.

Tammy Romo

Mike, can I add just one thing to Gary on the cost side? I just don't want to fail to mention that the guidance, of course, that we gave or the plan for the full year is up about 1%. But if you look at the trends as we go through the year, we will trend to flat by the end of the year.

Michael Linenberg - Deutsche Bank AG, Research Division

Gary, would it be fair to say, just going from the segment-based revenue system to an O&D system, the $150 million to $175 million, it seems like that's like 1%, 1.5% of revenue. A lot of times when airlines go through this transition, you hear numbers like 3%, 4%. So is that -- it feels like that there's maybe some cushion built in there as well. I mean, is that the way to think about?

Gary C. Kelly

I think that's a fair question. We're not purposefully sandbagging with any one of these numbers. On the other hand, because of the nature of revenues on such a gigantic base, they could be a lot bigger. And I think I would be delighted at that, as would everyone. But it does -- again, at least in reference to your question, is this an unrealistic, overly aggressive plan? No. If the economy is in a funk and we run into a sequence of Septembers -- September is still a mystery to me. I don't know why September for the industry was as weak as it was, but it was. So I'm sure we'll have those kind of bumps in the road, but at least we've got a lot of stuff coming down the pipe that will help fuel that momentum.

Robert E. Jordan

Mike, the other thing too I'd add is the typical -- you're right. The typical airline experience in the first year that they convert from a segment-based to an O&D-based is about a 1.2% revenue boost, because you do tend -- it takes a while to implement, and you have fits and starts and you tend to move around a bit before you hit a steady state. And part of that $100-million contribution in 2013 and that $150 million run rate is based on the typical early expectation that you see, which is about a 1.2% to 1.4% boost in revenue. And then airlines do tend to then move beyond that in a later phase.

Glenn D. Engel - BofA Merrill Lynch, Research Division

Glenn Engel, BofA Merrill. A revenue and a cost question. On the revenue side, in the first half, business travel was up yet your close-in bookings were down. Did you push -- have you pushed fares too high or at least list prices? And on the cost side, you've cut back a lot of marginal flying that's boosted your RASM up. Have you made -- how have you made your cost structure more variable with these new schedules? And do you need anything in your labor contracts to get further?

Gary C. Kelly

Bob and Mike, you all want to...

Robert E. Jordan

Why don't you take the labor piece first there, because [indiscernible] Yes, so one of the things that we need to work on in our labor contracts is to introduce more flexibility in there to get the right people to the right place at the right time. So that is probably one of our key focus areas where I think that we could help out -- help get our work force at the right place at the right time. So I do think we will probably carry a little bit of a cost penalty by not being able to pull the costs out as fast as the revenue changes could come on place, and that will be one of our key initiatives. As you think about the continued optimization of the schedule, which is -- beyond what I talked about today, this recapturing of turn and block time is really something that's pretty new because it's a -- the tightening of the operation to be able to recapture time in the heart of the day is very new for us because as you -- what we've typically done is cut unproductive flying, which of course tends to be at the end of the day, and then attempt to redeploy that. But if you cut a 6:00 a.m. flight and the opportunity is really at 2:00 p.m., you can -- the plane is already flying at 2:00 p.m. You can't -- if cut it at 6:00 a.m., you can't put it back to work at 2:00 p.m. because it already is committed. So the new techniques are really meant to capture turn and block times to compress the day. That frees up aircraft to be able to fund a mission that is in the heart of the day where we really see the demand. The traditional optimization that we have been on track here in the last 4 or 5 years or even a little bit longer really is just taking -- looking at unproductive flying, in some cases simply cutting it and pulling in utilization just a bit, in some cases cutting it and redeploying it to a better opportunity. But the issue there really is it's unproductive for a reason. It's unproductive typically because it's at the wrong time or a slightly wrong time. It has a -- because of that, it has a very low load factor. Because it has a load factor you're having to move down prices to generate -- stimulate demand. So the majority of the activity that we've been performing is really pulling in the day. And then working with Mike and his team, because as you pull in the aircraft utilization, it of course has an impact in terms of the way we staff our stations, the cost of the stations, the quality of life that our employees enjoy because they have a schedule that they're used to fulfilling each day. And we've worked in combination as we have pulled in the day, and we're also working together to manage the impacts that come out of this tightening of turn and block.

Michael G. Van De Ven

So, Glenn, just also -- just if Bob is going to be able to push more block hours per day on a shorter operating day just from a cost perspective, that's cheaper for us to operate. So I don't have -- we don't have to staff the airports as long during the day, so there's absolutely a cost advantage for scheduling the airplane that way that we will get.

Gary C. Kelly

And, Glenn, on the -- on what I think I understood your question to be on the fare structure and business demand. You've made this point before with me and with us. As fares go up, that changes things. And so like it or not, the airline industry has this array of fares that have to be managed. So we are continually modifying our approach to inventory management and fares within the fare structure to react to customer reaction. I'm not comfortable elaborating on what that strategy is for competitive reasons, but I will certainly tell you that we've worked harder with the business travel demand to make sure that we're getting the bookings with that group. So it's sophisticated. It's very dynamic, and it certainly changes when fares go up. And that's the environment that, of course, the industry has been living in, especially since 2008.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Tom Kim from Goldman Sachs. I wanted to ask you a broader question about the competitive landscape. How do you view it today? And to what extent do you -- are these plans sort of in view of a -- I would describe it as a relatively benign competitive environment, benign in that carriers are in general trying to cut capacity, in general all trying to raise pricing. So to what extent does your plan assume this relatively benign sort of competitive environment, particularly from, let's say, the network majors. And then I'll leave it at that.

Gary C. Kelly

Well, I would say that, first of all, all markets aren't equal and all airlines are different. As a broad statement, of course, with the charts that I shared with you all earlier, obviously capacity has been managed very aggressively over the past 12 years and certainly recently. My recollection is that most quarters in recent history, we've seen total industry capacity in decline domestically. Based on everything that we all know, high fuel prices, an uncertain economy, I would -- and just published schedules, I would expect that headline to continue in 2013. You all probably know as good or better than I do what the industry forecasts are for capacity. Within that though, you definitely have carriers who are behaving differently. And there is a new competition showing up in Southwest markets more in 2012, Ryan and Marcy, I think, than what we have been seeing probably in 2011 and 2010. The net effect of that is you've got some adds; some substracts; and on an overall basis, there's more subtracts. But I would expect that, that's going to continue and, I think, with the disciplining factors being those 2: the economic outlook, which nobody can be certain of; and then the fuel prices, the same thing. The thing that clearly has been happening is when the economic outlook gets better, Chris, so do fuel prices. They follow in lockstep. So sometimes we have to be careful what we wish for. But right now, the fuel prices, the outlook is pretty benign, and we think that we've got a revenue plan for next year even with some of the sluggishness in the economy. That's all assuming we don't have some crazy fiscal cliff problem.

John D. Godyn - Morgan Stanley, Research Division

John Godyn at Morgan Stanley. Two questions. Gary, first, just in your closing, you reiterated the fact that low costs and low fares are sort of the key part of the competitive advantage. Of course, in an elevated fuel price environment and the kind of moves that we've seen over the last decade, it certainly makes low cost more difficult and perhaps low fares. If we imagined a world of prolonged lower fuel prices for whatever reason but not a recession, what kind of opportunities would that uncover for you?

Gary C. Kelly

I think on a per trip basis, it would be mean a wider cost advantage. There's somewhere along that spectrum where your fixed costs can be driven down by more activity, and we're well past that right now. So it's got to be a lot lower, I think, before that would really be all that effective. But I think the main thing to reiterate is that, that is our vision. And it's just logic would say the opposite of that is -- in other words, we haven't given up on positioning Southwest as a low cost, low fare carrier because one could concede that. There are Southwest look-alikes around the world that don't hold themselves out as low fare carriers. But we're -- that's a 41-year-old brand that is in customer's minds that I think would be very dangerous to try to change. And besides, we don't feel like we need to. But my own opinion is that I don't think fuel prices are going to move to a point that would materially change that. We're going to have to find other opportunities to widen our cost of advantage and sustain that.

John D. Godyn - Morgan Stanley, Research Division

And, Tammy, can I just follow up on some of the guidance? On the RASM guidance, you are using a fuel price that looks like it's above current market. How should we think about how much that influenced the RASM guidance? What might RASM guidance be for investors if it was just current market fuel prices?

Tammy Romo

We've based our fuel -- it was -- it's more or less in line with current market prices, so I don't think there would be a big change in our unit revenue. And again, the 4% to 5% is our plan. But we -- again, we built -- it's not -- we built our plan from the bottoms up, so we would have to go back and rethink our plan. I don't know that I'd be prepared here to say that we would change our 4% to 5%, because there's a plan that backs up the 4% to 5%.

Gary C. Kelly

Yes, I agree.

John D. Godyn - Morgan Stanley, Research Division

And on the CASM x fuel guidance, does that include any assumption of labor contracts? You highlighted that as a risk in the earlier presentation.

Tammy Romo

Yes, the cost guidance assumes -- they're based on our -- the contracts that are in place today. And of course, we normally wouldn't change that unless we have new contracts in place.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Duane Pfennigwerth from Evercore. I'm wondering if you could help us think about the net ancillary impact benefit from these new initiatives. How should we be thinking about the bag fee revenue that you lose on the AirTran side as you implement this codeshare and as you continue to replace AirTran with Southwest fleet?

Robert E. Jordan

Well, I think a couple of things. So I went pretty quickly through these new ancillary opportunities, and I'll just -- I'll come back to your AirTran but -- so again, it's a couple of things. On the ancillary, the fee side, its really boosting Southwest fees. And this will be announced tomorrow, by the way, and they go into effect on February 13. It -- we're boosting our own Southwest fees, for example, overweight bags from $50 to $100, early bird from $12 -- from $10 to $12.50. AirTran is moving their bag fees from, I think, $20 to $25 on the first bag to $25 to $35 on the second bag. So we're moving them all up what I would characterize as modestly, and those are coming into effect at a very quick pace, again, in the first quarter. The AirTran fees, as we implement codeshare, with codeshare now upon us, we'll be implementing test markets here in the first 60 -- in the next 60 days and we'll have full connectivity in place in the next -- by the end of the first quarter. The -- depending on how you book, you may or you may not pay those AirTran fees. So if you book on South -- if you book the codeshare on Southwest and it has an AirTran segment, that AirTran segment will not be subject to an AirTran bag fee. It will take on the Southwest policy. But the $400 million in run rates synergies accounts for all of that, so the revenue gains through codeshare net out any fee loss on AirTran. So the $400 million in run rate synergies that we expect to get in 2013 account for the net of all of that. The other thing that I just wanted to add on, I went through a lot of different things that are changes or, in some cases, new for 2013. We talked about revenue management, O&D. We talked about the network changes, recapturing turn and block to redeploy those to better flight activities. We talked about the ancillary changes, the fee increases, the no-show fee, the selling of available boarding slots. We talked about the continuation of our strategic initiatives, the increase in the AirTran integration contribution in 2013. We talked about fleet modernization, the $80 million a year in 2013 incrementally above 2012 that the All-New Rapid Rewards program that will be contributing. So there's a long list of very significant and new and incremental revenues coming online in 2013. And as the owner -- the commercial guy, the owner of the revenue plan, what I really like about the revenue plan that we have built for 2013, it is very solid. So the line items, we've got to deliver them all, of course. It's very solid. We have very specific line items in terms of the things that will be delivered. It produces a -- as Tammy mentioned, a 4-ish kind of RASM increase. And last, it produces a -- again, we've got to deliver all this, but it hits our 15% ROIC without that plan being extremely aggressive. So we haven't baked a number of fare increases in and a lot of ways to get to that gap. So the things that are coming online through our strategic initiatives, coming online through these new activities that we're taking into place in 2013 to drive revenue produce a very -- hit our revenue target without having to lean on things like a set of fare increases that are obviously very dependent on whether the -- on how the economy plays out in 2013. So I'm just as -- a long answer, but I'm very excited about our 2013 revenue plan and the fact that in my own mind, it is very reasonable.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just a follow-up on labor. With respect to your negotiation process, you talked about alignment of goals with respect to financial objectives. I wonder how that's different from how you've approached these negotiations in the past. And then with respect to what's occurred in the industry in terms of pilot labor cost reset, is that a good thing or a bad thing for Southwest? Is it a temporary good thing? How should we be thinking about your relative position?

Michael G. Van De Ven

I think, historically, we just were in a different position as we approached our labor contracts, because we never had a wage scale that was at a significant premium to the industry. And we have that in most of our work groups. And that is a result of the bankruptcies and the restructured labor contracts. So that's just -- that's a new fact, a new reality that I think that we're facing going forward. And so what we need to do is -- job security is important at Southwest Airlines, and people like to protect what they have in terms of pay and benefit. So most of the feedback that I get from our employees is, "Look, guys, whatever you all do, we've got a really great thing going on here. Please don't mess that up. Figure out what we need to do, and we'll go do it." And so I think that's our challenge in the labor contracts, is to go realize that we have wage scale disadvantages to the industry. And that over time as -- and we're already seeing evidence of this in some of the contracts. Some of these wage scales that they have taken reductions on through bankruptcy, they're starting to build back up. And so at least, for example, in some of the pilot contracts, we're seeing that the wage rates on the 737 airplanes approaching Southwest Airlines level rates in the 2015, '16-ish time frame. Outside of that, though, we just need to find ways -- creative ways to get the right people at the right place at the right time through flexibility and just initiatives that we can take advantage of because of new technology, by way of example. And we'll just need to work through our negotiating teams to go find that creative ways to do that. They all understand the challenges that we face, and our employees count on us to solve that challenge. And I think we can go do that.

Gary C. Kelly

Duane, I might add, again, relative to at least contemporary time within the last decade, what is different in '12 than maybe in '07 or in 2002, in 2001 and '02, we all predicted that this was going to happen. But now we have ample evidence. What evidence am I talking about? We have a reconstituted legacy competitive set. It is absolutely an empirical fact. They are more competitive today than they were in '07, than they were in 2002 by a long shot. Just look at their results, number one. Number two, what Mike said very clearly, there is empirical evidence that our wage rates are much higher than our competitors. Third is the realization of some dreams a decade ago of new low-cost competition, and now that is absolutely a reality. So knowing all of those things, coupled with the fact that we have not hit our financial targets, makes that not just obvious but an imperative.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

It's me, Helane Becker. So I just wanted to ask the labor question slightly differently. One is, what's your thinking in terms of the timeline over how many years it will take you to negotiate the contracts? And then the other question is, can you talk about the impact of ObamaCare on your benefit rates, given that I'm sure you're 15% isn't won and done? It's a goal that goes every year for however many years you can achieve it. So how does that impact your thought process as well?

Gary C. Kelly

Let me start answering the labor part one. And, Jeff, if you don't mind, I know everybody would like to see and hear from you, so I'll let Jeff speak to the ObamaCare piece. But we care deeply about our employees, and Mike did a splendid job, I think, of describing all of the wonderful things they do in rich detail. They make this company work. They make it very successful. So it's not our objective for our labor negotiations to drag on and on and on. Quite the contrary. I want our employees to have contracts. I want our employees to be well taken care of. This is a bargaining process. And by definition, it demands that 2 parties come to an agreement. And so it is impossible to predict how long that's going to take. My point is I don't want it to take a long time. But we've got to prepare Southwest for the next generation. We've got to preserve our low cost. We've got to preserve the outstanding service that we have. I think it is very important for the company to grow. We haven't grown in several years. This will put us in a position where we can preserve the culture and all the wealth that our employees have accumulated at this point. And that's going to -- that will have to be the overriding objective. And we'll work really hard to pull that off just as fast as we can. Jeff, do you want to talk about -- there you are -- ObamaCare?

Jeff Lamb

Sure. So good morning. The impact of health-care reform on the 46,000 employees with our plans is fairly significant. We have 2 major things that we're doing to offset that. We started major wellness initiatives over the last 12 months, like companies -- trying to get people to avoid having the medical costs. We've also implemented a more consumer-driven health savings account plan this year that we'll be growing over the next few years. I think the impact is hardest because we just don't know what it's going to be, the -- kind of the trickle down effect of the changes as we saw most recently with this fee, but some additional cost on us probably in the range of $12 million to $15 million from '14, '15, and '16 through that latest fee. But those are estimates at this point, and we think we'll be able to offset those by some of the changes that I mentioned.

Hunter K. Keay - Wolfe Trahan & Co.

This is Hunter Keay from Wolfe Trahan. Two questions for you, one on Alaska and one on Hawaii. I noticed that you had the state of Alaska on that last slide of yours, Gary. I think that's the first time I've seen that. Can you talk about sort of that as an opportunity to grow, what you'd look for in terms of sort of triggering initiatives? Is it high fares? And what did you learn in the years that you've competed against Alaska in the city of Seattle as opposed to sort of you what might expect if and when you decide to go in there?

Gary C. Kelly

The -- again, the vision that we just wanted to -- not really share, just to repeat with you all is we're preparing Southwest for the next phase. And we're acknowledging that the world has changed. Ron reemphasized that point about shorthaul. We were very much a shorthaul carrier as late as 1996. We began to fly a little bit longer after that. But longhaul for us really meant we needed to change some plays. And so now we have a more, I think, comprehensive strategy that takes into account the needs of the longhaul markets, whether it's equipment or service, scheduling, whatever it might be, from fares, the whole array of things. We just weren't all that good initially at longhaul. Now we've adjusted our frequent-flier plan. Now we've adjusted our boarding process. Now we've brought in the 737-800. Mike talked about the various operating certifications that we are adding. So we'll have the capabilities in addition to a new reservation system that will allow for international. We'll have those capabilities in place before 2015. That opens up tactically the choice for us to fly to all the places that Ron showed on that route map, essentially all of North America, the northern tier of South America. Moving to Alaska, specifically the place and the airline, Alaska is a very fine airline and have been for many, many years. They are the hometown airline, as they like to describe themselves in Seattle. They have a strong brand. They have a legacy cost structure that is much higher than Southwest, and we compete with them like we compete with other legacies in that respect. But they're very formidable, and they are growing in their own right here, as we all know, recently. They dominate the state of Alaska. There is clearly an opportunity to consider that as a future expansion opportunity. The op certifications that Mike talked about, as well as the equipment that we now have and the 737-800, makes that a viable thought for us. But clearly, I'm not going to give you all a priority there. Alaska is a relatively small opportunity. I would certainly admit that Hawaii and Mexico and other places are much larger opportunities. But as long as we live up to the value proposition with low costs and low fares, as long as we hit our profit target and as long as we keep our customer service levels high, we ought to be able to think of all of those as viable growth options. If you add it up, all of the opportunities that are presented by that route map, on a rough base of 700 airplanes, there are 200 or 300 airplanes worth of growth opportunities, all else being equal. Now I'm not telling you all that we're going to go put in an order to grow Southwest by 200 or 300 airplanes. But the point is we'll have ample opportunities to choose from to grow the airline with all the capabilities in place. We just need to be sure that we're hitting our financial targets.

Hunter K. Keay - Wolfe Trahan & Co.

That's great. I appreciate that. And to Hawaii, can you update us on where you stand with that and how you think about -- I don't think the aircraft you're going to utilize can really go much, I think, beyond the Rockies at the very most. Can you update us with a timeline as much as you can provide and how you're thinking about deploying new service into that market?

Gary C. Kelly

I don't think I can provide a whole lot of insight there. And to try not to be repetitive here, though -- the array of things that you see are tactical choices. We will need to complete our AirTran integration by 1/1/15, which means we need to bring up international and then move the AirTran international routes, obviously, into Southwest Airlines. So I guess you could say that makes international a priority, but that's really not incremental service. I think the incremental route expansion is really more a function of when are we going hit our 15% return, which will then allow us to grow the fleet so that we can expand this combined airline of Southwest and AirTran, and that -- we're not speaking to that today, as you know. Our message today is: 2013, we're going to finish our strategic construction, and we're not going to grow the fleet until we are satisfied that we're generating the right returns.

Kevin Crissey - UBS Investment Bank, Research Division

Kevin Crissey, UBS. I wanted to ask 2 questions about your distribution advantage, specifically your website. Well, part of it being website. Why aren't you dominant in hotel sales in, say, Las Vegas? Why isn't that one of the strategic objectives, is to look at that as an ancillary revenue in maybe nonflying? But when you have the customers, you should be selling a hotel room, particularly in a city like Vegas, all the time. Why is that not on the list?

Robert E. Jordan

Well, that's a great question. I'll tell you, we -- you would assume Vegas or other locations because we dominate the domestic traffic. So 1 in 4 passengers are flying on Southwest Airlines. We ought to dominate the other aspects that go along with that: hotels, packages, cars, et cetera. I'll tell you this. We don't typically share the numbers but we get a very, very fair share. We use a number of partners. We get a very, very share and -- a very, very fair share, and I'm happy based on history with where we are with our vacations and our packaged product. I'm not happy with where we could be. We are conducting a number of tests around the way we think about dynamic pricing, putting those packages together with some of our partners. And I will tell you why we've not published an exact goal. Sitting here as the Chief Commercial Officer, one of my very large goals for driving revenue production is to boost our ancillary and partner revenues, not just through things like the Rapid Rewards program, but through partnering, packaging, vacations, hotel sales, rental cars, all those other attributes that can go along with combining that with the flight. So I would just say that we're very aware of it. We have a project plan to deal with that, and we'll share more of that as it comes to light.

Gary C. Kelly

I think, Kevin, the other thing, it is something that we have looked at pretty thoroughly, but it just didn't make the cut with the big 5. And there's the fleet initiative. Especially when that came online in 2011, that's a lot of work. And of course, the whole AirTran integration is a lot of work. So those are really big numbers, along with the frequent-flier program, that are flowing in. I'd agree with you and Bob that I think there is an opportunity there but it's just not been a focus at this point.

Kevin Crissey - UBS Investment Bank, Research Division

Okay, fair enough. And then a follow-up question on -- when we talk about hail [ph], flights not booking well, the first thought is, well, we'll lower some fares. But that's not the way an OTA would look at it. They would look at, how they can attract more eyeballs to their site to sell more? In what way does your website traffic play into your revenue management tactics at this point?

Robert E. Jordan

Well, a couple of things. It is a huge advantage to be able to drive folks through a number of actions to Southwest Airlines through southwest.com. southwest.com is, I believe, the #2 travel site in the world. We have a huge asset in southwest.com. We have fares that are available only on southwest.com. And by bringing folks to Southwest, as you mentioned, it also allows us to attract other revenue streams that are available only through southwest.com's packages that only we can provide, for example. The second piece of that -- and we -- as you know, AirTran distributes through multiple locations and multiple distribution sites, including most of the OTAs. So we've got a lot of data on how that -- what those customers and what those transactions look like in terms of average fare, in terms of cost. And I will tell you that the value of the transaction directed through southwest.com is more valuable than the transaction directed through an OTA. So that's another aspect. But we've looked at this. We -- I would just say that we evaluate it on a fairly regular basis. We invest a lot of our advertising dollars in southwest.com only. Lower fares are available on southwest.com only, and I'm very, very pleased with the traffic on the site. The percentage of our bookings that flow through southwest.com are in the 90% -- 90%-plus range. The -- if I had to tell you that there was one thing that I -- not that I worry about, but that we have to work on is when we enter a new market, and the travelers in that may not -- in that market may not be as familiar with southwest.com. We do have to work a little harder to establish the awareness that Southwest fares are available on southwest.com only. We've had great luck there as we entered Denver, for example. Denver is probably the prime example. We grew from -- in the last 6 to 7 years from -- no presence in Denver to one of our largest cities at about 175-type flights -- 75 flights per day. Again, all of those book through southwest.com. We are the traffic leader in Denver, so we can absolutely have success with that model. But we do -- it is something that we do look at periodically.

Mark Streeter - JP Morgan Chase & Co, Research Division

Mark Streeter, JPMorgan. First question, just 2, first for Tammy. How are you going to fund the business next year with the aircraft deliveries and so forth? Are you going to pay cash? Are you going to raise unsecured debt, secured debt? How are you looking at funding CapEx going forward?

Tammy Romo

Well, we -- of course, you've seen our cash flow. We are generating a tremendous amount of free cash flow. And with the plan that we presented today, we certainly don't need to do any refinancing. So I think we can cover that, if we choose, through our free cash flow generation. We -- if you look at our plan and assuming we achieve our 15% ROIC, we would see our leverage continue to decline. I'm not saying that it will. We'll just have to get in and evaluate exactly what we want to do on the financing front, but we certainly don't need to.

Mark Streeter - JP Morgan Chase & Co, Research Division

Great. And then just a second question for you and maybe for Gary as well. If I look at that forecast and our forecast for the industry and so forth, it seems like you're going to be sitting on a lot of excess cash and generating a lot of cash. And you mentioned up there one of the parameters, sort of low 40s leverage and so forth. So I'm just sort of wondering how you think about return of capital to shareholders going forward. It seems like you're going to be in a position, maybe not now but 6, 12, 9 months from now, something like that, to more aggressively repurchase shares, pay more dividends. How are you sort of balancing the free cash flow forecast against that parameter of staying sort of low 40s leverage?

Tammy Romo

Yes. It's exactly what you said, Mark. It is a balance, and we absolutely want to maintain our investment-grade rating. So we'll be balancing that against our focus to aggressively return value to shareholders. And as Gary mentioned earlier, we do intend -- repurchasing stock would certainly be something that we will continue in the future.

Gary C. Kelly

Yes, just to be clear, I already mentioned that as part of our plan that Tammy shared with you all, with that plan, I would continue doing share repurchases in 2013. Obviously, if the plan changes, then that slot changes. Beyond 2013, to your point, if we have that kind of a high-class problem, we'll do 3 things. We'll consider what debt to pay down, what cash to return to shareholders and how we want to continue to manage our fleet modernization and then grow the airline. So I would love to be in a position where those are our considerations. But for 2013, the plan is not to change our CapEx for fleet. So it just narrows the opportunities. We have some debt service that's coming up in '14, and I think there's another fairly large debt service requirement in 2016. So all of that we're contemplating. And again, with the 2013 plan, just to reiterate, we'll see leverage continue to drop very dramatically. So the cash flow has been strong. I haven't been real happy with the earnings in '11 and '12. They've been -- they've certainly been adequate. But the cash flow has been strong, and we've been able to do a lot. We've paid down a lot of debt. We've returned a lot of cash to shareholders.

Tammy Romo

Mark, just to give you the numbers, for the exact numbers for the debt repayments in 2013, that's $189 million, and then it's close to $540 million in 2014. And just to -- just one more note. If you look at what we've done historically, I think we have really, in my opinion, balanced very well. We take care of our bondholders and we take good care of our shareholders as well. But it's exactly how you led off the question. It really is just balancing all of those objectives.

Michael W. Derchin - CRT Capital Group LLC, Research Division

It's Mike Derchin of CRT. Could you give us an update on the -- your WiFi situation? And what kind of opportunity is that going forward?

Gary C. Kelly

Mike, we've got 417 of the next-gen aircraft in our fleet. So you got Classics and you got next-gen. The 417 airplanes will all be equipped with WiFi by February. I think as we speak today, we've got 380 up and running. And I think, Mike, you're getting all the new 800s delivered with the WiFi installed on it. So we're simply retrofitting some of our 700s with the WiFi at this point. The take rates are improving. You look at the mix of short, medium, longhaul flights, as you would guess, the shorthaul flights, the take rates are the worst. The longhaul flights, the take rates are pretty good, still single digits. The -- we've introduced television. So, Bob, I think we've got, what, 8 channels, something like that.

Robert E. Jordan

Right.

Gary C. Kelly

And the opportunity is there to expand the television offering, as well as to begin selling movies. So the in-flight entertainment aspect for Southwest is very promising, is very exciting. And because of the installation numbers on the airplanes, we haven't been pushing it, but that will change. So we'll begin to promote that much more aggressively in 2013. The other thing that Brian would tell you or Mike would tell you is the reliability. The reliability, Brian, I think you mentioned, is up in the 98s at this point. So he's not going to be satisfied and neither will we until we're in that 99.5 range, but we've seen very nice progress. It's bleeding edge technology, so we've definitely had some problems with some components that have been switched out. And then finally, we've got some performance challenges right now. Brian, I don't think we're limiting any use of the devices on board the aircraft. So competitors don't allow streaming video, as an example. So we're just sorting through bandwidth and performance. And so we may need to either make -- with our partner, make more investments for bandwidth or we may have to consider some tweaks. But when you fly us, try it. The television is remarkable, and I've been very, very pleased with that. And its performance actually is very good. Intuitively, I thought it might look like streaming video. It's TV and it looks really, really good. But at long last, we're nearing the completion there. AirTran still has Gogo, and that will -- as I understand it, that's going to continue until all the AirTran airplanes are either converted to Southwest or retired to Delta. So all the 737 -- again, all the 737 next-gens will have it.

Daniel McKenzie - The Buckingham Research Group Incorporated

Dan McKenzie with Buckingham Research. A couple of questions, one housecleaning, one efficiency-related. But for the fourth quarter, can you update us on what the non-fuel cost outlook is for the fourth quarter? Non-fuel cost outlook for the fourth quarter?

Tammy Romo

Oh, no change in guidance there. We are -- x fuel, profit-sharing and special items, we up -- expect to be up in the 6% range, so no change in guidance. And as a reminder, that is elevated because of the investment in the fleet initiatives that we've described to you today.

Daniel McKenzie - The Buckingham Research Group Incorporated

Okay. Second question is not a 2013 question, but it is an efficiency question. I can't resist looking at the number of seats flown by Southwest and AirTran combined today versus 5 years ago. And when I look at that, what I'm seeing is a smaller network -- 8% to 9% smaller network being flown with a burden of roughly 35, 37 more aircraft. And I appreciate that you acquired a hub-and-spoke airline and there are reasons via the network optimization that, that is the case. The question is not, why is that the case? The question really gets to, is that something that you can reverse and get back to sort of a 2008 efficiency level with respect to the seats versus the aircraft that you fly? And how could you do that?

Gary C. Kelly

Okay, Mike, think about that while I yak for a minute. I think I understood all your question, Dan. It was a little hard to hear, but if not, please redirect, just interrupt and redirect. The schedule has been aggressively optimized since about that time. So the fuel price crisis in '08 begat some pretty aggressive techniques in, I'm sure, 2009. There was a fair number of flights in that flight schedule that were unprofitable, alarmingly high. Again, fuel prices went from here to here. And so it required appropriate action. A lot of those flights that were taken out have been semi-permanently removed because they were early and late in the day. So I remember, Bob, that -- Bob had network planning and then Tammy did. So the percentage of flights in the meat of the day, call that 7 to 7, was at an all-time high. And my recollection is 88% of our departures had then been compressed simply because we removed these flights. So the aircraft utilization instantly went down. And you saw all these kinds of metrics. It's creeping back in a little bit. One of the initiatives, though, that Bob has mentioned to you is that during the prime time of the day, he and Mike are going to be putting more flights into that 7 to 7. And so you will see probably an increase in utilization in 2013, and I mentioned that also in my remarks, compared to '12. And it won't be by jamming flights into the shoulders. It will be during the meat of the day. The other thing, it's -- this comment is nuanced, but it's very important. We're going to be more -- we've got a little different technique with how we are optimizing flight choices in the network, with a purposeful eye towards trying to force more traffic onto nonstop flights and not competing against our sales and offering so many alternative itineraries with connections. So that's a pretty sophisticated look into the flight schedule that is more focused than what we've done historically, and I'm very excited about it. So it's not necessarily going to create more flight activity, but it is hopefully going to be a more productive use of an aircraft within the day. I think that there may be opportunities, almost to your fuel cost question earlier. If fuel prices were lower, we might consider off-peak flying more aggressively, i.e., in the evening. And we do have some later evening flights than, I think, Bob, what we had maybe in '09. You will find a 9:00 and a 10:00 in some of the markets, but for the most part, we're really trying to jam those flights in when people primarily want to fly. So hopefully that answered your question.

Robert E. Jordan

If I can add just one more thing, and I think, Gary, you really hit it. But the -- as fuel prices have come up, the -- you've got to decide what is the true measure of productivity in a network and an aircraft. And in the old days of $30 crude oil, it was very easy. And the more you could fly the aircraft, because you could charge absolutely low prices, particularly very early and very late, it was easy. You optimized for the operation and for productivity of the operation and utilization. Today, optimizing for profitability is maybe, in a lot of cases, not the same as optimizing for utilization of the aircraft. And so we've really had to balance that and, as Gary mentioned, trimming out those, and particularly early and late underperforming flights. The opportunity to then redeploy it is to -- because it's already busy in the heart of the day, is to redeploy it to another early or late flight, which may or may not be any more productive. So managing for profit is, in some cases, particularly with higher variable cost, is not the same as managing for utilization any longer. Second, we do have aircraft that are tied up in conversion on the AirTran side, so I think that's probably 1% of the fleet. It's simply out because it's being converted. We do have -- because of the higher costs in terms of managing the 717s, we have pulled down the AirTran utilization of the 717s a bit, number one, because of the cost; number two, because the 17 cities that I mentioned that we exited were, in most cases, very, very small. They're flying a very small number of flights. And to put those 717s back to work in the broader network is a little more difficult. So you -- we saw the utilization of the 717s come down a lot more than the utilization of the broader fleet, which is sort of affecting the average. So it's a combination of a number of factors. Now your second piece of your question is, as you pull all this together, what do you think is going to happen? And as I think over the next couple of years, as we move the 717s out, we get back to an all-737 fleet, -7s, -8s, in particular, I do think we will see that utilization then come back up as number one, we're past the conversion; number two, we have eliminated the -- again, it's primarily the 17s. It just does make sense for Southwest to fly in terms of the frequencies that we like to fly those. So I do think you'll see the utilization creep back up as we move our way through the integration.

Gary C. Kelly

And, Dan -- I'm glad you tagged on there, Bob, because that is new news. The 717s are underutilized, and then there are a number of aircraft out for the physical conversion. And that will continue. You'll have that slop until 2015. So we'll clearly have as an objective from an operation to harvest that aircraft time once we get through the conversion and get AirTran fully integrated into Southwest. That's very material to your question.

Marcy Brand

We have reached the end of our day, but we are going to take our final question from Dave.

David E. Fintzen - Barclays Capital, Research Division

Dave Fintzen from Barclays. Just a quick question, following up on the -- just that harvesting of aircraft time from block times and turn times. It's just -- maybe a question for Mike. Is that time in the schedule today that's not being used from an operational standpoint? Are those just excess blocks? Or how worried are you that you'll be able to actually operate this schedule at your current on-time performance?

Robert E. Jordan

Okay. Let me start. I'll tell you what. We tag together all the time, work together. Mike, we've worked together for 20 years, right? And so we balance the commercial and the operational side because sometimes we have competing objectives. But the -- from the commercial side, it's really pulling down very modestly the block times that we invest, pulling down modestly the turn times that we invest. So that -- that is really the only tool -- using the aircraft more efficiently is really the only tool in the heart of the day to gather up enough time to be able to redeploy the aircraft to a market timing that makes a lot of sense, that you know you have demand and it can make you a lot of money. Again, back to the end of the day, if cutting -- redeploying an "end of the day" trip to another "end of the day" trip really doesn't do much for our revenue performance. But we have looked -- so from the commercial side, it is relatively simple to tighten that up and write a different schedule. We've then gone through modeling the impacts on, well, what about our costs? What about our turn times? What about our on-time performance? What about other operational impacts? So we've not taken the decision lightly at all. And I'll let Mike talk about those operational impacts and what we're doing to mitigate those.

Michael G. Van De Ven

Yes. So there is definitely a pressure point with respect to the on-time performance, and it is generated because we have a lot of activity between passengers and bags that need to move between airplanes. And we don't have much ground time for the airplanes to do that. So what drives the on-time performance pressure is asking yourself the question, do I need to hold this flight for a couple of more minutes for the bags to connect? What is different today than what it was 2 or 3 years ago is we didn't have much visibility or much -- many tools into predicting how much activity would be at which flights, at which times of day. We have that today based on our last couple of years of experience, and we've developed playbooks in our op center to help guide our people how to execute plays to improve -- to not take a delay. So that's one of the reasons. So we've put people in, but we've also put procedures in, and we've seen our on-time performance improve. I think we have an opportunity to recapture some of the investment in people and in turn times because we've also made that investment in terms of the playbook, and give that back to the network planning guy. So cautiously optimistic that we'll be able to go do that and still have a very satisfying on-time performance. I certainly think we can do that. I don't think we'll be below industry average or anything like that. I'd like to make sure that we still have our on-time performance in the 81, 82 range if we can.

Marcy Brand

Okay. Well, that does conclude our morning. I'd like to just say a quick thank you to the New York Stock Exchange for hosting us in this beautiful venue, very nice. Thank you for welcoming us. Thank you all for joining us either here in the room or on our webcast, and we wish you a very happy holidays.

Gary C. Kelly

Thank you.

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