Southwest Airlines' (LUV) CEO Gary Kelly on Q4 2015 Results - Earnings Call Transcript

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Southwest Airlines Co (NYSE:LUV)

Q4 2015 Results Earnings Conference Call

January 21, 2015 12:30 PM ET

Executives

Marcy Brand - Senior Director, IR

Gary Kelly - President and CEO

Tammy Romo - SVP, Finance and CFO

Linda Rutherford - VP, Communications and Outreach

Analysts

Jamie Baker - JPMorgan

Duane Pfennigwerth - Evercore ISI

Rajeev Lalwani - Morgan Stanley

Hunter Keay - Wolfe Research

Savi Syth - Raymond James

Michael Linenberg - Deutsche Bank

Jeffrey Dastin - Reuters

Operator

Welcome to the Southwest Airlines Fourth Quarter and Annual 2015 Conference Call. My name is Tom, and I will be moderating today’s conference. This call is being recorded and a replay will be available on southwest.com in the Investor Relations section.

At this time, I’d like to turn the call over to Ms. Marcy Brand, Senior Director of Investor Relations. Please go ahead ma’am.

Marcy Brand

Thank you, Tom and good morning everyone. And welcome to today’s call to discuss fourth quarter 2015 results. Joining me on the call today, we have Gary Kelly, Chairman, President, and CEO; Tammy Romo, Executive Vice President and CFO, Bob Jordan, Executive Vice President and Chief Commercial Officer, Mike Van de Ven, Executive Vice President and Chief Operating Officer.

Please note today’s call will include forward-looking statements and because these statements are based on the company’s current intent, expectations and projections. They are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. As this call will include references to non-GAAP results excluding special items, please reference this morning’s press release in the Investor Relations section of southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

At this time, I’d like to go ahead and turn the call over to Gary for opening remarks.

Gary Kelly

Thank you, Marcy and thanks everybody for joining us today for our year-end 2015 earnings call. This was another superb and critical year for Southwest, and I am very grateful to all of our people for their hard work. I want to especially thank them for these terrific results. Tammy is going to take us through the quarter, but I want to offer up, not a comprehensive overview, but at least a few highlights.

Of course this was by far our best year of earnings in our entire history, and that includes a record return on invested capital of 32.7%. We no doubt benefited from 29% lower economic jet fuel prices. Obviously that was a major component of our earnings. But so were record load factors, and revenues were up also very solid 5.6%. It was a strategic year for us in that we had secular growth opportunities at Dallas arising from the refuel of Wright Amendment and of course that has been a phenomenal success.

We’ve also had secular growth opportunities out of Washington Reagan and LaGuardia that is arising from the acquisition of slots. It was also a year that follow at the end of 2014, the completion of the AirTran, our acquisition and integration. a lot of new markets resulted from that. And then of course it was also a year where we had a unique opportunity in which to build in international terminal and launch international flights out of Houston Hobby. That was for the first time since 1969 by the way.

All of that added up to capacity growth of 7.2%, and then of course we were delighted that traffic was stronger than that. It grew 8.8%. And as a backdrop the economy for last year was solid travel demand was solid and of course energy prices moved even lower. So the convergence of all of these things made 2015 very successful year, but again one that was also very strategic for us.

And we accomplished virtually everything that we set out to do, and in some cases where we didn’t, we at least laid significant progress. I'm very happy about that, but certainly that includes generating record operating cash flow, strong free cash flow, and we also returned a record $1.4 billion to shareholders in the form of share repurchases and dividends. So I want to make sure that I highlight two announcements from this morning's release. First of all, we announced that we will soon launch a $500 million accelerated share repurchase program. I'm sure you all saw that. And then second we recently ordered 33 new 737-800s from Boeing, and that is spread out for delivery in '16, '17 and '18; and the sole purpose for that is to accelerate further the retirement of our Classic fleet.

So mechanically we did that by exercising six options, and then on top of that we placed new orders for 27 more. So you get to 33 more new airplanes. And then in addition to that on our fleet chart, you'll also see that we have committed to two more used aircraft. But I just want to reiterate that our capacity plans for the next five years are essentially unchanged by this announcement. We're replacing the Classics with next generation airplanes. And then in particular our capacity plans for 2016 are unchanged and we still plan to grow this year between 5% and 6%.

So the financial, operations and customer service effects of these fleet announcement are all very favorable and Tammy will take us through all that. Work continues along three basic themes this year, as far as investment goes for the future. One as we have significant airport renovation and infrastructure projects underway across the country, some we're managing, some we're not. But big project at LAX, Fort Lauderdale, Chicago Midway and New Orleans. In that Fort Lauderdale in particular will bring on new capacity for us in 2017. Number two, we've got significant commercial technology program underway, and the headline on that of course is the replacement of a reservation system that's also targeted for 2017. And then finally we have a major program underway with our operations technology, and the headline on that is the new 737 MAX, along with other very significant technology improvements that [Indiscernible] has planned, and that is also a 2017 deliverable, at least with respect to the MAX.

So for this year, in addition to focus on these investment programs, we want to do a handful of things. We want to continue to manage our network growth and mature our developing markets. Number two we want to compete vigorously in an increasingly competitive environment. Number three, we want to continue to work on and improve our reliability of our operations. Next, we want to continue our focused on the hospitality of our customer service, and through all of this, we want to continue to grow our unit revenues, our margins and our earnings. So there is nothing really fancy about or 2016; pretty basic blocking and tackling things. But clearly 2017 is shaping up to be a pretty big year for Southwest Airlines.

I just want to highlight for our Southwest people finally that our profit sharing for 2015 will eclipse last year's record and increase by 74% to an all-time record of $620 million, and I am very pleased about that. I'm very proud of them and their hard work and I am very pleased that they're being justly rewarded with that.

So Tammy, with that quick overview I'd love to turn it over to you and have you take us through the quarter.

Tammy Romo

All right, thank you Gary and welcome everyone. We're very pleased to report a standard year of record performance in 2015, representing our 43 consecutive year of profit. Our annual earnings, excluding special items were a record $2.4 billion or $3.52 per diluted share, which was an increase of 75% year-over-year. Our fourth quarter performance was also record setting, and represented 11 consecutive quarter of profit. Fourth quarter net income excluding special items increased 46% year-over-year to $591 million or $0.90 per share, which was in line with consensus.

Operating income excluding special items was a record $992 million, which produced a 5-point improvement in operating margin of 19.9%, which is the best fourth quarter margin we've seen since 1978, and it's also worth nothing like last quarter with and without the benefit substantially large rail prices, our earnings and margins improved year-over-year. And the record that really stands out is free cash return on invested capital, excluding special items of 32.7%. I would like congratulate all of our outstanding employees on these fantastically built and like Gary thrilled we can reward our employees with a record breaking profit sharing $620 million for 2015.

Our total operating revenues in the fourth quarter were a record $5 billion, up 7.5% year-over-year on a capacity increase of 8.4%. Passenger revenues were also a record $4.6 billion. Demand for our low fares remained very strong throughout the quarter, resulting in more than 11% growth in traffic, and an all-time fourth quarter record high load factor. A softer yield environment resulted in a 7% decline in passenger revenue yields and an $8 decrease in our average fares. Our fourth quarter operating revenues included a $125 million net benefit from the amended Chase contract and the required accounting treatment, and this $125 million benefit was about 2 to 3-point improvement to RASM.

For 2016, we expect to realize a year-over-year incremental benefit from the amended Chase agreement and accounting change, but once we reach third quarter, we will of course lapse the year-over-year benefit. For our first quarter 2016, our estimated incremental benefit is approximately $110 million and that is included in the RASM guidance that we provided. Our developmental markets continue to perform in line with our expectations, and Dallas continued to outperform the system on margins and return.

International is also developing as planned, including our inaugural service from Houston, which was launched during the fourth quarter. Our fourth quarter RASM declined 0.7%, which was in line with our guidance. Considering a point impact from development markets and roughly 2-point impact from increased [indiscernible] in space, we're very pleased with our fourth quarter record and likely industry leading revenue performance.

Thus far in January, demand for our low fares remained strong, soft yet stable yields have continued thus far into first quarter and based on our current bookings and revenue trends, we are estimating first quarter 2016 RASM will be flat year-over-year. In light of the current yield environment, we're very pleased with our first quarter revenue outlook at this juncture.

Our freight and other revenue production was also favorable. In addition to the incremental benefit from the amended Chase card that I mentioned earlier, our ancillary revenue production was strong led by growth in EarlyBird and our upgraded boarding revenues. And we currently expect first quarter 2016 freight and other revenues to be comparable with fourth quarter 2015.

I'll turn to our cost performance now, and our fourth quarter unit cost, excluding special items decreased just under 7%, year-over-year due to substantially lower fuel prices and cost control, particularly our fleet modernization efforts. Our economic fuel cost decreased almost $200 million year-over-year and that was driven by a 23% decline in fuel prices. With the current state of the oil market and oversupply situation, we currently expect another year-over-year decline in first quarter and full year 2016 economic fuel cost.

Based on our current hedge portfolio for this year, and market prices as of last Friday, we expect our first quarter fuel price to be approximately $1.70 per gallon, and I'll also provide you our estimates by quarter here. Second quarter is expected to be approximately $1.60 per gallon, and second half we expect that to be in the $1.80 to $1.95 per gallon range, again based on last Friday.

And that brings us to a full year 2016 fuel price per gallon in the $1.70 to $1.75 range. So our market prices, we're still benefiting from lower fuel prices and currently estimate over $500 million in economic fuel savings this year. Our first quarter 2016 estimated fuel price per gallon is below last year's $2 per gallon and represents the lowest economic fuel price we've realized since third quarter of 2006.

With respect to our hedge book, our strong profit margins today call for a more conservative approach to hedging in this low fuel environment. We will continue to manage our existing portfolio to minimize cost as we burn off our 2016 and 2017 position. Prospectively, we'll focus on catastrophic protection with no downside risk, particularly in this environment for 2018. As we reported or 35% hedged, and that’s with all calls and call spread. So while our hedging philosophy has not changed, our tactics have in this environment. And we will manage through our portfolio and just fourth quarter of 2015, we participated in 85% of the market decline.

So I’ll take you through our non-fuel cost quickly. Excluding fuel and special items, our unit costs were flat, including a 30% year-over-year increase in profit sharing that our employees earned for fourth quarter 2015. Our profit showing expense accrued in the fourth quarter was $136 million and that brings again the total for the year to understanding $620 million, which again was a 75% year-over-year.

Excluding profit sharing and special items, our non-fuel unit costs decrease 1.1% year-over-year, which was towards the more favorable end of our cost guidance, due primarily to a reduction in advertise and lower airport costs than we had expected. Our fleet modernization produced the expected $700 million an EBIT this year and that’s even with the drop in fuel prices. Based on our current cost trends we expect first quarter 2016 CASM, excluding fuel, special items and profit sharing to increase approximately 2% year-over-year. And keep in mind that roughly one point of the year-over-year increase is driven by accelerated depreciation, which of course is a non-cash charge from our recent decision to accelerate the retirement of the Classic fleet that Gary took you through.

For our full year 2016, we are currently estimating a 1% year-over-year increase in our unit cost, excluding fuel our special items and profit sharing. And again, this modest cost inflation is almost entirely driven by the accelerated depreciation. And as a quick reminder, as we noted in our press release this morning, this cost guidance only reflects our current labor contracts. Therefore, it does not include the impact from the tentative agreement currently out for vote with our ramp operations provisioning and cargo both.

I’ll move to our balance sheet and cash flows. And of course our balance sheet and cash flows remain very strong. We ended the quarter with $3.1 billion in cash and short-term investments and that's as opposed to being $835 million in cash collateral to third-parties. We generated $3.2 billion in operating cash flow in 2015 and incurred $2 billion in capital expenditures.

For 2016, we continue to estimate CapEx of approximately $2 billion, and I’ll cover our aircraft CapEx when I’ll review our fleet plans so shortly. We returned $1.4 billion to shareholders in 2015, which exceeded our free cash flow of $1.1 billion. And we will have $200 million remaining on the $1.5 billion purchase program after we launch our 500 million accelerated share repurchase, which we will be doing soon.

We repaid $213 million in debt and capital lease obligations during 2015, and issued a $500 million senior unsecured note at an all-time low 2.65%. And this was in light of our debt maturities of approximately $600 million here in 2016. Our leverage including off balance sheet aircraft leases remains in the low to mid 30% range, and of course we are very proud of our strong balance sheet, with an aggressive investment grade rating that was further strengthened during fourth quarter with an upgrade to BBB+ and that followed an upgrade in July by Moody’s to BAA1. We’re focused on preserving the strength in our balance sheet and cash flows, while continuing our long standing track record of returning significant value to our shareholders.

I’ll move now to our fleet and capacity plans. We ended 2015 with 704 aircraft, in our fleet as planned and outlined in this morning's release. Our press release also included our future delivery schedule that I pointed to, that we restructured at the end of December in conjunction with our decision to further accelerate the retirement of our Classic fleet. I’ll quickly take you through the revisions that they included, the conversion of our remaining 25 NextGen-700 from orders to NextGen-800 from orders. And it included the addition as Gary mentioned of 33-800 firm deliveries and as he noted, some of those were options that we had exercised.

And we had two additional -700s. We now intend to retire our Classic fleet no later than mid-2018, and that's compared to our previous plan that have retirement skewing into 2021. And we had a 129 Classic aircraft in our fleet at yearend. Roughly two thirds of our Classic aircraft were impacted by our decision to further accelerate the retirement; and the incremental in seakage [ph] aircraft in our restructured order book is intended to back flow these aircrafts while maintaining our current plans to keep our year-over-year fleet growth over the next three years to no more than 2% on average.

The accelerated retirement plan is estimated to produce cumulative EBIT improvement of approximately $200 million over the acceleration period, and that's primarily through maintenance and fuel cost savings. And I'd also note that this incorporates the approximate $100 million in accelerated depreciation that I referred to earlier.

And the overall customer experience will improve as well with a fully Wi-Fi equipped more modernized fleet. Our future from capital commitments increased approximately 400 million as a result of the order book revisions and our 2015 capital expenditures increased $200 million to $300 million and that was primarily related or that was related to restructuring of our order book.

Our aircraft CapEx for 2016 is still estimated to fall in the $1.3 billion to $1.4 billion range, and our average aircraft CapEx for 2017 and 2018 combined is currently estimated to be in a similar range as 2016 which was very manageable. While the details of our Boeing agreement are confidential, the economics of our NZ order book are very supportive of our continued fleet modernization efforts.

Overall the internal rate of return on accelerating retirement of our Classic fleet is estimated to exceed our -- the return of investment, and this is after tax, which we reported to you in 2015 of almost 21%. So it was a very easy decision for us. We are still optimizing our retirement schedule over the next few years, but we expect in 2016 with roughly 720 aircraft. With regards to capacity, we ended 2015 as planned and we continue to plan for 5% to 6% year-over-year growth this year. And as we previously noted, the majority of 2016 capacity growth is related to the annualized impact of our 2015 expansion.

So in conclusion, we ended an exceptionally strong 2015 with a record fourth quarter, and our outlook for first quarter calls for another quarter of strong operating margins approaching 20%. Despite a soft yield environment, demand held strong producing record revenues. We currently estimate our first quarter RASM will be flat year-over-year based on revenue and booking trends. That's for 2016, which suggest the continuation of the strong demand and a soft yield environment.

Substantially lower fuel prices and other cost controls contributed to our favorable cost performance in 2015, and our outlook for 2016 calls for modest cost inflation excluding fuel, special items and profit sharing. And again, that was driven largely by our decision to accelerate the retirement of our Classic fleet, which is expected to produce a significant cost savings, and an EBIT improvement and the $200 million range. We continue to benefit from lower fuel prices and currently estimate this year's fuel cost to be more than $500 million lower year-over-year, based on Friday's prices and including our current fuel hedge.

Our balance sheet is industry leading and our cash flows remain strong, and as ever we are committed to creating value, and we are very pleased that we were able to restore over 100% of our free cash flow to shareholders in 2015. And as we announced this morning, we will be launching our $500 million accelerated share repurchasing, which will leave $200 million remaining on our outstanding 1.5 billion buyback authorization. And again our pretax return on invested capital was an astounding 32.7%.

I would like to close by thanking all of our employees for their outstanding contribution to these very strong results.

So with that Tom, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. And will now open our analyst portion of today's call. [Operator Instructions]. Thank you for waiting. We'll begin our first question from Jamie Baker with JP Morgan.

Jamie Baker

I'm hoping to ask 2.5 questions here. The half-question Tammy, you noted also as a TA -- two TAs out right now, they guided this morning and the impact assuming ratification. Are you willing do the same in terms of what that would mean for the XL [ph] cabin guide you just gave?

Tammy Romo

No Jamie, just out of respect, the process of -- we'll update that as we progress here.

Jamie Baker

Sure understood. So why don't we move on to Gary here, and another question on labor. Given your history of profitability, it's no surprise that your 737 wage rates came to represent the peak for U.S. Airlines easily over the last decade. But as the competitor wage bar begin to rise above yours currently, is it inevitable the Southwest pass to establish a peak with every successful contract; or put differently, is your business model predicated on maintaining above market pay scales, or was that just a byproduct of how poorly the competition was at one point?

Gary Kelly

Well, I am going to try to give you -- I am going to try to answer your question and I want to try to be diplomatic and respectful of the negotiations process here. But I would just say our business model Jamie, is great service and low cost. And we -- every single employee at Southwest Airlines signs up for that, and of course we all need to continue to work hard every day to deliver on those two things. So that is our business model, not. There has never been a promise to be the highest paying airline in the industry. And so to the extent that we're able to do that because we produced great results, I think that is terrific. But all of that needs to obviously be negotiated with our labor groups and that's what happens, and that's the way that works. I think the overriding objective for us is to continue to have a healthy company meaning that we are safe and that we're financially strong. And in order to do that we've got continue to offer great service and our objective is to the low cost producer and live up to the low fare brand promise that we have.

Jamie Baker

And as a follow up to that last point you've made and I guess this echoes the discussion that you and I had at the Wings Club. You've never faced a larger percentage of competitive capacity that have lower costs than your own than you currently do. In fact, last time you faced a formidable competitor with a superior cost structure, as near as I could tell, you brought them. So I'm wondering how growth at Spirit and Frontier, given their cost structures alters how you think about your own business going forward?

Gary Kelly

Let me just affirm virtually everything you said. The only edit I would make is that actually when we acquired Air Tran, their costs were not lower than ours interestingly enough, at least by my analysis.

Jamie Baker

Fair enough.

Gary Kelly

But clearly there are carriers today whose costs are lower. On that point you and I certainly agree. And first of all, I think that is inventible that overtime that an industry will get more competitive, especially when there is a disrupter as there has been with Southwest Airlines. So it is not shocking at all that we have more intense competition today than in any time in our history. And it is a challenge for our Company and something that I'm very confident that our people will rise up to that challenge. But indeed, it will put an obligation on us to continue to innovate and work very, very hard so that we don’t lose our low fare leadership position in the country.

So absolutely, it is different and I think we recognize that the industry is more competitive today than it has been ever. I would quickly add by the way that Southwest has never been stronger. We've never had the route network. We've never had the depth and the breadth of the service that we offer. And we've never had a balance sheet this strong, we've never had earnings this strong. So it's really up to us to continue to make sure that we compete and be the best at service and price.

Operator

We’ll take our next question from Duane Pfennigwerth with Evercore ISI.

Duane Pfennigwerth

So the hedge liabilities you called out for '16 and '17, appreciate that detail. I'm just wondering, can that change or is it fully locked in at this point? In other words, if fuel goes higher, does it shrink?

Tammy Romo

It is if fuel goes higher, it certainly shrinks. I'll start there. And no, it is not entirely locked in. But I think the main takeaway there is that we -- as prices go down, so does our fuel bill as well. So yes, I gave you a pretty good amount of detail there on our hedge as I walk through our -- my comments there. So I think we're positioned very well. We know what we have to manage and I think we're positioned well, if fuel prices go up or if they go down from here.

Duane Pfennigwerth

And then as we think about the capacity that you had in development last year and specifically the Redmond markets, can you help us quantify the benefit you expect, having less of that capacity in development? And if you can help us with sort of the full pie, maybe you could just talk about the markets that you launched in late 2014 that you should've had basically a year of experience with by the fourth quarter, if you saw sort of significant RASM improvement there. And thanks for taking the questions?

Gary Kelly

Duane, you were fading in and out, but I think we got the gist of your question. Yes, we have -- we can quantify at least from an internal perspective what we think the opportunity is there. I would just start out by acknowledging that that assumes all else as equal and – but, I'm sure that you and everyone else understand that.

Tammy Romo

Yes, just a couple of comments there to maybe help you out, Duane. We had, again like you said a high number -- high percentage of our markets were under development. You know what those markets are and I'll remind you that the high percentages did include the market that we were converting from AirTran over to Southwest. So the point I'm making there is not all of the markets are created equal. Obviously we reported a lot on Dallas, Love Field and are very pleased with how those markets are progressing. But we wouldn’t expect our international markets as an example to mature at the rate we would say Dallas or even the AirTran markets. So they're all a little bit different, but I can at least help quantify the impact we're expecting here in the first quarter. And if you -- it's probably in terms of -- it's probably at 1 point, I call it -- maybe not even a 1-point impact from development markets. So as we move in to 2016, at least my expectation would be that we'll get some tailwinds from our development markets as those continue to mature.

Operator

We'll take our next question from Rajeev Lalwani with Morgan Stanley.

Rajeev Lalwani

Just two for you guys. The first, I guess with oil coming down so much, and obviously you're going to see that benefit from the fuel numbers you provided. How does that impact how you're thinking about the business either from a revenue or a capacity standpoint, if at all? And then second question was just, you announced the aircraft order today and the acceleration. What drove down -- what changed over the last couple of months. It seems like the opportunity has been out there for some time?

Gary Kelly

Tammy, I'll take a shot, and if you want to chime in, please do on both of those. I would admit to you all that it is -- the year is off to a very concerning start, when it comes to headlines around the world. It's almost as if we're living in a different dimension here at Southwest, and from what I've heard from some of our competitor reports too. So our business continues to be strong, but I will quickly admit that there are concerning headlines around the world. So then you translate this to oil prices and living in Texas my entire life, this is an oil and gas state, and yes, it is concerning, the impact it will have on companies and debt payments and jobs and so on.

There's no question that the United States has benefited from the oil and gas boom that was occurring over the last X number of years since the -- really since the recession. So yes, that's all a concern that no doubt you have. We share that. But at least in terms of seeing any manifestation of that in our business, we just – we don’t see it. Even our oil and gas markets, if you want to call them that, produced very strong results in the fourth quarter. Several of our markets have year-over-year -- our yield pressure if you will. So that's not unique to those markets, but they still produce very, very handsome returns. But yes, it's just something we're going to have to keep our eye on. And I offer that background, just as an acknowledgment that we're just living in a world where we need to continue to be alert and be cautious.

I will then follow-on and say that we feel like our plan for 2015 was sound and it turned out to be so. We think that the follow-on plan for 2016 is also sound. It is more conservative then what we had committed ourselves for last year. And as Tammy and I have both reiterated, we’ve not made any change with our capacity outlook. And especially for 2016, we’re still right in the 5% to 6% range, and I think all of us would be prepared that if for whatever reason travel demand weakens, then we would want to address that, and then at least discuss what kind of options we have to react on the down side. But in terms of taking advantage, further advantage of low energy prices and boosting our capacity, we don’t have any plans to do that. Tammy, before we go into the second question, anything you would like to add?

Tammy Romo

No, I think that was perfect. And in terms of your question on why did we decide to accelerate the Classics. I guess, I just point that to our fleet modernization efforts that when we set our plan, I guess, I just have to say, we’ve been very pleased with the benefits from our fleet modernizations so far, and as we've continued to evaluate, just the operating cost of operating Classic as it dwindles in size. We just really took out our pencils, evaluated it and we were able to come up with a plan that actually is going to enable us to improve our EBIT at very modest capital levels.

So I think you know our Southwest well. We prefer a simplified fleet, and even though the Classic fleet is 737, we'd much prefer to operate 700s and 800s. It certainly simplifies a lot of the operations, and also just improves the reliability in terms of just less downtime from a maintenance perspective. So I think we’ll get also get a boost from the productivity of our fleet, which certainly was part of the EBIT contribution that we’re expecting. So all-in-all when we set down and evaluated it, it became pretty compelling to go ahead and accelerate the Classics. So hopefully that helps provide a little color as to what went into the decision making tranches. Gary, did you have anything?

Gary Kelly

Tammy, only thing I would say about -- it’s always a fair question; why now? Why not earlier? Why not later? And I think it's back to that convergence or confluence of things. First of all, we’re at a fleet number that is manageable to think about accelerating retirement in that way. We have more out of service time with those airplanes for maintenance reasons than we do the rest of our fleet. And Tammy made that point. I just want to reiterate. You'll get a lot more productivity out of a new airplane than what we are currently getting out of these Classics, which means you don’t necessarily even have to have a tail-by-tail replacement, although that is our plan. But they'll be more efficient.

The other thing is that Boeing was available to us. Boeing had delivery positions and we were able to strike a deal with them, and in a way that worked for them and was win for them. It was win for us. So that was key. With respect to our people, think about the people who have to touch the airplane, the pilots, flight attendants, mechanics, specially. It’s just far easier for our people to operate the NextGen than it is the Classic. That's just a fact. So this will simplify a lot of things for all three of those work groups and in particular, our pilots.

So it’s a good deal. If it works out, it will be better for our customers and all the way around we're just delighted that we have this alternative available and we’re able pull all together to end of the year. But it was an idea and a decision that was aggressively pursued in 2015, in fact in the later part of 2015 and fortunately it all team together.

Tammy Romo

And just again on the cost obviously. As always, it's just part of our DNA at Southwest. We're very focused on costs and being the low costs producer, and this is just yet another way to help us as we’re managing our cost here over the next several years.

Operator

And we’ll take our next question from Hunter Keay with Wolfe Research.

Hunter Keay

You guys didn’t buy back stock in the quarter for first time in almost five years it looks like. You'd still put money off in the repo and I understand you did the $500 million ARS. But I would have thought you guys would come in and thoughts on after cutting the revenue guide. Did that have anything to do -- not buying the stock have anything to do with posting 800 [ph] million dollars in hedge collateral, or can you give us any kind of colors, the thinking behind sort of putting it on hold for the quarter?

Tammy Romo

No. It didn’t have anything to do with the fuel hedge collateral, and honestly wouldn't read anything into that at all. We are more focused. As we said this morning we are launching a 500 million accelerated share repurchase and we'll get that launched soon, and then after that we will have 200 remaining on our 1.5, which was approved at our shareholder meeting last night. So we've gone through that authorization pretty darn quick, returning more than a 100% of our free cash flow in 2014 to our shareholders. So I'm very proud of what we did there in 2014 with respect to the share repurchases. So again, actually that included our dividends. So we are -- I don’t think there is anything more to it than that.

Gary Kelly

That's true. That was already a record amount, and as we've allowed here, we were also beginning to have serious thoughts and conversations with the Boeing company and what -- how that cash flow might flow from that deal. So I think what's material is that we have announced the $500 million today.

Hunter Keay

Yes. Okay that's just fair. Thank you. And looks like -- when I look at schedule data, I think you guys are trimming over the capacity at Love Field markets into LaGuardia and Regan and moving some of that out west little bit. Does that have anything to do with the operational challenges that you might be encountering at Love Field because of the ongoing legal dispute and obviously the [indiscernible] or feel it but does that have anything to do with that, or is that unrelated and there are other factors, maybe just sort of like market demand based decisions. Any color around what's flowing into that -- if the [indiscernible] is correct.

Gary Kelly

Yes. You bet, yes sir you bet. No. There is no -- I think our operations folks have done a marvelous job. They are doing what is for us ten turns a day on a gate with well -- in less than full utilization of 18 gates. So the operation actually is doing fine, which simply means that we have --- when we finally get access to all the gates, we will be able to put more flights in there. But you'll note Hunter, that we make changes all over the country, and we don’t make dramatic changes in Dallas, but you've got markets like Seattle that come into mind and Fort Myers, Florida where we make very significant seasonal adjustments. The other things that I mentioned to the media on this very same question this morning is that you know that we have a lot of new flying that's transpired since October 2014. And I went through all that stuff and so has Tammy. So with all of those new way routes, I think we would readily admit to you that in some cases we may have too many flights in some places, we may not have enough flights in places, and so there is always some tuning that continues, and that is all that's going on here at Love Field. So my recollection -- we'll still at a 180 daily departures, which probably cut through everything, and answers your questions best that way. But yes we've got some pluses and minuses in routes, and there's nothing unusual about that.

Operator

And will take our next question from Savi Syth with Raymond James.

Savi Syth

Just on the unit cost growth, I was just kind of curious, with the higher capacity growth in the first half, I would have thought maybe -- a little surprised by the 2% [indiscernible] growth, and then just wondering -- I know the one-point from the [indiscernible] depreciation. Just wondering the timing -- the timing issues or what was leading to that very high increase in 1Q?

Tammy Romo

Yes. You are exactly right, Savi. The guidance for the full year is more 1%. So you are exactly right. It's just the timing of when our expenses are falling.

Savi Syth

Got it. And then just on the USCC question, they came up before; just wondering Gary, if you have any thoughts here. It seems like the industry was going through a bit of the segmentation. And I know Southwest wants to be kind of the leading low cost, low fare airline. But there is a product differential, and then your kind of performance or be at the product or the service, and merely the things that I was just kind of curious as to what your thought process is? Do you need to be the lowest fare recognizing, that there is a difference in product, and then maybe your thoughts on kind of the customer segmentation, if there is a customer segmentation or if this is truly like a commodity business and you just have to be -- have the lowest fares?

Gary Kelly

Well. I love your question. Well, everybody's question, but that -- I think that's one that's an interesting one to share. And I'm happy to have an opportunity to address it. We want to be the best service at the lowest price. Period. And describing price, I would agree that we are going to have to do some comparisons between unbundled pricing versus our more bundled approach. All-in, I want Southwest Airlines to be the lowest price. We'll win if we have the best service at the lowest price. And that's been our tradition, that's been our history, that’s what the whole Company is based upon, and that's what our growth plans are fundamentally based upon.

I think it is a slippery slope to accept that our costs and our fares can be higher based on service, because as you well know, there is a long list of failures in the airline industry who pursue that exact strategic plan. And it's really a compound. It really not facing up to the challenges of finding more and better ways to compete on cost and on price. So thing I love about Southwest is it's been a Company who has been able to do both. And the other thing that you find I think, which is a slippery slope is companies can change. And while service may not be a great attribute for some of our competitors today, who will go on unnamed, who is to say as they can change that in the future. And so we need to continue to strive to be the best at both, and we need -- while we may not have all the answers at any given point in time, I think that that needs to continue to be our guiding line.

Operator

And we have time for one more question. We'll take our last question from Michael Linenberg with Deutsche Bank.

Michael Linenberg

Two quick ones here. When we started the quarter, the guide was for RASM to be up about 1%, and as we moved through much of the quarter, that number was out there. And then, about a month back you took guidance down. And when I think about across the industry, we did see some, some of the carriers come in with weaker than expected at revenues. Some of it was fuel surcharges, some of it was FX, some of it was the Paris attacks. Those are to take some things that I didn’t think impacted you on one hand. Then on the other, we did hear that some airlines just ran a better operation because the winter weather wasn't that bad. So I am curious with your exposure on the energy patch, was that some of it, that you saw some demand weakness in your core energy markets, or is it just a better run operation? What drove that down so much?

Gary Kelly

Mike, I don't think Tammy would either. I wouldn't blame our energy markets at all, although as I mentioned earlier, I think it is true that the energy markets are seeing some softness in RASM year-over-year, but they're still really healthy. I think the thing that’s -- and Tammy will better insights no doubt, but the thing that stands out to me was Thanksgiving. And we were pretty much tracking along with our forecast for the quarter until then. And if you'll recall our discussion with our November traffic, the pricing environment was not -- I used a word and it was quoted at the time, it was unusual. So the Christmas holiday period was more normal. But regardless, you kind of fast-forward now and Tammy, maybe it might be more helpful to talk about current trends as opposed to what changed, but Mike, that was the main thing that I recall in the fourth quarter, was the yields over the week of thanksgiving holiday travel based on unusual discounting in the industry were lower than what we would have predicted. Anything you want to add there, Tammy?

Tammy Romo

Yes, Gary I agree. That really was what -- that was primarily what was different from what our forecast was going into the quarter. And by the end of year with the holiday performance in the December, that was actually within our expectations. So as we're just trying to sort through all of that I would just -- our expectation going into the first quarter based on what we've seen so far, and in January is demand seems strong. We're continuing to see strong load factors, but again we're also continuing to see those come in at weaker yields. So at least I guess the way I would characterize at least from what we're seeing so far and our bookings is stabilized.

Gary Kelly

Mike, the only other thing I would just point out is we had the same question here after -- so Thanksgiving occurred the Paris attacks. And whether there was an effect on bookings with us, with our competitor, I don't know. That's hard to tease out all of that. But the other thing that's going here is if you looking the border GDP results for the fourth quarter, and they weren’t very good. So it's possible that the industry was seeing some softening in demand that led to more aggressive discounting. And it's coupled with the industry also growing faster than GDP. So it wouldn’t be shocking to find that there was a little bit of a rough patch there and just trying to get supply and demand cleared at the right price.

So -- but any of that -- beyond that, we're continuing to manage our developing markets. We're continuing to manage our markets in which there are competitive changes in terms of pluses and minuses in activity and overall the demand -- that all -- as we said -- demand, it all adds up to I think a very solid outlook. And I'll just reiterate one more time, that our results are not adjusted for the difference in stage, length and gauge. If you do that, we're turning in positive unit revenue performances in the fourth quarter for the full year 2015, and that would also continue to be our outlook in the first quarter.

Michael Linenberg

It's a good point. And then just on the capacity, I apologize if you threw this out there, Tammy, but I think you gave the full year number five to six, which is obviously unchanged, but normally around this time of the year, you'd get it to us by quarter end. The way it seems, it seems like it would be front end loaded, obviously impacted by the leap day. Do you have kind of rough -- what those rates are by quarter, how we should model it for the year?

Gary Kelly

Well, she did say 8 to 9 for the first quarter.

Tammy Romo

Yeah, 8.

Michael Linenberg

It's 8.

Tammy Romo

9 for the…

Gary Kelly

It is – I think it was 8.3 in the fourth quarter or so. The high watermark is going to be this quarter and then it will start trending down from there, but I will defer to you on the rest of the quarters, Ms. Romo.

Tammy Romo

Thank you, Mr. Kelly. Yes, so after this quarter, second quarter is in the 4% to 5% range, yes.

Operator

And that concludes the Analyst portion of today's call. Thank you for joining. Ladies and gentlemen, we will now begin our media portion. At this time, I'd like to introduce Ms. Linda Rutherford, Vice President of Communications and Outreach.

Linda Rutherford

Thank you and good afternoon. If you go ahead and queue up, Tom you can give them instructions and we'll get started up on the media Q&A.

Operator

[Operator Instructions] Thank you for standing by. We'll take our first question from Jeffrey Dastin with Reuters.

Jeffrey Dastin

Has Southwest recently exited any pure hedge contracts early for further participation in the fuel price decline? And if so, at what cost?

Tammy Romo

Yes, I'll be happy to take that. We have reduced our hedges here in 2016. So the answer to that question would be yes. We -- we're just looking at what we had last reported to you in terms of our hedge percentages against the main difference would be in the second half of 2016. so we did reduce our hedges there substantially in light of the declining fuel market. So we went from call it 60% to 70% in the second half of 2016 to probably closer to 30% to 35%.

Jeffrey Dastin

And a brief follow up to make sure I understood your earlier comments correctly. Is Southwest relying more heavily on call options this year than last?

Tammy Romo

That would be going forward, and that's correct. And in fact our 2018 position only represents call options. That's exactly right.

Gary Kelly

So in other words we were already long with a position for '16 and '17 as 2015 unfolded. So Tammy and her team are continuing to work those positions off as best they can, but then any additional hedges that they're doing, they're doing with the call options to answer your question there.

Jeffrey Dastin

So, the call options are also for 2016 and 2017 in addition to 2018.

Tammy Romo

Actually anything that we've added, just to be fair to your question, well…

Gary Kelly

Yes.

Tammy Romo

The majority of what we've added in 2015 has been call, because all we have is 2018. But yes, I think that would be fair.

Operator

[Operator Instructions]. And Ms. Rutherford, there appears to be no further questions at this time. I would like to turn the call back over to you for any additional or closing remarks.

Linda Rutherford

Thank you so much Tom. If anyone in our media community has any follow-up questions, please reach out to us 214-792-4847 or shoot us a question over to www.swamedia.com. Thanks, and have a great afternoon.

Operator

That concludes today’s call. Thank you for joining.

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