Southwest Airlines (LUV) Q3 2016 Results - Earnings Call Transcript

Oct. 26, 2016 9:31 PM ETSouthwest Airlines Co. (LUV)
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Southwest Airlines Co. (NYSE:LUV) Q3 2016 Earnings Call October 26, 2016 12:30 PM ET

Executives

Marcy Brand - Southwest Airlines Co.

Gary C. Kelly - Southwest Airlines Co.

Tammy Romo - Southwest Airlines Co.

Robert E. Jordan - Southwest Airlines Co.

Michael G. Van de Ven - Southwest Airlines Co.

Linda B. Rutherford - Southwest Airlines Co.

Analysts

Jack Atkins - Stephens, Inc.

Jamie N. Baker - JPMorgan Securities LLC

Duane Pfennigwerth - Evercore Group LLC

Hunter K. Keay - Wolfe Research LLC

Savanthi N. Syth - Raymond James & Associates, Inc.

Andrew George Didora - Bank of America Merrill Lynch

Rajeev Lalwani - Morgan Stanley & Co. LLC

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Darryl Genovesi - UBS Securities LLC

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Helane Becker - Cowen & Co. LLC

Michael Linenberg - Deutsche Bank Securities, Inc.

Conor Shine - The Dallas Morning News, Inc.

Susan Carey - The Wall Street Journal, Inc.

Mary Schlangenstein - Bloomberg News

David Koenig - Associated Press

Dawn Gilbertson - The Arizona Republic, Inc.

Richard Velotta - Las Vegas Review-Journal

Operator

Welcome to the Southwest Airlines' Third Quarter 2016 Conference Call. My name is Tom, and I'll be moderating today's call. This call is being recorded and a replay will be available on Southwest.com in the Investor Relations section.

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

Marcy Brand - Southwest Airlines Co.

Thank you, Tom, and good morning, everyone and welcome to today's call to discuss our third quarter 2016 performance. 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; and 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 at Southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

Following the prepared remarks, we will open the call up for questions. We ask that you please limit yourself to one question and one follow up, so that we can accommodate as many questions as possible.

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

Gary C. Kelly - Southwest Airlines Co.

Thank you, Marcy, and thank you all for joining us. We are very pleased to report strong third quarter profits today, and especially considering the effects of the technology outage that we suffered in July, earnings per share were down from a year-ago levels by $0.01. We generated strong free cash flow of almost $400 million for the quarter, and returned $312 million to shareholders through dividends and share repurchases. RASM performed exactly in line with our expectation, and again, that's taking into account the negative impact of 0.5 point that we had from the technology outage. We have consistently outperformed the domestic industry for 2015 and for the first part of 2016, along with the lapse of the year-over-year gains in our 2015 Chase deal; we've got harder comparisons in the near-term. Even with the outperformance, though, we've seen weakening sequential trends for a number of quarters now.

But that feels like that's coming to an end, taken into account the timing of the holidays in September and November and December, January time period, the monthly and quarterly sequential trends look good to us, they look like they're stabilizing. I would quickly add it's a little too early to tell, if they are improving, although close-in bookings and yields are improved.

As compared to some of the guidance that I've heard from our competitors, there seems to be a difference between the expectations surrounding the December-January holiday time period, but it's our guess at this point, consistent with what we saw calendar wise in 2011, that that might be as high as a point and a half. So you take that into account and again our trends between third quarter and fourth quarter look very comparable and maybe even better. A couple of very encouraging signs, first of all, the percent of new markets or developing markets are roughly at historic levels for us, down very significantly from where we were in 2014 and 2015. This will continue and perhaps fall further in 2017 as we slow our domestic growth to roughly 2%, and of course, this bodes well for our unit revenue outlook. The domestic industry is growing seat miles well ahead of GDP growth and we've seen significant competitive capacity adds in markets that we serve and it's increased competition that's diluting revenue on routes that we serve that accounts for the decline in unit revenue trends, and especially here in 2016.

We're planning for rising cost in 2017 and that is due to higher jet fuel prices and labor rates. Our goal is to arrest the trend of declining unit revenues in 2017 and achieve positive unit revenue comparisons for the year as compared to 2016. We'll rely primarily on basic revenue management and route design techniques to achieve that and we're leaning heavily on our fleet modernization in the near-term to help mitigate our unit cost pressures.

In the meantime and as we anticipated again in 2017 – for 2017, profits, cash flow, internal investments and shareholder returns are all strong. We achieved a 32.3% ROIC pre-tax for the 12 months ended September 30 and will be close to 30% for the year 2016. So, I anticipate another very strong showing in 2017, despite the competitive environment.

Our priorities for the balance of this year and next year are unchanged. We'll start service to Cuba next month. We'll launch Mexico service from LAX under the new U.S., Mexico bilateral in December. We'll complete construction of a new five-gate international terminal in Fort Lauderdale in mid-2017 and then launch new international flights thereafter. We'll deploy the booking feature of our new reservation system in December, and begin flying those bookings in May of 2017, when we're fully deployed with our new reservation system. We'll launch the new Boeing 737 MAX next year and coincident with that retire our Boeing 737 Classic fleet. In addition to those initiatives, we'll also continue to focus on the basics, which are three, running a reliable operation, offering our customers exceptional hospitality and delivering superior profits and returns for our employees and our shareholders.

So with that very quick overview, I'd like to turn it over to Tammy Romo to take us through the quarter.

Tammy Romo - Southwest Airlines Co.

Thank you, Gary, and welcome, everyone. We're delighted to report another quarter of strong results. Our third quarter GAAP net income was $388 million, and excluding special items, our net income was $582 million, which represented almost a 7% decline from third quarter last year's record results. Aside from our normal hedge accounting adjustments, special items this quarter included $356 million in expense related to proposed unit contract bonuses and $18 million charge related to the early termination of four of our Classic operating leases.

As a result of the reduction in the outstanding shares from buyback activity, our earnings per share of $0.93 was down slightly by only 1% year-over-year, exceeding consensus by $0.05. The impact from our share repurchases is meaningful and since 2011, we've decreased our share count by 18%, demonstrating our ongoing commitment to return value to our shareholders.

Our third quarter EPS included about a $0.07 impact from our July technology outage. And without this impact, third quarter EPS excluding special items would've exceeded last year's record $0.94 with net income excluding special items comparable to last year's record $623 million. Of course we're delighted with our return on invested capital, which was an outstanding 32.3% ROIC for the 12 months ended September 30. Overall, a very strong performance. And I'd like to commend all of our hardworking employees on another stellar quarter, especially with the challenging operational environment from the technology outage.

We remain excited about the progress on our commercial and operational investment, including our new reservation system that we will begin selling reservations on in December followed by the transition to one reservation system planned for May of next year. And our outlook for fourth quarter supports another solid quarter to end a tremendous year of strong results.

With that overview, I'll turn to revenues, which were a strong $5.1 billion. This was just $7 million shy of beating third quarter's last year's record, excluding the special revenue adjustment in third quarter last year. And if you exclude the $55 million unexpected reduction in our revenues from the technology outage, our third quarter passenger and operating revenues would've reached record levels. The 4.1% year-over-year decline in operating unit revenues was driven by record third quarter traffic at lower yields. We did see improvement in close-in trends during the quarter, however, the fare environment remained challenging, stable but soft is how I would characterize the yield environment in third quarter with average fares down over $7.

Our freight revenues were impacted by a softer demand environment, but our other revenue improved year-over-year, driven by strong Rapid Rewards and other ancillary performance, especially EarlyBird and upgraded boarding products. Overall, given the industry fare environment, we are pleased with our relative operating revenue performance.

Turning to our fourth quarter revenue outlook. While close-in trends have been encouraging, the industry yield environment remains competitive. And in addition, as other airlines have noted on their calls, fourth quarter comparisons will be challenged by the calendar placement of the holidays, particularly Christmas and New Year.

We estimate the calendar placement and compressed holiday travel the week prior to Christmas attributes an estimated 1.5 of RASM penalty. As a result, we expect our fourth quarter RASM to decline in the 4% to 5% range, whereas October currently running down about 5% including the impact of Hurricane Matthew.

October is trending in line with what we saw in July and August, suggesting trends have stabilized. Based on the holiday shift, December is expected to have the most difficult year-over-year comparison. With respect to sequential third to fourth quarter trends, we're about 2 points off normal averages, which we attribute largely to the calendar placement of the holidays as well as the impact of the outage and to a lesser extent Hurricane Matthew.

Looking past all the noise around the holiday shift, we are very pleased with early January bookings and wouldn't rule out starting the year with flat to possibly positive year-over-year unit revenue comparisons. We currently expect fourth quarter freight and other revenues to increase from fourth quarter last year as well.

And moving now to our cost, our operating unit cost excluding special items decreased 2.4% year-over-year, largely from lower profit sharing and jet fuel prices. Our profit sharing for third quarter was $101 million compared with $177 million in third quarter last year. The lower profit sharing expense is due to the year-over-year increase in proposed union contract bonuses.

Our economic jet fuel price per gallon declined a little over 8% year-over-year to $2.02 for the third quarter, which was driven by lower crude and heating oil prices. We expect fuel prices to be higher here in the fourth quarter. And based on market prices last Thursday and our current fourth quarter hedge position, we expect our fourth quarter fuel price per gallon to be close to $2.10.

Excluding fuel, special items and profit sharing, our unit cost came in up 2.6%, which is better than we expected. When you consider that almost 1.5 points of this year-over-year increase is from accelerated depreciation associated with our Classic fleet retirement and close to another point of the increase was driven by cost associated with the July technology outage, this was a very solid performance.

Based on the current trends, we expect fourth quarter 2016 CASM, excluding fuel, special items and profit sharing to increase in the 4% to 5% range year-over-year. About 3.5 points of this increase relates to the impact of the recent tentative agreements and our ongoing labor negotiations, and another point relates to accelerated depreciation of the Classics.

For full year 2016, we expect a 2% to 3% increase in our unit cost, excluding fuel, special items and profit sharing with the impact of the recent labor negotiations driving just over a point of the increase. The remaining 1% increase is right in line with our guidance at the beginning of the year, driven by the acceleration of the Classic fleet retirement.

And as always, we remain focused on controlling spend to protect our low cost structure and low-fare brand, which is even more essential with the increased labor cost pressure and a challenging revenue environment. We're making important investments in operational planning and recoverability tools for our employees to improve the customer experience as well as our efficiency.

I have just a few comments on our liquidity and capital deployment. We ended third quarter with cash and short-term investments of $3.4 billion. We also have a fully available unsecured revolving credit line of $1 billion, which was recently replaced and extended through August 2021 at a favorable term. Our estimated CapEx for this year remains unchanged at approximately $2 billion, with $1.3 billion of that for aircraft spend and approximately $700 million in non-aircraft capital spend.

Our free cash flow of $392 million during the third quarter enabled us to return $312 million to shareholders through buybacks and dividends. We completed the $250 million accelerated share repurchase executed in July. And year-to-date, we have returned $1.7 billion to shareholders through the repurchase of $1.5 billion of common stock and the payment of $222 million in dividends. Our leverage including off-balance sheet aircraft leases is in the low- to mid 30% range.

I'll turn to the fleet and quickly walk you through that. We ended the quarter with 714 aircrafts in our fleet and our plan is to end the year with 723 aircrafts and that remains unchanged from what we last reported to you. We reached a meaningful milestone in our fleet during third quarter with the retirement of our last -500 aircraft. We have 95 Classic 737-300s remaining in our fleet that would be retired by the end of September of next year.

During third quarter, we purchased four of our -300s off operating lease. The lease termination cost, it was recorded as an $18 million special item and essentially represents the cash payment for the equity buyout. We assumed ownership of the aircraft, thus adding the fair value of aircraft as well as the associated remaining obligations to the balance sheet as debt.

We will continue to pay the underlying debt payments, but we now avoid the lease return condition cost exposure. And our estimated EBIT improvement of our accelerated Classic retirement remains in excess of $200 million as the prepayment of the rents were already contemplated in our original assumptions. As the economics of the equity buyout were clearly favorable, we will continue to evaluate the opportunity to do similar transactions with the remaining 31 Classics under operating lease that have terms that extend beyond September 30 of next year.

Our year-over-year capacity growth for this year remains unchanged in the 5% to 6% range. And as we announced last month, in light of the current revenue environment, we are slowing our capacity growth next year to less than 4%, likely 3.5%. Our domestic growth is estimated to account for approximately 2 points of that growth, with the remaining allocated to international. We'll begin the year with approximately 4% growth in first quarter 2017, bending down to flat to slightly up in fourth quarter 2017, due to the retirement of the Classic fleet by the end of the third quarter next year.

In closing, we're pleased with our strong performance thus far this year. And based on our fourth quarter outlook, we're thrilled with the prospect of ending the year with an ROIC near 30%. And with that overview, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. [Break] (20:08-20:30) And we'll take our first question from Jack Atkins with Stephens.

Jack Atkins - Stephens, Inc.

Good morning, good afternoon, everybody, and thanks for the time.

Gary C. Kelly - Southwest Airlines Co.

Hi, Jack.

Jack Atkins - Stephens, Inc.

Just to clarify, I guess for my first question, just to clarify Tammy's comments there in her prepared remarks. With the comments around unit revenue – positive unit revenues in early 2017, was that simply for January or was that a 1Q comment? And then, can you quantify the impact from Hurricane Matthew to your fourth quarter RASM expectations?

Tammy Romo - Southwest Airlines Co.

Sure. I'd be happy to do that. Yeah, the comment regarding getting back to flat and possibly a positive unit revenue was for early next year. I wouldn't rule that for January, but again it's early to know. As you know the majority of our bookings come in the month of travels, so we get about 50% of our bookings in the month of travel, but just based on what we're seeing in our booking trends so far for January, it looks really good.

Jack Atkins - Stephens, Inc.

Okay, great. Thank you for that Tammy. And then so, when we think about the impact in 2017 from the recently-announced labor agreements, is there any way to sort of help us frame up the impact that you guys are expecting on a full year, next year?

Tammy Romo - Southwest Airlines Co.

Yeah. We shared that, for the fourth quarter it's about 3.5 points, so that's at least a reference point for you for next year. I don't think we will be too far off for that range on a year-over-year basis next year, but we will certainly firm up all that guidance for you on our next conference call.

Jack Atkins - Stephens, Inc.

Okay, great. Thanks again for the time.

Tammy Romo - Southwest Airlines Co.

And the – you had a question, sorry about that, of Hurricane Matthew, let me just give that to you really quick. For October, it was probably close to a point for the year-over-year October performance and be a little – it'll be less than that for the quarter in terms of RASM.

Jack Atkins - Stephens, Inc.

Okay. Thank you, Tammy.

Operator

And we will take our next question from Jamie Baker with JPMorgan.

Jamie N. Baker - JPMorgan Securities LLC

Hey, good afternoon everybody. So, Gary, based on the trajectory that you're on, it seems probable, not definite, but probable that Southwest will pay more than any airline for fuel next year, have significant ex-fuel cost pressures but you're certainly not alone, and potentially see the sharpest margin decline of any airline in the States and that's actually not the issue, I mean that's just kind of where the math is taking me. The question is when you ponder how the competition treats you, and I'm not suggesting that you become some 90-pound weakling, but isn't there some risk that if the industry perceives you as being in a weakened position, other airlines might start to turn on you?

Gary C. Kelly - Southwest Airlines Co.

Oh, I think that if airlines perceive weakness, they clearly will act upon that and the report today is certainly not of weakness, it's of strength. We're looking forward to a really solid 2017 and we – as you well know, we have consistently outperformed the industry on the revenue front, not just the last 24 months, but over a longer period of time. Going back well into five or six years ago, so we have a lot of tailwinds that we're looking forward to. We have a much smaller percentage of our route system under development and that's after a very aggressive 2013, 2014 and 2015, which have resulted in stellar profits. So that should provide wonderful strength for us.

It is appropriate for us to slow our growth and be measured in the expansion that we undertake here in the near term until our unit revenue turns positive. We are off of our revenue plan here in 2016 and it's largely a second half issue. As you recall, we had our analyst discussion back in June and then weeks later, we're seeing that the fare environment had changed for us pretty significantly. So, we have a lot of strengths, we have costs that are significantly below the vast majority of our competitors, certainly if you look at the number of seats that are out there, and we will continue to be strong and we'll continue to operate strong.

A lot of the revenue declines year-over-year that we've seen after June 30, are – well, virtually all of them are in markets where we've seen competitive additions to those markets. So, we'll be mindful of that competitive growth, but you know that we're going to use our balance sheet, we're going to use our cost structure, we're going to use our employees with the service that we offer and we'll fight hard to maintain every single customer that we've fought hard to win.

Jamie N. Baker - JPMorgan Securities LLC

Okay. Thanks, Gary. I'll just leave it at one question this time. Thanks.

Operator

And we'll take our next question from Duane Pfennigwerth with Evercore ISI.

Duane Pfennigwerth - Evercore Group LLC

Hey. Thanks. I wondered if you'd expand on that a little bit. Thinking about your relative cost structure versus other large airlines, in a period where there was a lot of restructuring around you that you didn't do and a lot of furloughing around you that you didn't do, how do you feel about your relative cost position today, looking out over the next five years versus the period that you have been in where large competitors restructured around you?

Gary C. Kelly - Southwest Airlines Co.

Well, I would say that, if you look at recent history, say the last five years, maybe the last three to four years, compared to where I think we are, Duane, over the next five years, I think our competitive position is no worse and arguably at least relative to some competitors, I think it will be better. We've got work to do on our part and we've got opportunities to boost our efficiencies, our productivity, we'll need to continue to work with our labor leadership to find ways to improve our efficiencies and eliminate waste, but I think we're positioned very, very well there.

The fleet modernization is the blunt tool that we'll use here in the near term and then as we deploy more and more new technologies over the next five years, we'll have better tools and techniques to drive efficiencies further, but I think we're very well positioned and that will continue to be the guiding principle for Southwest going forward which is to maintain our low cost position in the industry and improve upon it. And we're going to continue to work hard to achieve that.

Duane Pfennigwerth - Evercore Group LLC

Thanks for that Gary. And then did you provide 2017 CASM-ex, I may have missed it?

Tammy Romo - Southwest Airlines Co.

No, Duane, we did not provide that. We intend to provide that on our next call. We're still working through our plan; we're in the process of finalizing that. So, we'll certainly give you a full report the next time we talk.

Duane Pfennigwerth - Evercore Group LLC

Okay. Just a follow-up there, can you say how much of the accelerated depreciation is flowing through that fourth quarter guidance and when that would be expected to go away? Thanks for taking the questions.

Tammy Romo - Southwest Airlines Co.

In the fourth quarter guidance that would be about one – it'd be about 1% of our CASM, the change in our CASM-ex.

Duane Pfennigwerth - Evercore Group LLC

And do you know when that decapitates? Thanks for taking the questions?

Tammy Romo - Southwest Airlines Co.

Yeah. We'll – of course, we'll have our Classic fleet fully retired by September 30 of next year.

Duane Pfennigwerth - Evercore Group LLC

Thank you.

Operator

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

Hunter K. Keay - Wolfe Research LLC

Hi. Thank you. Gary or maybe even Bob, we often don't get a ton of data granularity from Southwest on RASM on these earnings calls, but can you give us some color around the nature of what's been driving the yield weakness, obviously you mentioned competitive capacity percentage in new markets, but what are the other things that we hear about like the impact of advantage fares or ULCCs or maybe even your own mix of connecting the local traffic. Can you maybe point out anything that's been sort of specific or maybe underappreciated at Southwest that you've identified as a RASM headwind that might be changing a little bit in the 4Q RASM forecast? Thank you.

Gary C. Kelly - Southwest Airlines Co.

Well, yeah, thanks, Hunter. And I do agree with you that we talk less about competitors and competitors' fares than our competitors do, so that's not going to change here today, but yeah, I mean the fare environment is very competitive and we have seen an increase in competitor seats in our markets that is fairly significant year-over-year, and so that obviously has an impact on us.

In terms of how we – and of course the past four quarters through the second quarter of last year, we benefited from a very significant improvement with our Chase credit card deal, so that lapses. And that puts us in a position where I think until we find another way for us to differentiate our revenue production, we're going to kind of fall in with industry performance, which is where I see us here in the third quarter, that's where I see us in the fourth quarter, so I don't see that we are out of step at all.

As to the mix of – within Southwest Airlines of connecting versus nonstop traffic, I'll let Bob speak to that. We provide some insights there, but it is clear that to your – if I think I understand where you're headed with your point that the fare environment will absolutely impact the mix of traffic that we realize on our network, so that will ebb and flow. Sometimes that's a positive effect in the short-term, sometimes it's a negative effect. There's nothing necessarily structural. We do have tools in place to manage that, we're looking forward to better tools with revenue management techniques, revenue management systems, new reservation system to manage that in the future. But, Bob, is there anything specific that you want to share here for the third and fourth quarter.

Robert E. Jordan - Southwest Airlines Co.

No, I'm probably being redundant, but yeah we have seen a, as you would expect with some of the changes in the fare environment a shift from some connect at traffic to nonstop. We anticipated that and so through our revenue management systems we changed settings and things that you'd normally do to anticipate the shift in traffic there, but it's not a material change in terms of what we can – in terms of what we're managing or seeing. We saw it and we're managing it.

Hunter K. Keay - Wolfe Research LLC

Okay.

Gary C. Kelly - Southwest Airlines Co.

But I think, Hunter, we're a member of the industry, we're in a scenario where there are more seats being added than the GDP is growing in terms of driving just natural travel demand, and we're all seeing unit revenue pressure as a consequence of that. It's not shocking with fuel prices being down where they are and we're – our goal has been and will continue to be to, which we think is the right thing to do for Southwest, is to continue to target positive unit revenue performances in each and every period. We're not achieving that right now, that's not acceptable to us and we're going to continue to make adjustments until we do.

Hunter K. Keay - Wolfe Research LLC

So, as my follow-up then, you said you wanted to hit revenue positive last year and you didn't and you're still – I mean you're talking about seats above GDP, but you're doing it too. So I mean, if you're not tracking towards positive unit revenue as we move through the course of the year, even if your ROIC is above your cost of capital, would you cut capacity further?

Gary C. Kelly - Southwest Airlines Co.

Well, and again I have to push back a little bit. So, without retelling the entire story, if you go from 2013, 2014, 2015, and then there is some spill over into 2016, we had strategic opportunities that we took advantage of. It's something that you know well. Especially given the aggressive growth that we had in those periods, the revenue performance was exceptional. There're a lot of things that came online that we were confident that they would produce, they have produced and they've been sustainable.

The industry growth has picked up in the last several years. So, yes, we'll need to contend with that. So, it is certainly correct to say that we're one of those that is currently growing faster than GDP and I'm mindful of that and hopefully have explained why that has been. And I think prospectively, we'll need to be more conservative with our growth and we're obviously committed to doing that in 2017.

Tammy's already pointed out that we have an opportunity for positive unit revenue performance beginning in the first quarter. Some of the January strength that we're seeing, of course, admittedly is the holiday shift. But I think the main tailwind that I'm encouraged with is the fewer number of markets under development have sort of balanced against the number of markets that are now facing more competition, so on balance right now that's a negative number.

Hunter K. Keay - Wolfe Research LLC

Thank you, Gary.

Operator

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

Savanthi N. Syth - Raymond James & Associates, Inc.

Hey, good afternoon. Just a follow-up on a couple of things. Just on the compressed holiday travel is the thinking based on what you were seeing in bookings, do you recover most of that 1 point, 1.5 point impact, and that the compression is not significant.

Gary C. Kelly - Southwest Airlines Co.

Yeah.

Savanthi N. Syth - Raymond James & Associates, Inc.

And also – I'm sorry, go ahead.

Gary C. Kelly - Southwest Airlines Co.

It's recovered in January, yes.

Tammy Romo - Southwest Airlines Co.

Savi, I'll clarify that. Yeah. So, basically, if you look at the Christmas holiday, with that falling on a Sunday, there will be compression basically, I think, prior to that holiday. In other words, customers will wait to take that trip in between Christmas and New Years. So, we do expect some of that 1.5 point to shift into first quarter, but we believe some of that will be permanently lost, if you will. And if you actually go back to periods where the holiday timing fell at the same spot on the calendar, I think that's 2011 and 2005, our forecast lines up with what we saw back in 2005 and 2011. So, we don't expect all of that shift to move into July. I would expect them – actually that we might lose the majority of that, but we'll have to wait and see. It's so early to know at this point.

Savanthi N. Syth - Raymond James & Associates, Inc.

Got it. And Tammy, maybe if I could just ask on that 3.5 point pressure in fourth quarter due to the contracts. Which contracts are in that? And are there any that's not – I'm just trying to think of as – if there is maybe a partial impact to the quarter or how should I think about that as maybe a run rate going forward?

Tammy Romo - Southwest Airlines Co.

Savi, I think, you should think of it as the – based on the status of all of our TAs that you're aware of. So, mainly, of course, that would be the pilots and our flight attendants.

Savanthi N. Syth - Raymond James & Associates, Inc.

Okay. Got it, great. And if I may squeeze just one quick enough for answer. Gary, you mentioned route design techniques in addition to kind of basic revenue management. Could you clarify that?

Gary C. Kelly - Southwest Airlines Co.

Well. Sure. All we're talking about is just what frequencies we have deployed to city-pairs, what city-pairs we have out there. So, it's nothing magical about it. But those are the two levers, as you well know, and those are the levers that we will rely upon here to manage towards positive RASM.

Savanthi N. Syth - Raymond James & Associates, Inc.

All right, great. Thank you.

Operator

We'll take our next question form Andrew Didora with Bank of America.

Andrew George Didora - Bank of America Merrill Lynch

Hi. Good afternoon, everyone, and thank you for taking the questions. Tammy, just had a question with regards to fuel. I think it's 63% hedged toward 2017 and this is pretty much well ahead of where you have been at this time of the year for each of the past two years from a hedge perspective. Can you give us a sense of kind of the range of prices that you may have locked in for fuel next year? Or just based on the current curve and current hedge book, what your 2017 hedge losses would be relative to 2016?

Tammy Romo - Southwest Airlines Co.

Sure. I'd be happy to provide that. Yeah, as you noted, we're 63% hedged and we have gains that would kick in, if I remember correctly, just above 75 Brent, and the liability associated with our hedge book for 2015 (sic) [2017] is $525 million.

Andrew George Didora - Bank of America Merrill Lynch

$525 million. Thank you. And your hedge losses for 2016 were turning out $1 billion.

Tammy Romo - Southwest Airlines Co.

Our hedge losses for next year will be significant – based on the market will be significantly less next year. You are correct.

Andrew George Didora - Bank of America Merrill Lynch

Great. Thank you. And then second question just for Gary. I guess based on kind of what you're seeing in the RASM environment, is there anything that makes you question or have you seen any sort of structural change in the general health of the leisure traveler at all?

Gary C. Kelly - Southwest Airlines Co.

No, not at all. I think this is all pretty predictable to, if the scenario is lower input cost and capacity is then secondly stepped up as a consequence because profits are strong, there are more seats fighting for the same number of passengers essentially and prices are going to soften. And that's exactly what's happening here.

So, a couple of things need to happen, either demand needs to improve or supply needs to come in better alignment. But in the meantime, I just remind everybody that the profits are if they're not record levels, they're near record levels. So, I think what we will want to do at Southwest is to continue to manage in a way that does not assume that these good times are extrapolated into infinity. I think that would be an enormous mistake.

So, the best discipline for us is to make sure that we keep revenues at a very healthy level and then therefore, for us that means that we want to continue to hang on to their unit revenue gains that we worked hard to achieve. But that's pretty much it in nutshell, that's what every other airline is seeing and what they'll do to manage is obviously their business, but that's what we're going to do at Southwest.

Andrew George Didora - Bank of America Merrill Lynch

Thank you.

Operator

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

Rajeev Lalwani - Morgan Stanley & Co. LLC

Hi. Thanks for the time. Just on your comment of getting to positive RASM next year. Do you think your capacity guide that sort of 3.5%, 4% level is enough to get you there based on just demand trends today and competitive dynamics today? Or do you think you need a little bit of help from the latter things I just mentioned?

Gary C. Kelly - Southwest Airlines Co.

No, I think that that is a good plan for 2017. Our plan is to have flat-to-slightly up unit revenue performance for the year. There're always things that are unpredictable in any given year, but that is the plan and that's based on our capacity set for next year. The one strategic thing that clearly we have underway that we want to follow through with is we're building this international terminal at Fort Lauderdale and that's strategic and it's committed and we will absolutely add to that. But back to Savi's earlier question, with our current performance, we're going to look very hard in our route network and make some decisions about what routes we might want to cut, what routes we might want to increase and it's just a normal part of our process that we go through for every schedule from that matter, but it will be with an increased intensity here, because we're not hitting our target.

So, that's what you would expect us to do and that's what we expect ourselves. So, yeah, I'm comfortable with the 3.5%, 4% growth for next year and we'll continue to be thinking about what we do in 2018, based on how things progress in 2017.

Rajeev Lalwani - Morgan Stanley & Co. LLC

Okay. Gary you're saying, you are assuming that the current demand environment, the current competitive dynamics sort of continue into next year or are you thinking that that's a help to get you there?

Gary C. Kelly - Southwest Airlines Co.

It is based on our forecast of what competition is doing in 2017. So, all of us have a sense of what capacity is expected for 2017. So, yes, we're factoring all that in.

Rajeev Lalwani - Morgan Stanley & Co. LLC

And then just follow-up. What is the reservation system upgrade come into play as far as being able to help you get there? Does that – or is that part of what you were just describing earlier in terms of router network adjustments?

Gary C. Kelly - Southwest Airlines Co.

No, that's really – I'm not counting on anything from our new reservation system for 2017 in terms of moving the needle on improving our RASM performance. So, we're just going to rely on doing things the old fashion way for now, which again, I'm very proud of what our people have done over the course of time to get us to this point knowing full well we don't have all the tools and techniques that we would like to have or that we will have. But those aren't going to magically appear in 2017, that will come online and my expectation is that they'll come online gradually, in beginning in late 2017, early 2018. If we do better than that, I think that would all be fantastic, but I'm not counting on that.

Rajeev Lalwani - Morgan Stanley & Co. LLC

Of course, always. Thank you, Gary.

Gary C. Kelly - Southwest Airlines Co.

You bet.

Operator

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

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Good afternoon. Thanks for taking my question.

Gary C. Kelly - Southwest Airlines Co.

Sure, Julie.

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Tammy, I wanted to go back to your comments on flat-to-positive RASM potentially in the first quarter. What are the other factors that give you confidence on that trajectory given your low level of visibility with just a fraction of the bookings so far, your own capacity growth still above GDP, there is not a ton of relief on competitive capacity, the holiday shift might not fully be recaptured and Easter shifts back into Q2. So, just trying to understand what you guys are seeing at this stage that gives you the confidence to say that?

Tammy Romo - Southwest Airlines Co.

Yes, Julie, that's just based on the bookings that we have for January relative to where we were last year. So, as you pointed out, that's not a – it's certainly not a forecast for all the reasons that you just noted, but at least the early signs for January are encouraging.

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Okay. And then can you just remind us, just on Easter shifting back into April, is that going to be – I think last year, you guys called it out the $15 million swing between the two quarters, is it similar this year?

Tammy Romo - Southwest Airlines Co.

Yeah. At this point, I wouldn't think that it would be materially different from that.

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Okay. And then what percentage of January do you have booked at this point?

Gary C. Kelly - Southwest Airlines Co.

I don't know...

Tammy Romo - Southwest Airlines Co.

We have...

Gary C. Kelly - Southwest Airlines Co.

...but it is not much. I mean it's enough for us to get a read on the headline trends that we're describing to you. But, yeah, we've got a long way to go. We generally will start a month with about half the bookings in place.

Tammy Romo - Southwest Airlines Co.

Yeah. So...

Gary C. Kelly - Southwest Airlines Co.

Yeah. Tammy, I'd mentioned one other thing on the first quarter, which is our seat growth is less than 3% in the first quarter. So, our growth is absolutely beginning to slow.

Tammy Romo - Southwest Airlines Co.

That's right.

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

When will you guys give us an indication on the pace of growth in the second quarter? I noticed that recently on the website, you guys are going to release just maybe two more weeks, November 1, I think, typically you released more like four to six weeks of seat inventory, is that because you're re-thinking the pace of growth in the second quarter given the revenue environment?

Tammy Romo - Southwest Airlines Co.

Julie I can help. As it lines up to our full year guidance anyway, the less than 4% just kind of mathematically the way that would fall out quarter-to-quarter is that, second to third quarter would be in the 4% to 5% range. And then we bend down in the fourth quarter. And so that would be closer to flat when we get to the fourth quarter. So, that's kind of mathematically how all that would fall out. Now of course, domestic growth would be less than what I just provided. I call it a point or so.

Gary C. Kelly - Southwest Airlines Co.

The schedule is – all we're doing now is preparing for the launch of the new reservation system and that's the only thing that has a bearing on what you see published.

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Okay, understood.

Gary C. Kelly - Southwest Airlines Co.

We don't have specific date to tell you yet, but other than we said, it's going to be in May. So just to be clear, the published schedule has nothing to do with any concern about the revenue.

Tammy Romo - Southwest Airlines Co.

Yes.

Julie Yates - Credit Suisse Securities (USA) LLC (Broker)

Got it. Okay. Thank you so much.

Gary C. Kelly - Southwest Airlines Co.

You bet.

Operator

And we'll take our next question from Darryl Genovesi with UBS.

Darryl Genovesi - UBS Securities LLC

Hi, guys. Thanks for the time. Hey, Tammy, you called out a 100 basis point to 150 basis point hit to RASM in the fourth quarter from the calendar. But I was wondering, does that also include the discount travel vouchers that you had issued during the service disruption, the redemption of those that likely takes place in the fourth quarter?

Tammy Romo - Southwest Airlines Co.

No, that did not include the travel vouchers. We would expect some impact from the travel vouchers, but we don't expect that to be significant.

Darryl Genovesi - UBS Securities LLC

Okay. Thanks for that. And then I guess on...

Tammy Romo - Southwest Airlines Co.

And just, if you're looking for a dollar figure there, it's going to be, say, under $10 million.

Darryl Genovesi - UBS Securities LLC

Right. Thank you. And then with respect to 2017 unit cost, I think Duane had asked you about the accelerated depreciation, you said it carries through, but it doesn't actually grow next year, right, the accelerated depreciation is pretty constant from here?

Tammy Romo - Southwest Airlines Co.

It's pretty constant, that's exactly right, as we move into next year.

Darryl Genovesi - UBS Securities LLC

Okay. And then...

Gary C. Kelly - Southwest Airlines Co.

Hiring units along the way, so that'll – actually that will come down as will the fuel burn penalty that you get with the older airplanes and the extra maintenance burden, so it all sort of tapers off.

Darryl Genovesi - UBS Securities LLC

Okay. And then, I guess are there any other big cost items that you would highlight for 2017 that we haven't talked about already today?

Tammy Romo - Southwest Airlines Co.

We will have some costs associated with the implementation of our reservation system. As we ramp up for that, that will also taper off, but as Gary alluded to earlier, I think we're very well positioned next year. Yes, we do have cost pressures from our labor agreements, but we have opportunities, I think, throughout the company to really fine-tune and improve efficiencies and that's exactly what we're going to be focused on. And we are looking forward to giving you more of an update on our next conference call. But other than that, I wouldn't really call anything out. As we look into 2017 and 2018 too, our hope would be on the technology side as well, we could at least start bending that down in addition. So, now I'm – we are very focused on this and I'm confident that we'll be able to control our cost over the long run.

Gary C. Kelly - Southwest Airlines Co.

Tammy...

Darryl Genovesi - UBS Securities LLC

Great. Thanks very much.

Gary C. Kelly - Southwest Airlines Co.

Darryl, and I think this is probably somewhat related to Jamie's earlier question about cost, but there is a significant amount of spending this year and next year related to technology, investments and they are not necessarily all capitalized, a lot of that's just running straight through the expenses. So, they are all being done because we believe that there will be significant value that flows from them. And I agree with Tammy, I would hope that we can rein in some of our technology spending in the future, because for us it's quite high right now, but all very important things that we want to get accomplished.

Darryl Genovesi - UBS Securities LLC

Right. Thanks, again.

Operator

We'll go next to Joseph DeNardi with Stifel.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Gary, is getting to positive RASM next year is a goal of yours in the company then should it be a component of your short-term compensation? And as far as I can tell that 17% of your short-term comp is driven by total revenues, would you like to commit to replace that with a RASM metric?

Gary C. Kelly - Southwest Airlines Co.

Well, I wish it was up to me, and I would do it differently, that's a joke. I don't know, I'll talk to the board about that. I've heard that feedback from investor relations that some of our investors are interested in that. We try to have a balanced approach. We don't want to incent the wrong behavior, and although, the officers that I work with and our directors are mostly focused – are all focused on just doing what's best for Southwest Airlines.

Yeah. That's something that we'll look at, but no, I'm not going to commit, because I'm not in-charge. I'm not the Chairman of the comp committee and that will be up to the compensation committee.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Okay. Fair enough. And then, just at Lauderdale, could you just – I mean, are you guys prepared at this point to maybe share with us what your plans are? I think you have exclusive access to four of the five gates, what sort of utilization you guys expect to have there, initially?

Gary C. Kelly - Southwest Airlines Co.

We'll be releasing that in January, so stay tuned.

Joseph DeNardi - Stifel, Nicolaus & Co., Inc.

Okay. Thank you.

Operator

We'll take your next question from Helane Becker with Cowen & Company.

Helane Becker - Cowen & Co. LLC

Thanks, operator. Hi, guys. Thanks for the time. So, just one question here, I know the flight attendant results are due back on Monday, when is the pilot results due back?

Gary C. Kelly - Southwest Airlines Co.

I think, Mike, it's later next week.

Michael G. Van de Ven - Southwest Airlines Co.

Yeah, November 7.

Gary C. Kelly - Southwest Airlines Co.

November 7.

Michael G. Van de Ven - Southwest Airlines Co.

Yes.

Gary C. Kelly - Southwest Airlines Co.

November 7.

Helane Becker - Cowen & Co. LLC

November 7. Perfect. And then, on the CASM guidance, the 4% to 5% that you gave us, is that inclusive of the salary increases that you also talked about or is that excluding the salaries?

Tammy Romo - Southwest Airlines Co.

That would be including them.

Gary C. Kelly - Southwest Airlines Co.

Yeah. That assumes those deals are in effect. Yes.

Helane Becker - Cowen & Co. LLC

Okay. And then, just one last follow-up, you talked about the tech outage earlier in the third quarter, so as you think about that IT spend, does that also include some amount of money to prevent an occurrence again where if something goes – I mean you can't obviously always prevent things, but if something goes wrong again, can you – can like your pilots wirelessly check in or can you go to a wireless system or somehow still manage to keep the airline running, while in the background you fix the issues?

Gary C. Kelly - Southwest Airlines Co.

Actually you're very insightful there. I mean we have a long list of opportunities to improve our tools and techniques, and of course we just didn't start this year, this has been a process, I've been with Southwest for 30 years and we've been continually investing in technology and evolving tools. Hardening or fortifying our technology is absolutely a component of our spending. Right now, we are in the midst of establishing a new data center, which in effect has a complete redundant data center at the same place in addition to a backup facility, is just one example.

So, all those things are underway, and with the belief that – I mean just like a product, we want our airline to be better every year than it was the year before and we want our technology tools and capabilities also to fit that kind of a definition. I think I've mentioned to you all many times before, we've got two basic stacks of technology that we're working on, we've got the commercial side of things with the new reservation system as the marquee item, but there are a long list of sub projects under that that we've shared with you all, that are on the docket over the next several years. Likewise, Mike Van de Ven on the op side of things has a similar agenda and better automation and techniques – rather and tools and techniques and communication techniques are very much in the queue for work over the next several years with respect to our flight crews. So, the outage was really odd. I think I would readily admit to everybody that it is impossible to have a failsafe back over for every conceivable scenario that could happen, but it is – we're in really good shape and have a lot of experience in preventing outages like that. So, hopefully that addresses your question, but absolutely we want to continue to invest to fortify our technology.

Helane Becker - Cowen & Co. LLC

Yes. Thank you very much. Thank you.

Operator

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

Michael Linenberg - Deutsche Bank Securities, Inc.

Hey, thanks. Good afternoon, everyone. Hey, Gary, two quick ones here. Gary, you talk about the increased competition in your markets. Can you give us a sense about, maybe as a percent of ASMs, what you've seen coming over the last year? And just looking at the schedules, it does seem to be much more driven by ultra-low cost carriers rather than majors. Is that right?

Gary C. Kelly - Southwest Airlines Co.

Sure. In other words, all things that you know that most of the high-growth airlines are the smaller low-cost airlines, although some of the legacy carriers are obviously growing in the grand scheme of things pretty aggressively as well, but, yeah, most of it is coming there. And then number two, Southwest is a big city, big traffic airline and that's where the passengers are. So we are clearly for the most – there's one exception with one airline who has a different strategy, but we're – in an environment like this, we at Southwest should fully expect more competition. We have expected it. We predicted it internally and in fact, it's happening. So, we need to compete and we need to compete by striving to have the best service at the lowest price. And that's what our strategy is oriented around. But we're not surprised that that is the case, Mike, but that is what you're asking is exactly what's happening.

Michael Linenberg - Deutsche Bank Securities, Inc.

Do you have a sense on maybe percentage of coverage? Is that something you have or maybe I can get it from you offline?

Gary C. Kelly - Southwest Airlines Co.

I don't have that readily in my mind. I'm looking at Tammy and Marcy to see if they have something they feel comfortable in sharing, but why don't you let us work on that because I do think that's a very reasonable question and is something that would help everyone understand better what is happening in the revenue environment. But in any event, we need to be very prepared for competition, we are. Our employees are warriors and we're going to fight very hard to not only keep the customers that we serve today, but we want to win more in the future. So, you do that with great service and low fares, period.

Tammy Romo - Southwest Airlines Co.

Gary, on just the – in terms of seats, I do have, that figure is roughly – it's probably roughly a 20% increase year-over-year for the third quarter and just a group, the ULCCs.

Michael Linenberg - Deutsche Bank Securities, Inc.

Great.

Gary C. Kelly - Southwest Airlines Co.

So, it's big. And again, I think hopefully that will help everyone to get a sense of why there is some impact on our unit revenue performance. That's a pretty big increase. And actually, as I look at our individual city-pair results, I'm very pleased with how well we are performing. So, we're not going anywhere. We're not going to back off in these markets. And obviously, we're very pro-competition and pro-consumer and very well prepared to compete in this environment.

Michael Linenberg - Deutsche Bank Securities, Inc.

Right. And if I then just squeeze in just one more on just ancillaries per passenger, every airline measures it differently. They throw in different items. When you guys think about that, like what's a rough number? And if you don't have it, you can always give it to me offline, but thanks for the questions.

Gary C. Kelly - Southwest Airlines Co.

Well, so, Mike, you're just talking about what's the right number to be targeting for us?

Michael Linenberg - Deutsche Bank Securities, Inc.

No, what is it currently? Are you $12 a passenger, $15 a passenger, how do you think about that? And just kind of get a baseline number there.

Gary C. Kelly - Southwest Airlines Co.

We've got the number. I just don't have it at my fingertips. We don't rank high in the way, I think, we would categorize ancillary. And I do think that we have some pretty significant opportunities to drive our ancillary business in the future. I would just quickly say that while we aren't hitting our revenue target in the bulls-eye right now, we are doing a lot. And so, I don't want our company to chase too many things simultaneously. We need to focus, we need to execute well, we have a very good strategy, we have a long history of performing exceptionally well and I'm very confident that we'll continue to execute well.

However, there are a fair number of opportunities that we ultimately will want to pursue and we'll keep those relatively close to the vest until we're ready to reveal them. But I'm not talking about charging for bags, I'm not talking about change fees or some of those basics, but we do have opportunities to invest in tools and techniques, and perhaps beef up our own resources to be able to pursue some of these opportunities, and I think that that they would be meaningful. But driving growth in the ancillaries per passenger is absolutely an objective that we have. I don't know that we'll be doing a lot of that in 2017. It feels to me like it's more of a follow on after we get our new reservation system in.

Tammy Romo - Southwest Airlines Co.

Yeah. I agree, Gary. The only other thing I would add to that is, at least for the ancillary products that we do have, like our EarlyBird and our Business Select, EarlyBird for as an example, we're continuing to see very significant year-over-year growth in ancillary products such as that.

Michael Linenberg - Deutsche Bank Securities, Inc.

Okay, great. Thanks, Tammy. Thanks, Gary.

Gary C. Kelly - Southwest Airlines Co.

Okay.

Operator

And that concludes the analyst portion of today's call. Thank you for joining. Ladies and gentlemen, we'll now begin our media portion for today's call. I'd like to first introduce Ms. Linda Rutherford, Vice President and Chief Communications Officer.

Linda B. Rutherford - Southwest Airlines Co.

Thank you, Tom, and welcome to the members of the media, who are on our call today. Before you start to queuing for questions, Tom, do you mind just giving them some instructions on how to do so?

Operator

Yes, ma'am. [Break] (01:06:17-01:06:42) We'll now take our first question from Conor Shine with The Dallas Morning News.

Conor Shine - The Dallas Morning News, Inc.

Just wondering if you could provide a little bit more detail, kind of geographically, which markets you are seeing higher than average competition. Are there specific ones that you're feeling that pressure more?

Gary C. Kelly - Southwest Airlines Co.

Not really. Of course, knowing you're Dallas centric, ironic. The one that I don't mind sharing is Dallas and Dallas is very strong, of course we're the steady state over at Love Field at this point, but the Dallas is doing well and DFW is an airport with its traffic has grown a lot. Just thinking about the 48 states, there is a lot of competitive pressure in the west. You got airlines that are adding capacity in Seattle, in LA, I guess, Bob, in the bay area, so – but for the most part it's all over the country. So, there are about – the industry is growing at about a 5% clip in terms of seats and as you know the economy is growing, it's sub 2%. So that's what's happening, and it makes sense to the industry to do that because energy prices are so low, and we're leveraged to have energy prices.

Conor Shine - The Dallas Morning News, Inc.

Thank you.

Operator

And we'll go next to Susan Carey with The Wall Street Journal.

Susan Carey - The Wall Street Journal, Inc.

Good morning. Hey, Tammy I think I missed your last comment about what I heard was a 20% increase in seats, this was from the discussion about what the ULCCs are doing. And I just – I'm thinking I can't have heard that right and which period and compared with what?

Tammy Romo - Southwest Airlines Co.

That was just for the third quarter, but we're seeing – that's year-over-year for the third quarter, but we're seeing, as Gary said, competition really across all of our markets by the entire industry, but certainly a lot of seats being added by the ULCCs, but that was the third quarter year-over-year comment.

Gary C. Kelly - Southwest Airlines Co.

So, I don't know the statistics, Susan, so I'm going to make sure that we clarify for you what it is. So, Tammy, you're saying if you took the ULCC seats in our markets that they grew their seats by 20%?

Tammy Romo - Southwest Airlines Co.

That is correct.

Susan Carey - The Wall Street Journal, Inc.

Wow.

Gary C. Kelly - Southwest Airlines Co.

Yeah. Their seats, now again, they're a lot smaller than we are, so it's not 20% of our seats, it's 20% of their seats.

Susan Carey - The Wall Street Journal, Inc.

Okay. Super. Thank you.

Tammy Romo - Southwest Airlines Co.

And just given – not to give too many numbers, but just to put an exclamation point on what Gary just said, that's in terms of just total seats for the industry that's probably close to probably, yes, 5%.

Susan Carey - The Wall Street Journal, Inc.

And this is domestic seats?

Tammy Romo - Southwest Airlines Co.

That is correct.

Susan Carey - The Wall Street Journal, Inc.

Okay. Thank you very much.

Operator

And we'll take our next question from Mary Schlangenstein with Bloomberg News.

Mary Schlangenstein - Bloomberg News

Thanks. Gary, is there any way you can put any detail on the ancillary opportunities that you'll look at? Are there – is there any way you can describe a couple of those for us?

Gary C. Kelly - Southwest Airlines Co.

Well, it's just not ready for prime time. And I'd rather not share with our competitors where we see opportunities for a variety of reasons. So, I will decline on that one, but thank you for the question.

Mary Schlangenstein - Bloomberg News

Okay. Can I also ask, you filed with the DOT to extend the start date on your Fort Lauderdale Havana route to December 12, have you gotten a response from the DOT on that yet?

Gary C. Kelly - Southwest Airlines Co.

We have not.

Mary Schlangenstein - Bloomberg News

Great. Thank you.

Gary C. Kelly - Southwest Airlines Co.

My pleasure. I'm very informed on that topic, Mary.

Mary Schlangenstein - Bloomberg News

Thank you.

Operator

And we'll take our next question from David Koenig with The Associated Press.

David Koenig - Associated Press

Hi. Well, Susan, actually asked my question, but insist Gary to clarify that. But maybe Tammy could – if it's a 20% increase in the third quarter and seats from the legacy up from the ULCCs, do you have a comparable figure from the legacy? And then more broadly for Gary, did you not expect this or was this to a greater extent than you'd ever seen before?

Gary C. Kelly - Southwest Airlines Co.

Well, no, I'll just speak for me personally. Yes, I have expected that if the industry profits recover, which they have and then we recovered more with lower fuel prices, it's just a natural extension of that is that individual companies are going to be more aggressive, and especially the smaller carriers. So, I think it's all very predictable. What the effect of that behavior is, is less predictable.

So we had a plan for 2016, it's turned out to be more aggressive than our results and we go back and adjust. So, but no, I don't think it's shocking where we are at all, and we will continue to compete very aggressively in this environment, and I think we have all the strengths that we need, mainly the people of Southwest Airlines to compete and win customers, compete for and win customers.

David Koenig - Associated Press

Okay, thanks. And was there a legacy figure on that Tammy?

Tammy Romo - Southwest Airlines Co.

It would be in the 5% to 10% range, but just keep in mind, that's a very significant percentage of the seats in the industry. But if you're just looking at the network carriers, it'd be in the 5% to 10% range.

Gary C. Kelly - Southwest Airlines Co.

And if I could just, hopefully this helps clarify for everybody. We're the nation's leading airline, we're in all the major cities, we're in all the major city pairs. And so by definition, anybody who grows in the U.S., they will likely be growing in our market. So, I probably should have made that more common sense argument for the group earlier, but the competition isn't adding seats to small markets, in fact if anything, they're taking seats out of small markets. So, where they're going where traffic is and that is our specialty, because we are an airline that serves major markets with lots of traffic. So, I think it's very – it should be intuitive for everyone that whether it's a legacy carrier or whether it is a ULCC that they will likely be overlapping with us, when they add capacity.

David Koenig - Associated Press

All right. Thank you.

Tammy Romo - Southwest Airlines Co.

Just as a reminder, we carry one in four passengers here in the U.S. and our network is vast. So, I don't think there is really anything surprising, in the numbers that we've provided.

Gary C. Kelly - Southwest Airlines Co.

Right.

Operator

And we'll take our next question from Dawn Gilbertson, with The Arizona Republic Newspaper.

Dawn Gilbertson - The Arizona Republic, Inc.

Good morning, Gary. I have a couple of questions. You mentioned in the beginning, the new booking feature of the reservation system will debut in December. What does that mean if anything for travelers?

Gary C. Kelly - Southwest Airlines Co.

I don't think it's going to really mean anything. I think that customers will mostly go to Southwest.com, that's where the super majority of our customers book Southwest and they will see the same Southwest.com as they know and love, it is behind Southwest.com, where we'll have a new reservation system engine. So, Bob, I think for the most part is going to be invisible to our customers. So, they won't know that they are making a booking in a new system, as far as I can recall.

Robert E. Jordan - Southwest Airlines Co.

No. That's exactly right. The ease of use with Southwest.com will continue exactly like it is today and for customers booking there, they really won't see any change.

Dawn Gilbertson - The Arizona Republic, Inc.

Will they see change come May?

Gary C. Kelly - Southwest Airlines Co.

I'd have to think about that. I don't think there is anything that is customer experience wise that they'll see. So this is all back office things. Now, Bob has staffed up in our call centers significantly in anticipation of a new system that will take longer for our people to work with just because of a learning curve. So, we'll have all the resources we need, so that should be transparent to the customer as well. But other than that, I don't think the customer – even in that, I don't think the customers are going to see anything different.

Robert E. Jordan - Southwest Airlines Co.

They won't.

Dawn Gilbertson - The Arizona Republic, Inc.

You mean stepping up, as in the approaches or right away like starting now in the rate (01:16:28) centers?

Gary C. Kelly - Southwest Airlines Co.

Well, he staffed up already, because they need...

Dawn Gilbertson - The Arizona Republic, Inc.

Okay.

Gary C. Kelly - Southwest Airlines Co.

...to go through training and they need to know what it's like to talk to a customer and make a booking and work through changes and all those things before we add the new technology. So, all that is in place and I think Mike is going to – between Mike and Bob, they'll have trained about 20,000 employees with this new reservation system. One other thing real quick though, Dawn, since you're on this topic is remember that we launched international service in mid-2014 and that is using the technology that we are now converting the rest of our reservation system to.

Dawn Gilbertson - The Arizona Republic, Inc.

Okay.

Gary C. Kelly - Southwest Airlines Co.

So, we already have a lot of experience with this current technology and so I'm expecting that this is going to go very well.

Dawn Gilbertson - The Arizona Republic, Inc.

Okay. A couple more if I may, you gave the $55 million revenue impact from the outage? I don't recall a cost figure, is it on the cost side? Is there a figure for that? How many?

Gary C. Kelly - Southwest Airlines Co.

Four...

Dawn Gilbertson - The Arizona Republic, Inc.

I'm sorry, you're cutting out?

Gary C. Kelly - Southwest Airlines Co.

$24 million

Dawn Gilbertson - The Arizona Republic, Inc.

$24 million? Okay. Got you. And last question, if I may, I think you already alluded to this when you were talking about ancillary, but in one of the analyst's reports this morning, it talks about given the weak RASM and the labor cost pressures, it's time for investors to turn up the volume on the need for things like bag fees. Do you have any comment on that beyond what you've already said?

Gary C. Kelly - Southwest Airlines Co.

Well, my hearing is good, and I understand, I think, my answer is consistent, which is, if we want to improve RASM, we don't want to charge bag fees, because that would only have a negative effect on our RASM. We have a unique and beloved position in the industry with this approach and we would be foolish to squander it, so no thought whatsoever on charging bags.

Dawn Gilbertson - The Arizona Republic, Inc.

Thank you so much.

Gary C. Kelly - Southwest Airlines Co.

Beyond what we already do, of course, which is modest.

Dawn Gilbertson - The Arizona Republic, Inc.

Right. Thank you.

Gary C. Kelly - Southwest Airlines Co.

Thank you.

Operator

And we have time for one more question, we'll take our last question from Richard Velotta with Las Vegas Review-Journal.

Richard Velotta - Las Vegas Review-Journal

Good morning, Gary. I actually have a couple as well. One, could you give an update as to where Las Vegas stands in the queue for international service to Mexico – based off of what the new plans for LAX?

Gary C. Kelly - Southwest Airlines Co.

Well, Rich, right now, there is none plan for 2017, so our (01:19:16) Las Vegas is, as you know, an extraordinarily important market for Southwest and one that we have just tremendous community relationships with. So, we will continue to keep it very high in our consideration set, but the focus for next year will be following up or following through with our Houston Hobby launch, we're obviously just getting started in Cuba and LAX to Mexico and then we'll be launching at Fort Lauderdale. So that's going to keep us really busy here for the near term.

Richard Velotta - Las Vegas Review-Journal

Okay. And then, the other would be, is it my understanding that Southwest does not have any objections to the northern most stadium – proposed stadium site. Pilots had indicated they were not in favor of the southern one that have Bali Hai golf course, but there is a northern one near Russell Road that I haven't heard specifically, whether there is any problem with that?

Gary C. Kelly - Southwest Airlines Co.

But, Rich, let me get back to you on that one.

Richard Velotta - Las Vegas Review-Journal

All right.

Gary C. Kelly - Southwest Airlines Co.

So I want to make sure I give you an accurate answer and that has not been my focus. (01:20:37) up-to-date information.

Richard Velotta - Las Vegas Review-Journal

Okay. Thank you.

Operator

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

Linda B. Rutherford - Southwest Airlines Co.

Thanks, Tom. As always, if our media folks have any follow-up questions, you can reach us at 214-792-4847 or via our media web portal at www.swamedia.com. Thanks so much.

Operator

And that concludes today's call. Thank you for joining.

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