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SOUTHWEST AIRLINES Tammy Romo SVP Finance and CFO J.P. Morgan Aviation, Transportation & Industrials Conference
©2013 Southwest Airlines Co.
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Forward Looking Statements This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on, and include statements about, the Company’s estimates, expectations, beliefs, intentions, and strategies for the future, and are not guarantees of future performance. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include without limitation statements related to (i) the Company’s strategic initiatives and its related financial and operational plans, objectives, goals, and expectations; (ii) its financial outlook and targets; (iii) its fleet and capacity plans, including its fleet modernization plans; (iv) its integration of AirTran; and (v) its expectations with respect to liquidity and capital expenditures. Forward-looking statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) demand for the Company’s services and the impact of fuel prices, economic conditions, and actions of competitors (including, without limitation, pricing, scheduling, and capacity decisions and consolidation and alliance activities) on the Company’s business decisions, plans, and strategies; (ii) the Company’s ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; (iii) the Company’s ability to timely and effectively prioritize its strategic initiatives and related expenditures; (iv) the Company’s dependence on third parties with respect to certain of its initiatives, in particular with respect to its fleet plans; (v) the Company’s ability to effectively complete the integration of AirTran and realize the expected benefits from the acquisition; (vi) changes in the price of aircraft fuel and any changes to the Company’s fuel hedging strategies and positions; and (vii) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
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Investing in our Future Solid Foundation
Financially Positioned for
Prosperity
Building for the future from a solid foundation
Proven business strategy Low cost producer Dominant market share Valued product Strong network Record setting financial
performance Clear and compelling
objectives
Record financial performance
Healthy free cash flow Focus on capital efficiency Capacity discipline Commitment to return
value to Shareholders
Premier frequent flier program
Fleet modernization AirTran integration New reservation system,
including international capabilities
Wright Amendment repeal Airport experience
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We have a proven business strategy
Investing in our Future Solid Foundation Financially Positioned for Prosperity
Compelling Customer Proposition
Best Customer Service Robust network Low fares and high value Direct Customer
relationships
Operational Excellence & Efficiency
Safe, clean, efficient operation
Low cost producer Excellent labor relations
Strong Financial Results
Consistent profitability Strong balance sheet Excellent Shareholder
return
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We remain a low cost leader
Source: DOT Form 41 and DOT T100 domestic mainline data for the 12 months ended September 30, 2013. Stage-length adjusted for Southwest’s average stage length.
Solid Foundation Investing in our Future Financially Positioned for Prosperity
14.31 12.88
11.80 10.83 10.74 10.67
9.82 9.25 8.28
7.19 6.83
0.00
5.00
10.00
15.00
20.00
United Delta American VirginAmerica
USAirways
Alaska JetBlue Frontier Southwest Spirit Allegiant
Network LCCs ULCCs
CAS
M, e
xclu
ding
fuel
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Other Carriers
30%
Southwest Airlines
70%
Investing in our Future Solid Foundation Financially Positioned for Prosperity
We are the nation’s largest1 domestic airline
Market Share in Southwest Airlines Top 100 O&D
1) As measured by the number of originating passengers boarded and based on data available from the U.S. Department of Transportation as of September 30, 2013.
Bay Area Chicago D.C. So. Cal. Las Vegas Denver
24% of total domestic market share Serve 24 of the top 25 US domestic cities Serve 95 of the top 100 domestic O&D markets
70% market share in our top 100 O&D markets #1 in market share in 55 of our 96 airports #1 in market share in 95 of our top 100 O&D markets
#1 market share in several greater metro areas
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Investing in our Future Solid Foundation Financially Positioned for Prosperity
Shopping & Booking Experience
Inflight Experience Other Products
Airport Experience
SWA Gift Card
Complementary drinks & snacks
Live TV Gate to Gate
WiFi
Business Select
Business Travel program
Business Select
Evolve Interior
SWA Branded Credit Card
Cargo
southwest.com Mobile southwest.com
Charters
Business Select
Discount travel alert Travel deal emails
Expedited security
Automated check-in Pet Travel
Group travel
Frequent Flyer Program
Vacation Packages Hotel & rental car
Our People
Automated check-in
Bags Fly Free
TSA Pre-check
No Change Fees
We provide a unique Customer experience for our business and leisure travelers
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Named ninth most admired Company in the world in FORTUNE magazine’s 2014 survey of corporate reputations. Received the top ranking by
Forbes for The Brands American Women and Men Desire Most.
In 2013, Southwest once again ranked highest in terms of fewest Customer complaints.
Southwest is the only commercial airline to be honored as a leader in the commitment to transparency and responsible business practices in the 14th annual list of 100 Best Corporate Citizens.
Southwest placed first in the Travel category and fifth in the overall brand rankings out of more than 250 companies in the American Brand Excellence Awards.
Investing in our Future Solid Foundation Financially Positioned for Prosperity
For the third straight year, Southwest Airlines is named Brand of the Year in the Value Airline category according to the Harris Poll EquiTrend® (EQ) study.
Our value and quality are widely recognized
Recognized as a 2014 Customer Champion by J.D. Power and Associates for service excellence across all facets of the customer experience.
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Our trips flown have increased over 40% since 2000
Annual Passengers 63.7M Trips Flown 903,754 Total Fleet (in service) 344 Passenger Load Factor 70.5% Avg Length of Haul 663 Destinations 57
December 2000 December 2013
Annual Passengers 108.1M Trips Flown 1,312,785 Total Fleet (in service) 680 Passenger Load Factor 80.1% Avg Length of Haul 966 Destinations 96
Solid Foundation Investing in our Future Financially Positioned for Prosperity
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We’ve had 41 consecutive years of profitability
Investing in our Future Solid Foundation Financially Positioned for Prosperity
in m
illion
s, e
xclu
ding
spe
cial
item
s
$(50)
$50
$150
$250
$350
$450
$550
$650
$750
$850
1971 1980 1990 2000 2013
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Southwest Airlines’ objectives are clearly defined
Investing in our Future Solid Foundation Financially Positioned for Prosperity
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Our major strategic initiatives propel our objectives
Financially Positioned for Prosperity Investing in our Future Solid Foundation
All New Rapid Rewards
Fleet Modernization & - 800
AirTran Integration
International and Reservations System Replacement
2013 contribution
$400M synergies
$300M EBIT
$100M YOY
revenue
Redesigned our frequent flier program to better align with our business model
Since the launch of ANRR in March 2011 recognized $280M in incremental revenue
Retrofitted to Evolve cabin interiors Retiring 737 Classic fleet Launch customer for the Boeing 737 MAX Transitioning 717 fleet to Delta Introduced Boeing 737 – 800s to our fleet
Will provide Southwest with the ability to serve both domestic and international markets
Acquired AirTran in May 2011 Integrating Southwest Airlines’ and AirTran’s networks,
fleets, systems and People to create a stronger airline Expected to be completed in 2014
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Rapid Rewards® is a premier frequent flier program
Financially Positioned for Prosperity Investing in our Future Solid Foundation
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Fleet Modernization has a dual benefit of lower unit costs while expanding our revenue opportunities
737-800 52 in our fleet as of YE 2013 52 more firm orders
Evolve interior All Southwest -700s; 78 -300s AirTran -700s retrofit with conversion
737 MAX 13% more fuel efficient over today’s most
fuel-efficient single-aisle airplane 200 firm orders, with first delivery
expected in 2017 737 Classic Retirements Replacing a 737 Classic with a 737-700 or 737-800 reduces fuel burn by 6-7%
717 Leased/Subleased to Delta All of AirTran’s 717s will be removed from network by end of 2014 All transitions to Delta complete by end of 2015
Financially Positioned for Prosperity Investing in our Future Solid Foundation
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Fleet Modernization
The Boeing Company The Boeing Company 737NG 737 MAX
-700 Firm Orders
-800 Firm
Orders Options Additional
-700s -7 Firm Orders
-8 Firm Orders Options Total
2014 - 33 - 13 - - - 46 2015 - 19 - 5 - - - 24 2016 31 - 12 - - - - 43 2017 15 - 12 - - 14 - 41 2018 10 - 12 - - 13 - 35 2019 - - - - 15 10 - 25 2020 - - - - 14 22 - 36 2021 - - - - 1 33 18 52 2022 - - - - - 30 19 49 2023 - - - - - 24 23 47 2024 - - - - - 24 23 47 2025 - - - - - - 36 36 2026 - - - - - - 36 36 2027 - - - - - - 36 36
56 (a) 52 36 18 30 170 (b) 191 553
(a) Flexibility to substitute 737-800s in lieu of 737-700 firm orders. (b) Flexibility to substitute MAX 7 in lieu of MAX 8 firm orders beginning in 2019.
Financially Positioned for Prosperity Investing in our Future Solid Foundation
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Financially Positioned for Prosperity Investing in our Future Solid Foundation
AirTran and Southwest will be fully integrated by the end of 2014 Connected the Southwest and AirTran networks in April 2013
Expanded Southwest Cargo to the AirTran network
Ended 2013 with Southwest service in all domestic AirTran airports
Converted 20 of the 52 AirTran 737-700s to the Southwest livery
Transitioned 22 of the 88 AirTran 717-200s to Delta Air Lines
Reached a cumulative 73 percent of the AirTran workforce converted
to Southwest Customers now able to transfer loyalty rewards between the
Southwest’s Rapid Rewards and AirTran’s A+ Rewards frequent flyer programs
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Financially Positioned for Prosperity Investing in our Future Solid Foundation
Southwest Airlines and AirTran offer service to 7 international destinations from 9 US gateways
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Financially Positioned for Prosperity Investing in our Future Solid Foundation
Wright Amendment will be repealed in October 2014
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Financially Positioned for Prosperity Investing in our Future Solid Foundation
We are investing in the airport experience
William P. Hobby Airport
Hobby International Expansion Project
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Financially Positioned for Prosperity Investing in our Future Solid Foundation
We had the winning bids to acquire additional slots in key markets
William P. Hobby Airport
Hobby International Expansion Project
LGA 12 slots
(6 daily round trips)
Permanent control of 10 slots previously leased
(5 round trips)
Currently operate 27 daily round trips
62 total slots (33 daily round trips)
DCA 54 slots
(27 daily round trips)
Currently operate 17 daily round trips
88 total slots (44 daily round trips)
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(in millions, except EPS) 4Q 2013YOY
Change 2013YOY
ChangeOperating Profit 418$ 207.4% 1,448$ 72.8%Net Income 236$ 263.1% 805$ 93.0%Diluted Earnings per Share 0.33$ 266.7% 1.12$ 100.0%GAAP Net Income 212$ 171.8% 754$ 79.1%Profitsharing 66$ 247.4% 228$ 88.4%
RASM (in cents) 13.89 3.8% 13.58 1.8%CASM (in cents) 12.58 (2.8)% 12.47 (1.7)%CASM, exfuel & PS (in cents) 8.12 (0.4)% 7.94 1.3%Fuel price (per gallon) 3.05$ (8.1)% 3.12$ (4.9)%
Solid Foundation Investing in our Future
We had record financial results in 2013, producing 13.1% ROIC1
(Excluding special items)
Financially Positioned for Prosperity
1) ROIC defined as annual pre-tax return on invested capital, excluding special items
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$3.2 billion in unrestricted core cash and short term investments at December 31, 2013
$1 billion line of credit fully undrawn and available
2013 cash flow from operations of $2.48 billion and free cash flow of $1.03 billion*
2013 capital spending of $1.45 billion
Balance Sheet leverage of approximately 38%
Investment grade rating by all three agencies
2013 Invested Capital decreased by $1.0 billion, or 7.9%
Our financial position is strong
Solid Foundation Investing in our Future Financially Positioned for Prosperity
*This bullet was revised on March 20, 2014 to accurately reflect the Company’s cash flow from operations reported in its Form 10-K filed with the Securities and Exchange Commission.
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Our free cash flow has strengthened
Free Cash Flow
See note regarding use of non-GAAP financial measures at http://investorroom.southwest.com
2011 2012 2013 $-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Capital Expenditures Free Cash Flows
Solid Foundation Investing in our Future Financially Positioned for Prosperity
in millions
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We have returned over $1.2B to our Shareholders
Solid Foundation Investing in our Future Financially Positioned for Prosperity
% Free Cash Flow 62%
$239M
$422M
$611M
2011 2012 2013 $-
$100
$200
$300
$400
$500
$600
$700Dividends Share Repurchase
59% 59%
in millions
See note regarding use of non-GAAP financial measures at http://investorroom.southwest.com
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Revenues Based on revenue trends thus far and March bookings, we currently expect first
quarter 2014 PRASM to increase approximately 3% year-over-year, including less than a point of benefit from the January and February storms this year, combined. • January 2014 PRASM is estimated to have increased approximately 5% y/y. • February 2014 PRASM is estimated to have increased approximately 5% y/y.
As AirTran Customers continue to book through southwest.com, we currently expect first quarter 2014 freight and other revenues to decline from first quarter last year.
Costs Based on market prices as of March 6th and our current hedge position, our first
quarter 2014 economic fuel price is forecasted to be in the $3.05 to $3.10 per gallon range.
Based on current trends and more challenging y/y comparisons, we expect first quarter unit costs, excluding fuel, special items and profit sharing, to increase year-over-year in the 5% range. Approximately three points of this estimated year-over-year increase is attributable to the January and February storms this year, combined.
Capacity First quarter 2014 available seat mile capacity is expected to be roughly flat year-over-
year.
First Quarter 2014 outlook
Solid Foundation Investing in our Future Financially Positioned for Prosperity
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Our 2014 priorities support our prosperity goals
Solid Foundation Investing in our Future Financially Positioned for Prosperity
• Flat year-over-year Disciplined Capacity
• $3.3B unrestricted core cash and short term investments as of March 6th
• $1.7B to $1.8B estimated full year CAPEX • $550M debt obligations
Healthy Free Cash Flow
• Momentum for 15% ROIC • YTD 2014 buyback of $315M, including
February launch of $200M ASR Returning Value
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Investing in our Future Solid Foundation
Financially Positioned for
Prosperity
Building for the future from a solid foundation
Proven business strategy Low cost producer Dominant market share Valued product Strong network Record setting financial
performance Clear and compelling
objectives
Record financial performance
Healthy free cash flow Focus on capital efficiency Capacity discipline Commitment to return
value to Shareholders
Premier frequent flier program
Fleet modernization AirTran integration New reservation system,
including international capabilities
Wright Amendment repeal Airport experience
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Reconciliation of Reported Amounts to Non-GAAP Items
See note regarding use of non-GAAP financial measures at http://investorroom.southwest.com
(in millions, except per share amounts) 4Q 2013 4Q 2012 Change 2013 2012 Change
Total operating expenses, as reported $ 4,042 $ 4,082 $ 16,421 $ 16,465 (Deduct): Net impact from fuel contracts (13) (31) (84) (32)(Deduct): Acquisition and integration costs, net (19) (14) (86) (183)(Deduct): Profitsharing (66) (19) (228) (121)Total operating expenses, non-GAAP, excluding Profitsharing
$ 3,944 $ 4,018 (1.8)%
$ 16,023 $ 16,129 (0.7)%
Operating income, as reported $ 386 $ 91 $ 1,278 $ 623 Add : Net impact from fuel contracts 13 31 84 32 Add: Acquisition and integration costs, net 19 14 86 183 Operating income, non-GAAP $ 418 $ 136 207.4% $ 1,448 $ 838 72.8%
Net income, as reported $ 212 $ 78 $ 754 $ 721 Add (Deduct): Net impact from fuel contracts 19 (34) (5) (189)Add (Deduct): Income tax impact of fuel contracts (7) 12 2 73 Add: Acquisition and integration costs, net (1) 12 9 54 112 Net income, non-GAAP $ 236 $ 65 263.1% $ 805 $ 417 93.0%
Net income per share, diluted, as reported $ 0.30 $ 0.11 $ 1.05 $ 0.56 Add (Deduct): Net impact from fuel contracts (1) 0.02 (0.03) - (0.15)Add: Impact of special items, net (1) 0.01 0.01 0.07 0.15 Net income per share, diluted, non-GAAP $ 0.33 $ 0.09 266.7% $ 1.12 $ 0.56 100.0%
Operating Income, non-GAAP $ 1,448 $ 838 Net adjustment for aircraft leases (2) 143 117 Adjustment for fuel hedge accounting (60) (36)Adjusted Operating Income, non-GAAP $ 1,531 $ 919
Average invested capital (3) $ 11,664 $ 12,580 Equity adjustment for fuel hedge accounting 50 145 Adjusted average invested capital $ 11,714 $ 12,725 7.9%
ROIC, pre-tax 13.1% 7.2%
(1) Amounts net of tax.
(3) Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.
(2) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft.
29 ©2013 Southwest Airlines Co.