5 Things Southwest Airlines Co. Management Wants You to Know

By Markets Fool.com

Southwest Airlines turned in a stellar Q2 performance. While unit revenue declined 4.7% year over year, Southwest's growth helped drive down non-fuel unit costs, while falling fuel prices created a huge earnings tailwind.

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Southwest Airlines' management spent about an hour talking to reporters and analysts following the earnings report to provide more detail on the strong quarter and the outlook for the next year. Here are five important points they emphasized.

Dallas Love Field growth is working

Dallas [capacity] was up 150% year-over-year. Its load factors and profit margins and return on invested capital all exceed system average. And in that statistic, I'm talking about the new Dallas markets, not just Dallas in total.
-- Southwest Airlines CEO Gary Kelly

For years, Southwest Airlines waited patiently for the repeal of federal regulations prohibiting most long-haul flights at Love Field in Dallas. Southwest has always had a strong market presence in Dallas -- it was one of the airline's inaugural markets, and its headquarters is on the airport grounds -- but it has never been able to take full advantage of this position.

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That all changed last October with the opening of Love Field to flights anywhere in the U.S. And Southwest bet big on growth there. It's operating more flights each day, using larger airplanes, and flying longer distances. These new flights have already been very successful.

In fact, Southwest Airlines CEO Gary Kelly claims that the new flights in Dallas are performing better than Southwest's system average. That's unusual for new routes. Kelly also noted that Southwest has consistently filled more than 90% of the seats on its flights at Love Field.

Similar opportunity in Houston -- but not as big

We're following through ... with the launch of new international service in Houston at Hobby for the first time since the 1960s. And it has Love Field-like opportunities to lower fares, add flights and stimulate the market. Obviously, the scale there is much, much smaller and admittedly, the risk is greater so we'll take all of that into account with our expansion plans.
-- Gary Kelly

Southwest Airlines has a similar opportunity coming up in Houston. Hobby Airport -- also one of the inaugural airports in Southwest's route network -- has been closed to international flights for decades. However, Southwest is putting the finishing touches on a five-gate international terminal there, which is scheduled to open on October 15.

This new terminal will allow Southwest to expand its presence in Houston by starting flights to a variety of destinations in Mexico, Central America, and the Caribbean that were previously off-limits.

That said, the scale of the opportunity is a lot smaller. Even over the next five years combined, Southwest isn't likely to add as much capacity in Houston as it did in Dallas in the past year alone.

Revenue trends getting better

... July is currently trending better than average sequentially, and third quarter is also trending up sequentially from the second quarter.
-- Southwest Airlines CFO Tammy Romo

Despite earning record profits this year, Southwest Airlines stock hasn't performed very well. A big reason for that is its weak unit revenue. While investors have probably become too obsessed with this single metric, it's legitimately concerning to see airlines losing their pricing power.

Fortunately, Southwest Airlines CFO Tammy Romo stated on the earnings call that demand seems to be stabilizing. While she wasn't ready to definitively call a bottom, she still offered hope that Southwest's unit revenue performance will improve going forward.

Big credit card windfall coming

So as we reported this morning with our release, we'll recognize an additional $250 million in [credit card] revenue for the second half, which will continue on in future quarters. And then, of course, we'll also recognize an additional one-time benefit in July of $150 million.
-- Gary Kelly

In addition to the "organic" impact of demand on unit revenue, Southwest will also get a huge unit revenue boost from a new credit card agreement that it recently signed. Southwest has a big loyalty program in Rapid Rewards, and that's attractive to credit card issuers that are looking to lure customers with attractive rewards programs.

As a result, Southwest will get paid more for each point it sells going forward. The annualized benefit of the new agreement is about $500 million. That's enough to provide a lift of 2 to 3 percentage points to Southwest's unit revenue for the next year.

Returning lots of cash to shareholders

During the second quarter, we repurchased $380 million in shares, and we announced today that we plan to launch another $500 million accelerated stock repurchase program soon, which will bring our share repurchases to -- this year to nearly $1.2 billion.
-- Tammy Romo

While most airlines are reporting very strong profitability this year, Southwest has a much stronger balance sheet than most of its peers. As a result, while many airlines are using the windfall from lower fuel prices to repair their balance sheets, Southwest has been able to return most of it to shareholders.

In the first half of 2015, Southwest generated $1 billion in free cash flow and returned $811 million of that to shareholders through dividends and buybacks. With Southwest planning to launch a $500 million accelerated share repurchase soon, it is on pace to return more or less all of its free cash flow to shareholders this year.

Given that Southwest Airlines stock currently trades for about 10 times projected 2015 earnings, the company's aggressive share buyback program is a boon for long-term investors.

The article 5 Things Southwest Airlines Co. Management Wants You to Know originally appeared on Fool.com.

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