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Southwest’s Shareholders’ Meeting: Celebrating Houston

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Southwest’s Shareholders’ Meeting: Celebrating Houston

Southwest’s Shareholders’ Meeting: Celebrating Houston
May 14
10:40 2015

MIAMI — Southwest Airlines hosted its 2015 Annual Meeting of Shareholders in Houston on Wednesday with Gary Kelly, Southwest’s CEO, primarily addressing a room full of stockholders and media members at the Hyatt Regency in Downtown Houston.

Business items included the election of ten Directors, approval of executive officer compensation, amendment of the 2007 Equity Incentive Plan, and the ratification of an independent auditor, Ernst & Young. After the completion of formal business, Kelly opened the floor to shareholders in attendance, answering questions before officially concluding the meeting.

Southwest traditionally holds the event on the second Monday of May in Dallas, where the airline has its headquarters. Thus, the meeting’s location in Houston – marking the first time Southwest hosted the meeting outside of Dallas – carries a particular significance and symbolism, especially with The Hyatt Regency being at the intersection of Louisiana and Dallas Street.

The move to Houston comes as Southwest plans to open a new five gate international terminal at Houston Hobby Airport (HOU) in October of this year.

Kelly, expressing his “delight” with the developments in the area, deemed the meeting a “[celebration of] Houston,” which he cites as an excellent partner for the airline.

2014 represented a transformational year for Southwest, according to Kelly. The airline finally completed its integration with AirTran, wrapping up the merger process initiated in 2010. Southwest unveiled a new “Heart” livery in a brand refresh during the year. Additionally, the airline added flights at a number of key airports, including Washington-Reagan (DCA), New York-LaGuardia (LGA), and Dallas Love Field (DAL).

Southwest’s prosperity in 2014 and its resoundingly successful first quarter of 2015 allowed the airline to reveal a more significant dividend of $0.075 per share for the second quarter. This represents a 25% increase from the $0.06 per share dividend of the previous quarter, and marks the 155th consecutive quarter that the airline has paid a dividend. In addition, the company’s board of directors authorized a new $1.5 billion share repurchase program.

Building off its success, Southwest plans to grow “approximately seven percent” by available seat miles (ASM’s) in 2015 and will end the year with “roughly 700 aircraft.”

Likewise, Southwest expects growth of “six-to-seven percent” in 2016, adding “two percent” more aircraft. New aircraft will take the form of “pre-owned” 737-700’s and deliveries of “new” 737-800’s, reflecting the company’s intent to capture more long-haul traffic, better served by larger aircraft, as well as continuing to support short-haul flights. Southwest will also serve as the launch customer for the 737-MAX.

Kelly fielded a number of interesting questions from shareholders. He said that while Southwest currently has no plans to offer service to Cuba, it ranks among the fifty destinations in North and South America to which the airline may add flights in the coming years since travel restrictions between the two countries have been eased.

Also, Kelly expressed a willingness to expand further at New York’s LaGuardia Airport should the opportunity become available. Southwest currently features thirty-three daily flights to LaGuardia, many of which it added after acquiring slots required for divestiture in the American/US Airways merger. He pointed to construction at Dallas Love Field and Houston Hobby as evidence of Southwest’s desire to grow when appropriate; however, he also believes the hefty price tag of reconstructing LaGuardia’s dated terminal – far greater than the bill at Love Field and Houston Hobby – as a potential impediment to growth there.

The meeting also brought to attention some pressing concerns facing the airline. Protests from Southwest’s ramp workers, represented by Transport Workers Union Local 555, negatively overhung the meeting and drew a few concerned questions from shareholders. Employees picketed outside the hotel, raising signs asking Southwest to put “people before profits” and reminding the company that “it’s just a machine without a heart.”

Kelly responded by expressing his attempts “to be very fair” during the negotiations, and maintained that the company’s “first dollar” continues to go to the employees, who enjoy industry-leading compensation. He also noted that while still yet to strike an agreement with ramp workers, Southwest has reached deals with many of its other unionized workers.

In a media session following the shareholders’ meeting, Kelly tackled the gate dispute at Dallas Love Field, claiming that Southwest fully intends to “use every ounce of time and space” allowed by its eighteen gates, two of which it subleases from United.

While Delta currently flies to Love Field, Southwest has indicated no desire firm to accommodate their five daily flights to Atlanta beyond July 6. Court proceedings, in which Delta asserts it has a right to continue its service to the airport, will extend well past July 6, leaving some ambiguity surrounding their future at Love Field. When asked where he thinks Delta should go, Kelly suggested that they go to the “owner of the airport.” He somewhat jokingly noted the availability of another airport, Dallas-Ft. Worth International, next door. Delta already harbors service to DFW.

Southwest, historically a low-cost carrier, has faced upward creeping prices in recent years, leading some to allege the airline no longer offers low cost service. To those accusations, Kelly responded by stating that Southwest continues to offer the lowest fare “forty to fifty percent of the time,” far more often than any other individual airline. This holds true without accounting for added fees that other airlines tack onto the ticket, while Southwest resists the temptation to nickel-and-dime fliers. He acknowledged that ultra-low-cost carriers (ULCC’s) may sometimes beat Southwest, but reaffirmed Southwest’s commitment to low fares.

Southwest attributes some of its record profitability to the decline of fuel prices. However, the price of fuel has trended back upward more recently, exhibiting a “w-shape” according to Kelly. He believes the market is behaving “sensibly,” but also noted that Southwest enjoys “$1.3 to $1.4 billion” in fuel savings, even after factoring in losses from hedging activity.

Finally, Kelly concluded the media session by grappling with the proposed construction of a high speed rail line between Dallas and Houston. Such a development would presumably harm Southwest, which benefits from strong traffic along the route. The airline has not taken a position on the issue yet, choosing to direct its attention on “other focuses” for the moment. But he did point out that, while Southwest publicly opposed a high speed rail proposal in the 1990’s, the current proposal relies on private funding rather than the “government subsidies” underlying the former one. This contributes to Southwest’s neutrality on the issue so far.

Overall, Southwest believes more of the same – that is, profitability – lies in its future, a message it certainly wanted to communicate to its shareholders. Southwest enjoys a string of over forty consecutive years of profitability, a streak unmatched in the airline industry. With its 2015 shareholders’ meeting, Southwest celebrates its historical success as well as its promising future. Houston factors in heavily into its future plans, and Southwest’s Annual Meeting of Shareholders demonstrates its role as a cornerstone in its route system.

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Jack Harty

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