Southwest Airlines Co. [LUV] 2018 Annual Meeting of Shareholders Wednesday, May 16, 2018, 10:00 AM ET Participants: Gary Kelly; Chairman of the Board and Chief Executive Officer Mark Shaw; SVP, General Counsel and Corporate Secretary Dee Phillips; Authorized Shareholder Representative Presentation Gary Kelly: Okay, we run an on-time airline. So good morning, everybody, and welcome to the Southwest Airlines 2018 Annual Meeting of Shareholders. I'm Gary Kelly, Chairman of the Board and CEO of Southwest Airlines. Before we begin, if you've not read the Rules of Conduct that were provided to you before the meeting, please take a minute to read them. These are the rules we're going to follow this morning, and the meeting will now come to order. Before we address the official business of the meeting, I'd like to take this opportunity to introduce our magnificent Board of Directors, and as I call your name would each of you please stand and be recognized: David Biegler; Veronica Biggins; Doug Brooks; Bill Cunningham; John Denison; Tom Gilligan; Grace Lieblein; Nancy Loeffler; John Montford; and Ron Ricks. [Applause after each introduction] And they are magnificent. Next I would like to introduce our head table up here: Mr. Tom Nealon, our President; Chief Operating Officer, Mike Van de Ven; our General Counsel, Mr. Mark Shaw; Chief Financial Officer Tammy Romo. [Applause after each introduction] Also, I'd like our Executive Vice Presidents to stand: Bob Jordan; Andrew Watterson and Greg Wells. [Applause] And we have a number of our officers here this morning. Would you also please stand so we can recognize you -- and you're magnificent. [Applause] So I'll now move on to the formal business of this meeting. At the table to my right is Mr. Jim Raitt. He has been appointed to act as our Inspector of Election on behalf of Broadridge Financial Solutions. If you're a registered shareholder and have not turned in your proxy card, you may submit your proxy card to Mr. Raitt at this time. If you're a registered shareholder and wish to vote in person we will be distributing ballots shortly. Mr. Shaw, again, our Senior Vice President and General Counsel and our Corporate Secretary, is going to report on some formal matters related to the holding of this meeting.
Mark Shaw: Thank you, Mr. Chairman. I have received an Affidavit of Distribution from Broadridge certifying that the Notice and other proxy materials for this meeting were distributed to all shareholders of record commencing on April 6, 2018. The list of our shareholders of record is at the Inspector of Elections table and will be kept open during the meeting for inspection by any shareholder. The list has also been available for inspection at the Company's offices for at least 10 days prior to this meeting. In addition, the Inspector of Election has signed an oath of office and has determined that the holders of more than a majority of the shares entitled to vote at this meeting are present in person or by proxy. This is sufficient for a quorum to conduct business. Gary Kelly: Thank you, Mark. I declare that this meeting is duly constituted and convened. As stated in the Notice of the Meeting, there are five proposals to be voted on today, each of which is identified in the Agenda. Proposal 1 is the election of directors for 1-year terms. Proposal 2 is the advisory vote to approve named executive officer compensation. Proposal 3 is the ratification of the selection of Ernst & Young, LLP as the Company's independent auditors for the fiscal year ending December 31, 2018. Proposal 4 is the advisory vote on a shareholder proposal to require an independent Board Chair. And Proposal 5 is the advisory vote on a shareholder proposal to permit shareholder action by written consent. Each of these proposals is discussed in detail in a proxy statement. Regarding Proposal number 3, ratification of the selection of Ernst & Young as the Company's independent auditors for the fiscal year ending December 31, 2018, Ernst & Young also served as the Company's independent auditors for fiscal year 2017. Mr. Brandon Roland, our Ernst & Young Audit Partner, and Ms. Lindsay Goodreau, Ernst & Young Senior Manager, are present and they are available to respond to appropriate questions. Mr. Rowland and Ms. Goodreau may make a statement at this time if they wish. They do not wish. With respect to Proposal number 4 regarding an advisory vote on a shareholder proposal to require an independent board chairman, is the shareholder proponent or his authorized representative present? And I believe she is, indeed. You may present the proposal at this time, Dee. Thank you. Dee Phillips: I'm [Dee Phillips] and I'm here presenting Proposal 4, Independent Board Chairman, on behalf of Kenneth Steiner of Great Neck, New York. Shareholders request the Board of Directors to adopt this policy and amend the governing documents as necessary to require that the Chairman of the Board of Directors whenever possible to be an independent member of the Board. The Board would have the discretion to phase in this policy with the next Chief Executive Officer transition. If the Board determines that a Chairman who is independent when selected is no longer independent, the Board shall select a new Chairman who satisfies the requirements of the policy within a reasonable amount of time.
Caterpillar is an example of a company changing course and naming an independent board chairman. Ironically, Caterpillar had opposed the shareholder proposal for an independent board chairman as recently as its 2016 Annual Meeting. Wells Fargo also changed course and named an independent board chairman in 2016. Having a board chairman who is independent of management is a practice that will promote greater management accountability to shareholders and lead to a more objective evaluation of management. Please vote yes, independent board chairman, Proposal 4. Gary Kelly: Thank you, Dee. With respect to Proposal number 5 -- don't go away -- regarding an advisory vote on a shareholder proposal to permit shareholder action by written consent, is the shareholder proponent or his authorized representative present? And I know you are. Dee. Dee Phillips: I should have stayed standing. Proposal 5, shareholder right to act by written consent, sponsor [Don Sheveden] of Redondo Beach, California. Shareholders request that the Board of Directors take the necessary steps to permit written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. This written consent is to be consistent with giving shareholders the fullest power to act by written consent in accordance with applicable law. This includes shareholder ability to initiate any appropriate topic for written consent. This proposal topic won majority shareholder support at 13 major companies in a single year. This included 67% support at both Allstate and Sprint. Hundreds of major companies enable shareholder action by written consent. Taking action by written consent in place of a meeting is a means shareholders can use to raise important matters outside the normal annual meeting cycle. A shareholder right to act by written consent and to call a special meeting are two complementary ways to bring an important matter to the attention of both management and shareholders outside the annual meeting cycle. Scores of Fortune 500 companies provide for shareholders to call special meetings and to act by written consent. Please vote yes, shareholder right to act by written consent, Proposal 5. Gary Kelly: Thank you, ma'am. Well done. Is there any shareholder discussion of the matters before the meeting or are there any questions for Ernst & Young? Hearing none, a vote on all of the proposals will be taken at this time. I hereby declare the polls open for voting. If you are a registered shareholder or hold a proxy for a registered shareholder and would like a ballot to vote in person, please raise your hand. If you have already voted by proxy and do not wish to change your vote, you will not need a ballot.
And while we finish up the voting, I'll provide a quick recap of 2017 and our plans for this year. 2017 was another very strong year. And that was following record years in 2014, '15, and '16. We realized record revenues of more than $21 billion and profits of $2.1 billion. And that's excluding special items. And that was the third best in Southwest Airlines' history. It represents our 45th consecutive year of profits. That is a record unmatched in the domestic airline industry and may not be matched in all of corporate America. Our pretax return on invested capital and net margin, excluding special items, were stellar, at 25.9% and 10%, respectively. And these were among the best in our industry. We ended the year 2017 with a record year-end stock price of $65.45, which was an annual increase of 30%, again leading the industry. Our operating and free cash flows were strong, strengthening our investment-grade financial position and earning us an upgrade in our credit ratings with Moody's to A3 and with Standard & Poor's to BBB+. And based on these strong results we returned $1.9 billion to shareholders, with $1.6 billion in share repurchases and a record $274 million in dividends. Buoyed by the tax reform and a solid cost performance, our first-quarter 2018 earnings per share excluding special items increased 29.3% compared with a year ago and, barring any unforeseen events, we look forward to another strong year of earnings, margins, cash flows and return on invested capital. And based on these strong results and this very strong outlook we announced today that our Board has increased our quarterly dividend 28% to $0.16 per share per quarter, and the Board has also authorized a $2 billion share repurchase upon the completion of our May 2017 $2 billion authorization. So as of today, we have $350 million remaining on the current authorization. After retiring our classic 737 fleet last year, we ended the year 2017 with a fleet of 706 aircraft, and that was down from the previous year-end count of 723. Coincident with those retirements we launched Boeing's all-new 737 MAX 8, and we currently operate 15 in our fleet. And the MAX brings 13 to 14% better fuel economy, 15% longer range and 40% less noise. And that's all as compared with the previous-generation 737. In 2018 we expect to grow our fleet by 46, end this year with a fleet count of 752 aircraft, which would be an all-time record. And that translates to an available seat-mile growth rate in the low 5% range year over year. We have numerous profitable opportunities to expand in the coming years and we have the Boeing aircraft delivery schedule to support that growth. Our focus this year is on boosting service through our domestic route system. And of course recently we have been talking about Hawaii. And we announced our Hawaii destinations and our California gateway cities -- Kona, Honolulu, Maui and Lihue in the Islands and Oakland, Sacramento, San Diego and San Jose in California. Our goal remains to be selling Hawaii flights by year end with specific dates, flights and fares coming soon. Flying is subject to
FAA approval and certification of extended over-water operations. That work is continuing. It is on schedule. Our Hawaii expansion will be a major focus for Southwest in 2019 as far as our fleet growth is concerned. As of today, approximately 96% of our capacity is deployed domestically, with 4% deployed internationally. We have 14 international destinations, 86 domestic. And beyond the 4 Hawaii destinations we believe we have as many as 50 additional opportunities to expand our route map in North America and parts of South America. That would take us over 150 destinations, which translates to growth of hundreds of Boeing 737s -- not all next year. It may take us 25 years, but it is wonderful, of course, to have those kinds of opportunities to grow. Our growth aspirations are exciting. But in order to grow successfully we need to maintain low costs so that we can offer low fares with no bag fees, no change fees, free live TV and the most generous frequent flyer program in the world. In order to grow successfully we need the best and the warmest and the friendliest and the most caring people to deliver the kind of hospitality for which Southwest is famous. And in order to grow successfully we need a strong balance sheet, strong liquidity and healthy profits. And we have all these things. We connect people to what's important in their lives and we do that with friendly, reliable and low-cost air travel. And our people have built Southwest into the largest, the most successful and the most popular airline in America in terms of customers. Our vision is to be the world's most flown and most loved and most profitable airline. I'm very proud of our people and I'm very proud of our results. I am very confident about these bold aspirations because I believe in all of them. And that completes my report. We'll now wrap up the voting on the matters before the meeting. Is there any registered shareholder or proxy present who desires to vote on any matter before this meeting and who has not signed and handed in his or her ballot? It appears that all the voting has been completed and I hereby declare the polls closed. Mr. Shaw, will you please report on the preliminary results of the voting? Mark Shaw: Yes, Mr. Chairman. I have the Preliminary Report of the Inspector of Election. With respect to Proposal 1, each of the 11 Director nominees has received votes in favor of their election, constituting over 96% of the votes for or against their election. And each nominee for Director has been duly elected. With respect to Proposals 2 and 3, these proposals have received votes in favor of their approval constituting over 95% and 97%, respectively, of the votes cast for or against such proposals, which means that each of such proposals has passed. With respect to Proposal 4, this proposal has not received a majority of vote in favor. And with respect to Proposal 5, that proposal also has not received a majority vote in favor. Gary Kelly: Thank you, Mr. Shaw. The final results will be reported by the Company on Form 8- K.
There being no further business to come before this Meeting, I declare this Annual Meeting of Shareholders adjourned.