Southwest optimistic on hitting 15% ROIC goal in 2013

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Southwest Airlines is optimistic that it is on track to reach its goal of a 15% pre-tax return on investment capital (ROIC) in 2013, a target that led to the airline deferring dozens of Boeing 737 deliveries two months ago.

The carrier's president and chief executive Gary Kelly notes that the carrier achieved 8% pre-tax ROIC for the 12 months that ended in June, but that the second quarter's standalone ROIC was well over 15%, in an earnings call today.

"That's not my prediction for the next four quarters, but it puts in perspective our progress towards that goal," says Kelly.

He points out the various initiatives underway at the airline that will help Southwest reach the 15% mark, summing up: "We got a very nice portfolio of opportunities that will bring significant value... I don't think we are prepared to say at all that we won't hit our target next year."

These initiatives include the ongoing integration of Southwest subsidiary AirTran, which the airline acquired in May 2011. Southwest is also adding more fuel efficient 737-800s to its fleet, adding more seats to its 737-700s to boost revenues and will lease AirTran's 88 717s to Delta Air Lines in a deal that is expected to generate $200 million in annual cost savings for the carrier.

In May, Kelly announced that Southwest would defer 30 737 deliveries scheduled for 2013 and 2014 to 2017 and 2018 as it aims to keep capacity flat or slightly down in the next few years in order to hit the 15% ROIC goal. The deferrals are expected to save Southwest $1 billion in capital spending in the next three years.

Asked if maintaining flat capacity growth will be the "new normal", Kelly says that the airline aims to be "more tactical" in the future as it continues to work towards the 15% ROIC goal. This approach includes investing in projects that will help the airline grow, such as focusing on launching international operations.

Southwest will build an international terminal at Houston Hobby airport and will implement a reservations system that will allow it to fly internationally in 2014. AirTran, which offers flights to Mexico and the Caribbean, will transition these flights to Southwest once this occurs.

The airline reported record net income of $273 million in the second quarter ended 30 June. Southwest chief financial officer Laura Wright says today that the carrier expects a solid third quarter, but does not expect year-over-year growth to exceed that in the second quarter. Unit passenger revenues in July, for one, will be softer than June's, says Wright. This is especially due to the fact that the 4 July independence day holiday fell during the middle of the week, she notes.