Southwest Airlines Reports Fourth Quarter Results and 39th Consecutive Year of Profitability

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Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its fourth quarter and full year 2011 results.  Fourth quarter 2011 net income was $152 million, or $.20 per diluted share, which included $86 million (net) of favorable special items.This compared to net income of $131 million, or $.18 per diluted share, for fourth quarter 2010, which included favorable special items totaling $16 million (net).  Excluding special items, fourth quarter 2011 net income was $66 million, or $.09 per diluted share, compared to net income of $115 million, or $.15 per diluted share, in fourth quarter 2010.  This exceeded Thomson's First Call mean estimate of $.08 per diluted share for fourth quarter 2011.  Additional information regarding special items is included in this release and in the accompanying reconciliation tables. 

For the full year 2011, net income was $178 million, or $.23 per diluted share, which included $152 million (net) of unfavorable special items. This compared to $459 million, or $.61 per diluted share, for full year 2010, which included $91 million (net) of unfavorable special items.  Excluding special items, full year 2011 net income was $330 million, or $.43 per diluted share, compared to net income of $550 million, or $.74 per diluted share, for full year 2010.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "Excluding special items, fourth quarter 2011 net income was $66 million, and full year 2011 net income was $330 million.  We had an outstanding revenue performance.  Our fourth quarter operating revenues were a record $4.1 billion.  Fourth quarter passenger revenues were strong, driven by record yields and continued high load factors.  Compared to the prior year, our fourth quarter passenger unit revenues increased 8.2 percent (on a combined basis, as defined below).  Based on current traffic and booking trends, we expect another strong passenger revenue performance in first quarter of 2012.   

"While it is always disappointing to report a year-over-year decline in profits (excluding special items), the fourth quarter and full year declines were primarily caused by significantly higher fuel prices.  Our fourth quarter economic fuel costs per gallon increased 33.7 percent to $3.29, compared to our combined fuel costs of $2.46 per gallon in fourth quarter last year.  Our full year 2011 combined economic fuel costs were $3.18 per gallon, an increase of 34.7 percent, compared to our combined fuel costs of $2.36 per gallon last year.  Based on market prices as of January 13th, our first quarter 2012 economic fuel costs, including fuel taxes, are estimated to be approximately $3.35 per gallon, compared to our combined economic fuel costs, including fuel taxes, of $2.95 per gallon in first quarter last year.  High energy prices demand continued focus on improving productivity and eliminating waste.

"Despite the decline in earnings, 2011 was a momentous year at Southwest Airlines.  We celebrated our 40th year of providing legendary low fare, high quality, domestic air travel and delivered our 39th consecutive year of profits to our Shareholders.  We launched service to Greenville-Spartanburg and Charleston, South Carolina and Newark, New Jersey within two weeks time, increasing Southwest's domestic footprint to 72 cities.  In March, we launched our All-New Rapid Rewards® program.  The completely revamped, industry-leading frequent flyer program continues to grow at a strong pace.  Results, thus far, are well beyond our expectations. 

"On May 2nd, we acquired AirTran Airways, increasing our fleet by 140 aircraft, and extending our combined network into key markets we didn't previously serve, such as Atlanta and Washington, D.C., via Ronald Reagan National Airport, as well as many smaller domestic cities and leisure markets in the Caribbean and Mexico.   We also expanded our presence at New York LaGuardia, Boston, Milwaukee, and Baltimore/Washington. 

"While it will take several years to fully integrate AirTran into Southwest Airlines, I am very proud of the tremendous progress in only eight months' time.  We are on track to obtain our single operating certificate this quarter. The Southwest Airlines Pilots' Association and the Air Line Pilots Association took the lead on negotiating a seniority list integration (SLI) agreement that was ratified by both Pilot groups.  The Flight Attendants', Mechanics', and Flight Instructors' unions have tentative SLI agreements, currently out for vote by the memberships.  As a result of the superb efforts of our People, we are already producing over $200 million of net annualized pre-tax synergies, which is 50 percent of our $400 million target by 2013 (excluding acquisition and integration expenses).  For 2011, we realized $80 million in net pre-tax synergies, and the acquisition was modestly accretive to our 2011 results, excluding special items, as planned."

The Company incurred $134 million in expenses (before taxes) associated with the acquisition and integration of AirTran during 2011, including $37 million in fourth quarter 2011.  The Company expects total acquisition and integration expenses will be approximately $500 million. 

Kelly continued, "In December, we unveiled our fleet modernization plans, including the launch of the B737-MAX aircraft beginning in 2017, representing our fourth time as Boeing's launch customer.  Our agreements with Boeing afford us significant flexibility to replace our older, less efficient aircraft with new Boeing 737-700/800 aircraft and the B737-MAX aircraft.  During 2012, we will take delivery of 33 737-800s, with the first delivery of the -800 model to Southwest scheduled for March.  Earlier this week, we announced the final prong of our fleet modernization plans.  Leveraging the new Boeing Sky Interior from the -800 model, we decided to retrofit our -700 fleet with an updated cabin interior.  Evolve: The New Southwest Experience is a -700 cabin refresh intended to enhance Customer comfort, personal space, and the overall travel experience.  It allows for the added benefit of six additional seats, along with more climate-friendly and cost-effective materials.  Our fleet modernization plans have been designed to drive significant value in the near and long term.

"Operationally, we finished the year strong with our highest December ontime performance in 15 years.  Our People continue to deliver outstanding levels of Customer Service, as recognized by Southwest Airlines being named the 2011 Customer Service Champion by J.D. Powers, and the Customer Satisfaction Leader in Consumer Reports' list of airline ratings.

"I commend each of our 45,000+ Warriors for their hard work and notable accomplishments.  We accomplished everything we set out to do in 2011, with soaring fuel costs the only disappointment.  As we prepare for our next 40 years, our target is fixed on a 15 percent pretax return on invested capital.  Capital commitments for 2012 are approximately $1.3 billion, our 2012 capacity is estimated to be flat with 2011, and we currently plan to end 2012 with 691 aircraft in our fleet.  Future capital spending will be carefully monitored with a focus on generating free cash flow.  We are committed to providing exceptional Customer Service at everyday low fares; focused on investing in the Customer Experience while preserving our low cost position; and engaged in our strategic initiatives to drive Shareholder value."

Financial Results and Outlook

AirTran Airways, Inc. became a wholly-owned subsidiary of the Company on May 2, 2011. Results discussed in this release and provided in the accompanying unaudited Condensed Consolidated Financial Statements and Comparative Consolidated Operating Statistics include the results of operations and cash flows for AirTran from May 2 through December 31, 2011, including the impact of purchase accounting.  Periods presented prior to the acquisition date do not include AirTran's results.  However, the Company believes the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability.  Financial information presented on a "combined basis" is the sum of the historical financial results of the Company and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting only as of May 2, 2011.  Supplemental financial information presented on a "combined basis" and the accompanying reconciliations have been included in this release.

The Company's total operating revenues in fourth quarter 2011 increased 31.9 percent to $4.1 billion, compared to $3.1 billion in fourth quarter 2010, and increased 9.3 percent compared to $3.8 billion for combined fourth quarter 2010 total operating revenues.  Operating unit revenues increased 7.0 percent from fourth quarter 2010, on a combined basis.

Total fourth quarter 2011 operating expenses were $4.0 billion, compared to $2.9 billion in fourth quarter 2010, and compared to $3.5 billion for combined fourth quarter 2010 total operating expenses.  Excluding special items in both periods, fourth quarter 2011 unit costs increased 10.8 percent from fourth quarter 2010 combined unit costs, largely due to a 33.7 percent year-over-year increase in economic fuel costs per gallon.   Fourth quarter 2011 economic fuel costs of $3.29 per gallon included $0.12 per gallon in unfavorable cash settlements for fuel derivative contracts; however, fuel derivative contract premiums are down significantly year-over-year, as described below in other income.  Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables. 

Excluding fuel and special items in both periods, fourth quarter 2011 unit costs increased 0.5 percent from fourth quarter 2010's combined 7.72 cents.  Based on current cost trends, the Company expects another year-over-year increase in its first quarter 2012 unit costs, compared to first quarter 2011's combined unit costs of 7.83 cents, excluding fuel and special items in both periods.

Operating income for fourth quarter 2011 was $147 million, compared to $216 million in fourth quarter 2010.  Excluding special items in both periods, operating income was $167 million for fourth quarter 2011, compared to $263 million in fourth quarter 2010, and compared to $278 million for combined fourth quarter 2010 operating income.

Other income for the fourth quarter was $108 million compared to $3 million of other expenses for fourth quarter 2010.  This $111 million swing primarily resulted from $153 million in gains recognized in fourth quarter 2011, compared to $31 million in gains recognized in fourth quarter 2010.  In both periods, these gains primarily resulted from unrealized gains/losses associated with a portion of the Company's fuel hedging portfolio.  Excluding these special items, other losses were primarily attributable to the premium costs associated with the Company's fuel derivative contracts.  Fourth quarter 2011 premium costs were $14 million, compared to $44 million in fourth quarter 2010, on a combined basis. First quarter 2012 premium costs are currently estimated to be approximately $6 million, compared to combined premium costs of $36 million in first quarter 2011. 

Total operating revenues for the year ended December 31, 2011, increased 29.4 percent to $15.7 billion, while total operating expenses increased 34.6 percent to $15.0 billion, resulting in operating income of $693 million, compared to $988 million for the year ended 2010.  Excluding special items in both periods, operating income was $839 million for the year ended December 31, 2011, compared to $1.2 billion in 2010.  On a combined basis, total operating revenues for 2011 increased 12.7 percent to $16.6 billion, while total operating expenses increased 17.3 percent to $15.9 billion, resulting in combined operating income for 2011 of $662 million, compared to $1.1 billion for 2010.  Excluding special items in both periods, combined operating income for 2011 was $834 million, compared to $1.3 billion for 2010.

The Company's return on invested capital (before taxes and excluding special items) was approximately seven percent for the year ended December 31, 2011, including AirTran's results beginning May 2, 2011.  Additional information regarding pretax return on invested capital is included in the accompanying reconciliation tables.   

Liquidity

Net cash provided by operations for 2011 was $1.4 billion, and capital expenditures were $968 million.  As a result, the Company generated over $400 million in free cash flow* in 2011.

On August 5, 2011, the Company's Board of Directors authorized a share repurchase program to acquire up to $500 million of the Company's common stock. During 2011, the Company purchased approximately 27.5 million shares of common stock for approximately $225 million.  The Company repaid $638 million in debt during 2011, and is scheduled to repay approximately $560 million debt in 2012, including $430 million in first quarter 2012.  After this planned first quarter debt payment, the Company will have reduced debt by approximately $1 billion since acquiring AirTran in May 2011.  As of January 18th, the Company had approximately $3.5 billion in cash and short-term investments.  In addition, the Company also had a fully available unsecured revolving credit line of $800 million.

2011 Awards and Recognitions

  • Named the fourth most admired Company in the world in FORTUNE magazine's 2011 survey of corporate reputations
  • Voted best low-cost carrier in North America by Business Traveler Magazine subscribers
  • Named the 2011 Customer Service Champion by J.D. Powers based on customer feedback regarding service excellence
  • Named Brand of the Year in Harris Poll EquiTrend's airline category based on equity, customer connection, commitment, brand behavior, brand advocacy, and trust
  • Ranked third in the Top 10 Business Thought Leaders by TLG Communications
  • Received first place for Best Overall Customer Experience in the Keynote Competitive Research Industry Study examining U.S. Air Travel Websites
  • Named Airline of the Year by Express Delivery and Logistics Association, the tenth consecutive year for Southwest Airlines Cargo to receive the recognition; also recognized for Excellence in Web Site and Technology for the second year in a row
  • Southwest Cargo was also named Domestic Carrier of the Year for 2011 by the Airforwarders Association for the second consecutive year and was recently recognized for excellence in Air Cargo World's annual Air Cargo Excellence (ACE) Survey
  • Recognized by PR News with several awards including the 2011 PR News Corporate Responsibility Awards for Diversity Communications, the Corporate Social Responsibility Award for Best Report, and honorable mention for the Social Corporate Responsibility Award for Corporate/Nonprofit Partnership
  • Named the Greenest Airline by ClimateCounts.org
  • Voted the Customer Satisfaction Leader in Consumer Reports' list of airline ratings receiving the highest rankings in check-in ease, cabin crew service, cabin cleanliness, baggage handling, and seating comfort
  • Ranked sixth in the  2011 Customer Service Hall of Fame by MSN Money, the only airline to make the top ten
  • Named one of the 100 Top Military Friendly Employers by GI Jobs magazine
  • Recognized for Best Practices in Supplier Diversity by the Dallas Fort Worth Minority Business Council
  • Named the Stevie Award Winner for the Company of the Year-Transportation by The International Business Awards for outstanding performance and Customer Service
  • Received the 2011 Quest for Quality Award for Excellence in Air Cargo from Logistics Management Magazine; ranked first in ontime performance, value, and Customer Service
  • Recognized as one of the top ten safest airlines in the Holistic Safety Rating 2011 by the Air Transport Rating Agency
  • Recognized as one of the 50 best places to work by the Glassdoors.com Employees' Choice Awards    

Southwest will discuss its fourth quarter and full year 2011 results on a conference call at 12:30 p.m. Eastern Time today.  A live broadcast of the conference call will also be available at southwest.investorroom.com.

*See Note Regarding use of Non-GAAP financial measures.

Cautionary Statement Regarding Forward-Looking Statements

This news release 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.  Specific forward-looking statements include, without limitation, statements related to (i) the Company's financial targets, outlook, and projected results of operations; (ii) the Company's plans and expectations relating to its acquisition of AirTran, including without limitation anticipated integration timeframes and expected costs, synergies, and other financial results associated with the acquisition; (iii) the Company's fleet modernization plans and related expectations; and (iv) the Company's capacity plans. These forward-looking statements are based on the Company's current intent, expectations, and projections and are not guarantees of future performance.  These 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) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (ii) the Company's ability to successfully integrate AirTran and realize the expected synergies and other benefits from the acquisition; (iii) the impact of the economy on demand for air travel and the impact of fuel prices, economic conditions, and actions of competitors on the Company's business decisions, plans, and strategies; (iv) the Company's dependence on third parties with respect to certain of its initiatives; (v) 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; and (vi) 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, 2010.

 

SOUTHWEST AIRLINES CO.

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)

 

 

 

(in millions, except per share amounts)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

Year ended

 

 

 

 

 

 

December 31,

 

 

 

December 31,

 

 

 

 

 

 

2011

 

2010

 

Percent Change

 

2011

 

 

2010

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger

$

3,860

 

$

2,945

 

31.1

 

$

14,735

(2)

 

$

11,489

 

28.3

 

 

Freight

 

36

 

 

32

 

12.5

 

 

139

 

 

 

125

 

11.2

 

 

Other

 

212

 

 

137

 

54.7

 

 

784

(2)

 

 

490

 

60.0

 

 

 

Total operating revenues

 

4,108

 

 

3,114

 

31.9

 

 

15,658

 

 

 

12,104

 

29.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages, and benefits

 

1,145

 

 

955

 

19.9

 

 

4,371

 

 

 

3,704

 

18.0

 

 

Fuel and oil

 

1,494

 

 

940

 

58.9

 

 

5,644

 

 

 

3,620

 

55.9

 

 

Maintenance materials and repairs

 

239

 

 

195

 

22.6

 

 

955

 

 

 

751

 

27.2

 

 

Aircraft rentals

 

93

 

 

45

 

106.7

 

 

308

 

 

 

180

 

71.1

 

 

Landing fees and other rentals

 

254

 

 

201

 

26.4

 

 

959

 

 

 

807

 

18.8

 

 

Depreciation and amortization

 

192

 

 

160

 

20.0

 

 

715

 

 

 

628

 

13.9

 

 

Acquisition and integration

 

37

 

 

7

 

n.a.

 

 

134

 

 

 

8

 

n.a.

 

 

Other operating expenses

 

507

 

 

395

 

28.4

 

 

1,879

 

 

 

1,418

 

32.5

 

 

 

Total operating expenses

 

3,961

 

 

2,898

 

36.7

 

 

14,965

 

 

 

11,116

 

34.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

147

 

 

216

 

(31.9)

 

 

693

 

 

 

988

 

(29.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES (INCOME):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

51

 

 

41

 

24.4

 

 

194

 

 

 

167

 

16.2

 

 

Capitalized interest

 

(4)

 

 

(4)

 

-

 

 

(12)

 

 

 

(18)

 

(33.3)

 

 

Interest income

 

(2)

 

 

(3)

 

(33.3)

 

 

(10)

 

 

 

(12)

 

(16.7)

 

 

Other (gains) losses, net

 

(153)

 

 

(31)

 

n.a.

 

 

198

 

 

 

106

 

n.a

 

 

 

Total other expenses (income)

 

(108)

 

 

3

 

n.a.

 

 

370

 

 

 

243

 

52.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

255

 

 

213

 

19.7

 

 

323

 

 

 

745

 

(56.6)

 

PROVISION FOR INCOME TAXES

 

103

 

 

82

 

25.6

 

 

145

 

 

 

286

 

(49.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

$

152

 

$

131

 

16.0

 

$

178

 

 

$

459

 

(61.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.20

 

$

0.18

 

 

 

$

0.23

 

 

$

0.62

 

 

 

 

Diluted

$

0.20

 

$

0.18

 

 

 

$

0.23

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

777

 

 

747

 

 

 

 

774

 

 

 

746

 

 

 

 

Diluted

 

783

 

 

750

 

 

 

 

775

 

 

 

747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes May through December 2011 financial results for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement I for selected financial information on a combined basis, including AirTran for periods prior to the acquisition date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) The Company made a fourth quarter 2011 correction to change the allocation of revenues between Passenger and Other from its sale of frequent flyer points associated with its co-branded Chase Visa card. As part of this correction, the Company has reclassified $46 million in revenues for the period from January 2011 through September 2011 from Other revenue to Passenger revenue to conform to the current presentation. Prior periods were immaterial.

 

 

 

 

 

SOUTHWEST AIRLINES CO.

RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions, except per share amounts)

(unaudited)

 

Three months ended

 

 

 

Year ended

 

 

 

December 31,

 

 

 

December 31,

 

 

 

 

2011

 

 

2010

 

Percent Change

 

 

2011

 

 

2010

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel and oil expense, unhedged

$

1,455

 

$

886

 

 

 

$

5,580

 

$

3,296

 

 

Add: Fuel hedge losses included in Fuel and oil expense

 

39

 

 

54

 

 

 

 

64

 

 

324

 

 

Fuel and oil expense, as reported

$

1,494

 

$

940

 

 

 

$

5,644

 

$

3,620

 

 

Add (Deduct): Net impact from fuel contracts (2)

 

17

 

 

(40)

 

 

 

 

-

 

 

(172)

 

 

Fuel and oil expense, economic

$

1,511

 

$

900

 

67.9

 

$

5,644

 

$

3,448

 

63.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses, as reported

$

3,961

 

$

2,898

 

 

 

$

14,965

 

$

11,116

 

 

Add (Deduct): Net impact from fuel contracts (2)

 

17

 

 

(40)

 

 

 

 

-

 

 

(172)

 

 

Total operating expenses, economic

$

3,978

 

$

2,858

 

 

 

$

14,965

 

$

10,944

 

 

(Deduct): Charge for Asset impairment, net (3)

 

-

 

 

-

 

 

 

 

(14)

 

 

-

 

 

(Deduct): Charge for Acquisition and integration costs, net (4)

 

(37)

 

 

(7)

 

 

 

 

(132)

 

 

(7)

 

 

Total operating expenses, non-GAAP

$

3,941

 

$

2,851

 

38.2

 

$

14,819

 

$

10,937

 

35.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income, as reported

$

147

 

$

216

 

 

 

$

693

 

$

988

 

 

Add (Deduct): Net impact from fuel contracts (2)

 

(17)

 

 

40

 

 

 

 

-

 

 

172

 

 

Operating income, economic

$

130

 

$

256

 

 

 

$

693

 

$

1,160

 

 

Add: Charge for Asset impairment, net (3)

 

-

 

 

-

 

 

 

 

14

 

 

-

 

 

Add: Charge for Acquisition and integration costs, net (4)

 

37

 

 

7

 

 

 

 

132

 

 

7

 

 

Operating income, non-GAAP

$

167

 

$

263

 

(36.5)

 

$

839

 

$

1,167

 

(28.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (gains) losses, net, as reported

$

(153)

 

$

(31)

 

 

 

$

198

 

$

106

 

 

Add (Deduct): Net impact from fuel contracts (2)

 

168

 

 

71

 

 

 

 

(89)

 

 

33

 

 

Other losses, net, non-GAAP

$

15

 

$

40

 

(62.5)

 

$

109

 

$

139

 

(21.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes, as reported

$

255

 

$

213

 

 

 

$

323

 

$

745

 

 

Add (Deduct): Net impact from fuel contracts (2)

 

(185)

 

 

(31)

 

 

 

 

89

 

 

139

 

 

 

$

70

 

$

182

 

 

 

$

412

 

$

884

 

 

Add: Charge for Asset impairment, net (3)

 

-

 

 

-

 

 

 

 

14

 

 

-

 

 

Add: Charge for Acquisition and integration costs, net (4)

 

37

 

 

7

 

 

 

 

132

 

 

7

 

 

Income before income taxes, non-GAAP

$

107

 

$

189

 

(43.4)

 

$

558

 

$

891

 

(37.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

$

152

 

$

131

 

 

 

$

178

 

$

459

 

 

Add (Deduct): Net impact from fuel contracts (2)

 

(185)

 

 

(31)

 

 

 

 

89

 

 

139

 

 

Income tax impact of fuel contracts

 

78

 

 

12

 

 

 

 

(31)

 

 

(52)

 

 

 

$

45

 

$

112

 

 

 

$

236

 

$

546

 

 

Add: Charge for Asset impairment, net (5)

 

-

 

 

-

 

 

 

 

9

 

 

-

 

 

Add: Charge for Acquisition and integration costs, net (5)

 

21

 

 

3

 

 

 

 

85

 

 

4

 

 

Net income, non-GAAP

$

66

 

$

115

 

(42.6)

 

$

330

 

$

550

 

(40.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share, diluted, as reported

$

0.20

 

$

0.18

 

 

 

$

0.23

 

$

0.61

 

 

Add (Deduct): Net impact from fuel contracts

 

(0.10)

 

 

(0.03)

 

 

 

 

0.07

 

 

0.12

 

 

 

$

0.10

 

$

0.15

 

 

 

$

0.30

 

$

0.73

 

 

Add: Impact of special items, net (5)

 

(0.01)

 

 

-

 

 

 

 

0.13

 

 

0.01

 

 

Net income per share, diluted, non-GAAP

$

0.09

 

$

0.15

 

(40.0)

 

$

0.43

 

$

0.74

 

(41.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes May through December 2011 financial results for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement II for a reconciliation of selected combined amounts to non-GAAP items, including AirTran for periods prior to the acquisition date.

(2) See Reconciliation of Impact from Fuel Contracts.

(3) Net of profitsharing impact.

(4) Amounts net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.

(5) Amounts net of tax and profitsharing impact (see footnote (4) above).

 

SOUTHWEST AIRLINES CO.

RECONCILIATION OF IMPACT FROM FUEL CONTRACTS (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Year ended

 

 

December 31,

 

December 31,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Fuel and Oil Expense

 

 

 

 

 

 

 

 

Reclassification between Fuel and Oil and Other (gains)

 

 

 

 

 

 

 

 

losses, net, associated with current period settled contracts

$

41

$

(14)

$

35

$

(1)

Contracts settling in the current period, but for which gains

 

 

 

 

 

 

 

 

and/or (losses) have been recognized in a prior period *

 

(24)

 

(26)

 

(35)

 

(171)

Impact from fuel contracts to Fuel and oil expense

 

17

 

(40)

 

-

 

(172)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

Reclassification between Fuel and Oil and Other (gains)

 

 

 

 

 

 

 

 

losses, net, associated with current period settled contracts

$

(41)

$

14

$

(35)

$

1

Contracts settling in the current period, but for which gains

 

 

 

 

 

 

 

 

and/or (losses) have been recognized in a prior period *

 

24

 

26

 

35

 

171

Impact from fuel contracts to Operating Income

 

(17)

 

40

 

-

 

172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (gains) losses, net

 

 

 

 

 

 

 

 

Mark-to-market impact from fuel contracts

 

 

 

 

 

 

 

 

settling in future periods

$

127

$

24

$

(21)

$

21

Ineffectiveness from fuel hedges settling in future periods

 

82

 

33

 

(33)

 

11

Reclassification between Fuel and oil and Other (gains)

 

 

 

 

 

 

 

 

losses, net, associated with current period settled contracts

 

(41)

 

14

 

(35)

 

1

Impact from fuel contracts to Other (gains) losses, net

 

168

 

71

 

(89)

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

Mark-to-market impact from fuel contracts

 

 

 

 

 

 

 

 

settling in future periods

$

(127)

$

(24)

$

21

$

(21)

Ineffectiveness from fuel hedges settling in future periods

 

(82)

 

(33)

 

33

 

(11)

Other net impact of fuel contracts settling in the

 

 

 

 

 

 

 

 

current or a prior period (excluding reclassifications)

 

24

 

26

 

35

 

171

Impact from fuel contracts to Net Income **

 

(185)

 

(31)

 

89

 

139

 

 

 

 

 

 

 

 

 

(1) Includes May through December 2011 financial results for AirTran.

* As a result of prior hedge ineffectiveness and/or contracts marked-to-market through the income statement.

** Excludes income tax impact of unrealized items.

 

SOUTHWEST AIRLINES CO.

COMPARATIVE CONSOLIDATED OPERATING STATISTICS (1)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Year ended

 

 

December 31,

 

December 31,

 

 

2011

 

2010

 

Change

 

2011

 

2010

 

Change

Revenue passengers carried

 

 

27,536,128

 

 

 

22,451,968

 

 

22.6 %

 

 

103,973,759

 

 

 

88,191,322

 

 

17.9 %

Enplaned passengers

 

 

33,510,920

 

 

 

27,163,960

 

 

23.4%

 

 

127,551,012

 

 

 

106,227,521

 

 

20.1 %

Revenue passenger miles (RPMs) (000s)

 

 

25,180,506

 

 

 

20,005,943

 

 

25.9 %

 

 

97,582,530

 

 

 

78,046,967

 

 

25.0 %

Available seat miles (ASMs) (000s)

 

 

31,297,561

 

 

 

24,788,095

 

 

26.3 %

 

 

120,578,736

 

 

 

98,437,092

 

 

22.5 %

Load factor

 

 

80.5 %

 

 

 

80.7 %

 

 

(0.2) pts

 

 

80.9 %

 

 

 

79.3 %

 

 

1.6 pts

Average length of passenger haul (miles)

 

 

914

 

 

 

891

 

 

2.6 %

 

 

939

 

 

 

885

 

 

6.1 %

Average aircraft stage length (miles)

 

 

679

 

 

 

653

 

 

4.0 %

 

 

679

 

 

 

648

 

 

4.8 %

Trips flown

 

 

343,756

 

 

 

278,137

 

 

23.6 %

 

 

1,317,977

 

 

 

1,114,451

 

 

18.3 %

Average passenger fare

 

$

140.18

 

 

$

131.17

 

 

6.9 %

 

$

141.72

 

 

$

130.27

 

 

8.8 %

Passenger revenue yield per RPM (cents)

 

 

15.33

 

 

 

14.72

 

 

4.1 %

 

 

15.10

 

 

 

14.72

 

 

2.6 %

RASM (cents)

 

 

13.13

 

 

 

12.56

 

 

4.5 %

 

 

12.99

 

 

 

12.30

 

 

5.6 %

PRASM (cents)

 

 

12.33

 

 

 

11.88

 

 

3.8 %

 

 

12.22

 

 

 

11.67

 

 

4.7 %

CASM (cents)

 

 

12.66

 

 

 

11.69

 

 

8.3 %

 

 

12.41

 

 

 

11.29

 

 

9.9 %

CASM, excluding fuel (cents)

 

 

7.89

 

 

 

7.90

 

 

(0.1) %

 

 

7.73

 

 

 

7.61

 

 

1.6 %

CASM, excluding special items (cents)

 

 

12.59

 

 

 

11.51

 

 

9.4 %

 

 

12.29

 

 

 

11.11

 

 

10.6 %

CASM, excluding fuel and special items (cents)

 

 

7.76

 

 

 

7.88

 

 

(1.5) %

 

 

7.61

 

 

 

7.61

 

 

- %

Fuel costs per gallon, including fuel tax (unhedged)

 

$

3.17

 

 

$

2.44

 

 

29.9 %

 

$

3.16

 

 

$

2.29

 

 

38.0 %

Fuel costs per gallon, including fuel tax

 

$

3.25

 

 

$

2.59

 

 

25.5 %

 

$

3.19

 

 

$

2.51

 

 

27.1 %

Fuel costs per gallon, including fuel tax (economic)

 

$

3.29

 

 

$

2.48

 

 

32.7 %

 

$

3.19

 

 

$

2.39

 

 

33.5 %

Fuel consumed, in gallons (millions)

 

 

458

 

 

 

361

 

 

26.9 %

 

 

1,764

 

 

 

1,437

 

 

22.8 %

Active fulltime equivalent Employees

 

 

45,392

 

 

 

34,901

 

 

30.1 %

 

 

45,392

 

 

 

34,901

 

 

30.1 %

Aircraft in service at period-end

 

 

698

 

 

 

548

 

 

27.4 %

 

 

698

 

 

 

548

 

 

27.4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRASM (Passenger unit revenue) - Passenger revenue yield per ASM

RASM (unit revenue) - Operating revenue yield per ASM

CASM (unit costs) - Operating expenses per ASM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes May through December 2011 operating statistics for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement V for consolidated operating statistics on a combined basis, including AirTran for periods prior to the acquisition date.

 

 

SOUTHWEST AIRLINES CO.

SELECTED CONSOLIDATING FINANCIAL INFORMATION

DETAIL OF AIRLINE FOURTH QUARTER 2011 RESULTS AND PURCHASE ACCOUNTING IMPACT

(in millions)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Purchase

 

 

 

 

 

 

 

Southwest (1)

 

 

AirTran (2)

 

 

 

Accounting (3)

 

 

Consolidated

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Passenger

$

3,239

 

$

619

 

$

2

 

$

3,860

 

Freight

 

36

 

 

-

 

 

 

-

 

 

36

 

Other

 

126

 

 

86

 

 

-

 

 

212

 

 

Total operating revenues

 

3,401

 

 

705

 

 

 

2

 

 

4,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages, and benefits

 

1,003

 

 

142

 

 

 

-

 

 

1,145

 

Fuel and oil

 

1,213

 

 

281

 

 

-

 

 

1,494

 

Maintenance materials and repairs

 

175

 

 

64

 

 

 

-

 

 

239

 

Aircraft rentals

 

44

 

 

59

 

 

 

(10)

 

 

93

 

Landing fees and other rentals

 

210

 

 

44

 

 

 

-

 

 

254

 

Depreciation and amortization

 

167

 

 

15

 

 

 

10

 

 

192

 

Acquisition and integration

 

35

 

 

2

 

 

 

-

 

 

37

 

Other operating expenses

 

420

 

 

87

 

 

-

 

 

507

 

 

Total operating expenses

 

3,267

 

 

694

 

 

 

-

 

 

3,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

$

134

 

$

11

 

 

$

2

 

$

147

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Results presented for Southwest exclude AirTran results and the impact of purchase accounting.

(2) Results presented for AirTran exclude Southwest results and the impact of purchase accounting.

(3) Represents the impact of purchase accounting.

 

 

SOUTHWEST AIRLINES CO.

RECONCILIATION OF SELECTED CONSOLIDATING FINANCIAL INFORMATION TO NON-GAAP ITEMS (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions)

(unaudited)

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31, 2011

 

 

Southwest

 

AirTran

 

 

 

 

 

 

 

 

Fuel and oil expense, standalone unhedged

$

1,169

 

$

286

 

Add/(Deduct): Fuel hedge (gains) losses included in Fuel and oil expense

 

44

 

 

(5)

 

Fuel and oil expense, standalone (2)

$

1,213

 

$

281

 

Deduct: Net impact from fuel contracts (3)

 

17

 

 

-

 

Fuel and oil expense, standalone economic

$

1,230

 

$

281

 

 

 

 

 

 

 

 

Total operating expenses, standalone (2)

$

3,267

 

$

694

 

Deduct: Net impact from fuel contracts (3)

 

17

 

 

-

 

Total operating expenses, standalone economic

$

3,284

 

$

694

 

Deduct: Charge for Acquisition and integration costs (4)

 

(35)

 

 

(2)

 

Total operating expenses, standalone non-GAAP

$

3,249

 

$

692

 

 

 

 

 

 

 

 

Operating income, standalone (2)

$

136

 

$

11

 

Add: Net impact from fuel contracts (3)

 

(17)

 

 

-

 

Operating income, standalone economic

$

119

 

$

11

 

Add: Charge for Acquisition and integration costs (4)

 

35

 

 

2

 

Operating income, standalone non-GAAP

$

154

 

$

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Selected amounts presented in this schedule are standalone non-GAAP financial results for each of Southwest and AirTran. These standalone results exclude the results of the other airline, and the impact of purchase accounting.

(2) See Selected Consolidating Financial Information - Detail of Airline Fourth Quarter 2011 Results and Purchase Accounting Impact for the detail of standalone airline results and the purchase accounting impact.

(3) See Reconciliation of Impact from Fuel Contracts.

 

 

 

 

 

 

(4) No profitsharing impact. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.

 

 

 

 

 

 

 

 

SOUTHWEST AIRLINES CO.

 

 

 

 

 

RETURN ON INVESTED CAPITAL (1)

 

 

 

 

 

(in millions)

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Year Ended

 

December 31, 2011

 

December 31, 2010

Operating Income, as reported

$

693

 

$

988

Add: Net impact from fuel contracts

 

-

 

 

172

Add: Acquisition and integration costs, net (2)

 

146

 

 

7

Operating Income, non-GAAP

$

839

 

$

1,167

Net adjustment for aircraft leases (3)

 

131

 

 

84

Adjustment for fuel hedge accounting

 

(107)

 

 

(134)

Adjusted Operating Income, non-GAAP

$

863

 

$

1,117

 

 

 

 

 

 

 

 

 

 

 

 

Average Invested Capital (4)

$

12,372

 

$

10,431

Equity adjustment for fuel hedge accounting

 

203

 

 

434

Adjusted Average Invested Capital

$

12,575

 

$

10,865

 

 

 

 

 

 

ROIC, pretax

 

7%

 

 

10%

 

 

 

 

 

 

(1) Calculation includes the impact of the AirTran acquisition as of May 2, 2011.

(2) Net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.

(3) Net adjustment related to presumption that all aircraft in fleet are owned.

(4) Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.

 

 

 

 

 

 

 

SOUTHWEST AIRLINES CO.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

(unaudited)

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

829

 

$

1,261

 

 

Short-term investments

 

 

2,315

 

 

2,277

 

 

Accounts and other receivables

 

 

299

 

 

195

 

 

Inventories of parts and supplies, at cost

 

 

401

 

 

243

 

 

Deferred income taxes

 

 

263

 

 

214

 

 

Prepaid expenses and other current assets

 

 

238

 

 

89

 

 

 

Total current assets

 

 

4,345

 

 

4,279

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost:

 

 

 

 

 

 

 

 

Flight equipment

 

 

15,542

 

 

13,991

 

 

Ground property and equipment

 

 

2,423

 

 

2,122

 

 

Deposits on flight equipment purchase contracts

 

 

456

 

 

230

 

 

 

 

18,421

 

 

16,343

 

 

Less allowance for depreciation and amortization

 

 

6,294

 

 

5,765

 

 

 

 

 

 

12,127

 

 

10,578

 

Goodwill

 

 

970

 

 

-

 

Other assets

 

 

626

 

 

606

 

 

 

 

 

$

18,068

 

$

15,463

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,057

 

$

739

 

 

Accrued liabilities

 

 

996

 

 

863

 

 

Air traffic liability

 

 

1,836

 

 

1,198

 

 

Current maturities of long-term debt

 

 

644

 

 

505

 

 

 

Total current liabilities

 

 

4,533

 

 

3,305

 

 

 

 

 

 

 

 

 

 

 

Long-term debt less current maturities

 

 

3,107

 

 

2,875

 

Deferred income taxes

 

 

2,566

 

 

2,493

 

Deferred gains from sale and leaseback of aircraft

 

 

75

 

 

88

 

Other noncurrent liabilities

 

 

910

 

 

465

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

808

 

 

808

 

 

Capital in excess of par value

 

 

1,222

 

 

1,183

 

 

Retained earnings

 

 

5,395

 

 

5,399

 

 

Accumulated other comprehensive loss

 

 

(224)

 

 

(262)

 

 

Treasury stock, at cost

 

 

(324)

 

 

(891)

 

 

 

Total stockholders' equity

 

 

6,877

 

 

6,237

 

 

 

 

 

$

18,068

 

$

15,463

 

 

SOUTHWEST AIRLINES CO.

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Year ended

 

 

 

 

December 31,

 

December 31,

 

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

152

 

$

131

 

$

178

 

$

459

 

Adjustments to reconcile net income to

 

 

 

 

 

 

 

 

 

 

 

 

 

cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

192

 

 

160

 

 

715

 

 

628

 

 

Unrealized (gain) loss on fuel derivative instruments

 

(185)

 

 

(31)

 

 

90

 

 

139

 

 

Deferred income taxes

 

90

 

 

38

 

 

123

 

 

133

 

 

Amortization of deferred gains on sale and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

leaseback of aircraft

 

(3)

 

 

(3)

 

 

(13)

 

 

(14)

 

 

Changes in certain assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts and other receivables

 

70

 

 

39

 

 

(26)

 

 

(26)

 

 

 

Other current assets

 

(16)

 

 

(2)

 

 

(196)

 

 

(8)

 

 

 

Accounts payable and accrued liabilities

 

(13)

 

 

3

 

 

253

 

 

193

 

 

 

Air traffic liability

 

(222)

 

 

(226)

 

 

262

 

 

153

 

 

Cash collateral received from (provided to)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

derivative counterparties

 

234

 

 

115

 

 

(195)

 

 

265

 

 

Other, net

 

101

 

 

45

 

 

194

 

 

(361)

 

Net cash provided by operating activities

 

400

 

 

269

 

 

1,385

 

 

1,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment to acquire AirTran, net of AirTran cash on hand

 

-

 

 

-

 

 

(35)

 

 

-

 

 

Payments for purchase of property and equipment, net

 

(420)

 

 

(94)

 

 

(968)

 

 

(493)

 

 

Purchases of short-term investments

 

(574)

 

 

(1,293)

 

 

(5,362)

 

 

(5,624)

 

 

Proceeds from sales of short-term investments

 

900

 

 

1,367

 

 

5,314

 

 

4,852

 

Net cash used in investing activities

 

(94)

 

 

(20)

 

 

(1,051)

 

 

(1,265)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from Employee stock plans

 

4

 

 

10

 

 

39

 

 

55

 

 

Proceeds from termination of interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

derivative instrument

 

-

 

 

-

 

 

76

 

 

-

 

 

Payments of long-term debt and capital lease obligations

 

(447)

 

 

(31)

 

 

(557)

 

 

(155)

 

 

Payments of convertible debt

 

-

 

 

-

 

 

(81)

 

 

-

 

 

Payment of credit line borrowing

 

-

 

 

-

 

 

-

 

 

(44)

 

 

Payments of cash dividends

 

-

 

 

-

 

 

(14)

 

 

(13)

 

 

Repurchase of common stock

 

(50)

 

 

-