Southwest Airlines Reports Third Quarter Results

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Southwest Airlines Co. (NYSE:LUV) (the "Company") today reported its third quarter 2012 results.  Third quarter 2012 net income was $16 million, or $.02 per diluted share, which included $81 million (net) of unfavorable special items.  This compared to a net loss of $140 million, or $.18 loss per diluted share, in third quarter 2011, which included unfavorable special items totaling $262 million (net).  Excluding special items, third quarter 2012 net income was $97 million, or $.13 per diluted share, compared to $122 million, or $.15 per diluted share, in third quarter 2011.  This exceeded the First Call consensus estimate of $.12 per diluted share.  Operating income for third quarter 2012 was $51 million, compared to $225 million in third quarter 2011.  Excluding special items, operating income was $208 million for third quarter 2012, compared to $285 million for the same period last year.  Additional information regarding special items is included in this release and in the accompanying reconciliation tables.  

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "Our third quarter 2012 net income was $97 million, and operating income was $208 million, each excluding special items.  Our third quarter 2012 passenger revenues, unit revenues, and load factor were all third-quarter records and meaningful accomplishments; however, we need sustained revenue momentum to achieve our return on invested capital target. And, that is a priority.  While in line with the domestic industry, our third quarter 2012 year-over-year unit revenue growth was more sluggish than planned due to weaker demand, particularly in September. While the economy remains a significant concern, we are encouraged, thus far, by October's bookings and revenue trends.  Thus far in October 2012, passenger unit revenues are running ahead of the comparable year ago period by approximately four percent.  For next year, we are excited about planned initiatives including the first phase of our new revenue management system.

"We have significant transformation work underway on five key strategic initiatives, and I am proud of our People and their results. The integration of AirTran into Southwest is our top priority and much progress was made in third quarter.  We have converted nine AirTran aircraft to the Southwest livery.  AirTran's airport facilities at Seattle and Des Moines have been converted to Southwest; Key West, Florida will be converted next month; and Branson, Missouri is scheduled for March 2013.  Our April 2013 schedule, to be published next week, will reflect four more AirTran city conversions at Charlotte, North Carolina; Flint, Michigan; Portland, Maine; and Rochester, New York.  During third quarter 2012, AirTran ceased operations at six cities, while Southwest launched new service to Dayton, Akron-Canton, and Ronald Reagan Washington National Airport, which began the integration of AirTran in those cities.  We remain on track to launch connection of the two airlines' networks early next year and significantly optimize the combined networks compared to third quarter 2012.  Seniority list integrations for seven of the eight impacted unions have been resolved.  We produced approximately $110 million in pre-tax synergies in the first nine months of 2012, and we plan for $400 million in pre-tax synergies in 2013 (excluding acquisition and integration expenses). I am very pleased with the AirTran integration results, thus far, and anticipate significant financial performance improvement from next year's planned actions.

"Our operating costs grew in the third quarter, but much of the growth was investment related. In particular, we are in the early stages of restructuring and retrofitting our fleet to improve our unit costs and long-term financial performance.  This 'fleet modernization' effort is one of our strategic initiatives, and it, too, is expected to drive significant financial benefits beginning in 2013. We have retrofitted 147 Southwest 737-700s with our updated cabin interior and plan to complete all 372 -700 retrofits in first half 2013.   AirTran's -700s are receiving the updated interior as the aircraft are converted to the Southwest livery.  We have added 26 737-800s to our fleet, with eight more deliveries scheduled for this year.   Our near-term plans call for keeping the fleet relatively flat taking into account our aircraft deliveries, 737 Classic retirements, and leases/subleases to Delta.  Overall, we anticipate our fleet modernization efforts will significantly benefit pre-tax results in excess of $700 million, annually, once fully implemented in 2015. 

"Third quarter 2012 economic fuel costs were $3.16 per gallon, which was in line with third quarter 2011. Crude oil and jet fuel prices have soared over the last several months, and our fourth quarter 2012 economic fuel costs are expected to hit an all-time high $3.45 per gallon (based on market prices as of October 15, 2012).  This is disappointing, especially given the weak economy, and we will need to more aggressively control costs in the next year.

"Our liquidity and balance sheet remain strong.  As of yesterday, total cash on hand and short-term investments were $3.5 billion, in addition to a fully available unsecured revolving credit line of $800 million.  Operating cash flow for the first nine months of this year was approximately $1.8 billion, resulting in strong free cash flow* of nearly $900 million.  During that time, we continued to return cash to our Shareholders with the repurchase of approximately 37 million shares of common stock for approximately $325 million and dividends totaling $22 million.  We also repaid $517 million of debt and capital lease obligations without refinancing.  Our debt levels are modest with debt-to-capital leverage near 40 percent, including off balance sheet aircraft leases.  We remain committed to our goals of enhancing Shareholder value, preserving our financial strength, and achieving our 15 percent pre-tax return on invested capital."

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 beginning May 2, 2011, including the impact of purchase accounting.  Year-to-date 2011 results do not include AirTran's results prior to the acquisition date.  However, the Company believes the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability.  Year-to-date 2011 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 beginning May 2, 2011.  Supplemental financial information presented on a "combined basis" and the accompanying reconciliations are included in this release.

The Company's total operating revenues in third quarter 2012 of $4.3 billion were comparable to third quarter 2011.  Operating unit revenues increased 0.6 percent from third quarter 2011.  Based on traffic and revenue trends thus far, the Company currently expects a solid year-over-year increase in operating unit revenues in fourth quarter 2012.

Total third quarter 2012 operating expenses were $4.3 billion, compared to $4.1 billion in third quarter 2011.  Excluding special items in both periods, third quarter 2012 operating expenses increased 1.9 percent from third quarter 2011.  

Third quarter 2012 economic fuel costs were $3.16 per gallon, including $.03 per gallon in unfavorable cash settlements for fuel derivative contracts, compared to $3.18 per gallon in third quarter 2011, including $.02 per gallon in unfavorable cash settlements.   Based on market prices as of October 15, 2012, the Company expects fourth quarter 2012 economic fuel costs to be approximately $3.45 per gallon, including $.09 per gallon in unfavorable cash settlements for fuel derivative contracts. Fourth quarter 2012 premium costs, recorded in Other (gains) losses, are currently estimated to be approximately $3 million, compared to premium costs of $14 million in fourth quarter 2011 and $36 million in fourth quarter 2010.  As of October 15, 2012, the fair market value of the Company's hedge portfolio through 2016 was a net asset of approximately $196 million, compared to a net asset of approximately $133 million at September 30, 2012, and a net liability of $140 million at June 30, 2012.  Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.

Excluding fuel, profitsharing, and special items in both periods, third quarter 2012 unit costs increased 6.2 percent from third quarter 2011. Based on current cost trends, the Company expects a similar year-over-year increase in its fourth quarter 2012 unit costs, excluding fuel, profitsharing and special items in both periods.  Third quarter 2012 profitsharing expense was $29 million, compared to $36 million in third quarter last year.

Operating income for third quarter 2012 was $51 million, compared to $225 million in third quarter 2011.  Excluding special items, operating income was $208 million for third quarter 2012, compared to $285 million in third quarter 2011.  The Company incurred $145 million in special charges (before taxes) during third quarter 2012 primarily associated with the Boeing 717 lease/sublease agreement with Delta Air Lines, Inc. and Boeing Capital Corp.  Cumulative costs associated with the acquisition and integration of AirTran, as of September 30, 2012, totaled $310 million (before taxes).  The Company expects total acquisition and integration costs will be approximately $550 million. 

Other expenses for third quarter 2012 were $18 million, compared to $451 million in third quarter 2011.  This $433 million decrease primarily resulted from $10 million in other gains recognized in third quarter 2012, compared to $405 million in other losses recognized in third quarter 2011.  In both periods, these gains and losses primarily resulted from unrealized mark to market gains/losses associated with a portion of the Company's fuel hedging portfolio, which are special items.  Excluding these special items, other losses were $18 million in third quarter 2012, compared to $36 million in third quarter 2011, primarily attributable to the premium costs associated with the Company's fuel derivative contracts.  Net interest expense declined to $28 million in third quarter 2012, compared to $46 million in third quarter 2011, primarily as a result of the Company's repayment of its $400 million notes in December 2011 and the redemption of its $385 million notes in March 2012. 

Total operating revenues for the nine months ended September 30, 2012 increased 11.8 percent year-over-year to $12.9 billion, while total operating expenses increased 12.5 percent year-over-year to $12.4 billion, resulting in operating income in the nine months ended September 30, 2012 of $532 million, versus $546 million for the same period last year.  Excluding special items, operating income was $702 million for the nine months ended September 30, 2012, compared to $672 million for the same period last year.  Excluding special items and compared to combined results for the same period last year, total operating revenues for the nine months ended September 30, 2012 increased 3.4 percent, while total operating expenses increased 3.3 percent, resulting in a 5.2 percent increase in operating income for the nine months ended September 30, 2012. 

Net income for the nine months ended September 30, 2012 was $343 million, or $.45 per diluted share, compared to $26 million, or $.03 per diluted share, for the same period last year.  Excluding special items, net income for the nine months ended September 30, 2012 was $352 million, or $.46 per diluted share, compared to $263 million, or $.34 per diluted share, for the same period last year. 

The Company's return on invested capital (before taxes and excluding special items) was approximately seven percent for the twelve months ended September 30, 2012.  Additional information regarding pre-tax return on invested capital is included in the accompanying reconciliation tables.   

Awards and Recognitions

During third quarter 2012, Southwest Airlines was named to the 2012 Customer Service Hall of Fame by MSN Money.  Southwest also was honored for various efforts to be an employer of choice such as being recently named to the 2012 list of "Best Adoption Workplaces" by The Dave Thomas Foundation for Adoption and also being recognized by the Learning Spotlight Award by the Elliot Maises Learning 2012 Consortium for its commitment to employee training and development programs.  Southwest also was recognized as one of the Best Companies for Diversity Practices by Hispanic Business for diversity recruitment, retention, promotion, and supplier diversity.

Conference call

Southwest will discuss its third quarter 2012 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 http://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 and outlook and projected results of operations; (ii) the Company's plans with respect to its acquisition of AirTran and related financial and operational goals and expectations, including without limitation anticipated integration timeframes and expected benefits and costs associated with the acquisition; (iii) the Company's fleet plans, including its fleet modernization plans, and related financial goals and expectations; and (iv) the Company's other strategic initiatives and related financial and operational goals and expectations. 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) the impact of the economy on demand for the Company's services and the impact of fuel prices, economic conditions, and actions of competitors on the Company's business decisions, plans, and strategies; (ii) the Company's ability to effectively integrate AirTran and realize the expected synergies and other benefits from the acquisition; (iii) 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; (iv) the Company's ability to timely and effectively prioritize its strategic initiatives and related expenditures; (v) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (vi) the Company's dependence on third parties with respect to certain of its initiatives, in particular its fleet modernization plans; and (vii) 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, 2011.

SOUTHWEST AIRLINES CO.




CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)




(in millions, except per share amounts)




(unaudited)


























Three months ended




Nine months ended







September 30,




September 30,







2012


2011


Percent Change


2012


2011


Percent Change





















OPERATING REVENUES:


















Passenger

$

4,046


$

4,034

(2)

0.3


$

12,127


$

10,875

(2)

11.5



Freight


39



35


11.4



118



103


14.6



Other


224



242

(2)

(7.4)



670



572

(2)

17.1




Total operating revenues


4,309



4,311


(0.0)



12,915



11,550


11.8





















OPERATING EXPENSES:


















Salaries, wages, and benefits


1,189



1,146


3.8



3,552



3,226


10.1



Fuel and oil


1,528



1,586


(3.7)



4,615



4,150


11.2



Maintenance materials and repairs


300



272


10.3



862



717


20.2



Aircraft rentals


92



90


2.2



270



214


26.2



Landing fees and other rentals


278



257


8.2



791



705


12.2



Depreciation and amortization


217



191


13.6



620



523


18.5



Acquisition and integration


145



22


n.a.



168



97


73.2



Other operating expenses


509



522


(2.5)



1,505



1,372


9.7




Total operating expenses


4,258



4,086


4.2



12,383



11,004


12.5





















OPERATING INCOME


51



225


(77.3)



532



546


(2.6)





















OTHER EXPENSES (INCOME):


















Interest expense


35



50


(30.0)



112



143


(21.7)



Capitalized interest


(5)



(3)


66.7



(16)



(8)


100.0



Interest income


(2)



(1)


100.0



(5)



(8)


(37.5)



Other (gains) losses, net


(10)



405


n.a.



(119)



351


n.a.




Total other (income) expenses


18



451


(96.0)



(28)



478


n.a.





















INCOME (LOSS) BEFORE INCOME TAXES


33



(226)


n.a.



560



68


n.a.


PROVISION (BENEFIT) FOR INCOME TAXES


17



(86)


n.a.



217



42


n.a.





















NET INCOME (LOSS)

$

16


$

(140)


n.a.


$

343


$

26


n.a.








































NET INCOME (LOSS) PER SHARE


















Basic

$

0.02


$

(0.18)




$

0.45


$

0.03





Diluted

$

0.02


$

(0.18)




$

0.45


$

0.03























WEIGHTED AVERAGE SHARES OUTSTANDING
















Basic


739



792





756



773





Diluted


740



792





762



774










































(1) Excludes financial results for AirTran prior to the May 2, 2011 acquisition date. 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 reclassification to change the allocation of Operating revenues between Passenger revenues and Other revenues from its sale of frequent flyer points associated with its co-branded Chase® Visa card.  The Company has thus reclassified $20 million and $46 million in Operating revenues for the three and nine month periods ended September 30, 2011, respectively, from Other revenues to Passenger revenues to conform to the current presentation.











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




Nine months ended





September 30,




September 30,





2012


2011


Percent Change


2012


2011


Percent Change



















Fuel and oil expense, unhedged

$

1,503


$

1,549




$

4,526


$

4,125




Add: Fuel hedge losses included in Fuel and oil expense


25



37





89



25




Fuel and oil expense, as reported

$

1,528


$

1,586




$

4,615


$

4,150




Deduct: Net impact from fuel contracts (2)


(12)



(24)





(2)



(17)




Fuel and oil expense, economic

$

1,516


$

1,562


(2.9)


$

4,613


$

4,133


11.6



















Total operating expenses, as reported

$

4,258


$

4,086




$

12,383


$

11,004




Deduct: Net impact from fuel contracts (2)


(12)



(24)





(2)



(17)




Total operating expenses, economic

$

4,246


$

4,062




$

12,381


$

10,987




Deduct: Asset impairment, net (3)


-



(14)





-



(14)




Deduct: Acquisition and integration costs, net (4)


(145)



(22)





(168)



(95)




Total operating expenses, non-GAAP

$

4,101


$

4,026


1.9


$

12,213


$

10,878


12.3



















Operating income, as reported

$

51


$

225




$

532


$

546




Add: Net impact from fuel contracts (2)


12



24





2



17




Operating income, economic

$

63


$

249




$

534


$

563




Add: Asset impairment, net (3)


-



14





-



14




Add: Acquisition and integration costs, net (4)


145



22





168



95




Operating income, non-GAAP

$

208


$

285


(27.0)


$

702


$

672


4.5



















Other (gains) losses, net, as reported

$

(10)


$

405




$

(119)


$

351




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


28



(369)





156



(257)




Other losses, net, non-GAAP

$

18


$

36


(50.0)


$

37


$

94


(60.6)



















Income (loss) before income taxes, as reported

$

33


$

(226)




$

560


$

68




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


(16)



393





(154)



274





$

17


$

167




$

406


$

342




Add: Asset impairment, net (3)


-



14





-



14




Add: Acquisition and integration costs, net (4)


145



22





168



95




Income before income taxes, non-GAAP

$

162


$

203


(20.2)


$

574


$

451


27.3



















Net income (loss), as reported

$

16


$

(140)




$

343


$

26




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


(16)



393





(154)



274




Add (Deduct): Income tax impact of fuel contracts


10



(154)





60



(105)





$

10


$

99




$

249


$

195




Add: Asset impairment, net (5)


-



9





-



9




Add: Acquisition and integration costs, net (5)


87



14





103



59




Net income, non-GAAP

$

97


$

122


(20.5)


$

352


$

263


33.8



















Net income (loss) per share, diluted, as reported

$

0.02


$

(0.18)




$

0.45


$

0.03




Add (Deduct): Net impact from fuel contracts


(0.01)



0.30





(0.13)



0.22





$

0.01


$

0.12




$

0.32


$

0.25




Add: Impact of special items, net (5)


0.12



0.03





0.14



0.09




Net income per share, diluted, non-GAAP

$

0.13


$

0.15


(13.3)


$

0.46


$

0.34


35.3



















(1) Excludes financial results for AirTran prior to the May 2, 2011 acquisition date. 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 acquisition and 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 (as described in 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


Nine months ended



September 30,


September 30,



2012


2011


2012


2011















Fuel and Oil Expense













Reclassification between Fuel and Oil and Other (gains)













losses, net, associated with current period settled contracts

$

4


$

3


$

(8)


$

(6)


Contracts settling in the current period, but for which gains













and/or (losses) have been recognized in a prior period (2)


(16)



(27)



6



(11)


Impact from fuel contracts to Fuel and oil expense

$

(12)


$

(24)


$

(2)


$

(17)




























Operating Income













Reclassification between Fuel and Oil and Other (gains)













losses, net, associated with current period settled contracts

$

(4)


$

(3)


$

8


$

6


Contracts settling in the current period, but for which gains













and/or (losses) have been recognized in a prior period (2)


16



27



(6)



11


Impact from fuel contracts to Operating Income

$

12


$

24


$

2


$

17




























Other (gains) losses, net













Mark-to-market impact from fuel contracts













settling in future periods

$

37


$

(288)


$

193


$

(148)


Ineffectiveness from fuel hedges settling in future periods


(5)



(78)



(45)



(115)


Reclassification between Fuel and Oil and Other (gains)













losses, net, associated with current period settled contracts


(4)



(3)



8



6


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

$

28


$

(369)


$

156


$

(257)




























Net Income













Mark-to-market impact from fuel contracts













settling in future periods

$

(37)


$

288


$

(193)


$

148


Ineffectiveness from fuel hedges settling in future periods


5



78



45



115


Other net impact of fuel contracts settling in the













current or a prior period (excluding reclassifications)


16



27



(6)



11


Impact from fuel contracts to Net Income (3)

$

(16)


$

393


$

(154)


$

274















(1) Excludes financial results for AirTran prior to the May 2, 2011 acquisition date.


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


(3) Excludes income tax impact of unrealized items.








SOUTHWEST AIRLINES CO.


COMPARATIVE CONSOLIDATED OPERATING STATISTICS (1)


(unaudited)


























Three months ended




Nine months ended




September 30,




September 30,




2012


2011


Change


2012


2011


Change


Revenue passengers carried


28,318,779




28,208,036



0.4

%



82,738,949




76,437,631



8.2

%


Enplaned passengers


34,913,698




35,010,060



(0.3)

%



101,278,271




94,040,092



7.7

%


Revenue passenger miles (RPMs) (000s)


27,162,606




27,322,289



(0.6)

%



78,053,971




72,402,024



7.8

%


Available seat miles (ASMs) (000s)


33,080,807




33,318,089



(0.7)

%



96,944,289




89,281,174



8.6

%


Load factor


82.1

%


82.0

%


0.1

pts

80.5

%


81.1

%


(0.6)

pts


Average length of passenger haul (miles)


959




969



(1.0)

%



943




947



(0.4)

%


Average aircraft stage length (miles)


697




690



1.0

%



694




679



2.2

%


Trips flown


347,346




359,630



(3.4)

%



1,033,968




974,221



6.1

%


Average passenger fare

$

142.86



$

143.03

(2)


(0.1)

%


$

146.56



$

142.27

(2)


3.0

%


Passenger revenue yield per RPM (cents)


14.89




14.77

(2)


0.8

%



15.54




15.02

(2)


3.5

%


RASM (cents)


13.02




12.94



0.6

%



13.32




12.94



2.9

%


PRASM (cents)


12.23




12.11

(2)


1.0

%



12.51




12.18

(2)


2.7

%


CASM (cents)


12.87




12.26



5.0

%



12.77




12.32



3.7

%


CASM, excluding fuel (cents)


8.25




7.50



10.0

%



8.01




7.68



4.3

%


CASM, excluding fuel & profitsharing (cents)


8.16




7.39



10.4

%



7.90




7.60



3.9

%


CASM, excluding special items (cents)


12.40




12.08



2.6

%



12.60




12.18



3.4

%


CASM, excluding fuel & special items (cents)


7.81




7.38



5.8

%



7.84




7.56



3.7

%


CASM, excluding fuel, profitsharing, & special items (cents)


7.72




7.27



6.2

%



7.73




7.47



3.5

%


Fuel costs per gallon, including fuel tax (unhedged)

$

3.13



$

3.16



(0.9)

%


$

3.21



$

3.15



1.9

%


Fuel costs per gallon, including fuel tax

$

3.19



$

3.23



(1.2)

%


$

3.27



$

3.17



3.2

%


Fuel costs per gallon, including fuel tax (economic)

$

3.16



$

3.18



(0.6)

%


$

3.27



$

3.16



3.5

%


Fuel consumed, in gallons (millions)


478




490



(2.4)

%



1,404




1,307



7.4

%


Active fulltime equivalent Employees


46,048




45,112



2.1

%



46,048




45,112



2.1

%


Aircraft in service at period-end


692




699



(1.0)

%



692




699



(1.0)

%

























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) Excludes operating statistics for AirTran prior to the May 2, 2011 acquisition date. See Supplemental Combined Statement IV for operating statistics on a combined basis, including AirTran for periods prior to the acquisition date.




(2) The Company made a fourth quarter 2011 reclassification to change the allocation of Operating revenues between Passenger revenues and Other revenues from its sale of frequent flyer points associated with its co-branded Chase® Visa card.  The Company has thus reclassified $20 million and $46 million in Operating revenues for the three and nine month periods ended September 30, 2011, respectively, from Other revenues to Passenger revenues to conform to the current presentation. This reclassification affects certain prior year operating statistics.























SOUTHWEST AIRLINES CO.







RETURN ON INVESTED CAPITAL (1)







(in millions)  







(unaudited)















12 Months Ended


12 Months Ended



September 30, 2012


September 30, 2011


Operating Income, as reported

$

679


$

761


Add (Deduct): Net impact from fuel contracts


(15)



57


Add: Acquisition and integration costs, net (2)


205



103


Add: Asset Impairment, net (3)


-



14


Operating Income, non-GAAP

$

869


$

935


Net adjustment for aircraft leases (4)


136



109


Adjustment for fuel hedge accounting


(47)



(129)


Adjusted Operating Income, non-GAAP

$

958


$

915
















Average Invested Capital (5)

$

12,788


$

11,910


Equity adjustment for fuel hedge accounting


231



202


Adjusted Average Invested Capital

$

13,019


$

12,112









ROIC, pre-tax


7%



8%









(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 of profitsharing impact.


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


(5) 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)






















September 30,


December 31,






2012


2011


ASSETS








Current assets:









Cash and cash equivalents


$

1,168


$

829



Short-term investments



2,067



2,315



Accounts and other receivables



430



299



Inventories of parts and supplies, at cost



544



401



Deferred income taxes



219



263



Prepaid expenses and other current assets



224



238




Total current assets



4,652



4,345












Property and equipment, at cost:









Flight equipment



16,177



15,542



Ground property and equipment



2,671



2,423



Deposits on flight equipment purchase contracts



446



456





19,294



18,421



Less allowance for depreciation and amortization



6,722



6,294







12,572



12,127


Goodwill



970



970


Other assets



619



626






$

18,813


$

18,068












LIABILITIES AND STOCKHOLDERS' EQUITY








Current liabilities:









Accounts payable


$

1,140


$

1,057



Accrued liabilities



1,040



996



Air traffic liability



2,524



1,836



Current maturities of long-term debt



265



644




Total current liabilities



4,969



4,533












Long-term debt less current maturities



2,961



3,107


Deferred income taxes



2,701



2,566


Deferred gains from sale and leaseback of aircraft



66



75


Other noncurrent liabilities



1,114



910


Stockholders' equity:









Common stock



808



808



Capital in excess of par value



1,228



1,222



Retained earnings



5,700



5,395



Accumulated other comprehensive loss



(125)



(224)



Treasury stock, at cost



(609)



(324)




Total stockholders' equity



7,002



6,877






$

18,813


$

18,068























SOUTHWEST AIRLINES CO.







CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)







(in millions)  







(unaudited)


























Three months ended


Nine months ended





September 30,


September 30,





2012


2011


2012


2011
















CASH FLOWS FROM OPERATING ACTIVITIES:













Net income (loss)

$

16


$

(140)


$

343


$

26


Adjustments to reconcile net income (loss) to














cash provided by (used in) operating activities:














Depreciation and amortization


217



191



620



523



Unrealized (gain) loss on fuel derivative instruments


(16)



393



(154)



274



Deferred income taxes


82



(90)



120



33



Amortization of deferred gains on sale and















leaseback of aircraft


(3)



(3)



(9)



(10)



Changes in certain assets and liabilities, net of acquisition:















Accounts and other receivables


(2)



11



(107)



(96)




Other assets


(74)



(42)



(164)



(180)




Accounts payable and accrued liabilities


(187)



(39)



114



266




Air traffic liability


(5)



(92)



688



485



Cash collateral received from (provided to) derivative counterparties


252



(409)



218



(429)



Other, net


184



2



164



93


Net cash provided by (used in) operating activities


464



(218)



1,833



985
















CASH FLOWS FROM INVESTING ACTIVITIES:














Payment to acquire AirTran, net of AirTran cash on hand


-



-



-



(35)



Payments for purchase of property and equipment, net


(406)



(276)



(949)



(548)



Purchases of short-term investments


(663)



(1,525)



(1,918)



(4,788)



Proceeds from sales of short-term investments


775



1,664



2,192



4,414



Other, net


17



-



31



-


Net cash used in investing activities


(277)



(137)



(644)



(957)
















CASH FLOWS FROM FINANCING ACTIVITIES:














Proceeds from Employee stock plans


5



4



22



35



Proceeds from termination of interest rate















derivative instrument


-



-



-



76



Payments of long-term debt and capital lease obligations


(48)



(48)



(517)



(110)



Payments of convertible debt


-



-



-



(81)



Payments of cash dividends


(7)



(3)



(22)



(14)



Repurchase of common stock


(50)



(175)



(325)



(175)



Other, net


(2)



(2)



(8)



(4)


Net cash used in financing activities


(102)



(224)



(850)



(273)
















NET CHANGE IN CASH AND CASH EQUIVALENTS


85



(579)



339



(245)
















CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


1,083



1,595



829



1,261
















CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,168


$

1,016


$

1,168


$

1,016































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

























SOUTHWEST AIRLINES CO.




FUEL DERIVATIVE CONTRACTS




AS OF OCTOBER 15, 2012


































Estimated difference in economic jet fuel price per gallon,





above/(below) unhedged market prices, including taxes




Average WTI Crude Oil









price per barrel

4Q 2012


1Q 2013


2013













$60

(2)


$0.25


$0.07




$70


$0.07


$0.02




$80


$0.03


$0.01




Current Market (1)


$0.03


$0.01




$100


$0.00


$0.00




$110


($0.08)


($0.02)




$125


($0.14)


($0.04)
































Average percent of estimated fuel consumption





covered by fuel derivative contracts at




Period

 varying WTI/Brent crude-equivalent price levels













2013

less than 15%




2014

approx. 50%




2015

approx. 30%




2016

approx. 15%






























(1)

WTI crude oil average market prices as of October 15, 2012 were approximately $92, $94 and $94 per barrel for fourth quarter 2012, first quarter 2013 and full year 2013, respectively.























(2)

For fourth quarter 2012, the Company's estimated fuel consumption is not covered by fuel derivative contracts due to settling its fourth quarter 2012 contracts in advance of their original settlement dates.  Therefore, the Company has effectively locked-in an above market amount of $0.09 per gallon, regardless of the price of jet fuel during fourth quarter 2012. 



















SOUTHWEST AIRLINES CO.










737 DELIVERY SCHEDULE










AS OF OCTOBER 17, 2012













































The Boeing Company


The Boeing Company




737 NG




737 MAX





-700

Firm

Orders



-800

Firm

Orders


Options


Additional

-800s


Firm

Orders



Options


Total



















2012

-



29


-


5


-



-


34

(2)

2013

-



20


-


-


-



-


20


2014

5



24


15


-


-



-


44


2015

36



-


12


-


-



-


48


2016

31



-


12


-


-



-


43


2017

30



-


25


-


4



-


59


2018

25



-


28


-


15



-


68


2019

-



-


-


-


33



-


33


2020

-



-


-


-


34



-


34


2021

-



-


-


-


34



18


52


2022

-



-


-


-


30



19


49


2023

-



-


-


-


-



23


23


2024

-



-


-


-


-



23


23


Through 2027

-



-


-


-


-



67


67



127

(1)


73


92


5

(3)

150



150


597





















































(1) The Company has flexibility to substitute 737-800s in lieu of 737-700 firm orders.







(2) Includes 26 aircraft delivered as of October 17, 2012.


(3) New delivery leased aircraft.


















SUPPLEMENTAL COMBINED STATEMENT I


SOUTHWEST AIRLINES CO.


SELECTED COMBINED FINANCIAL INFORMATION


(in millions)


(unaudited)

















Nine months ended







September 30,














Percent





2012



2011 (1)


Change














OPERATING REVENUES:











Passenger

$

12,127



$

11,687


3.8



Freight


118




 103