Southwest Airlines Reports Record Fourth Quarter And Full Year Profit; 41st Consecutive Year Of Profitability

Southwest Airlines Co. (NYSE:LUV) (the "Company") today reported its fourth quarter and full year 2013 results: 

  • Record fourth quarter net income, excluding special items*, of $236 million, or $.33 per diluted share, compared to fourth quarter 2012 net income, excluding special items, of $65 million, or $.09 per diluted share.  This exceeded the First Call consensus estimate of $.29 per diluted share.
  • Record fourth quarter net income of $212 million, or $.30 per diluted share, which included $24 million (net) of unfavorable special items, compared to net income of $78 million, or $.11 per diluted share, in fourth quarter 2012, which included $13 million (net) of favorable special items. 
  • Record full year net income, excluding special items, of $805 million, or $1.12 per diluted share, compared to full year 2012 net income, excluding special items, of $417 million, or $.56 per diluted share.
  • Record full year net income of $754 million, or $1.05 per diluted share, which included $51 million (net) of unfavorable special items, compared to net income of $421 million, or $.56 per diluted share, in full year 2012, which included $4 million (net) of favorable special items.
  • Return on invested capital* (before taxes and excluding special items) for full year 2013 of 13.1 percent, as compared to 7.2 percent for full year 2012.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "We are happy to report full year 2013 net income of $805 million, and fourth quarter 2013 net income of $236 million, both excluding special items.  We are extremely proud of these record results and the tremendous progress made on our strategic initiatives, which produced substantial returns and contributed significantly to our superb 2013 financial performance.  Our full year 2013 total operating revenues were a record $17.7 billion, and our cost performance was excellent.  We generated strong free cash flow* of $1.0 billion in 2013, allowing us to return $611 million to our Shareholders, through share repurchases and dividend payments, and reduce debt and capital lease obligations by $313 million.  Our pre-tax return on invested capital, excluding special items (ROIC), for full year 2013 was 13.1 percent, nearly double the prior year's performance.  I want to thank the outstanding People of Southwest and AirTran.  They deserve all the credit for producing these strong results, which earned them a $228 million contribution to the Profitsharing Plan for the year 2013, up 88.4 percent, or $107 million, compared to the prior year.

"We ended 2013 strong, with an exceptional fourth quarter performance.  Total operating revenues  were a fourth quarter record $4.4 billion, increasing 6.1 percent compared to fourth quarter last year.  On a unit basis (per available seat mile), our fourth quarter 2013 revenues increased 3.8 percent year-over-year, which is remarkable considering the increase in stage length and seat density.  While traffic was impacted at the beginning of the quarter by the federal government shutdown, we saw a healthy rebound in traffic and revenue trends, resulting in a five percent year-over-year increase in passenger unit revenues for the combined November/December period.  Strong travel demand and favorable year-over-year unit revenues have continued in January, thus far.  And, bookings for the remainder of the first quarter are strong.  Based on these trends, we currently expect year-over-year growth in first quarter 2014 unit revenues.

"We also had an outstanding fourth quarter 2013 cost performance, with unit costs, excluding special items, down 2.8 percent year-over-year.  We benefited from stable fuel prices, our ongoing fleet modernization efforts, and rigorous cost control efforts across the Company.  We closed the year with fourth quarter 2013 economic fuel costs of $3.05 per gallon, a decline of approximately eight percent from fourth quarter 2012.  Based on current market prices and our existing fuel derivative contracts, as of January 17th, we expect first quarter 2014 economic fuel costs to be in the $3.05 to $3.10 per gallon range, which would be a significant drop year-over-year.  Excluding fuel, profitsharing, and special items, our fourth quarter 2013 unit costs declined 0.4 percent year-over-year.  We expect a year-over-year increase in our first quarter 2014 unit costs, excluding fuel, profitsharing, and special items.

"We are on track with our AirTran integration, achieving approximately $400 million in annual net pre-tax synergies in 2013, as planned.  Since 2011, we have converted 17 of the 52 AirTran Boeing 737-700s to Southwest, and we have replaced the flying for 13 AirTran Boeing 717-200s transitioned to Delta in 2013, with Southwest 737 service.  Nine more 717s were removed from active service at year end 2013, and the remaining 66 717s are scheduled to be removed from the AirTran network by the end of this year, and transitioned to Delta through 2015.  The remaining 35 AirTran Boeing 737-700s are scheduled to be converted to Southwest this year.  During fourth quarter, we converted Memphis, Pensacola, San Juan, and Buffalo to Southwest, and launched Southwest service to Richmond.  At year end 2013, all remaining domestic AirTran markets had Southwest service.  We are pleased with the rapid improvement of our developing markets as we convert AirTran routes into Southwest and optimize our combined networks.  With our international reservation system scheduled for implementation later this month, we remain on track to convert AirTran's seven international markets, along with its remaining domestic markets, by the end of this year.  As planned, this will allow us to complete the AirTran integration and retire the brand by the end of 2014. 

"We plan to launch international service on Southwest Airlines this year, which will be a huge milestone for us.  Construction of a five-gate international facility at Houston's William P. Hobby Airport, expected to open in late 2015, has begun, and can accommodate Southwest service to destinations in the Caribbean, Mexico, Central America, and the northern cities of South America.  We also have future plans to bring Southwest near-international service to Fort Lauderdale-Hollywood International Airport (FLL).  Under a recently executed agreement with Broward County, Florida, which owns and operates FLL, we will oversee and manage the design and construction of the airport's Terminal 1 Modernization Project.  In addition to significant improvements to the existing Terminal 1, the project includes the design and construction of a new five-gate Concourse A with an international processing facility. 

"During 2014, we expect to take delivery of 33 new Boeing 737-800s and 12 pre-owned -700s, which will allow us to keep our 2014 capacity relatively flat, year-over-year, as we continue to transition the AirTran 717 fleet to Delta, and retire Classic Boeing 737 aircraft.  We continue to optimize the combined Southwest and AirTran route networks, and announced new travel options in 2014 to some of our Customers' favorite domestic destinations, like San Diego and Portland, Oregon.  We also look forward to expanding service to Dallas Love Field, with the October 2014 repeal of the Wright Amendment.

"We are excited about bringing more flights to New York's LaGuardia Airport with our recent acquisition of 12 takeoff and landing slots, pursuant to American Airlines' required divestiture for its merger with US Airways.  In addition, we gained permanent control of 10 takeoff and landing slots at LaGuardia that Southwest currently operates under lease from American.  In an effort to bring more low fares to Washington's Reagan National Airport, we also have bid on slots that American is required to divest. 

"We enter 2014 financially strong and excited about the opportunities unfolding.  We are proud of our many 2013 accomplishments, most notably our strong financial performance that we believe positions us well to achieve our targeted 15 percent ROIC in 2014.  As ever, we remain focused on providing job security for our Employees;  providing friendly, reliable and low-fare service to our Customers;  and enhancing Shareholder value." 

Notable 2013 accomplishments for Southwest Airlines include:

  • Achieved 41st consecutive year of profitability, with record profits
  • Achieved 13.1 percent return on invested capital (before taxes and excluding special items)
  • Contributed $228 million to the Profitsharing Plan, an increase of $107 million
  • Returned $611 million to Shareholders through repurchases of $540 million of common stock (38 million shares) and distribution of $71 million in dividends
  • Reduced long-term debt and capital lease obligations by $313 million
  • Deferred $1 billion in aircraft capital spending to beyond 2018
  • Received numerous awards and recognitions, most notably being recognized as the Best Domestic Airline for Customer Service by Executive Travel Magazine's Leading Edge Awards, named Brand of the Year in the Value Airline Category by the Harris Poll, and recognized with the top ranking by InsideFlyer Magazine for Best Customer Service and Best Loyalty Credit Card
  • For the 17th consecutive year, Southwest Airlines Cargo received the 2013 Quest for Quality Award, awarded by Logistics Management Magazine
  • Launched the first Southwest destination outside the 48 contiguous states with service to San Juan, Puerto Rico
  • Completed the connection between the Southwest and AirTran networks
  • Expanded Southwest Cargo to the AirTran network
  • Ended the year with Southwest service in all domestic AirTran airports
  • Launched AirTran service to Hartford and Oklahoma City
  • Completed the 143-seat Evolve retrofit of 372 Southwest 737-700s and 78 737-300s
  • Converted 6 of the 52 AirTran 737-700s to the Southwest livery with Evolve configuration, bringing cumulative conversions to 17
  • Transitioned 13 of the 88 AirTran 717-200s to Delta Air Lines
  • Reached a cumulative 65 percent of the AirTran workforce converted to Southwest, with the remaining flight crews and dispatchers scheduled to transition in 2014
  • Completed equipping all -700 and -800 aircraft with satellite-based WiFi  (including completed AirTran conversions) and became the first and only carrier to offer gate-to-gate connectivity
  • Partnered with DISH to offer "TV Flies Free" in second half 2013; DISH sponsorship was recently extended through 2014
  • Launched movies on demand, a new WiFi portal, and Messaging feature for iOS users   
  • Remained on track to implement Southwest's International Reservation system in January 2014
  • Broke ground on the five-gate, international facility at Houston's William P. Hobby Airport, planned to open in late 2015
  • Acquired 12 slots (for six roundtrip flights) at New York's LaGuardia Airport and permanently secured 10 slots (five roundtrip flights) that are currently being operated by Southwest
  • Joined the Transportation Security Administration's (TSA) expedited screening program known as TSA Pre Check™

Financial Results
The Company's fourth quarter 2013 total operating revenues increased 6.1 percent to $4.4 billion, while operating unit revenues increased 3.8 percent, on a 2.2 percent increase in available seat miles and a 3.0 percent increase in average seats per trip, all as compared to fourth quarter 2012.  Based on current revenue and booking trends, the Company expects year-over-year growth in its first quarter 2014 unit revenues.

Total operating expenses in fourth quarter 2013 decreased 1.0 percent to $4.0 billion, as compared to fourth quarter 2012.  The Company incurred costs (before taxes) associated with the acquisition and integration of AirTran, which are special items, of $19 million during fourth quarter 2013, compared to $14 million in fourth quarter 2012.  Excluding special items in both periods, total operating expenses of $4.0 billion in fourth quarter 2013 were comparable to fourth quarter 2012.  

Fourth quarter 2013 economic fuel costs were $3.05 per gallon, including $.03 per gallon in favorable cash settlements from fuel derivative contracts, compared to $3.32 per gallon in fourth quarter 2012, including $.09 per gallon in unfavorable cash settlements from fuel derivative contracts.  Based on the Company's fuel derivative contracts and market prices as of January 17th, first quarter 2014 economic fuel costs are expected to be in the $3.05 to $3.10 per gallon range, which is significantly below first quarter 2013's economic fuel costs of $3.29 per gallon.  As of January 17th, the fair market value of the Company's hedge portfolio through 2017 was a net asset of approximately $108 million.  Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.

Excluding economic fuel expense, profitsharing, and special items in both periods, fourth quarter 2013 operating costs increased 1.8 percent from fourth quarter 2012, and decreased 0.4 percent on a unit basis.  Based on current cost trends, the Company expects first quarter 2014 unit costs, excluding fuel, profitsharing, and special items, to increase from first quarter 2013's 8.21 cents, with full year 2014 unit costs, excluding fuel, profitsharing, and special items, expected to increase year-over-year in the two to three percent range.  

Fourth quarter 2013 operating income was a fourth quarter record $386 million, compared to $91 million in fourth quarter 2012.  Excluding special items, fourth quarter 2013 operating income was also a fourth quarter record $418 million, compared to $136 million in the same period last year.

Other expenses in fourth quarter 2013 were $52 million, compared to other income of $34 million in fourth quarter 2012.  This $86 million swing primarily resulted from $27 million in other losses recognized in fourth quarter 2013, compared to other gains of $62 million recognized in fourth quarter 2012.  In both periods, these gains/losses included 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, fourth quarter 2013 had $21 million in other expenses, compared to $3 million in fourth quarter 2012, primarily attributable to the premium costs associated with the Company's fuel derivative contracts.  First quarter 2014 premium costs related to fuel derivative contracts are currently estimated to be in the $10 million to $20 million range, compared to $5 million in first quarter 2013.  Net interest expense in fourth quarter 2013 was $25 million, compared to $28 million in fourth quarter 2012.

For 2013, total operating revenues increased 3.6 percent to $17.7 billion, while total operating expenses of $16.4 billion were comparable to 2012.  Operating income for 2013 was a record $1.3 billion, compared to $623 million for 2012.  For 2013, special charges (before taxes) associated with the acquisition and integration of AirTran were $86 million.  Cumulative costs associated with the acquisition and integration of AirTran, as of December 31, 2013, totaled approximately $410 million (before profitsharing and taxes).  The Company expects total acquisition and integration costs to be no more than $550 million (before profitsharing and taxes).  Excluding special items in both periods, operating income was a record $1.4 billion for 2013, compared to $838 million for 2012.  

As of January 22nd, the Company had approximately $3.1 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1 billion.  Net cash provided by operations during fourth quarter 2013 was $302 million, and capital expenditures were $451 million.  For  2013, net cash provided by operations was $2.49 billion, and capital expenditures were $1.45 billion, resulting in free cash flow of approximately $1.04 billion.  The Company currently estimates its 2014 capital expenditures to be in the $1.5 billion to $1.6 billion range.  The Company repurchased $540 million in common stock, or 38 million shares, during 2013.  Since August 2011, the Company has repurchased $1.2 billion, or 111 million shares, of common stock under its $1.5 billion share repurchase authorization.  This reduced the Company's outstanding common stock by approximately 14 percent.  The Company repaid $313 million in debt and capital lease obligations during 2013, and is currently scheduled to repay approximately $550 million in debt and capital lease obligations during 2014.

Conference Call
Southwest will discuss its fourth quarter and full year 2013 results on a conference call at 11:30 a.m. Eastern Time today.  A live broadcast of the conference call also will be available at www.southwestairlinesinvestorrelations.com.

*Additional information regarding special items is included in the accompanying reconciliation tables.  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 outlook and targets and projected results of operations; (ii) the integration of AirTran and the Company's related financial and operational plans and expectations, including the anticipated timing of full integration and the expected benefits and costs associated with the integration; (iii) the Company's fleet plans, including its fleet modernization and capacity plans and expectations; (iv) the Company's network plans, expectations, and opportunities; (v) the Company's plans and expectations with respect to international operations; (vi) the Company's plans and expectations related to managing risk associated with changing jet fuel prices; and (vii) the Company's plans and expectations with respect to capital expenditures and liquidity (including its plans for the repayment of debt and capital lease obligations). 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) demand for the Company's services and the impact of economic conditions, fuel prices, and actions of competitors (including without limitation pricing, scheduling, and capacity decisions and consolidation and alliance activities) 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) the Company's dependence on third parties with respect to certain of its initiatives, in particular with respect to its fleet plans; (vi) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (vii) the impact of governmental action and regulation on the Company's operations; and (viii) 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, 2012.  

 

Southwest Airlines Co.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)

 
 

Three months ended

     

Year ended

   
 

December 31,

     

December 31,

   
 

2013

 

2012

 

Percent

change

 

2013

 

2012

 

Percent

change

OPERATING REVENUES:

                     

Passenger

$

4,197

   

$

3,939

   

6.5

 

$

16,721

   

$

16,093

   

3.9

Freight

41

   

42

   

(2.4)

 

164

   

160

   

2.5

Other

190

   

192

   

(1.0)

 

814

   

835

   

(2.5)

   Total operating revenues

4,428

   

4,173

   

6.1

 

17,699

   

17,088

   

3.6

                       

OPERATING EXPENSES:

                     

Salaries, wages, and benefits

1,284

   

1,197

   

7.3

 

5,035

   

4,749

   

6.0

Fuel and oil

1,367

   

1,505

   

(9.2)

 

5,763

   

6,120

   

(5.8)

Maintenance materials and repairs

238

   

270

   

(11.9)

 

1,080

   

1,132

   

(4.6)

Aircraft rentals

84

   

85

   

(1.2)

 

361

   

355

   

1.7

Landing fees and other rentals

255

   

252

   

1.2

 

1,103

   

1,043

   

5.8

Depreciation and amortization

223

   

224

   

(0.4)

 

867

   

844

   

2.7

Acquisition and integration

19

   

14

   

35.7

 

86

   

183

   

(53.0)

Other operating expenses

572

   

535

   

6.9

 

2,126

   

2,039

   

4.3

  Total operating expenses

4,042

   

4,082

   

(1.0)

 

16,421

   

16,465

   

(0.3)

                       

OPERATING INCOME

386

   

91

   

n.a.

 

1,278

   

623

   

105.1

                       

OTHER EXPENSES (INCOME):

                     

Interest expense

33

   

35

   

(5.7)

 

131

   

147

   

(10.9)

Capitalized interest

(7)

   

(5)

   

40.0

 

(24)

   

(21)

   

14.3

Interest income

(1)

   

(2)

   

(50.0)

 

(6)

   

(7)

   

(14.3)

Other (gains) losses, net

27

   

(62)

   

(143.5)

 

(32)

   

(181)

   

(82.3)

  Total other expenses (income)

52

   

(34)

   

n.a.

 

69

   

(62)

   

n.a.

                       

INCOME BEFORE INCOME TAXES

334

   

125

   

167.2

 

1,209

   

685

   

76.5

PROVISION FOR INCOME TAXES

122

   

47

   

159.6

 

455

   

264

   

72.3

NET INCOME

$

212

   

$

78

   

171.8

 

$

754

   

$

421

   

79.1

                       

NET INCOME PER SHARE:

                     

Basic

$

0.30

   

$

0.11

       

$

1.06

   

$

0.56

     

Diluted

$

0.30

   

$

0.11

       

$

1.05

   

$

0.56

     
                       

WEIGHTED AVERAGE SHARES OUTSTANDING:

               

Basic

699

   

735

       

710

   

750

     

Diluted

707

   

736

       

718

   

757

     

 

Southwest Airlines Co.

Reconciliation of Reported Amounts to Non-GAAP Items

(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,

   
 

2013

 

2012

 

Percent

Change

 

2013

 

2012

 

Percent

Change

Fuel and oil expense, unhedged

$

1,364

   

$

1,436

       

$

5,645

   

$

5,963

     

Add: Fuel hedge losses included in Fuel and oil expense

3

   

69

       

118

   

157

     

Fuel and oil expense, as reported

$

1,367

   

$

1,505

       

$

5,763

   

$

6,120

     

Deduct: Net impact from fuel contracts (1)

(13)

   

(31)

       

(84)

   

(32)

     

Fuel and oil expense, economic

$

1,354

   

$

1,474

   

(8.1)%

 

$

5,679

   

$

6,088

   

(6.7)%

                       

Total operating expenses, as reported

$

4,042

   

$

4,082

       

$

16,421

   

$

16,465

     

Deduct: Net impact from fuel contracts

(13)

   

(31)

       

(84)

   

(32)

     

Total operating expenses, economic

$

4,029

   

$

4,051

       

$

16,337

   

$

16,433

     

Deduct: Charge for Acquisition and integration costs, net

(19)

   

(14)

       

(86)

   

(183)

     

Total operating expenses, non-GAAP

$

4,010

   

$

4,037

       

$

16,251

   

$

16,250

     

Deduct: ProfitSharing

(66)

   

(19)

       

(228)

   

(121)

     

Operating expense, non-GAAP excluding Profitsharing

$

3,944

   

$

4,018

   

(1.8)%

 

$

16,023

   

$

16,129

   

(0.7)%

                       

Operating income, as reported

$

386

   

$

91

       

$

1,278

   

$

623

     

Add: Net impact from fuel contracts (1)

13

   

31

       

84

   

32

     

Operating income, economic

$

399

   

$

122

       

$

1,362

   

$

655

     

Add: Charge for Acquisition and integration costs, net

19

   

14

       

86

   

183

     

Operating income, non-GAAP

$

418

   

$

136

   

n.a.

 

$

1,448

   

$

838

   

72.8%

                       

Other (gains) losses, net, as reported

$

27

   

$

(62)

       

$

(32)

   

$

(181)

     

Add (Deduct): Net impact from fuel contracts (1)

(6)

   

65

       

89

   

221

     

Other losses, net, non-GAAP

$

21

   

$

3

   

n.a.

 

$

57

   

$

40

   

42.5%

                       

Income before income taxes, as reported

$

334

   

$

125

       

$

1,209

   

$

685

     

Add (Deduct): Net impact from fuel contracts (1)

19

   

(34)

       

(5)

   

(189)

     
 

$

353

   

$

91

       

$

1,204

   

$

496

     

Add: Charge for Acquisition and integration costs, net

19

   

14

       

86

   

183

     

Income before income taxes, non-GAAP

$

372

   

$

105

   

n.a.

 

$

1,290

   

$

679

   

90.0%

                       

Net income, as reported

$

212

   

$

78

       

$

754

   

$

421

     

Add (Deduct): Net impact from fuel contracts (1)

19

   

(34)

       

(5)

   

(189)

     

Add (Deduct): Income tax impact of fuel contracts

(7)

   

12

       

2

   

73

     
 

$

224

   

$

56

       

$

751

   

$

305

     

Add: Charge for Acquisition and integration costs, net (2)

12

   

9

       

54

   

112

     

Net income, non-GAAP

$

236

   

$

65

   

n.a.

 

$

805

   

$

417

   

93.0%

                       

Net income per share, diluted, as reported

$

0.30

   

$

0.11

       

$

1.05

   

$

0.56

     

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

0.02

   

(0.03)

       

   

(0.15)

     
 

$

0.32

   

$

0.08

       

$

1.05

   

$

0.41

     

Add: Impact of special items, net (2)

0.01

   

0.01

       

0.07

   

0.15

     

Net income per share, diluted, non-GAAP

$

0.33

   

$

0.09

   

n.a.

 

$

1.12

   

$

0.56

   

100.0%

 

(1)

See Reconciliation of Impact from Fuel Contracts.

(2)

Amounts net of tax.

 

Southwest Airlines Co.

Reconciliation of Impact from Fuel Contracts

(See Note Regarding Use of Non-GAAP Financial Measures)

(in millions)

(unaudited)

 
 

Three months ended

 

Year ended

 

December 31,

 

December 31,

 

2013

 

2012

 

2013

 

2012

Fuel and oil expense

             

Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts

$

13

   

$

(35)

   

$

3

   

$

(42)

 

Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period (1)

(26)

   

4

   

(87)

   

10

 

Impact from fuel contracts to Fuel and oil expense

$

(13)

   

$

(31)

   

$

(84)

   

$

(32)

 
               

Operating Income

             

Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts

$

(13)

   

$

35

   

$

(3)

   

$

42

 

Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period (1)

26

   

(4)

   

87

   

(10)

 

Impact from fuel contracts to Operating Income

$

13

   

$

31

   

$

84

   

$

32

 
               

Other (gains) losses, net

             

Mark-to-market impact from fuel contracts settling in future periods

$

(9)

   

$

28

   

$

103

   

$

221

 

Ineffectiveness from fuel hedges settling in future periods

16

   

2

   

(11)

   

(42)

 

Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts

(13)

   

35

   

(3)

   

42

 

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

$

(6)

   

$

65

   

$

89

   

$

221

 
               

Net Income

             

Mark-to-market impact from fuel contracts settling in future periods

$

9

   

$

(28)

   

$

(103)

   

$

(221)

 

Ineffectiveness from fuel hedges settling in future periods

(16)

   

(2)

   

11

   

42

 

Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)

26

   

(4)

   

87

   

(10)

 

Impact from fuel contracts to Net Income (2)

$

19

   

$

(34)

   

$

(5)

   

$

(189)

 

 

(1)

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

(2)

Excludes income tax impact of unrealized items.

 

Southwest Airlines Co.

Comparative Consolidated Operating Statistics

(unaudited)

 
 

Three months ended

     

Year ended

   
 

December 31,

     

December 31,

   
 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

Revenue passengers carried

26,895,809

   

26,607,560

   

1.1%

 

108,075,976

   

109,346,509

   

(1.2)%

Enplaned passengers

33,118,822

   

32,699,829

   

1.3%

 

133,155,030

   

133,978,100

   

(0.6)%

Revenue passenger miles (RPMs) (000s)

25,652,363

   

24,821,008

   

3.3%

 

104,348,216

   

102,874,979

   

1.4%

Available seat miles (ASMs) (000s)

31,886,318

   

31,193,395

   

2.2%

 

130,344,072

   

128,137,110

   

1.7%

Load factor

80.4%

   

79.6%

   

0.8 pts.

 

80.1%

   

80.3%

   

(0.2) pts.

Average length of passenger haul (miles)

954

   

933

   

2.3%

 

966

   

941

   

2.7%

Average aircraft stage length (miles)

704

   

688

   

2.3%

 

703

   

693

   

1.4%

Trips flown

317,688

   

327,590

   

(3.0)%

 

1,312,785

   

1,361,558

   

(3.6)%

Average passenger fare

$

156.05

   

$

148.02

   

5.4%

 

$

154.72

   

$

147.17

   

5.1%

Passenger revenue yield per RPM (cents)

16.36

   

15.87

   

3.1%

 

16.02

   

15.64

   

2.4%

RASM (cents)

13.89

   

13.38

   

3.8%

 

13.58

   

13.34

   

1.8%

PRASM (cents)

13.16

   

12.63

   

4.2%

 

12.83

   

12.56

   

2.1%

CASM (cents)

12.68

   

13.08

   

(3.1)%

 

12.60

   

12.85

   

(1.9)%

CASM, excluding fuel (cents)

8.39

   

8.25

   

1.7%

 

8.18

   

8.07

   

1.4%

CASM, excluding special items (cents)

12.58

   

12.94

   

(2.8)%

 

12.47

   

12.68

   

(1.7)%

CASM, excluding fuel and special items (cents)

8.33

   

8.21

   

1.5%

 

8.11

   

7.93

   

2.3%

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

8.12

   

8.15

   

(0.4)%

 

7.94

   

7.84

   

1.3%

Fuel costs per gallon, including fuel tax (unhedged)

$

3.08

   

$

3.23

   

(4.6)%

 

$

3.10

   

$

3.21

   

(3.4)%

Fuel costs per gallon, including fuel tax

$

3.08

   

$

3.38

   

(8.9)%

 

$

3.16

   

$

3.30

   

(4.2)%

Fuel costs per gallon, including fuel tax (economic)

$

3.05

   

$

3.32

   

(8.1)%

 

$

3.12

   

$

3.28

   

(4.9)%

Fuel consumed, in gallons (millions)

442

   

444

   

(0.5)%

 

1,818

   

1,847

   

(1.6)%

Active fulltime equivalent Employees

44,831

   

45,861

   

(2.2)%

 

44,831

   

45,861

   

(2.2)%

Aircraft in service at period-end

680

   

694

   

(2.0)%

 

680

   

694

   

(2.0)%

 

RASM (unit revenue) - Operating revenue yield per ASM
PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
CASM (unit costs) - Operating expenses per ASM

 

Southwest Airlines Co.

Return on Invested Capital (ROIC)

(See Note Regarding Use of Non-GAAP Financial Measures)

(in millions)

(unaudited)

 
       
 

Twelve Months Ended

 

Twelve Months Ended

 

December 31, 2013

 

December 31, 2012

Operating Income, as reported

1,278

 

623

Add: Net impact from fuel contracts

84

 

32

Add: Acquisition and integration costs

86

 

183

Operating Income, non-GAAP

1,448

 

838

Net adjustment for aircraft leases (1)

143

 

117

Adjustment for fuel hedge accounting

(60)

 

(36)

Adjusted Operating Income, non-GAAP

1,531

 

919

       

Average invested capital (2)

11,664

 

12,575

Equity adjustment for hedge accounting

50

 

145

Adjusted average invested capital

11,714

 

12,720

       

ROIC, pre-tax

13.1%

 

7.2%

 

(1)

Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).

(2)

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,
2013

 

December 31,
2012

ASSETS

     

Current assets:

     

  Cash and cash equivalents

$

1,355

   

$

1,113

 

  Short-term investments

1,797

   

1,857

 

  Accounts and other receivables

419

   

332

 

  Inventories of parts and supplies, at cost

467

   

469

 

  Deferred income taxes

168

   

246

 

  Prepaid expenses and other current assets

250

   

210

 

    Total current assets

4,456

   

4,227

 

  Property and equipment, at cost:

     

  Flight equipment

16,937

   

16,367

 

  Ground property and equipment

2,760

   

2,714

 

  Deposits on flight equipment purchase contracts

764

   

416

 

  Assets constructed for others

359

   

 
 

20,820

   

19,497

 

  Less allowance for depreciation and amortization

7,431

   

6,731

 
 

13,389

   

12,766

 

  Goodwill

970

   

970

 

  Other assets

530

   

633

 
 

$

19,345

   

$

18,596

 

LIABILITIES AND STOCKHOLDERS' EQUITY

     

Current liabilities:

     

  Accounts payable

$

1,247

   

$

1,107

 

  Accrued liabilities

1,229

   

1,102

 

  Air traffic liability

2,571

   

2,170

 

  Current maturities of long-term debt

629

   

271

 

    Total current liabilities

5,676

   

4,650

 
       

Long-term debt less current maturities

2,191

   

2,883

 

Deferred income taxes

2,934

   

2,884

 

Construction obligation

437

   

331

 

Other noncurrent liabilities

771

   

856

 

Stockholders' equity:

     

  Common stock

808

   

808

 

  Capital in excess of par value

1,231

   

1,210

 

  Retained earnings

6,431

   

5,768

 

  Accumulated other comprehensive income (loss)

(3)

   

(119)

 

  Treasury stock, at cost

(1,131)

   

(675)

 

    Total stockholders' equity

7,336

   

6,992

 
 

$

19,345

   

$

18,596

 

 

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

(in millions)

(unaudited)

 
 

Three months ended

 December 31,

 

Year ended

 December 31,

 

2013

 

2012

 

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

             

  Net income

$

212

   

$

78

   

$

754

   

$

421

 

Adjustments to reconcile net income to cash provided by operating activities:

             

Depreciation and amortization

223

   

224

   

867

   

844

 

Unrealized (gain) loss on fuel derivative instruments

19

   

(34)

   

(5)

   

(189)

 

Deferred income taxes

(2)

   

131

   

50

   

251

 

Changes in certain assets and liabilities:

             

    Accounts and other receivables

57

   

74

   

(17)

   

(33)

 

    Other current assets

36

   

60

   

(46)

   

(104)

 

    Accounts payable and accrued liabilities

158

   

72

   

343

   

186

 

    Air traffic liability

(411)

   

(354)

   

400

   

334

 

Cash collateral received from derivative counterparties

1

   

15

   

57

   

233

 

    Other, net

9

   

(34)

   

87

   

121

 

  Net cash provided by operating activities

302

   

232

   

2,490

   

2,064

 

CASH FLOWS FROM INVESTING ACTIVITIES:

             

  Payments for purchase of property and equipment, net

(451)

   

(399)

   

(1,447)

   

(1,348)

 

  Purchases of short-term investments

(614)

   

(563)

   

(3,135)

   

(2,481)

 

  Proceeds from sales of short-term and other investments

812

   

773

   

3,198

   

2,996

 

  Net cash used in investing activities

(253)

   

(189)

   

(1,384)

   

(833)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

             

  Proceeds from Employee stock plans

66

   

5

   

97

   

27

 

  Proceeds from termination of interest rate derivative instrument

   

38

   

   

38

 

  Payments of long-term debt and capital lease obligations

(46)

   

(61)

   

(313)

   

(578)

 

  Payments of cash dividends

   

   

(71)

   

(22)

 

  Repayment of construction obligation

(3)

   

   

(5)

   

 

  Repurchase of common stock

(40)

   

(75)

   

(540)

   

(400)

 

  Other, net

(4)

   

(5)

   

(32)

   

(12)

 

  Net cash used in financing activities

(27)

   

(98)

   

(864)

   

(947)

 
               

NET CHANGE IN CASH AND CASH EQUIVALENTS

22

   

(55)

   

242

   

284

 
               

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

1,333

   

1,168

   

1,113

   

829

 
               

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,355

   

$

1,113

   

$

1,355

   

$

1,113

 
               

 

Southwest Airlines Co.

Fuel Derivative Contracts

As of January 17, 2014

 
 

Estimated economic jet fuel price per gallon,

including taxes

Average Brent Crude Oil 
price per barrel

1Q 2014 (2)

Full Year 2014 (2)

$85

$2.60 - $2.65

$2.45 - $2.50

$95

$2.80 - $2.85

$2.70 - $2.75

Current Market (1)

$3.05 - $3.10

$2.95 - $3.00

$115

$3.15 - $3.20

$3.20 - $3.25

$125

$3.30 - $3.35

$3.40 - $3.45

   

Period

Average percent of estimated fuel consumption covered by fuel derivative contracts
at varying WTI/Brent crude oil-equivalent price levels

2014

Approx. 20%

2015

Approx. 40%

2016

Approx. 35%

2017

Approx. 50%

 

(1)

Brent crude oil average market prices as of January 17, 2014, were approximately $106 and $104 per barrel for first quarter 2014 and full year 2014, respectively.

   

(2)

The Company currently has approximately 10 percent of its first quarter 2014 estimated fuel consumption covered by fuel derivative contracts at varying crude oil-equivalent prices; and approximately 30 percent at Gulf Coast jet fuel-equivalent prices. For full year 2014, the Company currently has approximately 15 percent of its full year 2014 estimated fuel consumption covered by fuel derivative contracts at varying crude oil-equivalent prices; and approximately 5 percent at Gulf Coast jet fuel-equivalent prices.  The economic fuel price per gallon sensitivities provided above assume the relationship between Brent crude oil and refined products based on market prices as of January 17, 2014.

 

Southwest Airlines Co.

737 Delivery Schedule

As of January 22, 2014

 
 

The Boeing Company

 

The Boeing Company

 
 

737 NG

 

737 MAX

 
 

-700

Firm

Orders

 

-800

Firm

Orders

Options

Additional

 -700s

-7

Firm

Orders

-8

Firm

Orders

 

Options

Total

2014

   

33

 

 

12

 

 

   

 

45

2015

   

19

 

 

5

 

 

   

 

24

2016

31

   

 

12

 

 

 

   

 

43

2017

15

   

 

12

 

 

 

14

   

 

41

2018

10

   

 

12

 

 

 

13

   

 

35

2019

   

 

 

 

15

 

10

   

 

25

2020

   

 

 

 

14

 

22

   

 

36

2021

   

 

 

 

1

 

33

   

18

 

52

2022

   

 

 

 

 

30

   

19

 

49

2023

   

 

 

 

 

24

   

23

 

47

2024

   

 

 

 

 

24

   

23

 

47

2025

   

 

 

 

 

   

36

 

36

2026

   

 

 

 

 

   

36

 

36

2027

   

 

 

 

 

   

36

 

36

 

56

(1)

 

52

 

36

 

17

 

30

 

170

(2)

 

191

 

552

 

(1)

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

(2)

The Company has flexibility to substitute MAX 7 in lieu of  MAX 8 firm orders beginning in 2019.

 

NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES

The Company's unaudited consolidated financial statements are prepared in accordance with GAAP. These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges the Company believes are not indicative of its ongoing operational performance.

As a result, the Company also provides financial information in this release that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information, including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company's economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts--all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis reflects the Company's actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide a better measure of the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

In addition to its "economic" financial measures, as defined above, the Company has also provided other non-GAAP financial measures, including results that it refers to as "excluding special items," as a result of items that the Company believes are not indicative of its ongoing operations.  These include expenses associated with the Company's acquisition and integration of AirTran.   The Company believes that evaluation of its financial performance can be enhanced by a presentation of results that exclude the impact of these items in order to evaluate the results on a comparative basis with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods.  As a result of the Company's acquisition of AirTran, which closed on May 2, 2011, the Company has incurred and expects to continue to incur substantial charges associated with integration of the two companies.  While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the charges as special items in its future presentation of non-GAAP results.

The Company has also provided free cash flow and ROIC, which are non-GAAP financial measures. The Company believes free cash flow is a meaningful measure because it demonstrates the Company's ability to service its debt, pay dividends and make investments to enhance Shareholder value. Although free cash flow is commonly used as a measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow. For the year ended December 31, 2013, the Company generated $1.04 billion in free cash flow, calculated as operating cash flows of $2.49 billion less capital expenditures of $1.45 billion. The Company believes ROIC is a meaningful measure because it quantifies how well the Company generates operating income relative to the capital it has invested in its business.  Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC may differ; therefore, the Company is providing an explanation of its calculation for ROIC in the accompanying reconciliation tables to the press release (See Return on Invested Capital).  

 

SOURCE Southwest Airlines

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