Southwest Airlines Reports Second Quarter Results

Record operating income

GAAP Net income of $228 million

Excluding special items, record net income of $273 million

Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its second quarter 2012 results.  Second quarter 2012 net income was $228 million, or $.30 per diluted share, which included $45 million (net) of unfavorable special items.  This compared to net income of $161 million, or $.21 per diluted share, in second quarter 2011, which included favorable special items totaling $40 million (net).  Excluding special items, second quarter 2012 net income was a record $273 million, or $.36 per diluted share, compared to $121 million, or $.15 per diluted share, in second quarter 2011.  This compared favorably to Thomson's First Call mean estimate of $.33 per diluted share.  Operating income for second quarter 2012 was $460 million, compared to $207 million in second quarter 2011.  Excluding special items, operating income was a record $485 million for second quarter 2012, compared to $276 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, "We are very pleased to report second quarter net income, excluding special items, that more than doubled second quarter last year.  Record revenues driven by steady growth were sufficient to overcome high jet fuel prices and produce a record operating income of $485 million, and a record net income of $273 million, both excluding special items.  These results would not have been possible without the successful implementation of our strategic initiatives by our People.  They have done, and continue to do, a magnificent job.

"We are producing very strong results despite a fragile economic environment. Operating cash flow for the twelve months ended June 30, 2012 was $1.6 billion, and free cash flow* for that period was over $300 million. During that time, we repaid $964 million in long-term debt, further reducing our debt to total capital ratio to 45 percent.  Total cash on hand plus short-term investments, at June 30, 2012, was a very solid $3.3 billion. These strong results and financial position, along with record second quarter profits, reinforce the Board's authorizations for the repurchase of $1 billion in Company common stock, of which half has been completed, along with more than doubling the Company's quarterly dividend to $.01 per share (declared and announced May 16, 2012).

"We continue to make great progress integrating AirTran into Southwest.  We received approval by the Federal Aviation Administration for our Single Operating Certificate in March 2012.  Since then, we've converted five AirTran aircraft to the Southwest paint and interior configuration, and have begun transitioning AirTran airport facilities to Southwest, with Seattle and Des Moines scheduled to be completed this quarter.  The majority of our unions have reached agreements regarding seniority integration, and we are making progress with the remaining agreements.  We produced approximately $80 million in net, pre-tax synergies in first half 2012, and we continue to target net, pre-tax synergies of $400 million in 2013 (excluding acquisition and integration expenses).

"We have significant efforts underway to strategically optimize and modernize our fleet.  Last December, we announced a firm order for 150 Boeing 737 MAX airplanes, and 58 additional 737NG aircraft, bringing our total firm orders with The Boeing Company to 350 for 2012 through 2022.  In January, we announced that we will retrofit the 737-700 fleet with an updated cabin interior.  Evolve: The New Southwest Experience provides a new environmentally friendly cabin experience designed to enhance Customer comfort and improve fleet efficiency.  The new sleek interior design also provides the opportunity to increase the number of seats onboard from 137 to 143.  In May, we moved 30 Boeing 737 scheduled deliveries for 2013 and 2014 to 2017 and 2018.  Earlier this month, we reached an agreement with Delta Air Lines, Inc. and Boeing Capital Corp. to lease or sublease all 88 of AirTran's Boeing 717 aircraft to Delta, beginning August 2013.  For now, our goal is to keep our fleet relatively flat, based on the current aircraft delivery schedule with Boeing, the B717 retirement schedule established with the Delta deal, and our adjusted retirement schedule for the 737 Classics. Given that we don't plan to grow the fleet until we hit our financial targets, deferring 30 new aircraft deliveries will reduce our 2012 to 2014 capital spending by approximately $1 billion.  Replacing B717s with B737s is expected to significantly benefit our financial results as the B737 trip costs approximate the B717's, but with 20-26 more seats.  All told, our various fleet initiatives are estimated to contribute, pre-tax, more than $300 million in 2013, more than $500 million in 2014, and in excess of $700 million in 2015. 

"We continue to aggressively optimize our combined networks.  AirTran began new international service in the second quarter to Cancun, Mexico City, and Cabo San Lucas.  Southwest launched new service between Austin-Bergstrom International Airport and Ronald Reagan Washington National Airport (DCA) earlier this month and, in early August, Southwest will add two daily roundtrips from DCA to St. Louis, Missouri.  Our 2012 available seat miles will be comparable to 2011 combined available seat miles, despite our plan to end this year with six fewer aircraft than 2011.  For 2013, we expect our fleet to remain comparable to 2012, and we are planning for modest year-over-year available seat mile growth, attributable to additional seats from 737-800 deliveries, the Evolve retrofit, and the replacement of B717s with B737s."   

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.  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 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 second quarter 2012 increased 11.6 percent to $4.6 billion, compared to $4.1 billion in second quarter 2011, and increased 4.7 percent year-over-year compared to $4.4 billion, on a combined basis.  Operating unit revenues increased 6.0 percent from second quarter 2011, on a combined basis.  Based on traffic and revenue trends thus far, the Company currently expects another solid year-over-year increase in operating unit revenues in third quarter 2012.

Total second quarter 2012 operating expenses were $4.2 billion, compared to $3.9 billion in second quarter 2011, and were comparable to second quarter last year on a combined basis.  Excluding special items in both periods, second quarter 2012 unit costs increased 1.7 percent from second quarter 2011 combined unit costs.  

Second quarter 2012 economic fuel costs were $3.22 per gallon, including $.04 per gallon in unfavorable cash settlements for fuel derivative contracts, compared to $3.28 per gallon in second quarter 2011, including $.03 per gallon in favorable cash settlements.  Based on market prices as of July 17, 2012, the Company expects third quarter 2012 economic fuel costs to be in the $3.05 to $3.10 per gallon range, including fuel taxes and $.03 per gallon in unfavorable cash settlements for fuel derivative contracts.  Third quarter 2012 premium costs, recorded in Other (gains) losses, are currently estimated to be approximately $17 million, compared to premium costs of $36 million in third quarter 2011.  As of July 17, 2012, the fair market value of the Company's hedge portfolio through 2016 was a net liability of approximately $30 million, compared to a $184 million net asset at March 31, 2012.  Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables. 

Excluding fuel and special items in both periods, second quarter 2012 unit costs increased 4.3 percent from second quarter 2011's combined 7.41 cents.  Based on current cost trends, the Company expects another year-over-year increase in its third quarter 2012 unit costs, compared to third quarter 2011's unit costs of 7.38 cents, excluding fuel and special items in both periods.

Operating income for second quarter 2012 was $460 million, compared to $207 million in second quarter 2011.  Excluding special items in both periods, operating income was $485 million for second quarter 2012, compared to $276 million in second quarter 2011, and compared to $295 million in second quarter last year, on a combined basis.  The Company incurred $11 million in special charges (before taxes) associated with the acquisition and integration of AirTran during second quarter 2012, representing a cumulative total of $165 million in acquisition and integration costs, as of June 30, 2012.  The Company expects total acquisition and integration costs will be approximately $550 million. 

Other expenses for second quarter 2012 were $92 million, compared to $68 million of other income in second quarter 2011.  This $160 million swing primarily resulted from $62 million in other losses recognized in second quarter 2012, compared to $113 million in other gains recognized in second quarter 2011.  In both periods, these gains and losses, which are special items, primarily resulted from unrealized mark to market gains/losses associated with a portion of the Company's fuel hedging portfolio.  Excluding these special items, other losses were $14 million in second quarter 2012, compared to $27 million in second quarter 2011, primarily attributable to the premium costs associated with the Company's fuel derivative contracts.  Second quarter 2012 premium costs were $12 million, compared to $26 million in second quarter 2011.  Net interest expense declined to $30 million in second quarter 2012, compared to $45 million in second 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 six months ended June 30, 2012 increased 18.9 percent year-over-year to $8.6 billion, while total operating expenses increased 17.5 percent year-over-year to $8.1 billion, resulting in operating income in first half 2012 of $481 million, versus $321 million in first half 2011.  Excluding special items in both periods, operating income was $495 million for first half 2012, compared to $387 million for the same period last year.  Excluding special items and on a combined basis, total operating revenues for the six months ended June 30, 2012 increased 5.2 percent year-over-year, while total operating expenses increased 4.1 percent year-over-year, resulting in combined operating income in first half 2012 of $495 million, versus $382 million in first half 2011. 

Net income for first half 2012 was $327 million, or $.43 per diluted share, compared to $166 million, or $.22 per diluted share, for the same period last year.  Excluding special items, net income for first half 2012 was $255 million, or $.33 per diluted share, compared to $142 million, or $.19 per diluted share, for the same period last year. 

The Company's return on invested capital (before taxes and excluding special items) was approximately 8 percent for the twelve months ended June 30, 2012.  Additional information regarding pre-tax return on invested capital is included in the accompanying reconciliation tables.   

Net cash provided by operations for second quarter 2012 was $145 million, and capital expenditures were $416 million.  On May 16, 2012, the Company's Board of Directors increased the Company's previous $500 million share repurchase authorization to $1 billion.  As of June 30, 2012, the Company had repurchased approximately 59 million shares of common stock for approximately $500 million, since the initial $500 million authorization by the Board of Directors on August 5, 2011.  As of July 18th, the Company had approximately $3.7 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $800 million.

Net cash provided by operations for first half 2012 was $1.4 billion, and capital expenditures were $543 million, resulting in free cash flow* in excess of $800 million.  The Company repaid $469 million in debt during first half 2012, and is scheduled to repay approximately $90 million in debt for the remainder of 2012.  

Southwest and AirTran Awards and Recognitions

  • Southwest named Customer Service Champions by JD Powers
  • Southwest named one of America's Top 500 Companies by Barrons
  • AirTran Airways received top honors in the 2012 Airline Quality Ratings based on ontime performance, customer complaints, and mishandled baggage; Southwest was also recognized for the best Customer Satisfaction rating
  • Southwest named as one of the BetterInvesting Top 100 companies
  • Southwest ranked first in the 2012 Switchfly Reward Seat Availability Survey by IdeaWorksCompany.com
  • Southwest recognized as the Eco-Pioneer of the Year by Air Transport World Magazine for environmentally sound business practices
  • Southwest ranked top airline in Bloomberg Business Week's Fifty Most Popular Employers for College Students
  • Southwest named one of the Most Valuable Employers for Military by CiviliansJobs.com

Southwest will discuss its second 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 www.southwestairlinesinvestorrelations.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 plans and expectations with respect to its acquisition of AirTran, including without limitation anticipated integration timeframes and expected benefits and costs associated with the acquisition; (ii) the Company's fleet plans and the Company's related growth plans and financial expectations; (iii) the Company's network and capacity plans and expectations; and (iv) the Company's financial outlook and projected results of operations. 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 Company's ability to successfully integrate AirTran and realize the expected synergies and other benefits from the acquisition; (ii) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (iii) 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; (iv) the Company's dependence on third parties with respect to certain of its initiatives, in particular its fleet modernization plans; (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, 2011.

 

SOUTHWEST AIRLINES CO.

     

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)

     

(in millions, except per share amounts)

     

(unaudited)

     
                                     
     

Three months ended

     

Six months ended

     
     

June 30,

     

June 30,

     
     

2012

 

2011

 

Percent Change

 

2012

 

2011

 

Percent Change

 
                                     

OPERATING REVENUES:

                               
 

Passenger

$

4,338

 

$

3,892

(2)

11.5

 

$

8,080

 

$

6,840

(2)

18.1

 
 

Freight

 

42

   

36

 

16.7

   

79

   

67

 

17.9

 
 

Other

 

236

   

208

(2)

13.5

   

447

   

331

(2)

35.0

 
   

Total operating revenues

 

4,616

   

4,136

 

11.6

   

8,606

   

7,238

 

18.9

 
                                     

OPERATING EXPENSES:

                               
 

Salaries, wages, and benefits

 

1,222

   

1,125

 

8.6

   

2,363

   

2,078

 

13.7

 
 

Fuel and oil

 

1,577

   

1,527

 

3.3

   

3,087

   

2,565

 

20.4

 
 

Maintenance materials and repairs

 

291

   

246

 

18.3

   

562

   

444

 

26.6

 
 

Aircraft rentals

 

90

   

79

 

13.9

   

178

   

125

 

42.4

 
 

Landing fees and other rentals

 

260

   

247

 

5.3

   

513

   

448

 

14.5

 
 

Depreciation and amortization

 

202

   

176

 

14.8

   

403

   

332

 

21.4

 
 

Acquisition and integration

 

11

   

58

 

(81.0)

   

24

   

75

 

(68.0)

 
 

Other operating expenses

 

503

   

471

 

6.8

   

995

   

850

 

17.1

 
   

Total operating expenses

 

4,156

   

3,929

 

5.8

   

8,125

   

6,917

 

17.5

 
                                     

OPERATING INCOME

 

460

   

207

 

122.2

   

481

   

321

 

49.8

 
                                     

OTHER EXPENSES (INCOME):

                               
 

Interest expense

 

38

   

51

 

(25.5)

   

77

   

94

 

(18.1)

 
 

Capitalized interest

 

(6)

   

(2)

 

n.a.

   

(11)

   

(5)

 

120.0

 
 

Interest income

 

(2)

   

(4)

 

(50.0)

   

(3)

   

(7)

 

(57.1)

 
 

Other (gains) losses, net

 

62

   

(113)

 

n.a.

   

(109)

   

(54)

 

n.a.

 
   

Total other (income) expenses

 

92

   

(68)

 

n.a.

   

(46)

   

28

 

n.a.

 
                                     

INCOME BEFORE INCOME TAXES

 

368

   

275

 

33.8

   

527

   

293

 

79.9

 

PROVISION FOR INCOME TAXES

 

140

   

114

 

22.8

   

200

   

127

 

57.5

 
                                     

NET INCOME

$

228

 

$

161

 

41.6

 

$

327

 

$

166

 

97.0

 
                                     
                                     

NET INCOME PER SHARE

                               
 

Basic

$

0.30

 

$

0.21

     

$

0.43

 

$

0.22

     
 

Diluted

$

0.30

 

$

0.21

     

$

0.43

 

$

0.22

     
                                     

WEIGHTED AVERAGE SHARES OUTSTANDING

                           
 

Basic

 

757

   

780

       

764

   

764

     
 

Diluted

 

764

   

787

       

771

   

765

     
                                     
                                     

(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 $16 million and $26 million in Operating revenues for the three and six month periods ended June 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

     

Six months ended

   
 

June 30,

     

June 30,

   
 

 

2012

 

 

2011

 

Percent Change

 

 

2012

 

 

2011

 

Percent Change

                               

Fuel and oil expense, unhedged

$

1,544

 

$

1,533

     

$

3,022

 

$

2,577

   

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

 

33

   

(6)

       

65

   

(12)

   

Fuel and oil expense, as reported

$

1,577

 

$

1,527

     

$

3,087

 

$

2,565

   

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

 

(14)

   

(11)

       

10

   

6

   

Fuel and oil expense, economic

$

1,563

 

$

1,516

 

3.1

 

$

3,097

 

$

2,571

 

20.5

                               

Total operating expenses, as reported

$

4,156

 

$

3,929

     

$

8,125

 

$

6,917

   

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

 

(14)

   

(11)

       

10

   

6

   

Total operating expenses, economic

$

4,142

 

$

3,918

     

$

8,135

 

$

6,923

   

(Deduct): Acquisition and integration costs, net (3)

 

(11)

   

(58)

       

(24)

   

(72)

   

Total operating expenses, non-GAAP

$

4,131

 

$

3,860

 

7.0

 

$

8,111

 

$

6,851

 

18.4

                               

Operating income, as reported

$

460

 

$

207

     

$

481

 

$

321

   

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

 

14

   

11

       

(10)

   

(6)

   

Operating income, economic

$

474

 

$

218

     

$

471

 

$

315

   

Add: Acquisition and integration costs, net (3)

 

11

   

58

       

24

   

72

   

Operating income, non-GAAP

$

485

 

$

276

 

75.7

 

$

495

 

$

387

 

27.9

                               

Other (gains) losses, net, as reported

$

62

 

$

(113)

     

$

(109)

 

$

(54)

   

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

 

(48)

   

140

       

129

   

111

   

Other losses, net, non-GAAP

$

14

 

$

27

 

(48.1)

 

$

20

 

$

57

 

(64.9)

                               

Income before income taxes, as reported

$

368

 

$

275

     

$

527

 

$

293

   

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

 

62

   

(129)

       

(139)

   

(117)

   
 

$

430

 

$

146

     

$

388

 

$

176

   

Add: Acquisition and integration costs, net (3)

 

11

   

58

       

24

   

72

   

Income before income taxes, non-GAAP

$

441

 

$

204

 

116.2

 

$

412

 

$

248

 

66.1

                               

Net income as reported

$

228

 

$

161

     

$

327

 

$

166

   

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

 

62

   

(129)

       

(139)

   

(117)

   

Add (Deduct): Income tax impact of fuel contracts

 

(24)

   

49

       

52

   

45

   
 

$

266

 

$

81

     

$

240

 

$

94

   

Add: Acquisition and integration costs, net (4)

 

7

   

40

       

15

   

48

   

Net income, non-GAAP

$

273

 

$

121

 

125.6

 

$

255

 

$

142

 

79.6

                               

Net income per share, diluted, as reported

$

0.30

 

$

0.21

     

$

0.43

 

$

0.22

   

Add (Deduct): Net impact from fuel contracts

 

0.05

   

(0.10)

       

(0.12)

   

(0.09)

   
 

$

0.35

 

$

0.11

     

$

0.31

 

$

0.13

   

Add: Impact of special items, net (4)

 

0.01

   

0.04

       

0.02

   

0.06

   

Net income per share, diluted, non-GAAP

$

0.36

 

$

0.15

 

140.0

 

$

0.33

 

$

0.19

 

73.7

                               

(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) 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.

(4) Amounts net of tax and profitsharing impact (see footnote (3) 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

 

Six months ended

 

June 30,

 

June 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

$

(10)

 

$

(11)

 

$

(12)

 

$

(9)

Contracts settling in the current period, but for which gains

                     

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

 

(4)

   

-

   

22

   

15

Impact from fuel contracts to Fuel and oil expense

$

(14)

 

$

(11)

 

$

10

 

$

6

                       
                       

Operating Income

                     

Reclassification between Fuel and Oil and Other (gains)

                     

losses, net, associated with current period settled contracts

$

10

 

$

11

 

$

12

 

$

9

Contracts settling in the current period, but for which gains

                     

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

 

4

   

-

   

(22)

   

(15)

Impact from fuel contracts to Operating Income

$

14

 

$

11

 

$

(10)

 

$

(6)

                       
                       

Other (gains) losses, net

                     

Mark-to-market impact from fuel contracts

                     

settling in future periods

$

(50)

 

$

136

 

$

156

 

$

139

Ineffectiveness from fuel hedges settling in future periods

 

(8)

   

(7)

   

(39)

   

(37)

Reclassification between Fuel and Oil and Other (gains)

                     

losses, net, associated with current period settled contracts

 

10

   

11

   

12

   

9

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

$

(48)

 

$

140

 

$

129

 

$

111

                       
                       

Net Income

                     

Mark-to-market impact from fuel contracts

                     

settling in future periods

$

50

 

$

(136)

 

$

(156)

 

$

(139)

Ineffectiveness from fuel hedges settling in future periods

 

8

   

7

   

39

   

37

Other net impact of fuel contracts settling in the

                     

current or a prior period (excluding reclassifications)

 

4

   

-

   

(22)

   

(15)

Impact from fuel contracts to Net Income (3)

$

62

 

$

(129)

 

$

(139)

 

$

(117)

                       

(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

 

Six months ended

   

June 30,

 

June 30,

   

2012

 

2011

 

Change

 

2012

 

2011

 

Change

Revenue passengers carried

   

28,859,348

     

27,114,480

   

6.4

%

   

54,420,170

     

48,229,595

   

12.8

%

Enplaned passengers

   

35,210,151

     

33,430,914

   

5.3

%

   

66,364,573

     

59,030,032

   

12.4

%

Revenue passenger miles (RPMs) (000s)

   

27,206,498

     

25,883,849

   

5.1

%

   

50,891,364

     

45,079,735

   

12.9

%

Available seat miles (ASMs) (000s)

   

33,230,589

     

31,457,412

   

5.6

%

   

63,863,482

     

55,963,085

   

14.1

%

Load factor

   

81.9

%

 

82.3

%

 

(0.4)

pts

79.7

%

 

80.6

%

 

(0.9)

pts

Average length of passenger haul (miles)

   

943

     

955

   

(1.3)

%

   

935

     

935

   

-

%

Average aircraft stage length (miles)

   

699

     

685

   

2.0

%

   

692

     

672

   

3.0

%

Trips flown

   

352,726

     

340,768

   

3.5

%

   

686,622

     

614,591

   

11.7

%

Average passenger fare

 

$

150.31

   

$

143.53

(2)

 

4.7

%

 

$

148.49

   

$

141.83

(2)

 

4.7

%

Passenger revenue yield per RPM (cents)

   

15.94

     

15.04

(2)

 

6.0

%

   

15.88

     

15.17

(2)

 

4.7

%

RASM (cents)

   

13.89

     

13.15

   

5.6

%

   

13.48

     

12.93

   

4.3

%

PRASM (cents)

   

13.05

     

12.37

(2)

 

5.5

%

   

12.65

     

12.22

(2)

 

3.5

%

CASM (cents)

   

12.51

     

12.49

   

0.2

%

   

12.72

     

12.36

   

2.9

%

CASM, excluding fuel (cents)

   

7.76

     

7.63

   

1.7

%

   

7.89

     

7.77

   

1.5

%

CASM, excluding special items (cents)

   

12.43

     

12.27

   

1.3

%

   

12.70

     

12.24

   

3.8

%

CASM, excluding fuel and special items (cents)

   

7.73

     

7.45

   

3.8

%

   

7.85

     

7.64

   

2.7

%

Fuel costs per gallon, including fuel tax (unhedged)

 

$

3.18

   

$

3.31

   

(3.9)

%

 

$

3.25

   

$

3.15

   

3.2

%

Fuel costs per gallon, including fuel tax

 

$

3.25

   

$

3.30

   

(1.5)

%

 

$

3.32

   

$

3.13

   

6.1

%

Fuel costs per gallon, including fuel tax (economic)

 

$

3.22

   

$

3.28

   

(1.8)

%

 

$

3.33

   

$

3.14

   

6.1

%

Fuel consumed, in gallons (millions)

   

483

     

462

   

4.5

%

   

926

     

817

   

13.3

%

Active fulltime equivalent Employees

   

46,128

     

43,805

   

5.3

%

   

46,128

     

43,805

   

5.3

%

Aircraft in service at period-end

   

695

     

694

   

0.1

%

   

695

     

694

   

0.1

%

                                             

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 $16 million and $26 million in Operating revenues for the three and six month periods ended June 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

 

June 30, 2012

 

June 30, 2011

Operating Income, as reported

$

853

 

$

892

Add (Deduct): Net impact from fuel contracts

 

(3)

   

65

Add: Acquisition and integration costs, net (2)

 

83

   

79

Add: Asset Impairment, net (3)

 

14

   

-

Operating Income, non-GAAP

$

947

 

$

1,036

Net adjustment for aircraft leases (4)

 

142

   

96

Adjustment for fuel hedge accounting

 

(68)

   

(130)

Adjusted Operating Income, non-GAAP

$

1,021

 

$

1,002

           
           

Average Invested Capital (5)

$

13,037

 

$

11,351

Equity adjustment for fuel hedge accounting

 

240

   

224

Adjusted Average Invested Capital

$

13,277

 

$

11,575

           

ROIC, pre-tax

 

8%

   

9%

           

(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)

             
                   
       

June 30,

 

December 31,

 
       

2012

 

2011

 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

 

$

1,083

 

$

829

 
 

Short-term investments

   

2,173

   

2,315

 
 

Accounts and other receivables

   

502

   

299

 
 

Inventories of parts and supplies, at cost

   

446

   

401

 
 

Deferred income taxes

   

284

   

263

 
 

Prepaid expenses and other current assets

   

203

   

238

 
   

Total current assets

   

4,691

   

4,345

 
                   

Property and equipment, at cost:

             
 

Flight equipment

   

15,952

   

15,542

 
 

Ground property and equipment

   

2,570

   

2,423

 
 

Deposits on flight equipment purchase contracts

   

420

   

456

 
     

18,942

   

18,421

 
 

Less allowance for depreciation and amortization

   

6,600

   

6,294

 
         

12,342

   

12,127

 

Goodwill

   

970

   

970

 

Other assets

   

513

   

626

 
       

$

18,516

 

$

18,068

 
                   

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             
 

Accounts payable

 

$

1,153

 

$

1,057

 
 

Accrued liabilities

   

1,142

   

996

 
 

Air traffic liability

   

2,528

   

1,836

 
 

Current maturities of long-term debt

   

257

   

644

 
   

Total current liabilities

   

5,080

   

4,533

 
                   

Long-term debt less current maturities

   

3,019

   

3,107

 

Deferred income taxes

   

2,563

   

2,566

 

Deferred gains from sale and leaseback of aircraft

   

69

   

75

 

Other noncurrent liabilities

   

945

   

910

 

Stockholders' equity:

             
 

Common stock

   

808

   

808

 
 

Capital in excess of par value

   

1,224

   

1,222

 
 

Retained earnings

   

5,692

   

5,395

 
 

Accumulated other comprehensive loss

   

(320)

   

(224)

 
 

Treasury stock, at cost

   

(564)

   

(324)

 
   

Total stockholders' equity

   

6,840

   

6,877

 
       

$

18,516

 

$

18,068

 
             
             
             

SOUTHWEST AIRLINES CO.

           

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)

           

(in millions)  

           

(unaudited)

           
                             
       

Three months ended

 

Six months ended

       

June 30,

 

June 30,

       

2012

 

2011

 

2012

 

2011

                             

CASH FLOWS FROM OPERATING ACTIVITIES:

                     
 

Net income

$

228

 

$

161

 

$

327

 

$

166

 

Adjustments to reconcile net income to

                     
   

cash provided by (used in) operating activities:

                     
   

Depreciation and amortization

 

202

   

176

   

403

   

332

   

Unrealized (gain) loss on fuel derivative instruments

 

63

   

(129)

   

(138)

   

(119)

   

Deferred income taxes

 

24

   

95

   

38

   

123

   

Amortization of deferred gains on sale and

                     
     

leaseback of aircraft

 

(3)

   

(3)

   

(6)

   

(7)

   

Changes in certain assets and liabilities, net of acquisition:

                     
     

Accounts and other receivables

 

(37)

   

(21)

   

(105)

   

(107)

     

Other current assets

 

(39)

   

(46)

   

(90)

   

(138)

     

Accounts payable and accrued liabilities

 

77

   

67

   

301

   

305

     

Air traffic liability

 

(28)

   

64

   

693

   

576

   

Cash collateral provided to derivative counterparties

 

(181)

   

(49)

   

(34)

   

(20)

   

Other, net

 

(161)

   

(78)

   

(19)

   

91

 

Net cash provided by operating activities

 

145

   

237

   

1,370

   

1,202

                             

CASH FLOWS FROM INVESTING ACTIVITIES:

                     
   

Payment to acquire AirTran, net of AirTran cash on hand

 

-

   

(35)

   

-

   

(35)

   

Payments for purchase of property and equipment, net

 

(416)

   

(215)

   

(543)

   

(272)

   

Purchases of short-term investments

 

(633)

   

(1,779)

   

(1,255)

   

(3,263)

   

Proceeds from sales of short-term investments

 

680

   

1,440

   

1,416

   

2,750

   

Other, net

 

14

   

-

   

14

   

-

 

Net cash used in investing activities

 

(355)

   

(589)

   

(368)

   

(820)

                             

CASH FLOWS FROM FINANCING ACTIVITIES:

                     
   

Proceeds from Employee stock plans

 

12

   

27

   

17

   

31

   

Proceeds from termination of interest rate

                     
     

derivative instrument

 

-

   

-

   

-

   

76

   

Payments of long-term debt and capital lease obligations

 

(38)

   

(32)

   

(469)

   

(62)

   

Payments of convertible debt

 

-

   

(81)

   

-

   

(81)

   

Payments of cash dividends

 

(8)

   

(3)

   

(14)

   

(10)

   

Repurchase of common stock

 

(225)

   

-

   

(275)

   

-

   

Other, net

 

(6)

   

(3)

   

(7)

   

(2)

 

Net cash used in financing activities

 

(265)

   

(92)

   

(748)

   

(48)

                             

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(475)

   

(444)

   

254

   

334

                             

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

1,558

   

2,039

   

829

   

1,261

                             

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,083

 

$

1,595

 

$

1,083

 

$

1,595

                             
                             

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

                             
       
       
 

SOUTHWEST AIRLINES CO.

   
 

FUEL DERIVATIVE CONTRACTS

   
 

AS OF JULY 17, 2012

   
                 
                 
                 
       

Estimated difference in economic jet fuel price per gallon,

       

above/(below) unhedged market prices, including taxes

     

Average WTI Crude Oil

         
     

price per barrel

3Q 2012

 

4Q 2012

 

2013 (1)

                 
     

$65

$0.11

 

$0.26

 

$0.23

     

$70

$0.05

 

$0.15

 

$0.14

     

$75

$0.03

 

$0.10

 

$0.07

     

$80

$0.03

 

$0.10

 

$0.06

     

Current Market (2)

$0.03

 

$0.09

 

$0.04

     

$100

$0.02

 

$0.04

 

$0.00

     

$105

($0.01)

 

($0.02)

 

($0.03)

     

$110

($0.04)

 

($0.09)

 

($0.11)

     

$115

($0.06)

 

($0.13)

 

($0.17)

                 
                 
                 
       

Average percent of estimated fuel consumption

       

covered by fuel derivative contracts at

     

Period

 varying Brent/WTI crude-equivalent price levels

                 
     

Second Half 2012 (3)

over 30%

     

2013 (1)

over 50%

     

2014

over 50%

     

2015

approx. 30%

     

2016

over 15%

                 
                 
                 
   

(1)

For 2013, the Company's current estimated fuel consumption covered by fuel derivative contracts includes modest coverage based on underlying Brent crude-equivalent products.  Therefore, 2013 jet fuel price per gallon estimates above or below market prices assume an average 2013 Brent crude oil premium to WTI crude oil of approximately $9 per barrel, based on the average forward curve as of July 17, 2012.  The Company's percentage of estimated fuel consumption covered by fuel derivative contracts is primarily between WTI/Brent crude oil levels of $105 and $140 per barrel.  At WTI/Brent crude oil levels above $140 per barrel, the Company has less than 20% of estimated fuel consumption covered by fuel derivative contracts.  The Company also has floor exposure, with the majority beginning at WTI/Brent crude oil levels of $75 per barrel.  

   
                 
                 
   

(2)

WTI crude oil average market prices as of July 17, 2012 were approximately $89, $91 and $92 per barrel in third quarter 2012, fourth quarter 2012 and full year 2013, respectively.

                 
                 
   

(3)

For second half 2012, the Company's percentage of estimated fuel consumption covered by fuel derivative contracts is primarily between WTI crude oil levels of $100 and $130 per barrel.  At WTI crude oil levels above $130 per barrel, the Company has less than 15% of estimated fuel consumption covered by fuel derivative contracts.  The Company also has floor exposure, with the majority beginning at WTI crude oil levels of $75 per barrel. 

                 
                   
                   

SOUTHWEST AIRLINES CO.

                 

737 DELIVERY SCHEDULE

                 

AS OF JULY 18, 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

(4)

 

150

 

597

 
                                 
                                 
                                 

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

           

(2) Includes 19 aircraft delivered as of July 18, 2012.

 

(3) New delivery leased aircraft.

           

(4) The Company has flexibility to accept MAX 7 or MAX 8 deliveries.

           
 
 
 

SUPPLEMENTAL COMBINED STATEMENT I

SOUTHWEST AIRLINES CO.

SELECTED COMBINED FINANCIAL INFORMATION