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Southwest Airlines Reports Second Quarter Results



              Southwest Airlines Reports Second Quarter Results

Net income of $224 million

Excluding special items, record net income of $274 million

PR Newswire

DALLAS, July 25, 2013

DALLAS, July 25, 2013 /PRNewswire/ -- Southwest Airlines Co. (NYSE:LUV) (the
"Company") today reported its second quarter 2013 results.  Second quarter
2013 net income was $224 million, or $.31 per diluted share, which included
$50 million (net) of unfavorable special items.  This compared to net income
of $228 million, or $.30 per diluted share, in second quarter 2012, which
included $45 million (net) of unfavorable special items.  Excluding special
items, second quarter 2013 net income was a record $274 million, or $.38 per
diluted share, compared to $273 million, or $.36 per diluted share, in second
quarter 2012.  This was in line with the First Call consensus estimate of $.38
per diluted share.  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  pleased to report record quarterly earnings of $274 million
(excluding special items).  This performance benefited from all-time high
operating revenues and lower fuel prices.  In addition, our focus on managing
costs resulted in modest year-over-year cost inflation despite significant
investments in fleet modernization and other strategic initiatives.  I commend
our hard-working and dedicated Employees for their efforts to achieve these
excellent results, while simultaneously executing on our strategic
initiatives. 

"While the lingering effects of government sequestration and higher taxes
continued to be a drag on air travel demand, second quarter 2013 revenues and
passenger traffic still reached record levels.  In addition, we are in the
midst of integrating AirTran, launching new city-pairs, and optimizing the
combined networks.  We maintained strong load factors and ended the quarter
with a record June load factor of 85.0 percent, which is notable considering
the increasing mix of larger gauge 737-800s and Evolve -700s.  Although the
2.4 percent year-over-year decline in second quarter unit revenues was below
plan^1, results improved throughout the quarter. Third quarter 2013 revenue
trends are encouraging, thus far.  To date, July unit revenues are
approximately three percent above last year's July, benefiting from Southwest
and AirTran network connections and our gradual combined network
optimization.  Current bookings for the remainder of the third quarter also
look solid. 

"We remain on track with our plan to fully integrate AirTran into Southwest
Airlines by the end of 2014.  We are on schedule to complete the conversion of
AirTran's Boeing 737-700s to the Southwest livery and deploy the Southwest
international reservation system next year.  During second quarter, we
transitioned one -700, bringing total aircraft conversions to 12 since the
acquisition.  Seven more -700 conversions are planned for this year, with the
remaining 33 planned for next year in conjunction with the conversion of
AirTran's eight international markets.  We will be transitioning AirTran's 88
Boeing 717-200s out of the fleet, beginning next month. 

"Connecting the Southwest and AirTran networks was a key milestone this
quarter.  As of April 14^th, Customers can now fly across our combined 97
destinations on a single itinerary.  Our ability to optimize the combined
networks and operations is enhanced significantly with connecting capabilities
as we continue to transition AirTran markets to the Southwest network. 
Earlier this week, we extended our 2014 flight schedule through early March
and announced new Southwest service between Hartsfield-Jackson Atlanta
International Airport and Ronald Reagan Washington National Airport, beginning
in February, which will augment AirTran's five daily nonstop flights.  During
second quarter 2013, Southwest launched new service to Charlotte, North
Carolina; Flint, Michigan; Portland, Maine; Rochester, New York; and Wichita,
Kansas, which were all AirTran cities.  We also began operating Southwest's
first scheduled service outside of the continental United States, with daily
service to San Juan, Puerto Rico, beginning April 14^th.  By the end of 2013,
we will have a Southwest presence in all AirTran domestic cities retained
following the acquisition.  While much of the converted capacity represents
new city-pairs, we expect these new routes to develop rapidly.  Our Cargo
business also benefited from connecting the networks, coincident with the
April 14^th launch of cargo on AirTran under the Southwest brand. 

"We are excited about our future network opportunities as we add international
capabilities and continue the development of our domestic route network.  We
were thrilled to be awarded the slot exemption from the U.S. Department of
Transportation to begin service between Houston Hobby and Ronald Reagan
Washington National Airport next month.  The introduction of this daily
Southwest service will complete a triad of nonstop service options between
Hobby and the Boston, New York, and Washington, D.C. metro areas. 

"We continue to make progress on our fleet modernization efforts.  During
second quarter, we added three new Boeing 737-800s into service and retired
two Boeing 737-300s.  We also removed the first AirTran 717 from active
service during the quarter in preparation for its transition out of the fleet
next month.  As of June 30, 2013, all Southwest Boeing 737-700s and 14 Boeing
737-300s have been retrofitted with the Evolve interior, and we plan to
retrofit 64 additional -300s in the second half of this year.  In May, we
announced revisions to our future aircraft delivery schedule, including the
launch of the Boeing 737 MAX 7 in 2019, with three objectives in mind: 
efficiently and aggressively manage our invested capital, shift the mix of new
aircraft deliveries to the MAX, and replace Boeing 717s and Boeing 737s being
retired over the next three years with more economical aircraft.  This
includes augmenting our Boeing orders with the acquisition of pre-owned
aircraft.  In line with our plan, available seat miles (capacity) for 2013 are
estimated to increase two percent year-over-year as a result of larger gauge
aircraft.  For 2014, we currently plan to keep our capacity in line with 2013
as we continue to optimize our network and execute our strategic plan.

"Our fleet modernization and other fuel conservation efforts resulted in a 4.1
percent improvement in second quarter available seat miles per gallon.  Second
quarter economic fuel costs declined significantly to $3.06 per gallon, as
expected, compared to second quarter 2012's $3.22 per gallon.  Based on our
fuel derivative contracts and market prices as of July 22^nd, third quarter
2013 economic fuel costs are expected to be in the $3.05 to $3.10 per gallon
range, which is below third quarter 2012's $3.16 per gallon. 

"Our second quarter unit costs, excluding fuel, special items, and
profitsharing, increased 1.7 percent, compared to second quarter last year. 
Based on current trends and benefits from our fleet modernization efforts, we
expect our third quarter 2013 unit costs, excluding fuel, special items, and
profitsharing, to increase slightly from third quarter 2012's 7.72 cents.   

"Our balance sheet and liquidity remain strong with approximately $3.7 billion
in cash and short-term investments, as of yesterday, and a $1 billion fully
available revolving credit facility.  Our second quarter cash flow from
operations was $778 million, and capital expenditures were $193 million,
resulting in $585 million in free cash flow^2.  Our strong cash flow
generation and record second quarter profits (excluding special items)
reinforce the Board's authorizations in May 2013 to increase our stock
repurchase program from $1 billion to $1.5 billion, along with quadrupling our
quarterly dividend to an estimated 1.2 percent annual yield (based on
yesterday's closing stock price of $13.76).  During second quarter 2013, we
returned approximately $279 million to our Shareholders through the payment of
$28 million in dividends and the repurchase of approximately $251 million, or
approximately 18 million shares, under an accelerated stock repurchase program
completed in June.  Since August 2011, we have repurchased approximately $975
million, or approximately 100 million shares, under our total $1.5 billion
share repurchase authorization." 

Awards and Recognitions

  o Named Brand of the Year in the Value Airline Category by the Harris Poll
  o Received top ranking by InsideFlyer Magazine for Best Customer Service and
    Best Loyalty Credit Card
  o Recognized as the Best Domestic Airline for Customer Service by Executive
    Travel Magazine's Leading Edge Awards
  o Awarded the Value Chain Gold Award for Aviation Cargo by Connect World
    Magazine
  o Recognized as one of Better Investing's Top 100 Companies
  o Named Corporate Advocate of the Year by the Hispanic Chamber of Commerce
    of Metro Denver
  o Received the Helen Woodward Animal Center Humane Award for assistance
    during Hurricane Sandy

Financial Results

The Company's second quarter 2013 total operating revenues increased 0.6
percent to $4.6 billion, while operating unit revenues decreased 2.4 percent,
on a 3.0 percent increase in available seat miles, and approximately four
percent increase in average seats per trip, all as compared to second quarter
2012.  Total operating expenses in second quarter 2013 increased 1.3 percent
to $4.2 billion, as compared to second quarter 2012.  The Company incurred
costs (before taxes) associated with the acquisition and integration of
AirTran, which are special items, of $26 million during second quarter 2013,
compared to $11 million in second quarter 2012.  Cumulative costs associated
with the acquisition and integration of AirTran, as of June 30, 2013, totaled
$363 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, total
operating expenses in second quarter 2013 were $4.2 billion, compared to $4.1
billion in second quarter 2012.  

Second quarter 2013 economic fuel costs were $3.06 per gallon, including $.05
per gallon in unfavorable cash settlements for fuel derivative contracts,
compared to $3.22 per gallon in second quarter 2012, including $.04 per gallon
in unfavorable cash settlements for fuel derivative contracts.  The Company
has derivative contracts in place for approximately 80 and 85 percent of its
estimated fuel consumption in the third and fourth quarters of 2013,
respectively.  As of July 22^nd, the fair market value of the Company's hedge
portfolio through 2017 was a net asset of approximately $102 million. 
Additional information regarding the Company's fuel derivative contracts is
included in the accompanying tables.

Excluding fuel, special items, and profitsharing in both periods, second
quarter 2013 operating costs increased 0.7 percent from second quarter 2012,
and 1.7 percent on a unit basis.

Operating income for second quarter 2013 was $433 million, compared to $460
million in second quarter 2012.  Excluding special items, operating income was
$479 million for second quarter 2013, compared to $485 million in the same
period last year.

Other expenses for second quarter 2013 were $70 million, compared to $92
million in second quarter 2012.  This $22 million decrease primarily resulted
from $47 million in other losses recognized in second quarter 2013, compared
to $62 million in second quarter 2012.  In both periods, these 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 $12 million in second quarter
2013, compared to $14 million in second quarter 2012, primarily attributable
to the premium costs associated with the Company's fuel derivative contracts.
Third quarter 2013 premium costs related to fuel derivative contracts are
currently estimated to be approximately $22 million, compared to $15 million
in third quarter 2012.  Net interest expense declined to $23 million in second
quarter 2013, compared to $30 million in second quarter 2012, primarily due to
the repayment of AirTran aircraft financing facilities during the first
quarter of 2013. 

For the six months ended June 30, 2013, total operating revenues increased 1.4
percent to $8.7 billion, while total operating expenses increased 1.2 percent
to $8.2 billion, resulting in operating income of $503 million, compared to
$481 million for the same period last year.  Excluding special items,
operating income was $591 million for first half 2013, compared to $495
million for first half 2012.  

Net income for first half 2013 was $283 million, or $.39 per diluted share,
compared to $327 million, or $.43 per diluted share, for the same period last
year.  Excluding special items, net income for first half 2013 was $328
million, or a record $.45 per diluted share, compared to $255 million, or $.33
per diluted share, for the same period last year.

The Company's return on invested capital^2 (before taxes and excluding special
items) was approximately nine percent for the twelve months ended June 30,
2013.  Additional information regarding pre-tax return on invested capital is
included in the accompanying reconciliation tables.  

For the six months ended June 30, 2013, net cash provided by operations was
$1.8 billion, and capital expenditures were $727 million, resulting in free
cash flow^2 in excess of $1 billion.  The Company repaid $216 million in debt
and capital lease obligations during first half 2013, and intends to repay
approximately $100 million more in debt and capital lease obligations during
the remainder of the year.

Conference Call

Southwest will discuss its second quarter 2013 results on a conference call at
12:30 p.m. Eastern Time today.  A live broadcast of the conference call also
will be available at http://southwest.investorroom.com.

^1The Company presented its 2013 plan at its Investor Day held in December
2012.  The presentation, including revenue and capacity assumptions in its
2013 plan, can be found at http://southwest.investorroom.com/past-events.

^2See 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 projected results of operations; (ii) the
integration of AirTran and the Company's related financial and operational
plans and expectations, including 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, opportunities, and expectations; (v) the Company's plans and
expectations related to managing risk associated with changing jet fuel
prices; and (vi) the Company's expectations with respect to liquidity
(including its plans for the repayment of debt and capital lease obligations)
and capital expenditures. 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 fuel prices, economic conditions, 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 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 and other regulation related to 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              Six months ended
                June 30,                        June 30,
                2013      2012         Percent  2013      2012         Percent
                                       change                          change
OPERATING
REVENUES:
Passenger       $ 4,380   $ 4,347  (1) 0.8      $ 8,218   $ 8,097  (1) 1.5
Freight         43        42           2.4      82        79           3.8
Other           220       227      (1) (3.1)    427       430      (1) (0.7)
     Total
operating       4,643     4,616        0.6      8,727     8,606        1.4
revenues
OPERATING
EXPENSES:
Salaries,
wages, and      1,298     1,222        6.2      2,481     2,363        5.0
benefits
Fuel and oil    1,489     1,577        (5.6)    2,946     3,087        (4.6)
Maintenance
materials and   281       291          (3.4)    571       562          1.6
repairs
Aircraft        92        90           2.2      185       178          3.9
rentals
Landing fees
and other       292       260          12.3     558       513          8.8
rentals
Depreciation
and             213       202          5.4      422       403          4.7
amortization
Acquisition and 26        11           136.4    39        24           62.5
integration
Other operating 519       503          3.2      1,022     995          2.7
expenses
     Total
operating       4,210     4,156        1.3      8,224     8,125        1.2
expenses
OPERATING       433       460          (5.9)    503       481          4.6
INCOME
OTHER EXPENSES
(INCOME):
Interest        33        38           (13.2)   62        77           (19.5)
expense
Capitalized     (8)       (6)          33.3     (13)      (11)         18.2
interest
Interest income (2)       (2)          —        (3)       (3)          —
Other (gains)   47        62           (24.2)   1         (109)        (100.9)
losses, net
     Total
other expenses  70        92           (23.9)   47        (46)         n.a.
(income)
INCOME BEFORE   363       368          (1.4)    456       527          (13.5)
INCOME TAXES
PROVISION FOR   139       140          (0.7)    173       200          (13.5)
INCOME TAXES
NET INCOME      $ 224     $ 228        (1.8)    $ 283     $ 327        (13.5)
NET INCOME PER
SHARE:
Basic           $ 0.31    $ 0.30                $ 0.39    $ 0.43
Diluted         $ 0.31    $ 0.30                $ 0.39    $ 0.43
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic           714       757                   719       764
Diluted         722       764                   727       771

(1) The Company made a fourth quarter 2012 reclassification to change the
allocation of revenues associated with its sale of frequent flyer points
directly to Customers and the redemption of those points for flights. The
Company has thus reclassified  $9 million and $17 million in Operating
revenues for the three and six months ended June 30, 2012, respectively, from
Other revenues to Passenger revenues to conform to the current presentation.

 

 

 

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           Six months ended
                      June 30,                     June 30,
                      2013      2012      Percent  2013      2012      Percent
                                          Change                       Change
Fuel and oil expense, $ 1,442   $ 1,544            $ 2,847   $ 3,022
unhedged
Add: Fuel hedge
losses included in    47        33                 99        65
Fuel and oil expense
Fuel and oil expense, $ 1,489   $ 1,577            $ 2,946   $ 3,087
as reported
Add (Deduct): Net
impact from fuel      (20)      (14)               (49)      10
contracts (1)
Fuel and oil expense, $ 1,469   $ 1,563   (6.0)    $ 2,897   $ 3,097   (6.5)
economic
Total operating       $ 4,210   $ 4,156            $ 8,224   $ 8,125
expenses, as reported
Add (Deduct): Net
impact from fuel      (20)      (14)               (49)      10
contracts (1)
Total operating       $ 4,190   $ 4,142            $ 8,175   $ 8,135
expenses, economic
Deduct: Acquisition   (26)      (11)               (39)      (24)
and integration costs
Total operating       $ 4,164   $ 4,131            $ 8,136   $ 8,111
expenses, non-GAAP
Deduct: Profitsharing (78)      (73)               (94)      (73)
expense
Total operating
expenses, non-GAAP,   $ 4,086   $ 4,058   0.7      $ 8,042   $ 8,038   —
excluding
Profitsharing
Operating income, as  $ 433     $ 460              $ 503     $ 481
reported
Add (Deduct): Net
impact from fuel      20        14                 49        (10)
contracts (1)
Operating income,     $ 453     $ 474              $ 552     $ 471
economic
Add: Acquisition and  26        11                 39        24
integration costs
Operating income,     $ 479     $ 485     (1.2)    $ 591     $ 495     19.4
non-GAAP
Other (gains) losses, $ 47      $ 62               $ 1       $ (109)
net, as reported
Add (Deduct): Net
impact from fuel      (35)      (48)               16        129
contracts (1)
Other losses, net,    $ 12      $ 14      (14.3)   $ 17      $ 20      (15.0)
non-GAAP
Income before income  $ 363     $ 368              $ 456     $ 527
taxes, as reported
Add (Deduct): Net
impact from fuel      55        62                 33        (139)
contracts (1)
                      $ 418     $ 430              $ 489     $ 388
Add: Acquisition and  26        11                 39        24
integration costs
Income before income  $ 444     $ 441     0.7      $ 528     $ 412     28.2
taxes, non-GAAP
Net income, as        $ 224     $ 228              $ 283     $ 327
reported
Add (Deduct): Net
impact from fuel      55        62                 33        (139)
contracts (1)
Add (Deduct): Income
tax impact of fuel    (21)      (24)               (12)      52
contracts
                      $ 258     $ 266              $ 304     $ 240
Add: Acquisition and
integration costs,    16        7                  24        15
net (2)
Net income, non-GAAP  $ 274     $ 273     0.4      $ 328     $ 255     28.6
Net income per share, $ 0.31    $ 0.30             $ 0.39    $ 0.43
diluted, as reported
Add (Deduct): Net
impact from fuel      0.05      0.05               0.03      (0.12)
contracts
                      $ 0.36    $ 0.35             $ 0.42    $ 0.31
Add: Impact of
special items, net    0.02      0.01               0.03      0.02
(2)
Net income per share, $ 0.38    $ 0.36    5.6      $ 0.45    $ 0.33    36.4
diluted, non-GAAP

(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  Six months ended
                                         June 30,            June 30,
                                         2013       2012     2013     2012
Fuel and oil expense
Reclassification between Fuel and oil
and Other (gains) losses, net,
                                         $  7       $ (10)   $ 7      $ (12)
  associated with current period settled
contracts
Contracts settling in the current
period, but for which gains and/or
                                         (27)       (4)      (56)     22
  (losses) have been recognized in a
prior period (1)
Impact from fuel contracts to Fuel and   $  (20)    $ (14)   $ (49)   $ 10
oil expense
Operating Income
Reclassification between Fuel and oil
and Other (gains) losses, net,
                                         $  (7)     $ 10     $ (7)    $ 12
  associated with current period settled
contracts
Contracts settling in the current
period, but for which gains and/or
                                         27         4        56       (22)
  (losses) have been recognized in a
prior period (1)
Impact from fuel contracts to Operating  $  20      $ 14     $ 49     $ (10)
Income
Other (gains) losses, net
Mark-to-market impact from fuel          $  (25)    $ (50)   $ 35     $ 156
contracts settling in future periods
Ineffectiveness from fuel hedges         (3)        (8)      (12)     (39)
settling in future periods
Reclassification between Fuel and oil
and Other (gains) losses, net,
                                         (7)        10       (7)      12
  associated with current period settled
contracts
Impact from fuel contracts to Other      $  (35)    $ (48)   $ 16     $ 129
(gains) losses, net
Net Income
Mark-to-market impact from fuel          $  25      $ 50     $ (35)   $ (156)
contracts settling in future periods
Ineffectiveness from fuel hedges         3          8        12       39
settling in future periods
Other net impact of fuel contracts
settling in the current or a prior       27         4        56       (22)

  period (excluding reclassifications)
Impact from fuel contracts to Net Income $  55      $ 62     $ 33     $ (139)
(2)

(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                   Six months ended
              June 30,                             June 30,
              2013         2012            Change  2013         2012            Change
Revenue
passengers    28,960,367   28,859,348      0.4%    54,164,301   54,420,170      (0.5)%
carried
Enplaned      35,530,779   35,210,151      0.9%    66,243,404   66,364,573      (0.2)%
passengers
Revenue
passenger     27,929,506   27,206,498      2.7%    51,686,249   50,891,364      1.6%
miles (RPMs)
(000s)
Available
seat miles    34,231,243   33,230,589      3.0%    65,032,668   63,863,482      1.8%
(ASMs) (000s)
Load factor   81.6%        81.9%           (0.3)   79.5%        79.7%           (0.2)
                                           pts.                                 pts.
Average
length of     964          943             2.2%    954          935             2.0%
passenger
haul (miles)
Average
aircraft      708          699             1.3%    701          692             1.3%
stage length
(miles)
Trips flown   343,592      352,726         (2.6)%  662,106      686,622         (3.6)%
Average
passenger     $  151.23    $  150.65   (1) 0.4%    $  151.73    $  148.80   (1) 2.0%
fare
Passenger
revenue yield 15.68        15.98       (1) (1.9)%  15.90        15.91       (1) (0.1)%
per RPM
(cents)
RASM (cents)  13.56        13.89           (2.4)%  13.42        13.48           (0.4)%
PRASM (cents) 12.79        13.08       (1) (2.2)%  12.64        12.68       (1) (0.3)%
CASM (cents)  12.30        12.51           (1.7)%  12.65        12.72           (0.6)%
CASM,
excluding     7.95         7.76            2.4%    8.12         7.89            2.9%
fuel (cents)
CASM,
excluding     12.16        12.43           (2.2)%  12.51        12.70           (1.5)%
special items
(cents)
CASM,
excluding
fuel and      7.87         7.73            1.8%    8.06         7.85            2.7%
special items
(cents)
CASM,
excluding
fuel, special 7.64         7.51            1.7%    7.92         7.74            2.3%
items, and
profitsharing
(cents)
Fuel costs
per gallon,
including     $  3.01      $  3.18         (5.3)%  $  3.12      $  3.25         (4.0)%
fuel tax
(unhedged)
Fuel costs
per gallon,   $  3.11      $  3.25         (4.3)%  $  3.23      $  3.32         (2.7)%
including
fuel tax
Fuel costs
per gallon,
including     $  3.06      $  3.22         (5.0)%  $  3.17      $  3.33         (4.8)%
fuel tax
(economic)
Fuel
consumed, in  478          483             (1.0)%  910          926             (1.7)%
gallons
(millions)
Active
fulltime      45,216       46,128          (2.0)%  45,216       46,128          (2.0)%
equivalent
Employees
Aircraft in
service at    696          695             0.1%    696          695             0.1%
period-end

 

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

 

(1) The Company made a fourth quarter 2012 reclassification to change the
allocation of revenues associated with its sale of frequent flyer points
directly to Customers and the redemption of those points for flights. The
Company has thus reclassified  $9 million and $17 million in Operating
revenues for the three and six months ended June 30, 2012, respectively, from
Other revenues to Passenger revenues to conform to the current presentation.

 

 

Southwest Airlines Co.
Return on Invested Capital
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions)
(unaudited)
                                      Twelve Months Ended  Twelve Months Ended
                                      June 30, 2013        June 30, 2012
Operating Income, as reported         645                  853
Add (Deduct): Net impact from fuel    92                   (3)
contracts
Add: Acquisition and integration      198                  83
costs
Add: Asset impairment, net (1)        —                    14
Operating Income, non-GAAP            935                  947
Net adjustment for aircraft leases    127                  160
(2)
Adjustment for fuel hedge accounting  (35)                 (68)
Adjusted Operating Income, non-GAAP   1,027                1,039
Average invested capital (3)          11,937               13,037
Equity adjustment for hedge           132                  240
accounting
Adjusted average invested capital     12,069               13,277
ROIC, pre-tax                         9%                   8%

 

 

(1) Net of profitsharing impact.
(2) Net adjustment related to presumption that all aircraft in fleet are
owned.
(3) 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,
                                                      2013       2012
ASSETS
Current assets:
     Cash and cash equivalents                        $ 1,489    $  1,113
     Short-term investments                           1,904      1,857
     Accounts and other receivables                   514        332
     Inventories of parts and supplies, at cost       461        469
     Deferred income taxes                            287        246
     Prepaid expenses and other current assets        209        210
          Total current assets                        4,864      4,227
Property and equipment, at cost:
     Flight equipment                                 16,707     16,367
     Ground property and equipment                    2,883      2,714
     Deposits on flight equipment purchase contracts  633        416
                                                      20,223     19,497
     Less allowance for depreciation and amortization 7,059      6,731
                                                      13,164     12,766
Goodwill                                              970        970
Other assets                                          384        633
                                                      $ 19,382   $  18,596
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                 $ 1,232    $  1,107
     Accrued liabilities                              1,207      1,102
     Air traffic liability                            3,077      2,170
     Current maturities of long-term debt             263        271
          Total current liabilities                   5,779      4,650
Long-term debt less current maturities                2,671      2,883
Deferred income taxes                                 2,883      2,884
Deferred gains from sale and leaseback of aircraft    57         63
Other noncurrent liabilities                          1,211      1,124
Stockholders' equity:
     Common stock                                     808        808
     Capital in excess of par value                   1,201      1,210
     Retained earnings                                6,015      5,768
     Accumulated other comprehensive loss             (248)      (119)
     Treasury stock, at cost                          (995)      (675)
          Total stockholders' equity                  6,781      6,992
                                                      $ 19,382   $  18,596

 

 

 

Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
                        Three months ended June 30,  Six months ended June 30,
                        2013            2012         2013          2012
CASH FLOWS FROM
OPERATING ACTIVITIES:
     Net income         $   224         $  228       $  283        $  327
     Adjustments to
reconcile net income to
cash provided by (used
in)

     operating
activities:
     Depreciation and   213             202          422           403
amortization
     Unrealized (gain)
loss on fuel derivative 55              63           33            (138)
instruments
     Deferred income    21              24           23            38
taxes
     Amortization of
deferred gains on sale  (3)             (3)          (6)           (6)
and leaseback of
aircraft
     Changes in certain
assets and liabilities:
          Accounts and  (51)            (37)         (147)         (105)
other receivables
          Other assets  6               (39)         (19)          (90)
          Accounts
payable and accrued     162             77           282           301
liabilities
          Air traffic   199             (28)         907           693
liability
          Cash
collateral received     (53)            (181)        (25)          (34)
from derivative
counterparties
          Other, net    5               (161)        7             (19)
     Net cash provided  778             145          1,760         1,370
by operating activities
CASH FLOWS FROM
INVESTING ACTIVITIES:
     Payments for
purchase of property    (193)           (416)        (727)         (543)
and equipment, net
     Purchases of       (900)           (633)        (1,624)       (1,255)
short-term investments
     Proceeds from
sales of short-term and 793             688          1,580         1,424
other investments
     Other, net         —               6            —             6
     Net cash used in   (300)           (355)        (771)         (368)
investing activities
CASH FLOWS FROM
FINANCING ACTIVITIES:
     Proceeds from      13              12           19            17
Employee stock plans
     Payments of
long-term debt and      (52)            (38)         (216)         (469)
capital lease
obligations
     Payments of cash   (28)            (8)          (43)          (14)
dividends
     Repurchase of      (251)           (225)        (351)         (275)
common stock
     Other, net         (9)             (6)          (22)          (7)
     Net cash used in   (327)           (265)        (613)         (748)
financing activities
NET CHANGE IN CASH AND  151             (475)        376           254
CASH EQUIVALENTS
CASH AND CASH
EQUIVALENTS AT          1,338           1,558        1,113         829
BEGINNING OF PERIOD
CASH AND CASH
EQUIVALENTS AT END OF   $   1,489       $  1,083     $  1,489      $  1,083
PERIOD

 

 

 

Southwest Airlines Co.
Fuel Derivative Contracts
As of July 22, 2013
                    Estimated economic jet fuel price per gallon,

                    including taxes
Average Brent Crude
Oil  price per      3Q 2013 (2)          4Q 2013 (2)        Full Year 2013
barrel
$85                 $2.85 - $2.90        $2.85 - $2.90      $3.00 - $3.05
$95                 $2.90 - $2.95        $2.90 - $2.95      $3.05 - $3.10
Current Market (1)  $3.05 - $3.10        $3.05 - $3.10      $3.10 - $3.15
$115                $3.15 - $3.20        $3.25 - $3.30      $3.20 - $3.25
$125                $3.25 - $3.30        $3.35 - $3.40      $3.25 - $3.30
                    Average percent of estimated fuel consumption covered by
Period              fuel derivative contracts at varying WTI/Brent crude
                    oil-equivalent price levels
2014                Approx. 35%
2015                Approx. 35%
2016                Approx. 30%
2017                Approx. 50%

 

(1)  Brent crude oil average market prices as of July 22, 2013 were
approximately $107 and $105 per barrel for third and fourth quarter 2013,
respectively.
(2)  The Company has approximately 80 percent of its third quarter 2013
estimated fuel consumption covered by fuel derivative contracts with
approximately 70 percent at varying Gulf Coast jet fuel-equivalent prices and
the remainder at varying Brent crude oil-equivalent prices.  The Company has
approximately 85 percent of its fourth quarter 2013 estimated fuel consumption
covered by fuel derivative contracts with approximately 75 percent at varying
Gulf Coast jet fuel-equivalent prices and the remainder at varying Brent crude
oil-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 July 22, 2013.

 

 

 

Southwest Airlines Co.
737 Delivery Schedule
As of July 24, 2013
        The Boeing Company                    The Boeing Company
        737 NG                                737 MAX
        -700        -800           Additional -7     -8
        Firm        Firm   Options            Firm   Firm       Options Total
         Orders     Orders          -700s     Orders Orders
2013    —           18     —       2          —      —          —       20    (3)
2014    —           36     —       7          —      —          —       43
2015    36          —      —       5          —      —          —       41
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    —           —      —       —          —      14         23      37
2024    —           —      —       —          —      14         23      37
2025    —           —      —       —          —      —          36      36
Through —           —      —       —          —      —          72      72
2027
        92      (1) 54     36      14         30     150    (2) 191     567

 

(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.
(3) Includes nine 737-800s and two leased 737-700s delivered through July 24,
2013.

NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES

The Company's unaudited condensed consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States (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 return on invested capital,
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 three months
ended June 30, 2013, the Company generated $585 million in free cash flow,
calculated as operating cash flows of $778 million less capital expenditures
of $193 million. For the six months ended June 30, 2013, the Company generated
$1,033 million in free cash flow, calculated as operating cash flows of $1,760
million less capital expenditures of $727 million. The Company believes return
on invested capital 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 return on invested capital is commonly used as a
measure of capital efficiency, definitions of return on invested capital may
differ; therefore, the Company is providing an explanation of its calculation
for return on invested capital (before taxes and excluding special items) in
the accompanying reconciliation tables to the press release (See Return on
Invested Capital).  

 

SOURCE Southwest Airlines Co.

Contact: Investor Relations (214) 792-4415
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