EXHIBIT 99.1 2003 4TH QUARTER & ANNUAL EARNINGS RELEASE
Published on January 22, 2004
CONTACT: Investor Relations (214) 792-4415
SOUTHWEST AIRLINES REPORTS FOURTH QUARTER EARNINGS AND 31st
CONSECUTIVE YEAR OF PROFITABILITY
DALLAS, TEXAS - January 22, 2004 - Southwest Airlines net income for
fourth quarter 2003 was $66 million, compared to $42 million for fourth
quarter 2002. Net income per diluted share was $.08 for fourth quarter 2003,
compared to $.05 in fourth quarter 2002. The Company also reported its 31st
consecutive year of profitability, with annual net income of $442 million or
$.54 per diluted share, compared to 2002 net income of $241 million or $.30
per diluted share. Excluding special items in each year, 2003 net income
was $298 million or $.36 per diluted share, compared to $198 million or
$.24 per diluted share for 2002.
Fourth Quarter 2003 Operating Results
Total operating revenues for fourth quarter 2003 increased 8.3 percent
to $1.52 billion, compared to $1.4 billion for fourth quarter 2002.
Operating income increased 26.1 percent to $111 million from $88 million in
fourth quarter 2002. Revenue passenger miles (RPMs) increased 5.3 percent in
fourth quarter 2003, as compared to a 4.0 percent increase in available seat
miles (ASMs), resulting in a 0.8 point increase in load factor to 63.8
percent. The passenger revenue yield per RPM increased 2.6 percent to 12.57
cents from 12.25 cents in fourth quarter 2002. Operating revenue yield per
ASM (RASM) increased 4.0 percent to 8.29 cents from 7.97 cents in fourth
quarter 2002.
Total fourth quarter 2003 operating expenses were $1.4 billion, an
increase of 7.1 percent compared to $1.3 billion in fourth quarter 2002.
Operating expenses per ASM (CASM) for fourth quarter 2003 increased 2.9
percent to 7.69 cents, compared to 7.47 cents in fourth quarter 2002. Unit cost
increases resulted primarily from higher labor, maintenance, airport,
and jet fuel costs, net of hedging and fuel efficiency gains. The Company's
hedging program resulted in the recognition of $41 million and $29 million in
gains during fourth quarter 2003 and 2002, respectively, and annual gains of
$171 million and $45 million for 2003 and 2002, respectively. Excluding
fuel, CASM for fourth quarter 2003 increased 2.8 percent to 6.51 cents,
compared to 6.33 cents for fourth quarter 2002.
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"Other expenses" were $10 million and $24 million for fourth quarter
2003 and 2002, respectively. Interest expense declined 25.9 percent due to
lower effective interest rates and the October 2003 redemption of $100
million of senior unsecured 8 3/4 percent Notes due October 15, 2003.
Capitalized interest increased to $10 million from $4 million in fourth
quarter 2002 as a result of higher Boeing aircraft progress payments. The
fourth quarter 2003 income tax rate of 34.9 percent reflected lower effective
state income tax rates.
James F. Parker, Vice Chairman and Chief Executive Officer, stated:
"Although 2003 represented another year of adversity for our industry,
Southwest produced its 31st consecutive year of profitability, which will
enable us to reward our dedicated Employees with a $126 million contribution
to our Company profitsharing plan.
"As the economy recovers and demand for business travel increases, our
unit revenue trends gradually continue to improve. Our fourth quarter 2003
RASM increased 4.0 percent from last year's improved performance of 7.97
cents. Although the first half of January 2004 showed modest unit revenue
growth, bookings suggest that January's load factor could fall below last
year's performance of 58.0 percent.
"As expected, we are experiencing some cost pressures. Our low cost
competitive advantage will endure, however. Our overall unit costs for
fourth quarter 2004 were up 2.9 percent versus last year's fourth quarter due
to a variety of items. While this increase is less than anticipated, we are
not satisfied with these inflationary trends and are aggressively
implementing various measures to improve our productivity. Effective
December 15, 2003, Southwest no longer pays a travel agency commission on
flights booked by traditional travel agencies, which will reduce operating
costs by approximately $40 million annually. We also recently announced the
consolidation of our reservation operations from nine into six Reservation
Centers. Although we will incur restructuring charges estimated in the $20
million range in first quarter 2004, we expect ongoing annual operating cost
savings to exceed that amount.
"We continue to be impacted by high energy costs. Although we were
well protected and recognized approximately $41 million in effective hedging
gains in fourth quarter 2003 fuel and oil expense, our average jet fuel costs
per gallon increased 4.7 percent versus last year's fourth quarter. We are
also substantially hedged in first quarter 2004 at 82 percent with caps under
$24 per barrel. Even with that hedge, based on
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current market conditions, our estimated first quarter 2004 average jet fuel
costs per gallon is in the 75 to 80 cents range. For the remainder of 2004,
we are over 80 percent hedged in each quarter with caps approximating $24 per
barrel. For 2005, we are approximately 70 percent hedged with caps in the
$24 per barrel range.
"Excluding estimated reservation operations restructuring costs, we
expect overall unit costs to increase again in first quarter 2004 as compared
to last year's first quarter. We expect cost pressures will begin to ease in
second half 2004.
"With our low cost advantage and outstanding service, we are excited
about our growth opportunities, particularly our entry into the Philadelphia
market in May 2004. As a result, we recently exercised options to acquire
five more 737-700s in 2005, which brings our current 2005 firm aircraft
orders and options to 28 and 6, respectively. Our total 2004 expected Boeing
737-700 additions remain at 47. After subtracting planned 737-200
retirements, we plan to grow annual capacity in the 7 to 8 percent range in
2004 and approximately 11 percent in 2005.
"Our priorities, with respect to our financial position, are to
maintain high liquidity levels, a strong balance sheet, and A credit ratings,
while still growing the airline and generating value for our Employee and
non-Employee Shareholders. We are anticipating substantial proceeds from
future exercises of Employee stock options. In consideration of our strong
cash position, strong balance sheet, and desire to maximize value for our
Employee and non-Employee Shareholders, our Board has authorized the
repurchase of up to $300 million of Southwest Airlines common stock from time
to time in the open market, from the proceeds of future Employee stock option
exercises.
"Southwest was included in Global Finance magazine's January 2004
'Expert's List of the World's Most Socially Responsible Companies' and
recently recognized as the 'Best Domestic Airline of the Year' by Travel
Weekly magazine. We commend our caring and altruistic Employees for these
honors.
"For information regarding the Company's Corporate Governance Program,
please see the new Corporate Governance section, under Investor Relations at
southwest.com."
Net cash provided by operations for fourth quarter 2003 was $291
million. We ended the year with $1.87 billion in cash plus our available
unsecured revolving credit line of $575 million.
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Operating revenues for the year ended December 31, 2003 increased 7.5
percent to $5.9 billion while operating expenses increased 6.8 percent to
$5.5 billion, resulting in operating income of $483 million. Excluding
special items, operating revenues for the year ended December 31, 2003
increased 8.2 percent to $5.9 billion while operating expenses increased 6.3
percent to $5.4 billion, resulting in operating income of $523 million. Net
income for 2003 increased 83.4 percent to $442 million, compared to $241
million in 2002. Net income per diluted share for the year was $.54 versus
$.30 in 2002. Excluding special items, 2003 net income was $298 million, or
$.36 per diluted share, versus 2002 net income of $198 million, or $.24 per
diluted share.
Special Items
The Company believes it is helpful to management and investors to
evaluate ongoing operational performance and trends by excluding special
items, as described below, for comparative purposes. A reconciliation of key
financial measures, excluding these special items, is included in this
release, pursuant to Regulation G issued by the Securities and Exchange
Commission. There were no special items in fourth quarter 2003 or fourth
quarter 2002.
Pursuant to the April 2003 Emergency Wartime Supplemental
Appropriations Act of 2002, the Company received a $271 million cash payment
from the U.S. government, which is included as "Other gains" in its Condensed
Consolidated Statement of Income for 2003. This special item, which was
recorded in second quarter 2003, resulted in an increase of approximately $40
million to Employee profitsharing expense.
Pursuant to the Air Transportation Safety and System Stabilization Act,
which was enacted following the September 2001 terrorist attacks, the Company
recognized $48 million from the U.S. Government, which is included in "Other
gains" in its Condensed Consolidated Statements of Income for 2002. This
special item was recorded in third quarter 2002.
The Company's 2002 results also included an additional $36 million in
passenger revenue recognized during second quarter 2002 from a reduction in
estimated future refunds and exchanges included in "Air traffic liability."
Southwest Airlines will conduct a conference call to discuss its
quarterly earnings today at 11:30 a.m. Eastern Time. A live broadcast of the
conference call will be available at www.southwest.com.
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This news release contains forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. All forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from the plans, intentions, and expectations reflected in
or suggested by the forward-looking statements. Additional information
concerning the factors which could cause actual results to differ materially
from the forward-looking statements are contained in the Company's periodic
filings with the Securities and Exchange Commission, including without
limitation, the Company's Annual Report on Form 10-K for the year ended 2002.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements to reflect events or circumstances that may arise
after the date of this press release.
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SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts)
(unaudited)
Three months ended Year Ended
December 31, December 31,
Percent Percent
2003 2002 Change 2003 2002 Change
OPERATING REVENUES:
Passenger $1,467 $1,357 8.1 $5,741 $5,341 7.5
Freight 24 22 9.1 94 85 10.6
Other 26 22 18.2 102 96 6.3
Total operating
revenues 1,517 1,401 8.3 5,937 5,522 7.5
OPERATING EXPENSES:
Salaries, wages,
and benefits 566 519 9.1 2,224 1,993 11.6
Fuel and oil 214 200 7.0 830 762 8.9
Maintenance materials
and repairs 109 94 16.0 430 390 10.3
Agency commissions 12 13 (7.7) 48 55 (12.7)
Aircraft rentals 46 47 (2.1) 183 187 (2.1)
Landing fees and other
rentals 96 87 10.3 372 345 7.8
Depreciation and
amortization 99 93 6.5 384 356 7.9
Other operating
expenses 264 260 1.5 983 1,017 (3.3)
Total operating
expenses 1,406 1,313 7.1 5,454 5,105 6.8
OPERATING INCOME 111 88 26.1 483 417 15.8
OTHER EXPENSES (INCOME):
Interest expense 20 27 (25.9) 91 106 (14.2)
Capitalized interest (10) (4) 150.0 (33) (17) 94.1
Interest income (6) (8) (25.0) (24) (37) (35.1)
Other (gains) losses,
net 6 9 n.a. (259) (28) n.a.
Total other expenses
(income) 10 24 n.a. (225) 24 n.a.
INCOME BEFORE
INCOME TAXES 101 64 57.8 708 393 80.2
PROVISION FOR
INCOME TAXES 35 22 59.1 266 152 75.0
NET INCOME $66 $42 57.1 $442 $241 83.4
NET INCOME PER SHARE:
Basic $ .08 $ .05 $ .56 $ .31
Diluted $ .08 $ .05 $ .54 $ .30
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 788 775 783 773
Diluted 833 813 822 809
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SOUTHWEST AIRLINES CO.
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
(unaudited)
Year ended
December 31,
Percent
(in millions, except per share amounts) 2003 2002 Change
Operating revenue, as reported $5,937 $5,522
Passenger revenue adjustment - (36)
Operating revenue, excluding special item $5,937 $5,486 8.2
Operating expenses, as reported $5,454 $5,105
Profitsharing impact of Stabilization
Act grant - (7)
Profitsharing impact of Wartime Act grant (40) -
Profitsharing impact of passenger
revenue adjustment - (6)
Operating expenses, excluding special items $5,414 $5,092 6.3
Operating income, as reported $483 $417
Profitsharing impact of Stabilization
Act grant - 7
Profitsharing impact of Wartime Act grant 40 -
Passenger revenue adjustment,
net of profitsharing - (30)
Operating income, excluding special items $523 $394 32.7
Net income, as reported $442 $241
Stabilization Act grant, net of income taxes
and profitsharing - (25)
Wartime Act grant, net of income taxes
and profitsharing (144) -
Passenger revenue adjustment,
net of income taxes and profitsharing - (18)
Net income, excluding special items $298 $198 50.5
Net income per share, diluted, as reported $.54 $.30
Stabilization Act grant, net of income taxes
and profitsharing - (.03)
Wartime Act grant, net of income taxes
and profitsharing (.18) -
Passenger revenue adjustment,
net of income taxes and profitsharing - (.03)
Net income per share, diluted,
excluding special items $.36 $.24 50.0
NOTE: The above schedule reconciles the financial measures, excluding
special items, included in this press release to the most comparable GAAP
financial measures. The special items were a $271 million Wartime Act grant
received in second quarter 2003 pursuant to the April 2003 Emergency Wartime
Supplemental Appropriations Act, a $48 million Stabilization Act grant
received in the third quarter 2002, and $36 million in additional passenger
revenue from a reduction in estimated refunds and exchanges included in "Air
traffic liability" in second quarter 2002. The $271 million Wartime Act
grant was received as a result of the war with Iraq and is recorded in "Other
gains." The $48 million Stabilization Act grant was received as a result of
the unfavorable impact of the September 11, 2001 terrorist attacks on the
airline industry and is recorded in "Other gains." The $36 million passenger
revenue adjustment was primarily due to a revision in estimated forfeited
tickets, resulting from a change in Customer travel patterns and higher than
usual mix of discount, nonrefundable ticket sales following the September 11,
2001 terrorist attacks.
In management's view, comparative analysis of results can be enhanced by
excluding the impact of these special items. None of these items are
indicative of the Company's ongoing operating performance for the applicable
period, nor should they be considered in developing trend analysis for future
periods, including 2004.
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SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
(unaudited)
Three months ended
December 31,
2003 2002 Change
Revenue passengers carried 16,289,875 15,554,337 4.7 %
Revenue passenger miles (RPMs) (000s) 11,664,359 11,082,514 5.3 %
Available seat miles (ASMs) (000s) 18,293,171 17,582,610 4.0 %
Load factor 63.8% 63.0% 0.8 pts.
Average length of passenger haul 716 713 0.4 %
Trips flown 238,365 238,163 0.1 %
Average passenger fare $90.03 $87.25 3.2 %
Average passenger fare, excluding
special items n.a. n.a. n.a.
Passenger revenue yield per RPM (cents) 12.57 12.25 2.6 %
Passenger revenue yield per RPM,
excluding special items n.a. n.a. n.a.
Operating revenue yield per ASM (cents) 8.29 7.97 4.0 %
Operating revenue yield per ASM,
excluding special items n.a. n.a. n.a.
Operating expenses per ASM (cents) 7.69 7.47 2.9 %
Operating expenses per ASM,
excluding special items n.a. n.a. n.a.
Operating expenses per ASM,
excluding fuel (cents) 6.51 6.33 2.8 %
Operating expenses per ASM,
excluding fuel and special items n.a. n.a. n.a.
Fuel costs per gallon,
excluding fuel tax (cents) 74.2 70.9 4.7 %
Fuel consumed, in gallons (millions) 288 282 2.1 %
Number of Employees at period-end 32,847 33,705 (2.5)%
Size of fleet at period-end 388 375 3.5 %
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Year Ended
December 31,
2003 2002 Change
Revenue passengers carried 65,673,945 63,045,988 4.2 %
Revenue passenger miles (RPMs) (000s) 47,943,066 45,391,903 5.6 %
Available seat miles (ASMs) (000s) 71,790,425 68,886,546 4.2 %
Load factor 66.8% 65.9% 0.9 pts.
Average length of passenger haul 730 720 1.4 %
Trips flown 949,882 947,331 0.3 %
Average passenger fare $87.42 $84.72 3.2 %
Average passenger fare, excluding
special items $87.42 $84.15(c) 3.9 %
Passenger revenue yield per RPM (cents) 11.97 11.77 1.7 %
Passenger revenue yield per RPM,
excluding special items (cents) 11.97 11.69(c) 2.4 %
Operating revenue yield per ASM (cents) 8.27 8.02 3.1 %
Operating revenue yield per ASM,
excluding special items (cents) 8.27 7.96(c) 3.9 %
Operating expenses per ASM (cents) 7.60 7.41 2.6 %
Operating expenses per ASM,
excluding special items (cents) 7.54(a) 7.39(b)(c)2.0 %
Operating expenses per ASM,
excluding fuel (cents) 6.44 6.30 2.2 %
Operating expenses per ASM,
excluding fuel and special items (cents) 6.38(a) 6.28(b)(c)1.6 %
Fuel costs per gallon,
excluding fuel tax (cents) 72.3 68.0 6.3 %
Fuel consumed, in gallons (millions) 1,143 1,117 2.3 %
Number of Employees at period-end 32,847 33,705 (2.5)%
Size of fleet at period-end 388 375 3.5 %
(a) Amounts exclude profitsharing impact of $271 million Wartime Act grant
in second quarter 2003.
(b) Amounts exclude profitsharing impact of $48 million Stabilization Act
grant in third quarter 2002.
(c) Amounts exclude $36 million in additional passenger revenue in second
quarter 2002 from a reduction in air traffic liability, and related
impact to operating expenses.
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SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
December 31,
(in millions)
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $1,865 $1,815
Accounts and other receivables 132 175
Inventories of parts and supplies, at cost 93 86
Fuel hedge contracts 164 113
Prepaid expenses and other current assets 59 43
Total current assets 2,313 2,232
Property and equipment, at cost:
Flight equipment 8,646 8,025
Ground property and equipment 1,117 1,042
Deposits on flight equipment purchase contracts 787 389
10,550 9,456
Less allowance for depreciation and amortization 3,107 2,810
7,443 6,646
Other assets 122 76
$9,878 $8,954
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $405 $362
Accrued liabilities 650 529
Air traffic liability 462 412
Current maturities of long-term debt 206 131
Total current liabilities 1,723 1,434
Long-term debt less current maturities 1,332 1,553
Deferred income taxes 1,420 1,227
Deferred gains from sale and leaseback of aircraft 168 184
Other deferred liabilities 183 134
Stockholders' equity:
Common stock 789 777
Capital in excess of par value 258 136
Retained earnings 3,883 3,455
Accumulated other comprehensive income 122 54
Total stockholders' equity 5,052 4,422
$9,878 $8,954
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SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Three months ended Year ended
December 31, December 31,
(in millions) 2003 2002 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $66 $42 $442 $241
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 99 93 384 356
Deferred income taxes 7 44 183 170
Amortization of deferred gains on sale and
leaseback of aircraft (4) (4) (16) (15)
Amortization of scheduled airframe
inspections & repairs 12 12 49 46
Income tax benefit from Employee stock
option exercises 41 38 41 38
Changes in certain assets and liabilities:
Accounts and other receivables 11 (49) 43 (103)
Other current assets (4) 5 (19) (10)
Accounts payable and accrued liabilities 149 (10) 129 (149)
Air traffic liability (106) (85) 50 (38)
Income taxes payable (5) - - -
Other 25 28 50 (16)
Net cash provided by operating activities 291 114 1,336 520
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (383) (231)(1,238) (603)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - - - 385
Proceeds from trust arrangement - - - 119
Proceeds from Employee stock plans 31 16 93 57
Payments of long-term debt and capital
lease obligations (109) (9) (130) (65)
Payment of trust arrangement - (20) - (385)
Payment of short term debt - - - (475)
Payments of cash dividends - - (14) (14)
Other, net 1 1 3 (4)
Net cash provided by (used in) financing
activities (77) (12) (48) (382)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (169) (129) 50 (465)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,034 1,944 1,815 2,280
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,865 $1,815 $1,865 $1,815
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Southwest Airlines Co.
Boeing 737-700 Delivery Schedule
As of 12/31/2003
Prior Schedule Current Schedule
Firm Options* Firm Options*
2004 47 - 47** -
2005 23 11 28 6
2006 22 12 22 12
2007 25 29 25 29
2008 6 45 6 45
2009-2012 - 177 - 177
Total 123 274 128 269
*Includes purchase rights
**Includes one leased aircraft
***