CONTACT: Investor Relations (214) 792-4415    

 

 

DALLAS, TEXAS - October 19, 2006 - Southwest Airlines (NYSE:LUV) today reported third quarter 2006 net income of $48 million, or $.06 per diluted share, compared to $210 million for third quarter 2005, or $.26 per diluted share. Excluding unrealized gains/losses primarily relating to future periods associated with Statement of Financial Accounting Standard (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, net income for third quarter 2006 was $154 million, or $.19 per share, flat with third quarter 2005's performance. (Refer to accompanying Reconciliation of Reported Amounts to Non-GAAP Items). These results compared to First Call’s mean estimate of $.20 per diluted share for third quarter 2006.

    Gary C. Kelly, CEO, stated: “Our third quarter 2006 results were solid given the dramatic rise in energy costs since last year. Our third quarter revenues were significantly impacted by the London terrorist threat in August, the increased security procedures put into effect by the Transportation Security Administration (TSA) as a consequence thereof, and an overall softening in demand for air travel. We estimate more than a $40 million revenue reduction for August and September related to the security threat and countervailing security measures. We began the quarter with unit revenue increases over ten percent. Although the revenue momentum has slowed, demand for low fares has continued and, overall, our revenue growth is healthy. Thus far in fourth quarter 2006, load factors and bookings remain solid, and year-over-year unit revenue growth is currently four to five percent. Although the increased security procedures created a substantial operating challenge, our operations were restored quickly back to normal with solid on-time performance. I am very grateful to and proud of our Employees, especially in Ground Operations, for their magnificent efforts and results.

“Our unit costs on an ‘economic’ basis increased 11.0 percent primarily due to higher jet fuel prices. Even with a $200 million third quarter 2006 cash gain from our fuel hedging position, our jet fuel costs per gallon increased over 60 percent from a year ago. We are 85 percent hedged (economic) for fourth quarter 2006, capped at an average crude-equivalent price of approximately $43 per barrel. Based on this hedge position and current market prices, we are currently forecasting our fourth quarter 2006 jet fuel costs per gallon (economic) to be in the $1.50 to $1.60 range. We are over 85 percent hedged for 2007 at approximately $49 per barrel; over 43 percent hedged in 2008 at approximately $44 per barrel; over 38 percent in 2009 at approximately $47 per barrel; about 17 percent in 2010 at approximately $63 per barrel; and have modest positions in 2011 and 2012.

“Excluding fuel, our third quarter 2006 unit costs were down compared with a year ago, which was an excellent performance. Based on current cost trends and the stringent efforts underway by our Employees, we expect our fourth quarter 2006 unit costs, excluding fuel, to decline from fourth quarter 2005’s 6.68 cents.

"We are very pleased with the initial Customer response to our new service at Washington Dulles International airport, which we commenced on October 5, 2006 with 12 daily nonstop departures to four cities: Chicago Midway, Las Vegas, Orlando, and Tampa Bay. With the implementation of the Wright Amendment Reform Act of 2006 this very week, we are also thrilled to offer Customers much lower fares to many new destinations to and from Dallas Love Field airport for the first time in our history. As of today, Customers can take advantage of one-stop (same plane) and connecting service to 25 new destinations from Love Field, and we look forward to adding additional destinations to meet Customer demand. I am hopeful this newfound freedom at Love Field will boost annual revenues upwards of $50 million.

"We have a number of developing and growing markets, and we are excited about our future growth opportunities. We have been actively exploring the used aircraft market for additional 2006 aircraft and acquired one 737-700 during third quarter. Additionally, we have signed an agreement to acquire another previously owned 737-700 aircraft, which will bring our total aircraft additions to 36 for this year. We also recently accelerated two Boeing 737-700 deliveries from 2008 to 2007, bringing our 2007 firm orders to 37.   We exercised one Boeing 737-700 option for 2008 delivery, bringing our 2008 firm orders and options to 29 and five, respectively.

"As a result of an annual survey conducted by Logistics Management magazine, Southwest Airlines Cargo was recognized with its 12^th Quest for Quality Award, placing first in Ontime Performance, Value, Customer Service, and Equipment and Operations. Southwest’s overall score ranked first among all of the Air Carrier award winners. The credit goes to our superb Cargo, Ramp, and Operations Employees. We are very proud of them, indeed. This bodes well for Southwest, as we strive to replace revenue lost from the canceled U.S. Mail contract, with more commercial cargo business."

Southwest will discuss its third quarter 2006 results on a conference call at 11:30 a.m. Eastern Time today. A live broadcast of the conference call will be available at southwest.com.

Total operating revenues for third quarter 2006 increased 17.7 percent to $2.34 billion, compared to $1.99 billion for third quarter 2005. Revenue passenger miles (RPMs) increased 8.6 percent to 17.8 billion, as compared to an 8.8 percent increase in available seat miles (ASMs) to 23.8 billion, resulting in a third quarter load factor of 74.7 percent. Passenger revenue yield per RPM increased 8.8 percent to 12.71 cents from 11.68 cents in third quarter 2005. Freight and Other revenues increased 9.1 percent from the same period last year due to an increase in business partner income partially offset by the elimination of mail revenue resulting from the decision not to renew the Company's contract with the U.S. Postal Service, effective as of the end of second quarter 2006. Operating revenue yield per ASM (RASM) increased 8.2 percent to 9.85 cents from 9.10 cents in third quarter 2005.

Total third quarter 2006 operating expenses were $2.08 billion, compared to $1.74 billion in third quarter 2005. Operating expenses per ASM (CASM) for third quarter 2006 increased 9.8 percent to 8.75 cents, compared to 7.97 cents in third quarter 2005. CASM (economic) for third quarter 2006 increased 11.0 percent to 8.75 cents, compared to 7.88 cents for third quarter 2005 primarily due to significantly higher jet fuel costs. CASM, excluding fuel, for third quarter 2006 decreased 0.6 percent to 6.38 cents from last year’s 6.42 cents.

Operating income for third quarter 2006 was $261 million, an increase of 5.2 percent, compared to $248 million in third quarter 2005. Operating income (economic) decreased 2.6 percent in third quarter 2006 to $260 million from $267 million in third quarter 2005.

The $278 million swing in total other expenses (income) primarily resulted from $186 million in “other losses” recognized in third quarter 2006 versus $104 million in “other gains” recognized in third quarter 2005. In both periods, these “other (gains) losses” primarily resulted from noncash SFAS 133 items.

Net cash provided by operations for the nine months ended September 30, 2006 was $1.26 billion, which included a $270 million decrease in fuel hedge collateral deposits related to future periods. For the nine months ended September 30, 2006, capital expenditures were $1.05 billion, and the Company also repurchased $600 million of its common stock. The Company ended third quarter 2006 with $2.3 billion in cash and short-term investments, which includes $680 million in fuel hedge collateral deposits. In addition, the Company also had a fully available unsecured revolving credit line of $600 million. During fourth quarter 2006, the Company will repay approximately $470 million in debt.

Total operating revenues for the nine months ended September 30, 2006 increased 21.7 percent to $6.81 billion while total operating expenses increased 20.7 percent to $6.05 billion, resulting in operating income of $760 million, compared to $585 million for the nine-month period in 2005. Operating income (economic) was $802 million and $606 million, respectively, for the nine months ended September 30, 2006 and 2005. Net income for the nine-month period in 2006 was $442 million, or $.53 per diluted share, compared to $414 million, or $.52 per diluted share, for the same period last year. Excluding the impact of the unrealized SFAS 133 items relating primarily to future periods, net income for the nine months ended September 30, 2006 was $491 million, or $.59 per diluted share, compared to $344 million, or $.43 per diluted share, for the same period last year. Including the cash benefit of $557 million from fuel hedging gains, year-to-date jet fuel costs per gallon (economic) increased 54.2 percent from the same period in 2005.

 

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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 2005 and subsequent filings. 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.

SOUTHWEST AIRLINES CO.
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
(in millions, except per share amounts)
(unaudited)
		Three Months Ended									Nine Months Ended
		September 30,									September 30,
								Percent									Percent
		2006			2005			Change			2006			2005			Change
Fuel and oil expense - unhedged		$	764		$	613					$	2,096		$	1,574
Less: Fuel hedge gains included in fuel and oil expense			(201	)		(276	)					(515	)		(627	)
GAAP fuel and oil expense, as reported			563			337			67.1			1,581			947			66.9
Add/(Deduct): Impact from current period settled contracts
included in Other (gains) losses, net			32			(22	)					(3	)		(26	)
Add/(Deduct): Fuel contract impact recognized in earnings
in prior periods for contracts settling in the current period			(31	)		3						(39	)		5
Fuel and oil expense - economic basis		$	564		$	318			77.4		$	1,539		$	926			66.2
Operating income, as reported		$	261		$	248					$	760		$	585
Add/(Deduct): Impact from current period settled contracts
included in Other (gains) losses, net			(32	)		22						3			26
Add/(Deduct): Fuel contract impact recognized in earnings
in prior periods for contracts settling in the current period			31			(3	)					39			(5	)
Operating income - economic fuel basis		$	260		$	267			(2.6)		$	802		$	606			32.3
Other (gains) losses, net, as reported		$	186		$	(104	)				$	71		$	(112	)
Add/(Deduct): Mark-to-market impact from fuel contracts
settling in future periods			(123	)		73						(18	)		88
Add/(Deduct): Ineffectiveness from fuel hedges settling in future periods			(18	)		14						(22	)		20
Add/(Deduct): Impact from current period settled contracts
included in Other (gains) losses, net			(32	)		22						3			26
Other (gains) losses, net - economic fuel basis		$	13		$	5			n.a.		$	34		$	22			n.a.
Net income, as reported		$	48		$	210					$	442		$	414
Add/(Deduct): Mark-to-market impact from fuel contracts
settling in future periods			123			(73	)					18			(88	)
Add/(Deduct): Ineffectiveness from fuel hedges settling in future periods			18			(14	)					22			(20	)
Add/(Deduct): Fuel contract impact recognized in earnings
in prior periods for contracts settling in the current period			31			(3	)					39			(5	)
Income tax impact of unrealized items			(66	)		35						(30	)		43
Net income - economic fuel basis		$	154		$	155			(0.6)		$	491		$	344			42.7
Net income per share, diluted, as reported		$	.06		$	.26					$	.53		$	.52
Add/(Deduct): Impact of fuel contracts, net of income taxes			.13			(.07	)					.06			(.09	)
Net income per share, diluted - economic fuel basis		$	.19		$	.19			-		$	.59		$	.43			37.2
Note regarding use of non-GAAP financial measures
The non-GAAP items referred to in this news release are provided as supplemental information, and should not be relied upon as alternative measures to
Generally Accepted Accounting Principles (GAAP). These non-GAAP measures include items calculated by the Company on an "economic" basis, which
excludes certain unrealized items that are recorded as a result of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended.
The unrealized items consist of gains or losses for derivative instruments that will settle in future accounting periods or gains or losses that have been
recognized in prior period results, but which have settled in the current period. This includes ineffectiveness, as defined, for future period instruments and
the change in market value for future period derivatives that no longer qualified for special hedge accounting, as defined in SFAS 133.
The Company's management utilizes both the GAAP and the non-GAAP results in this news release to evaluate the Company's performance and believes
that comparative analysis of results can be enhanced by excluding the impact of the unrealized items. Management believes in certain cases, the Company's
GAAP results are not indicative of the Company's operating performance for the applicable period, nor should they be considered in developing trend analysis
for future periods. In addition, since fuel expense is such a large part of the Company's operating costs and is subject to extreme volatility, the Company
believes it is useful to provide investors with the Company's true economic cost of fuel for the periods presented, based on cash settlements from hedging
activities including gains or losses recognized in prior periods, but excluding the unrealized impact of hedges that will settle in future periods.

 

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