Form: 8-K

Current report filing

April 19, 2007

Documents


 
CONTACT: Investor Relations (214) 792-4415
 
SOUTHWEST AIRLINES REPORTS FIRST QUARTER EARNINGS;
64th CONSECUTIVE QUARTER OF PROFITABILITY

 
DALLAS, TEXAS - April 19, 2007 - Southwest Airlines (NYSE:LUV) today reported its first quarter 2007 results. Net income for first quarter 2007 was $93 million, or $.12 per diluted share, compared to $61 million, or $.07 per diluted share, for first quarter 2006. Economic net income for first quarter 2007 was $33 million, or $.04 per diluted share, compared to $64 million, or $.08 per diluted share, for first quarter 2006. This economic net income result is in line with First Call’s mean estimate of $.04 per diluted share for first quarter 2007. (Refer to the reconciliation in the accompanying tables for further information regarding economic results.)

First Quarter 2007 Financial Highlights:
·  
Record first quarter revenues of $2.2 billion, up 8.9 percent
·  
Economic net income of $33 million, down 48.4 percent
·  
Economic net income per diluted share of $.04, down 50 percent
·  
Repurchased 13.5 million shares of common stock for $209 million
 
                Gary C. Kelly, CEO, stated: “Although we are gratified to report our 64th consecutive quarter of profitability, it is disappointing to report first quarter economic earnings below year-ago levels. Led by higher fuel costs, our year-over-year first quarter 2007 economic operating costs increased 4.3 percent per available seat mile, as expected. Based on the strength of last year’s overall revenue growth, we had hoped this year’s revenue growth would surmount these cost pressures. First quarter 2007 unit revenue growth of 1.4 percent was solid, but slower compared to last year’s growth rate. Inclement weather, a slowing economy, and higher fare levels likely combined to cool the rate of growth in domestic air travel.
“Last year’s second quarter revenue performance was exceptionally strong, on the heels of major capacity reductions by various competitors. Based on first quarter results, April traffic to date and future second quarter bookings, we expect to fall below last year’s extraordinary second quarter unit revenue of 10.70 cents. We do expect the normal seasonal improvement in unit revenues from first to second quarter, however.
 
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“Despite $65 million in favorable cash settlements from derivative contracts for first quarter 2007, our economic fuel costs per gallon increased 11.6 percent to $1.63. We have derivative contracts for over 95 percent of our estimated second quarter 2007 fuel consumption, capped at an average crude-equivalent price of approximately $50 per barrel (compared to over 75 percent at approximately $36 per barrel for second quarter 2006). Based on this derivative position and current market prices, we are hopeful our second quarter 2007 economic fuel costs will not exceed $1.70 per gallon. We currently have derivative contracts for approximately 90 percent of our estimated fuel consumption for the second half of 2007 at an average crude-equivalent price of approximately $50 per barrel.
 “As expected, our first quarter 2007 unit costs, excluding fuel, increased 1.7 percent over last year. Based on current cost trends, we expect our second quarter 2007 unit costs, excluding fuel, to be comparable to second quarter 2006’s 6.68 cents.
“We continue efforts to improve productivity and enhance the overall travel experience for our valued Customers. As always, we are dedicated to maintaining our Low Fare Leadership and strong Customer Satisfaction record and are proud that we were recently recognized by BusinessWeek on their list of the Top 25 Customer Service Champs. Southwest Airlines was also recognized for the eleventh consecutive year by Fortune as one of the Most Admired Companies in America. In addition, Forbes included Southwest in its Platinum List of Best Big Companies in America and Business Ethics Magazine recognized Southwest as one of the 100 Best Corporate Citizens for the eighth year in a row.
"With the lowest overall unit costs (adjusted for stage length), strongest financial position, outstanding Customer Service, and best Employees in the U.S. airline industry, we are well positioned to maintain our profitability and expand our route system even during less than favorable economic times for our industry. Our focus is on preparing Southwest for the future and perhaps being less reliant on fare increases for future unit revenue growth. Although we continue to be challenged with higher fuel and other cost pressures, we believe we have substantial opportunities to grow our revenues over the next several years and are confident we can achieve our longterm financial goals.
“We continue to actively explore the secondary aircraft market for additional aircraft and currently have intentions to lease two previously owned 737-700 aircraft, bringing our aircraft additions to 39 for this year. Our estimated year-over-year available seat mile growth for 2007 is approximately eight percent. In addition, we exercised two Boeing 737-700 options for 2008 delivery, bringing our 2008 firm orders and options to 32 and two, respectively. These aircraft will allow us to continue the successful development of our new markets and to respond to Customer demand in existing markets. We are also excited to resume service to San Francisco International Airport this fall.”
Southwest will discuss its first quarter 2007 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.

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Operating Results
Total operating revenues for first quarter 2007 increased 8.9 percent to $2.2 billion, compared to $2.0 billion for first quarter 2006. Total first quarter 2007 operating expenses were $2.1 billion, compared to $1.9 billion in first quarter 2006. Operating income for first quarter 2007 was $84 million compared to $98 million in first quarter 2006. Economic operating income was $70 million in first quarter 2007 compared to $115 million last year.
                “Other income” was $65 million for first quarter 2007, compared to $2 million in “other expenses” for first quarter 2006. The $67 million swing primarily resulted from unrealized “other (gains) losses” associated with Statement of Financial Accounting Standard (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The cost of the hedging program (which includes the premium costs of derivative contracts) of $14 million in first quarter 2007 and $11 million in first quarter 2006 is also included in "other (gains) losses."
Net cash provided by operations for first quarter 2007 was $617 million, which included a $345 million increase in fuel derivative collateral deposits related to future periods. Capital expenditures were $325 million for first quarter 2007. The Company repurchased 13.5 million shares of its common stock for $209 million during the first quarter, of which $200 million completed the $400 million repurchase authorization by the Company’s Board of Directors in November 2006. The remaining $9 million related to the $300 million repurchase program authorized last month. As of yesterday, the Company had repurchased 4.2 million shares of its common stock for a total of $62.8 million under this latest authorization.
The Company ended first quarter 2007 with $1.9 billion in cash and short-term investments, which included $885 million in fuel derivative collateral deposits. In addition, the Company had a fully available unsecured revolving credit line of $600 million. The Company will repay approximately $113 million in debt in the remainder of 2007.
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 2006 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.
 
 
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CONDENSED CONSOLIDATED STATEMENT OF INCOME
          
(in millions, except per share amounts)
             
(unaudited)
              
               
               
               
   
Three months ended
  
   
March 31,
  
           
Percent
 
   
2007
 
2006
 
Change
 
               
OPERATING REVENUES:
              
Passenger
  
$
2,112
  
$
1,938
    
9.0
 
Freight
    
30
   
35
   
(14.3
)
Other
    
56
   
46
   
21.7
 
  Total operating revenues
    
2,198
   
2,019
   
8.9
 
                     
OPERATING EXPENSES:
                    
Salaries, wages, and benefits
    
767
   
716
   
7.1
 
Fuel and oil
    
564
   
501
   
12.6
 
Maintenance materials and repairs
    
136
   
104
   
30.8
 
Aircraft rentals
    
39
   
40
   
(2.5
)
Landing fees and other rentals
    
136
   
120
   
13.3
 
Depreciation and amortization
    
135
   
124
   
8.9
 
Other operating expenses
    
337
   
316
   
6.6
 
  Total operating expenses
    
2,114
   
1,921
   
10.0
 
                     
OPERATING INCOME
    
84
   
98
   
(14.3
)
                     
OTHER EXPENSES (INCOME):
                    
Interest expense
    
29
   
34
   
(14.7
)
Capitalized interest
    
(13
)
  
(12
)
  
8.3
 
Interest income
    
(13
)
  
(18
)
  
(27.8
)
Other (gains) losses, net
    
(68
)
  
(2
)
  
n.a.
 
  Total other expenses (income)
    
(65
)
  
2
   
n.a.
 
                     
                     
INCOME BEFORE INCOME TAXES
    
149
   
96
   
55.2
 
PROVISION FOR INCOME TAXES
    
56
   
35
   
60.0
 
                     
                     
NET INCOME
  
$
93
  
$
61
    
52.5
 
                     
                     
NET INCOME PER SHARE:
                    
Basic
  
 
$ .12
  
 
$ .08
        
Diluted
  
 
$ .12
  
 
$ .07
        
                     
WEIGHTED AVERAGE SHARES OUTSTANDING:
                    
Basic
    
786
   
803
       
Diluted
    
800
   
836
       




 
 
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RECONCILIATION OF REPORTED AMOUNTS TO ECONOMIC RESULTS (SEE NOTE)
      
(in millions, except per share amounts)
              
(unaudited)
              
               
   
Three Months Ended
  
   
March 31,
  
   
 
      
Percent
  
   
2007
 
2006
 
Change
  
   
 
  
 
      
               
Fuel and oil expense - unhedged
  
$
643
  
$
617
        
Less: Fuel hedge gains included in fuel and oil expense
    
(79
)
  
(116
)
      
GAAP fuel and oil expense, as reported
    
564
   
501
   
12.6
 
Add/(Deduct): Impact from current period settled contracts
                    
included in Other (gains) losses, net
    
(4
)
  
10
       
Add/(Deduct): Fuel contract impact recognized in earnings
                    
in prior periods for contracts settling in the current period
    
18
   
(27
)
      
Fuel and oil expense - economic basis
  
$
578
  
$
484
    
19.4
 
                     
                     
Operating income, as reported
  
$
84
  
$
98
        
Add/(Deduct): Impact from current period settled contracts
                    
included in Other (gains) losses, net
    
4
   
(10
)
      
Add/(Deduct): Fuel contract impact recognized in earnings
                    
in prior periods for contracts settling in the current period
    
(18
)
  
27
       
Operating income - economic fuel basis
  
$
70
  
$
115
    
(39.1
)
                     
                     
Other (gains) losses, net, as reported
  
$
(68
)
$
(2
)
      
Add/(Deduct): Mark-to-market impact from fuel contracts
                    
settling in future periods
    
85
   
40
       
Add/(Deduct): Ineffectiveness from fuel hedges settling in future periods
    
(6
)
  
(17
)
      
Add/(Deduct): Impact from current period settled contracts
                    
included in Other (gains) losses, net
    
4
   
(10
)
      
Other (gains) losses, net - economic fuel basis
  
$
15
  
$
11
    
n.a.
 
                     
                     
Net income, as reported
  
$
93
  
$
61
        
Add/(Deduct): Mark-to-market impact from fuel contracts
                    
settling in future periods
    
(85
)
  
(40
)
      
Add/(Deduct): Ineffectiveness from fuel hedges settling in future periods
    
6
   
17
       
Add/(Deduct): Fuel contract impact recognized in earnings
                    
in prior periods for contracts settling in the current period
    
(18
)
  
27
       
Income tax impact of unrealized items
    
37
   
(1
)
      
Net income - economic fuel basis
  
$
33
  
$
64
    
(48.4
)
                     
                     
Net income per share, diluted, as reported
  
$
.12
  
$
.07
        
Add/(Deduct): Impact of fuel contracts, net of income taxes
    
(.08
)
  
.01
       
Net income per share, diluted - economic fuel basis
  
$
.04
  
$
.08
    
(50.0
)
                     
Note regarding use of economic (non-GAAP) financial measures
                    
The economic (non-GAAP) items and results 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). Items calculated by the Company on an "economic" basis exclude certain unrealized items that are recorded as a result of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. The unrealized items primarily 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 economic 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 certain gains or losses recognized in prior periods, but excluding the unrealized impact of hedges that will settle in future periods.
 
 
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SOUTHWEST AIRLINES CO.
              
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
          
(unaudited)
              
               
   
Three months ended
  
   
March 31,
  
   
2007
 
2006
 
Change
  
               
Revenue passengers carried
    
19,960,933
   
19,199,488
   
4.0
%
Enplaned passengers
    
22,903,073
   
22,015,484
   
4.0
%
Revenue passenger miles (RPMs) (000s)
    
16,109,071
   
15,280,497
   
5.4
%
Available seat miles (ASMs) (000s)
    
23,678,376
   
22,079,458
   
7.2
%
Load factor
    
68.0
%
  
69.2
%
  
(1.2)
  pts.
Average length of passenger haul (miles)
    
807
   
796
   
1.4
%
Average aircraft stage length (miles)
    
627
   
617
   
1.6
%
Trips flown
    
276,900
   
262,449
   
5.5
%
Average passenger fare
  
 
$105.79
  
 
$100.94
    
4.8
%
Passenger revenue yield per RPM (cents)
    
13.11
   
12.68
   
3.4
%
Operating revenue yield per ASM (cents)
    
9.28
   
9.15
   
1.4
%
Operating expenses per ASM (GAAP, in cents)
    
8.93
   
8.70
   
2.6
%
Operating expenses per ASM (economic, in cents)
    
8.99
   
8.62
   
4.3
%
Operating expenses per ASM, excluding fuel (cents)
    
6.54
   
6.43
   
1.7
%
Fuel costs per gallon, excluding fuel tax (unhedged)
  
 
$1.81
  
 
$1.86
    
(2.7
)%
Fuel costs per gallon, excluding fuel tax (GAAP)
  
 
$1.59
  
 
$1.51
    
5.3
%
Fuel costs per gallon, excluding fuel tax (economic)
  
 
$1.63
  
 
$1.46
    
11.6
%
Fuel consumed, in gallons (millions)
    
354
   
329
   
7.6
%
Fulltime equivalent Employees at period-end
    
33,195
   
31,396
   
5.7
%
Size of fleet at period-end
   
489
   
451
   
8.4
%





 
 
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SOUTHWEST AIRLINES CO.
          
CONDENSED CONSOLIDATED BALANCE SHEET
          
(in millions)
         
(unaudited)
          
           
   
March 31,
  
December 31,
  
   
2007
  
2006
  
           
ASSETS
         
Current assets:
          
Cash and cash equivalents
  
$
1,618
  
$
1,390
  
Short-term investments
    
315
   
369
 
Accounts and other receivables
    
278
   
241
 
Inventories of parts and supplies, at cost
    
174
   
181
 
Fuel derivative contracts
    
558
   
369
 
Prepaid expenses and other current assets
    
56
   
51
 
  Total current assets
    
2,999
   
2,601
 
               
Property and equipment, at cost:
              
Flight equipment
    
12,041
   
11,769
 
Ground property and equipment
    
1,384
   
1,356
 
Deposits on flight equipment purchase contracts
    
757
   
734
 
     
14,182
   
13,859
 
Less allowance for depreciation and amortization
    
3,897
   
3,765
 
     
10,285
   
10,094
 
Other assets
    
954
   
765
 
   
$
14,238
  
$
13,460
  
               
LIABILITIES & STOCKHOLDERS' EQUITY
             
Current liabilities:
              
Accounts payable
  
$
643
  
$
643
  
Accrued liabilities
    
1,748
   
1,323
 
Air traffic liability
    
1,010
   
799
 
Current maturities of long-term debt
    
123
   
122
 
  Total current liabilities
    
3,524
   
2,887
 
               
Long-term debt less current maturities
    
1,556
   
1,567
 
Deferred income taxes
    
2,183
   
2,104
 
Deferred gains from sale and leaseback of aircraft
    
117
   
120
 
Other deferred liabilities
    
304
   
333
 
Stockholders' equity:
              
Common stock
    
808
   
808
 
Capital in excess of par value
    
1,155
   
1,142
 
Retained earnings
    
4,264
   
4,307
 
Accumulated other comprehensive income
    
716
   
582
 
Treasury stock, at cost
    
(389
)
  
(390
)
  Total stockholders' equity
    
6,554
   
6,449
 
   
$
14,238
  
$
13,460
  






 
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
          
(in millions)
         
(unaudited)
          
   
Three months ended
  
   
March 31,
 
   
2007
 
2006
 
           
CASH FLOWS FROM OPERATING ACTIVITIES:
          
  Net income
  
$
93
  
$
61
  
  Adjustments to reconcile net income to
             
    cash provided by operating activities:
              
      Depreciation and amortization
    
135
   
124
 
      Deferred income taxes
    
42
   
35
 
      Amortization of deferred gains on sale and
              
         leaseback of aircraft
    
(4
)
  
(4
)
      Share-based compensation expense
    
13
   
22
 
      Excess tax benefits from share-based
              
         compensation arrangements
    
(29
)
  
(28
)
      Changes in certain assets and liabilities:
              
         Accounts and other receivables
    
(37
)
  
(13
)
         Other current assets
    
(56
)
  
14
 
         Accounts payable and accrued liabilities
    
383
   
317
 
         Air traffic liability
    
210
   
280
 
      Other
    
(133
)
  
(57
)
            Net cash provided by operating activities
    
617
   
751
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
  Purchases of property and equipment, net
    
(325
)
  
(262
)
  Purchases of short-term investments
    
(914
)
  
(850
)
  Proceeds from sales of short-term investments
    
968
   
782
 
  Proceeds from ATA Airlines, Inc. debtor in possession loan
    
-
   
20
 
  Other investing activities, net
    
-
   
1
 
            Net cash used in investing activities
    
(271
)
  
(309
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
  Proceeds from Employee stock plans
    
78
   
107
 
  Payments of long-term debt and capital lease obligations
    
(9
)
  
(37
)
  Payments of cash dividends
    
(7
)
  
(7
)
  Repurchase of common stock
    
(209
)
  
(214
)
  Excess tax benefits from share-based
              
    compensation arrangements
    
29
   
28
 
  Other, net
    
-
   
1
 
            Net cash provided by (used in) financing activities
    
(118
)
  
(122
)
               
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
228
   
320
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
1,390
   
2,280
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  
$
1,618
  
$
2,600
  






 
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737-700 DELIVERY SCHEDULE
                  
                           
                           
   
The Boeing Company
            
           
Purchase
 
Previously
          
   
Firm
  
Options
  
Rights
  
Owned
 
Total
                         
2007
    
37
               
2
 *  
39
**
2008
    
32
   
2
               
34
 
2009
    
18
   
18
               
36
 
2010
    
10
   
32
               
42
 
2011
    
10
   
30
               
40
 
2012
    
10
   
30
               
40
 
2008-2014
    
-
   
-
   
54
         
54
 
     
117
   
112
   
54
   
2
   
285
 
                                 
                                 
* Intend to lease two previously owned 737-700 aircraft
            
**2007 delivery dates: eight in first quarter, eleven in second quarter, eleven
      
   in third quarter and nine in fourth quarter.
                  


***