Southwest Airlines Reports Fourth Quarter Results and 39th Consecutive Year of Profitability

DALLAS, Jan. 19, 2012 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its fourth quarter and full year 2011 results.  Fourth quarter 2011 net income was $152 million, or $.20 per diluted share, which included $86 million (net) of favorable special items.This compared to net income of $131 million, or $.18 per diluted share, for fourth quarter 2010, which included favorable special items totaling $16 million (net).  Excluding special items, fourth quarter 2011 net income was $66 million, or $.09 per diluted share, compared to net income of $115 million, or $.15 per diluted share, in fourth quarter 2010.  This exceeded Thomson's First Call mean estimate of $.08 per diluted share for fourth quarter 2011.  Additional information regarding special items is included in this release and in the accompanying reconciliation tables. 

For the full year 2011, net income was $178 million, or $.23 per diluted share, which included $152 million (net) of unfavorable special items. This compared to $459 million, or $.61 per diluted share, for full year 2010, which included $91 million (net) of unfavorable special items.  Excluding special items, full year 2011 net income was $330 million, or $.43 per diluted share, compared to net income of $550 million, or $.74 per diluted share, for full year 2010.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "Excluding special items, fourth quarter 2011 net income was $66 million, and full year 2011 net income was $330 million.  We had an outstanding revenue performance.  Our fourth quarter operating revenues were a record $4.1 billion.  Fourth quarter passenger revenues were strong, driven by record yields and continued high load factors.  Compared to the prior year, our fourth quarter passenger unit revenues increased 8.2 percent (on a combined basis, as defined below).  Based on current traffic and booking trends, we expect another strong passenger revenue performance in first quarter of 2012.   

"While it is always disappointing to report a year-over-year decline in profits (excluding special items), the fourth quarter and full year declines were primarily caused by significantly higher fuel prices.  Our fourth quarter economic fuel costs per gallon increased 33.7 percent to $3.29, compared to our combined fuel costs of $2.46 per gallon in fourth quarter last year.  Our full year 2011 combined economic fuel costs were $3.18 per gallon, an increase of 34.7 percent, compared to our combined fuel costs of $2.36 per gallon last year.  Based on market prices as of January 13^th, our first quarter 2012 economic fuel costs, including fuel taxes, are estimated to be approximately $3.35 per gallon, compared to our combined economic fuel costs, including fuel taxes, of $2.95 per gallon in first quarter last year.  High energy prices demand continued focus on improving productivity and eliminating waste.

"Despite the decline in earnings, 2011 was a momentous year at Southwest Airlines.  We celebrated our 40^th year of providing legendary low fare, high quality, domestic air travel and delivered our 39^th consecutive year of profits to our Shareholders.  We launched service to Greenville-Spartanburg and Charleston, South Carolina and Newark, New Jersey within two weeks time, increasing Southwest's domestic footprint to 72 cities.  In March, we launched our All-New Rapid Rewards® program.  The completely revamped, industry-leading frequent flyer program continues to grow at a strong pace.  Results, thus far, are well beyond our expectations. 

"On May 2^nd, we acquired AirTran Airways, increasing our fleet by 140 aircraft, and extending our combined network into key markets we didn't previously serve, such as Atlanta and Washington, D.C., via Ronald Reagan National Airport, as well as many smaller domestic cities and leisure markets in the Caribbean and Mexico.   We also expanded our presence at New York LaGuardia, Boston, Milwaukee, and Baltimore/Washington. 

"While it will take several years to fully integrate AirTran into Southwest Airlines, I am very proud of the tremendous progress in only eight months' time.  We are on track to obtain our single operating certificate this quarter. The Southwest Airlines Pilots' Association and the Air Line Pilots Association took the lead on negotiating a seniority list integration (SLI) agreement that was ratified by both Pilot groups.  The Flight Attendants', Mechanics', and Flight Instructors' unions have tentative SLI agreements, currently out for vote by the memberships.  As a result of the superb efforts of our People, we are already producing over $200 million of net annualized pre-tax synergies, which is 50 percent of our $400 million target by 2013 (excluding acquisition and integration expenses).  For 2011, we realized $80 million in net pre-tax synergies, and the acquisition was modestly accretive to our 2011 results, excluding special items, as planned."

The Company incurred $134 million in expenses (before taxes) associated with the acquisition and integration of AirTran during 2011, including $37 million in fourth quarter 2011.  The Company expects total acquisition and integration expenses will be approximately $500 million. 

Kelly continued, "In December, we unveiled our fleet modernization plans, including the launch of the B737-MAX aircraft beginning in 2017, representing our fourth time as Boeing's launch customer.  Our agreements with Boeing afford us significant flexibility to replace our older, less efficient aircraft with new Boeing 737-700/800 aircraft and the B737-MAX aircraft.  During 2012, we will take delivery of 33 737-800s, with the first delivery of the -800 model to Southwest scheduled for March.  Earlier this week, we announced the final prong of our fleet modernization plans.  Leveraging the new Boeing Sky Interior from the -800 model, we decided to retrofit our -700 fleet with an updated cabin interior.  Evolve: The New Southwest Experience is a -700 cabin refresh intended to enhance Customer comfort, personal space, and the overall travel experience.  It allows for the added benefit of six additional seats, along with more climate-friendly and cost-effective materials.  Our fleet modernization plans have been designed to drive significant value in the near and long term.

"Operationally, we finished the year strong with our highest December ontime performance in 15 years.  Our People continue to deliver outstanding levels of Customer Service, as recognized by Southwest Airlines being named the 2011 Customer Service Champion by J.D. Powers, and the Customer Satisfaction Leader in Consumer Reports' list of airline ratings.

"I commend each of our 45,000+ Warriors for their hard work and notable accomplishments.  We accomplished everything we set out to do in 2011, with soaring fuel costs the only disappointment.  As we prepare for our next 40 years, our target is fixed on a 15 percent pretax return on invested capital.  Capital commitments for 2012 are approximately $1.3 billion, our 2012 capacity is estimated to be flat with 2011, and we currently plan to end 2012 with 691 aircraft in our fleet.  Future capital spending will be carefully monitored with a focus on generating free cash flow.  We are committed to providing exceptional Customer Service at everyday low fares; focused on investing in the Customer Experience while preserving our low cost position; and engaged in our strategic initiatives to drive Shareholder value."

Financial Results and Outlook

AirTran Airways, Inc. became a wholly-owned subsidiary of the Company on May 2, 2011. Results discussed in this release and provided in the accompanying unaudited Condensed Consolidated Financial Statements and Comparative Consolidated Operating Statistics include the results of operations and cash flows for AirTran from May 2 through December 31, 2011, including the impact of purchase accounting.  Periods presented prior to the acquisition date do not include AirTran's results.  However, the Company believes the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability.  Financial information presented on a "combined basis" is the sum of the historical financial results of the Company and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting only as of May 2, 2011.  Supplemental financial information presented on a "combined basis" and the accompanying reconciliations have been included in this release.

The Company's total operating revenues in fourth quarter 2011 increased 31.9 percent to $4.1 billion, compared to $3.1 billion in fourth quarter 2010, and increased 9.3 percent compared to $3.8 billion for combined fourth quarter 2010 total operating revenues.  Operating unit revenues increased 7.0 percent from fourth quarter 2010, on a combined basis.

Total fourth quarter 2011 operating expenses were $4.0 billion, compared to $2.9 billion in fourth quarter 2010, and compared to $3.5 billion for combined fourth quarter 2010 total operating expenses.  Excluding special items in both periods, fourth quarter 2011 unit costs increased 10.8 percent from fourth quarter 2010 combined unit costs, largely due to a 33.7 percent year-over-year increase in economic fuel costs per gallon.   Fourth quarter 2011 economic fuel costs of $3.29 per gallon included $0.12 per gallon in unfavorable cash settlements for fuel derivative contracts; however, fuel derivative contract premiums are down significantly year-over-year, as described below in other income.  Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables. 

Excluding fuel and special items in both periods, fourth quarter 2011 unit costs increased 0.5 percent from fourth quarter 2010's combined 7.72 cents.  Based on current cost trends, the Company expects another year-over-year increase in its first quarter 2012 unit costs, compared to first quarter 2011's combined unit costs of 7.83 cents, excluding fuel and special items in both periods.

Operating income for fourth quarter 2011 was $147 million, compared to $216 million in fourth quarter 2010.  Excluding special items in both periods, operating income was $167 million for fourth quarter 2011, compared to $263 million in fourth quarter 2010, and compared to $278 million for combined fourth quarter 2010 operating income.

Other income for the fourth quarter was $108 million compared to $3 million of other expenses for fourth quarter 2010.  This $111 million swing primarily resulted from $153 million in gains recognized in fourth quarter 2011, compared to $31 million in gains recognized in fourth quarter 2010.  In both periods, these gains primarily resulted from unrealized gains/losses associated with a portion of the Company's fuel hedging portfolio.  Excluding these special items, other losses were primarily attributable to the premium costs associated with the Company's fuel derivative contracts.  Fourth quarter 2011 premium costs were $14 million, compared to $44 million in fourth quarter 2010, on a combined basis. First quarter 2012 premium costs are currently estimated to be approximately $6 million, compared to combined premium costs of $36 million in first quarter 2011. 

Total operating revenues for the year ended December 31, 2011, increased 29.4 percent to $15.7 billion, while total operating expenses increased 34.6 percent to $15.0 billion, resulting in operating income of $693 million, compared to $988 million for the year ended 2010.  Excluding special items in both periods, operating income was $839 million for the year ended December 31, 2011, compared to $1.2 billion in 2010.  On a combined basis, total operating revenues for 2011 increased 12.7 percent to $16.6 billion, while total operating expenses increased 17.3 percent to $15.9 billion, resulting in combined operating income for 2011 of $662 million, compared to $1.1 billion for 2010.  Excluding special items in both periods, combined operating income for 2011 was $834 million, compared to $1.3 billion for 2010.

The Company's return on invested capital (before taxes and excluding special items) was approximately seven percent for the year ended December 31, 2011, including AirTran's results beginning May 2, 2011.  Additional information regarding pretax return on invested capital is included in the accompanying reconciliation tables.   

Liquidity

Net cash provided by operations for 2011 was $1.4 billion, and capital expenditures were $968 million.  As a result, the Company generated over $400 million in free cash flow* in 2011.

On August 5, 2011, the Company's Board of Directors authorized a share repurchase program to acquire up to $500 million of the Company's common stock. During 2011, the Company purchased approximately 27.5 million shares of common stock for approximately $225 million.  The Company repaid $638 million in debt during 2011, and is scheduled to repay approximately $560 million debt in 2012, including $430 million in first quarter 2012.  After this planned first quarter debt payment, the Company will have reduced debt by approximately $1 billion since acquiring AirTran in May 2011.  As of January 18^th, the Company had approximately $3.5 billion in cash and short-term investments.  In addition, the Company also had a fully available unsecured revolving credit line of $800 million.

2011 Awards and Recognitions

• Named the fourth most admired Company in the world in FORTUNE magazine's 2011 survey of corporate reputations
• Voted best low-cost carrier in North America by Business Traveler Magazine subscribers
• Named the 2011 Customer Service Champion by J.D. Powers based on customer feedback regarding service excellence
• Named Brand of the Year in Harris Poll EquiTrend's airline category based on equity, customer connection, commitment, brand behavior, brand advocacy, and trust
• Ranked third in the Top 10 Business Thought Leaders by TLG Communications
• Received first place for Best Overall Customer Experience in the Keynote Competitive Research Industry Study examining U.S. Air Travel Websites
• Named Airline of the Year by Express Delivery and Logistics Association, the tenth consecutive year for Southwest Airlines Cargo to receive the recognition; also recognized for Excellence in Web Site and Technology for the second year in a row
• Southwest Cargo was also named Domestic Carrier of the Year for 2011 by the Airforwarders Association for the second consecutive year and was recently recognized for excellence in Air Cargo World's annual Air Cargo Excellence (ACE) Survey
• Recognized by PR News with several awards including the 2011 PR News Corporate Responsibility Awards for Diversity Communications, the Corporate Social Responsibility Award for Best Report, and honorable mention for the Social Corporate Responsibility Award for Corporate/Nonprofit Partnership
• Named the Greenest Airline by ClimateCounts.org
• Voted the Customer Satisfaction Leader in Consumer Reports' list of airline ratings receiving the highest rankings in check-in ease, cabin crew service, cabin cleanliness, baggage handling, and seating comfort
• Ranked sixth in the  2011 Customer Service Hall of Fame by MSN Money, the only airline to make the top ten
• Named one of the 100 Top Military Friendly Employers by GI Jobs magazine
• Recognized for Best Practices in Supplier Diversity by the Dallas Fort Worth Minority Business Council
• Named the Stevie Award Winner for the Company of the Year-Transportation by The International Business Awards for outstanding performance and Customer Service
• Received the 2011 Quest for Quality Award for Excellence in Air Cargo from Logistics Management Magazine; ranked first in ontime performance, value, and Customer Service
• Recognized as one of the top ten safest airlines in the Holistic Safety Rating 2011 by the Air Transport Rating Agency
• Recognized as one of the 50 best places to work by the Glassdoors.com Employees' Choice Awards    

Southwest will discuss its fourth quarter and full year 2011 results on a conference call at 12:30 p.m. Eastern Time today.  A live broadcast of the conference call will also be available at southwest.investorroom.com.

*See Note Regarding use of Non-GAAP financial measures.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Specific forward-looking statements include, without limitation, statements related to (i) the Company's financial targets, outlook, and projected results of operations; (ii) the Company's plans and expectations relating to its acquisition of AirTran, including without limitation anticipated integration timeframes and expected costs, synergies, and other financial results associated with the acquisition; (iii) the Company's fleet modernization plans and related expectations; and (iv) the Company's capacity plans. 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) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (ii) the Company's ability to successfully integrate AirTran and realize the expected synergies and other benefits from the acquisition; (iii) the impact of the economy on demand for air travel and the impact of fuel prices, economic conditions, and actions of competitors on the Company's business decisions, plans, and strategies; (iv) the Company's dependence on third parties with respect to certain of its initiatives; (v) the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; and (vi) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010.