SOUTHWEST AIRLINES CO. 
By DALLAS, Jan. 24, 2013 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its fourth quarter and full year 2012 results. Fourth quarter 2012 net income was $78 million, or $.11 per diluted share, which included $13 million (net) of favorable special items. This compared to net income of $152 million, or $.20 per diluted share, in fourth quarter 2011, which included $86 million (net) of favorable special items. Excluding special items, fourth quarter 2012 net income was $65 million, or $.09 per diluted share, which was comparable to fourth quarter 2011. This exceeded the First Call consensus estimate of $.08 per diluted share. Additional information regarding special items is included in this release and in the accompanying reconciliation tables.
For the full year of 2012, net income was $421 million, or $.56 per diluted share, which included $4 million (net) of favorable special items. This compared to $178 million, or $.23 per diluted share, in full year 2011, which included $152 million (net) of unfavorable special items. Excluding special items, full year 2012 net income was $417 million, or $.56 per diluted share, compared to net income of $330 million, or $.43 per diluted share, for full year 2011. Operating income for full year 2012 was $623 million, compared to $693 million for full year 2011. Excluding special items, operating income for full year 2012 was $838 million, which was comparable to full year 2011.
Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "2012 was a year of tremendous progress. Our profits (excluding special items) of $417 million grew 26 percent as compared to 2011 and represented our 40(th) consecutive year of profitability. Without a doubt, this is a remarkable feat and a record unmatched in the airline industry. These solid earnings were achieved despite significant efforts and costs related to critical strategic initiatives. I expect these initiatives to produce substantial returns over the next several years. For 2012, these initiatives contributed to the 49 percent surge in our cash flow from operations to $2.1 billion. We ended the year with fourth quarter profits (excluding special items) of $65 million, which was in line with our year ago performance.
"I was very pleased with our operational performance for the year and our Customer Service delivery. Both were exceptional, especially considering the amount of work involved with our initiatives. I am deeply grateful to all of our People for their extraordinary efforts and a truly remarkable year.
"Our fourth quarter 2012 operating revenues were a fourth quarter record $4.2 billion, bringing full year 2012 operating revenues to more than $17 billion. Our strong fourth quarter 2012 operating revenue performance was driven by record yields, continued high load factors, and an impressive freight revenue performance. As with the full year profits, these strong revenues were achieved despite the transitional state of the AirTran route network. While there was much change in 2012, significant optimization efforts are planned in 2013 for the AirTran network. As we enter 2013, bookings and revenue trends, thus far, suggest a year-over-year improvement in January 2013 passenger unit revenues in the two to three percent range. While the effect of U.S. tax increases on the domestic economy remains uncertain, bookings for the remainder of first quarter, thus far, are strong.
"Our economic fuel costs, including fuel taxes, were $3.32 per gallon for fourth quarter 2012, and $3.28 per gallon for full year 2012, compared to $3.29 per gallon and $3.19 per gallon for the respective year-ago periods. Based on market prices as of January 18(th), our first quarter 2013 economic fuel costs, including fuel taxes, are estimated to be approximately $3.30 per gallon, as compared to $3.44 per gallon for first quarter 2012. While current fuel price levels are very high, the year-over-year decline estimated for first quarter 2013 economic fuel costs is an encouraging trend.
"As expected, our fourth quarter 2012 unit costs, excluding fuel, profitsharing, and special items, increased 5.8 percent, as compared to fourth quarter 2011. While we expect a similar trend in first quarter 2013, year-over-year unit cost inflation, excluding fuel, profitsharing, and special items, is expected to significantly ease for full year 2013 as we complete our Evolve interior cabin retrofits and begin to more fully realize benefits from our fleet modernization efforts.
"While we continue to transform our Company with a bold five-year strategic plan that began in 2011, we remain committed to the pillars of our success--outstanding Customer Service; safe, reliable, and efficient operations; and low costs. We are on track with our plan to fully integrate AirTran into Southwest Airlines by the end of 2014. We realized $142 million of net, annualized, pre-tax synergies during 2012, and we expect to achieve our $400 million target in 2013 (excluding acquisition and integration expenses). This month, we are on track to begin testing connecting itineraries between the Southwest and AirTran networks in a handful of markets, with significant offerings planned in February and more in March. Once fully implemented in April, we expect the connected networks to contribute incremental revenue in 2013 and provide significant opportunities to optimize the combined network. Our fleet modernization initiatives are on schedule with 259 Southwest 737-700 aircraft retrofitted with our new 143-seat Evolve cabin. We expect to have all 372 of Southwest's 737-700 aircraft retrofitted with Evolve by June and 78 of our 737-300 aircraft retrofitted by the end of 2013. We currently have 34 737-800s in our fleet with plans to grow to 54 this year and 78 next year. We have equipped 400 Southwest aircraft with Row 44 WiFi technology, providing our Customers access to satellite-based WiFi and live television. We intend to significantly grow our inflight entertainment offerings in 2013. We are thrilled with the Customer feedback and incremental revenue generated from our All-New Rapid Rewards frequent flyer program that was installed in 2011. Our international reservation system implementation is on track for 2014, and we continue to make great progress on implementing our new revenue management program in 2013. Also, we've announced new 2013 revenue streams: selling open A1 through A15 premium boarding positions and a new service charge for reuse of funds associated with restricted tickets that are not canceled (or changed) prior to departure. Collectively, we expect our strategic initiatives and new revenue streams to contribute the majority of the planned $1.1 billion year-over-year revenue increase in 2013. I am enthused about our 2013 plan and believe our transformation efforts will make us better, stronger, and more competitive.
"Our financial position remains strong with $3 billion in cash and short term investments. We generated $716 million in free cash flow* during 2012, and we expect healthy free cash flow* in 2013. We remain focused on enhancing Shareholder value through capital efficiency and our targeted 15 percent pretax return on invested capital.
"We believe in our strategic plan. And, the outstanding efforts, commitment, and dedication of our People exhibited in 2012 gives me confidence in our ability to successfully execute this plan. The year 2012 was a year of dramatic accomplishments that I believe positions us to be stronger than ever."
Notable 2012 accomplishments for Southwest Airlines include:
-- 40(th) consecutive year of profitability
-- 83.1 percent Ontime Performance
-- Recognized with numerous awards and recognitions, most notably being
named Customer Service Champions by JD Powers, included in the 2012
Customer Service Hall of Fame by MSN Money, and named one of America's
Top 500 Companies by Barrons
-- Received Single Operating Certificate in March 2012; ten months after
AirTran acquisition close
-- Launched 737-800 operations in March (34 aircraft currently in service)
-- Converted 259 Southwest 737-700s to new 143-seat Evolve configuration
(including progress thus far in 2013)
-- Continued equipping aircraft with satellite-based WiFi technology,
reaching the 400(th) installation in January 2013 (including AirTran
conversions)
-- Earned flag status and began selling service to Puerto Rico (to be
launched April 2013)
-- Launched Southwest service to Atlanta, Akron-Canton, and Dayton
-- Received slots at Ronald Reagan Washington National Airport and began
service
-- Launched AirTran service to Austin, Orange County, Mexico City, and Cabo
San Lucas
-- Discontinued AirTran service to 14 airports
-- Resolved all seniority list integrations
-- Converted 11 AirTran 737-700s to the Southwest livery with Evolve
configuration
-- Converted four AirTran stations to Southwest: Seattle, Dulles, Des
Moines, and Key West
-- Announced plans to convert seven more AirTran stations in 2013: Phoenix,
Branson, Charlotte, Flint, Portland (Maine), Rochester, and Wichita
-- Converted 26 percent of the AirTran workforce to Southwest
-- Harmonized all Customer policies between Southwest & AirTran
-- Opened new Pilot and Flight Attendant crew bases at Denver International
Airport
-- Selected Amadeus for International Reservation system for 2014
implementation
-- Completed 717 sublease/lease deal with Delta
-- Received Houston City Council approval for Hobby international terminal
-- Deferred $1 billion in capital spending
-- Returned $422 million to Shareholders through repurchasing $400 million
of common stock (approximately 46 million shares) and distributing $22
million in dividends
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 beginning May 2, 2011, including the impact of purchase accounting. Full year 2011 results do not include AirTran's results prior to the acquisition date. However, the Company believes the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability. Full year 2011 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 beginning May 2, 2011. Supplemental financial information presented on a "combined basis" and the accompanying reconciliations are included in this release.
The Company's total operating revenues in fourth quarter 2012 increased 1.6 percent to $4.2 billion, compared to $4.1 billion in fourth quarter 2011. Operating unit revenues increased 1.9 percent from fourth quarter 2011. Based on current bookings and revenue trends, the Company expects a solid year-over-year increase in its first quarter 2013 unit revenues.
Total fourth quarter 2012 operating expenses were $4.1 billion, compared to $4.0 billion in fourth quarter 2011. Excluding special items in both periods, fourth quarter 2012 operating expenses increased 2.4 percent from fourth quarter 2011.
Fourth quarter 2012 economic fuel costs, including fuel taxes, were $3.32 per gallon, including $.09 per gallon in unfavorable cash settlements for fuel derivative contracts, compared to $3.29 per gallon in fourth quarter 2011, including $.12 per gallon in unfavorable cash settlements for fuel derivative contracts. Based on market prices as of January 18, 2013, the Company expects first quarter 2013 economic fuel costs, including fuel taxes, to be approximately $3.30 per gallon, including $.05 per gallon in unfavorable cash settlements for fuel derivative contracts. First quarter 2013 premium costs related to fuel derivative contracts, recorded in Other (gains) losses, are currently estimated to be approximately $5 million, compared to premium costs of $6 million in first quarter 2012. As of January 18, 2013, the fair market value of the Company's hedge portfolio through 2017 was a net asset of approximately $216 million, compared to a net asset of approximately $220 million at December 31, 2012. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.
Fourth quarter 2012 profitsharing expense was $19 million, which was comparable to fourth quarter 2011. Excluding fuel, profitsharing, and special items in both periods, fourth quarter 2012 unit costs increased 5.8 percent from fourth quarter 2011. Based on current cost trends, the Company expects a similar year-over-year increase in its first quarter 2013 unit costs, excluding fuel, profitsharing and special items in both periods.
Operating income for fourth quarter 2012 was $91 million, compared to $147 million in fourth quarter 2011. Excluding special items in both periods, operating income was $136 million for fourth quarter 2012, compared to $167 million in fourth quarter 2011. The Company incurred $14 million in special charges (before taxes) during fourth quarter 2012 associated with the acquisition and integration of AirTran.
Other income for fourth quarter 2012 was $34 million, compared to $108 million in fourth quarter 2011. This $74 million decrease primarily resulted from $62 million in gains recognized in fourth quarter 2012, compared to $153 million in fourth quarter 2011. In both periods, these gains 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 $3 million in fourth quarter 2012, compared to $15 million in fourth quarter 2011, primarily attributable to the premium costs associated with the Company's fuel derivative contracts. Net interest expense declined to $28 million in fourth quarter 2012, compared to $45 million in fourth quarter 2011, primarily as a result of the Company's repayment of its $400 million notes in December 2011 and the redemption of its $385 million notes in March 2012.
Total operating revenues for full year 2012 increased 9.1 percent to $17.1 billion, while total operating expenses increased 10.0 percent to $16.5 billion, resulting in operating income of $623 million, compared to $693 million for full year 2011. For full year 2012, special charges (before taxes) associated with the acquisition and integration of AirTran were $183 million, bringing cumulative costs incurred to $324 million (before profitsharing and taxes). The Company expects total acquisition and integration costs will be no more than $550 million. Excluding special items, operating income was $838 million for full year 2012, compared to $839 million for full year 2011. Excluding special items and compared to combined results for the same period in 2011, total operating revenues for full year 2012 increased 3.0 percent, while total operating expenses increased 3.1 percent, resulting in a 0.5 percent increase in operating income for full year 2012.
The Company's return on invested capital (before taxes and excluding special items) was approximately 7 percent for the year ended December 31, 2012. Additional information regarding pretax return on invested capital is included in the accompanying reconciliation tables.
Net cash provided by operations for full year 2012 was $2.1 billion, and capital expenditures were $1.3 billion. As a result, the Company generated $716 million in free cash flow* in 2012. During 2012, the Company paid $22 million in dividends, which was a 57 percent increase over the year ago period. The Company also repurchased approximately 46 million shares of common stock for approximately $400 million. The Company repaid $578 million in debt and capital lease obligations during 2012, and intends to repay approximately $205 million in debt and capital lease obligations in 2013, including approximately $70 million in first quarter 2013. As of January 23(rd), the Company had approximately $3 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $800 million.
Southwest Airlines Fourth Quarter 2012 Awards and Recognitions
-- Recognized as one of the 2012 Green Rankings Top 500 US Companies by
Newsweek
-- Named to G.I. Job's 2013 Top 100 Military Friendly Employers
-- Ranked first in America's Happiest Airlines for Holiday Travel by Forbes
for the third consecutive year
-- Recognized with the Employees Choice Awards Best Place to Work 2013 by
Glassdoor.com
-- Named one of the Five Most Likeable Companies of 2012 by Likeable Media
-- Named one of the National Conference on Citizenship's The Civic 50 for
use of time, talent, and resources in civic engagement
Southwest will discuss its fourth quarter and full year 2012 results on a conference call at 11:30 a.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 strategic plans and initiatives; (ii) the Company's financial and operational goals and expectations with respect to its strategic initiatives, including anticipated timeframes for implementation of key initiatives and their expected impact on the Company's competitive position; (iii) the integration of AirTran and the Company's related financial and operational goals and expectations, including anticipated integration timeframes and expected benefits and costs associated with the integration; (iv) the Company's network plans and its related operational and financial expectations; (v) the Company's fleet plans, including its fleet modernization plans, and its related financial goals and expectations; and (vi) projected results of operations. 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) the impact of the economy on demand for the Company's services and the impact of fuel prices, economic conditions, and actions of competitors on the Company's business decisions, plans, and strategies; (ii) 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; (iii) the Company's ability to timely and effectively prioritize its strategic initiatives and related expenditures; (iv) the Company's ability to effectively integrate AirTran and realize the expected synergies and other benefits from the acquisition; (v) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (vi) the Company's dependence on third parties with respect to certain of its initiatives; and (vii) 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, 2011.
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)
(in millions, except per share amounts)
(unaudited)
Three months ended Year ended
December 31, December 31,
------------ ------------
2012 2011 Percent 2012 2011 Percent
Change Change
------ ------
OPERATING REVENUES:
Passenger $3,939 $3,866 (2) 1.9 $16,093 $14,754 (2) 9.1
Freight 42 36 16.7 160 139 15.1
Other 192 206 (2) (6.8) 835 765 (2) 9.2
Total operating revenues 4,173 4,108 1.6 17,088 15,658 9.1
OPERATING EXPENSES:
Salaries, wages, and
benefits 1,197 1,145 4.5 4,749 4,371 8.6
Fuel and oil 1,505 1,494 0.7 6,120 5,644 8.4
Maintenance materials and
repairs 270 239 13.0 1,132 955 18.5
Aircraft rentals 85 93 (8.6) 355 308 15.3
Landing fees and other
rentals 252 254 (0.8) 1,043 959 8.8
Depreciation and
amortization 224 192 16.7 844 715 18.0
Acquisition and integration 14 37 (62.2) 183 134 36.6
Other operating expenses 535 507 5.5 2,039 1,879 8.5
Total operating expenses 4,082 3,961 3.1 16,465 14,965 10.0
----- ----- ------ ------
OPERATING INCOME 91 147 (38.1) 623 693 (10.1)
OTHER EXPENSES (INCOME):
Interest expense 35 51 (31.4) 147 194 (24.2)
Capitalized interest (5) (4) 25.0 (21) (12) 75.0
Interest income (2) (2) - (7) (10) (30.0)
Other (gains) losses, net (62) (153) (59.5) (181) 198 (191.4)
Total other expenses (income) (34) (108) (68.5) (62) 370 (116.8)
--- ---- --- ---
INCOME BEFORE INCOME TAXES 125 255 (51.0) 685 323 112.1
PROVISION FOR INCOME TAXES 47 103 (54.4) 264 145 82.1
--- --- --- ---
NET INCOME $78 $152 (48.7) $421 $178 136.5
=== ==== ==== ====
NET INCOME PER SHARE
Basic $0.11 $0.20 $0.56 $0.23
Diluted $0.11 $0.20 $0.56 $0.23
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 735 777 750 774
Diluted 736 783 757 775
(1) Excludes financial results for AirTran prior to the May 2, 2011 acquisition date. See Supplemental Combined Statement I for selected financial information on a combined basis, including AirTran for periods prior to the acquisition date.
(2) 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 $6 million and $19 million in Operating
revenues for the three and twelve month periods ended December 31, 2011, respectively, from Other revenues to Passenger revenues to conform to the current presentation.
SOUTHWEST AIRLINES CO.
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (1)
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
(in millions, except per share amounts)
(unaudited)
Three months ended Year ended
December 31, December 31,
------------ ------------
2012 2011 Percent 2012 2011 Percent
Change Change
Fuel and oil expense, unhedged $1,436 $1,455 $5,963 $5,580
Add: Fuel hedge losses included in Fuel and oil expense 69 39 157 64
--- --- --- ---
Fuel and oil expense, as reported $1,505 $1,494 $6,120 $5,644
Add (Deduct): Net impact from fuel contracts (2) (31) 17 (32) -
--- --- --- ---
Fuel and oil expense, economic $1,474 $1,511 (2.4) $6,088 $5,644 7.9
------ ------ ------ ------
Total operating expenses, as reported $4,082 $3,961 $16,465 $14,965
Add (Deduct): Net impact from fuel contracts (2) (31) 17 (32) -
--- --- --- ---
Total operating expenses, economic $4,051 $3,978 $16,433 $14,965
Deduct: Asset impairment, net (3) - - - (14)
Deduct: Acquisition and integration costs, net (4) (14) (37) (183) (132)
--- --- ---- ----
Total operating expenses, non-GAAP $4,037 $3,941 2.4 $16,250 $14,819 9.7
------ ------ ------- -------
Operating income, as reported $91 $147 $623 $693
Add (Deduct): Net impact from fuel contracts (2) 31 (17) 32 -
--- --- --- ---
Operating income, economic $122 $130 $655 $693
Add: Asset impairment, net (3) - - - 14
Add: Acquisition and integration costs, net (4) 14 37 183 132
--- --- --- ---
Operating income, non-GAAP $136 $167 (18.6) $838 $839 (0.1)
---- ---- ---- ----
Other (gains) losses, net, as reported $(62) $(153) $(181) $198
Add (Deduct): Net impact from fuel contracts (2) 65 168 221 (89)
--- --- --- ---
Other losses, net, non-GAAP $3 $15 (80.0) $40 $109 (63.3)
--- --- --- ----
Income before income taxes, as reported $125 $255 $685 $323
Add (Deduct): Net impact from fuel contracts (2) (34) (185) (189) 89
--- ---- ---- ---
$91 $70 $496 $412
Add: Asset impairment, net (3) - - - 14
Add: Acquisition and integration costs, net (4) 14 37 183 132
--- --- --- ---
Income before income taxes, non-GAAP $105 $107 (1.9) $679 $558 21.7
---- ---- ---- ----
Net income, as reported $78 $152 $421 $178
Add (Deduct): Net impact from fuel contracts (2) (34) (185) (189) 89
Add (Deduct): Income tax impact of fuel contracts 12 78 73 (31)
--- --- --- ---
$56 $45 $305 $236
Add: Asset impairment, net (5) - - - 9
Add: Acquisition and integration costs, net (5) 9 21 112 85
--- --- --- ---
Net income, non-GAAP $65 $66 (1.5) $417 $330 26.4
--- --- ---- ----
Net income per share, diluted, as reported $0.11 $0.20 $0.56 $0.23
Add (Deduct): Net impact from fuel contracts (0.03) (0.10) (0.15) 0.07
----- ----- ----- ----
$0.08 $0.10 $0.41 $0.30
Add (Deduct): Impact of special items, net (5) 0.01 (0.01) 0.15 0.13
---- ----- ---- ----
Net income per share, diluted, non-GAAP $0.09 $0.09 - $0.56 $0.43 30.2
----- ----- ----- -----
(1) Excludes financial results for
AirTran prior to the May 2, 2011
acquisition date. See
Supplemental Combined Statement
II for a reconciliation of
selected combined amounts to non-
GAAP items, including AirTran for
periods prior to the acquisition
date.
(2) See Reconciliation of Impact
from Fuel Contracts.
(3) Net of profitsharing impact.
(4) Amounts net of profitsharing
impact on charges incurred
through March 31, 2011. The
Company amended its profitsharing
plan during second quarter 2011
to defer the profitsharing impact
of acquisition and integration
costs incurred from April 1, 2011
through December 31, 2013. The
profitsharing impact will be
realized in 2014 and beyond.
(5) Amounts net of tax and
profitsharing impact (as
described in footnote (4) above).
SOUTHWEST AIRLINES CO.
RECONCILIATION OF IMPACT FROM FUEL CONTRACTS (1)
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
(in millions)
(unaudited)
Three months ended Year ended
December 31, December 31,
------------ ------------
2012 2011 2012 2011
---- ---- ---- ----
Fuel and Oil Expense
--------------------
Reclassification between Fuel and Oil and Other (gains)
losses, net, associated with current period settled contracts $(35) $41 $(42) $35
Contracts settling in the current period, but for which gains
and/or (losses) have been recognized in a prior period (2) 4 (24) 10 (35)
--- --- --- ---
Impact from fuel contracts to Fuel and oil expense $(31) $17 $(32) $ -
---- --- ---- --- ---
Operating Income
----------------
Reclassification between Fuel and Oil and Other (gains)
losses, net, associated with current period settled contracts $35 $(41) $42 $(35)
Contracts settling in the current period, but for which gains
and/or (losses) have been recognized in a prior period (2) (4) 24 (10) 35
--- --- --- ---
Impact from fuel contracts to Operating Income $31 $(17) $32 $ -
--- ---- --- --- ---
Other (gains) losses, net
-------------------------
Mark-to-market impact from fuel contracts
settling in future periods $28 $127 $221 $(21)
Ineffectiveness from fuel hedges settling in future periods 2 82 (42) (33)
Reclassification between Fuel and Oil and Other (gains)
losses, net, associated with current period settled contracts 35 (41) 42 (35)
--- --- --- ---
Impact from fuel contracts to Other (gains) losses, net $65 $168 $221 $(89)
--- ---- ---- ----
Net Income
----------
Mark-to-market impact from fuel contracts
settling in future periods $(28) $(127) $(221) $21
Ineffectiveness from fuel hedges settling in future periods (2) (82) 42 33
Other net impact of fuel contracts settling in the
current or a prior period (excluding reclassifications) (4) 24 (10) 35
--- --- --- ---
Impact from fuel contracts to Net Income (3) $(34) $(185) $(189) $89
---- ----- ----- ---
(1) Excludes financial results for AirTran prior to the May 2, 2011 acquisition date.
(2) As a result of prior hedge ineffectiveness and/or contracts marked-to-market through the income statement.
(3) Excludes income tax impact of unrealized items.
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS (1)
(unaudited)
Three months ended Year ended
December 31, December 31,
------------ ------------
2012 2011 Change 2012 2011 Change
---- ---- ------ ---- ---- ------
Revenue passengers carried 26,607,560 27,536,128 (3.4)% 109,346,509 103,973,759 5.2%
Enplaned passengers 32,699,829 33,510,920 (2.4)% 133,978,100 127,551,012 5.0%
Revenue passenger miles (RPMs) (000s) 24,821,008 25,180,506 (1.4)% 102,874,979 97,582,530 5.4%
Available seat miles (ASMs) (000s) 31,193,395 31,297,561 (0.3)% 128,137,110 120,578,736 6.3%
Load factor 79.6% 80.5% (0.9) pts 80.3% 80.9% (0.6) pts
Average length of passenger haul (miles) 933 914 2.1% 941 939 0.2%
Average aircraft stage length (miles) 688 679 1.3% 693 679 2.1%
Trips flown 327,590 343,756 (4.7)% 1,361,558 1,317,977 3.3%
Average passenger fare $148.02 $140.38 (2) 5.4% $147.17 $141.90 (2) 3.7%
Passenger revenue yield per RPM (cents) 15.87 15.35 (2) 3.4% 15.64 15.12 (2) 3.4%
RASM (cents) 13.38 13.13 1.9% 13.34 12.99 2.7%
PRASM (cents) 12.63 12.35 (2) 2.3% 12.56 12.24 (2) 2.6%
CASM (cents) 13.08 12.66 3.3% 12.85 12.41 3.5%
CASM, excluding fuel (cents) 8.25 7.89 4.6% 8.07 7.73 4.4%
CASM, excluding fuel and profitsharing (cents) 8.19 7.83 4.6% 7.98 7.65 4.3%
CASM, excluding special items (cents) 12.94 12.59 2.8% 12.68 12.29 3.2%
CASM, excluding fuel and special items (cents) 8.21 7.76 5.8% 7.93 7.61 4.2%
CASM, excluding fuel, profitsharing, and special items (cents) 8.15 7.70 5.8% 7.84 7.53 4.1%
Fuel costs per gallon, including fuel tax (unhedged) $3.23 $3.17 1.9% $3.21 $3.16 1.6%
Fuel costs per gallon, including fuel tax $3.38 $3.25 4.0% $3.30 $3.19 3.4%
Fuel costs per gallon, including fuel tax (economic) $3.32 $3.29 0.9% $3.28 $3.19 2.8%
Fuel consumed, in gallons (millions) 444 458 (3.1)% 1,847 1,764 4.7%
Active fulltime equivalent Employees 45,861 45,392 1.0% 45,861 45,392 1.0%
Aircraft in service at period-end 694 698 (0.6)% 694 698 (0.6)%
PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
RASM (unit revenue) - Operating revenue yield per ASM
CASM (unit costs) - Operating expenses per ASM
(1) Excludes operating statistics for AirTran prior to the May 2, 2011 acquisition date. See Supplemental Combined Statement IV for
selected operating statistics on a combined basis, including AirTran for periods prior to the acquisition date.
(2) 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 $6 million and $19
million in Operating revenues for the three and twelve month periods ended December 31, 2011, respectively, from Other revenues to
Passenger revenues to conform to the current presentation.
SOUTHWEST AIRLINES CO.
RETURN ON INVESTED CAPITAL (1)
(in millions)
(unaudited)
Year ended Year ended
December 31, December 31,
2012 2011
------------- -------------
Operating Income, as reported $623 $693
Add: Net impact from fuel contracts 32 -
Add: Acquisition and integration costs, net (2) 183 132
Add: Asset impairment, net (3) - 14
--- ---
Operating Income, non-GAAP $838 $839
Net adjustment for aircraft leases (4) 117 129
Adjustment for fuel hedge accounting (36) (107)
--- ----
Adjusted Operating Income, non-GAAP $919 $861
Average Invested Capital (5) $12,575 $12,439
Equity adjustment for fuel hedge accounting 145 184
--- ---
Adjusted Average Invested Capital $12,720 $12,623
ROIC, pretax 7% 7%
(1) Calculation includes the impact of
the AirTran acquisition as of May 2,
2011.
(2) Net of profitsharing impact on
charges incurred through March 31,
2011. The Company amended its
profitsharing plan during second
quarter 2011 to defer the profitsharing
impact of acquisition and integration
costs incurred from April 1, 2011
through December 31, 2013. The
profitsharing impact will be realized
in 2014 and beyond.
(3) Net of profitsharing impact.
(4) Net adjustment related to assumption
that all aircraft in fleet are owned.
(5) 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)
December 31,
------------
2012 2011
---- ----
ASSETS
Current assets:
Cash and cash equivalents $1,113 $829
Short-term investments 1,857 2,315
Accounts and other receivables 332 299
Inventories of parts and supplies, at cost 469 401
Deferred income taxes 237 263
Prepaid expenses and other current assets 210 238
Total current assets 4,218 4,345
Property and equipment, at cost:
Flight equipment 16,367 15,542
Ground property and equipment 2,714 2,423
Deposits on flight equipment purchase
contracts 416 456
19,497 18,421
Less allowance for depreciation and
amortization 6,731 6,294
12,766 12,127
Goodwill 970 970
Other assets 633 626
--- ---
$18,587 $18,068
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,107 $1,057
Accrued liabilities 1,102 996
Air traffic liability 2,170 1,836
Current maturities of long-term debt 271 644
Total current liabilities 4,650 4,533
Long-term debt less current maturities 2,883 3,107
Deferred income taxes 2,901 2,566
Deferred gains from sale and leaseback of aircraft 63 75
Other noncurrent liabilities 1,124 910
Stockholders' equity:
Common stock 808 808
Capital in excess of par value 1,184 1,222
Retained earnings 5,768 5,395
Accumulated other comprehensive loss (119) (224)
Treasury stock, at cost (675) (324)
Total stockholders' equity 6,966 6,877
----- -----
$18,587 $18,068
======= =======
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)
(in millions)
(unaudited)
Three months ended Year ended
December 31, December 31,
------------ ------------
2012 2011 2012 2011
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $78 $152 $421 $178
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Depreciation and amortization 224 192 844 715
Unrealized (gain) loss on fuel derivative instruments (34) (185) (189) 90
Deferred income taxes 131 90 251 123
Amortization of deferred gains on sale and leaseback
of aircraft (3) (3) (12) (13)
Changes in certain assets and liabilities, net of
acquisition:
Accounts and other receivables 74 70 (33) (26)
Other current assets 60 (16) (104) (196)
Accounts payable and accrued liabilities 72 (13) 186 253
Air traffic liability (354) (222) 334 262
Cash collateral received from (provided to) derivative
counterparties 15 234 233 (195)
Other, net (31) 101 133 194
--- --- --- ---
Net cash provided by operating activities 232 400 2,064 1,385
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment to acquire AirTran, net of AirTran cash on
hand - - - (35)
Payments for purchase of property and equipment, net (399) (420) (1,348) (968)
Purchases of short-term investments (563) (574) (2,481) (5,362)
Proceeds from sales of short-term investments 773 900 2,964 5,314
Other, net - - 32 -
--- --- --- ---
Net cash used in investing activities (189) (94) (833) (1,051)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee stock plans 5 4 27 20
Proceeds from termination of interest rate derivative
instrument 38 - 38 76
Payments of long-term debt and capital lease
obligations (61) (447) (578) (540)
Payments of convertible debt - - - (81)
Payments of cash dividends - - (22) (14)
Repurchase of common stock (75) (50) (400) (225)
Other, net (5) - (12) (2)
--- --- --- ---
Net cash used in financing activities (98) (493) (947) (766)
NET CHANGE IN CASH AND CASH EQUIVALENTS (55) (187) 284 (432)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,168 1,016 829 1,261
----- ----- --- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,113 $829 $1,113 $829
=== ====== ==== ====== ====
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Fair value of equity consideration given to acquire
AirTran $ - $ - $ - $523
Fair value of common stock issued for conversion of debt $ - $ - $ - $78
(1) Includes the impact of the AirTran acquisition as of May 2, 2011.
SOUTHWEST AIRLINES CO.
FUEL DERIVATIVE CONTRACTS
AS OF JANUARY 18, 2013
Estimated difference in economic jet fuel price per
gallon,
above/(below) unhedged market prices, including taxes
-----------------------------------------------------
Average Brent Crude Oil
price per barrel 1Q 2013 Remainder of 2013 2013
---------------- ------- ----------------- ----
$70 $0.10 $0.03 $0.05
$80 $0.08 $0.00 $0.02
$90 $0.05 $0.00 $0.01
$100 $0.05 $0.00 $0.01
Current Market (1) $0.05 $0.00 $0.01
$120 $0.05 $0.00 $0.01
$130 $0.05 $0.00 $0.01
$140 $0.03 ($0.01) $0.00
Average percent of estimated fuel consumption
covered by fuel derivative contracts at
Period varying WTI/Brent crude oil-equivalent price levels
------ ----------------------------------------------------
2013 less than 15%
2014 approx. 50%
2015 approx. 30%
2016 approx. 20%
2017 approx. 10%
(1) Brent crude
oil average
market
prices as of
January 18,
2013 were
approximately
$111, $107,
and $108 per
barrel for
first
quarter
2013, the
remainder of
2013, and
full year
2013,
respectively.
SOUTHWEST AIRLINES CO.
737 FUTURE DELIVERY SCHEDULE
AS OF JANUARY 23, 2013
The Boeing Company The Boeing Company
737 NG 737 MAX
------ -------
-700 -800 Options Firm Options Total
Firm Firm Orders
Orders Orders
------ ------
2013 - 20 - - - 20
2014 5 24 15 - - 44
2015 36 - 12 - - 48
2016 31 - 12 - - 43
2017 30 - 25 4 - 59
2018 25 - 28 15 - 68
2019 - - - 33 - 33
2020 - - - 34 - 34
2021 - - - 34 18 52
2022 - - - 30 19 49
2023 - - - - 23 23
2024 - - - - 23 23
2025 - - - - 23 23
Through 2027 - - - - 44 44
--- --- --- --- --- ---
127 (1) 44 92 150 (2) 150 563
=== === === === === === === ===
(1) The Company has flexibility to substitute 737-800s in lieu of 737-700 firm orders.
(2) The Company has flexibility to accept MAX 7 or MAX 8 deliveries.
SUPPLEMENTAL COMBINED STATEMENT I
SOUTHWEST AIRLINES CO.
SELECTED COMBINED FINANCIAL INFORMATION
(in millions)
(unaudited)
Year ended
December 31,
------------
Percent
2012 2011 (1) Change
---- ------- ------
OPERATING REVENUES:
Passenger $16,093 $15,566 3.4
Freight 160 139 15.1
Other 835 891 (6.3)
Total operating revenues 17,088 16,596 3.0
OPERATING EXPENSES:
Salaries, wages, and benefits 4,749 4,564 4.1
Fuel and oil 6,120 6,005 1.9
Maintenance materials and
repairs 1,132 1,043 8.5
Aircraft rentals 355 389 (8.7)
Landing fees and other rentals 1,043 1,013 3.0
Depreciation and amortization 844 735 14.8
Acquisition and integration 183 160 14.4
Other operating expenses 2,039 2,025 0.7
Total operating expenses 16,465 15,934 3.3
------ ------
OPERATING INCOME $623 $662 (5.9)
(1) Selected financial
information presented in this historical financial
schedule on a combined basis information included in the
includes financial results for combined presentation has been
Southwest and AirTran for all conformed to Southwest's
periods presented, including financial statement
prior to the May 2, 2011 classification where
acquisition date. These appropriate. See Note Regarding
combined results include the Use of Non-GAAP Financial
impact of purchase accounting Measures.
as of May 2, 2011. AirTran's
SUPPLEMENTAL COMBINED STATEMENT II
SOUTHWEST AIRLINES CO.
RECONCILIATION OF SELECTED COMBINED AMOUNTS FROM SUPPLEMENTAL COMBINED STATEMENT I TO NON-GAAP ITEMS
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
(in millions)
(unaudited)
Year ended
December 31,
------------
Percent
2012 2011 (1) Change
---- ------- ------
Fuel and oil expense, combined unhedged $5,963 $5,959
Add: Fuel hedge losses included in Fuel and oil expense 157 46
--- ---
Fuel and oil expense, as presented on Supplemental $6,120 $6,005
Combined Statement I
Deduct: Net impact from fuel contracts (32) -
--- ---
Fuel and oil expense, combined economic $6,088 $6,005 1.4
------ ------
Total operating expenses, as presented on Supplemental
Combined Statement I $16,465 $15,934
Deduct: Net impact from fuel contracts (32) -
--- ---
Total operating expenses, combined economic $16,433 $15,934
Deduct: Asset impairment, net (2) - (14)
Deduct: Acquisition and integration costs, net (3) (183) (158)
---- ----
Total operating expenses, combined non-GAAP $16,250 $15,762 3.1
------- -------
Operating income, as presented on Supplemental $623 $662
Combined Statement I
Add: Net impact from fuel contracts 32 -
--- ---
Operating income, combined economic $655 $662
Add: Asset impairment, net (2) - 14
Add: Acquisition and integration costs, net (3) 183 158
--- ---
Operating income, combined non-GAAP $838 $834 0.5
---- ----
(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including prior to the May 2, 2011 acquisition date. These combined results include the impact of
purchase accounting as of May 2, 2011. AirTran's historical financial information included in the combined presentation has been conformed to Southwest's financial statement classification where appropriate.
(2) Net of profitsharing impact.
(3) Amounts net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of acquisition and integration costs incurred from April 1, 2011 through
December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
SUPPLEMENTAL COMBINED STATEMENT III
SOUTHWEST AIRLINES CO.
SELECTED CONSOLIDATING COMBINED 2011 FINANCIAL INFORMATION (1)
(in millions)
(unaudited)
Year ended December 31, 2011
----------------------------
Southwest
Airlines Co.
(as reported) AirTran (2) Combined
------------ ---------- --------
OPERATING REVENUES:
Passenger $14,754 $812 $15,566
Freight 139 - 139
Other 765 126 891
Total operating revenues 15,658 938 16,596
OPERATING EXPENSES:
Salaries, wages, and benefits 4,371 193 4,564
Fuel and oil 5,644 361 6,005
Maintenance materials and
repairs 955 88 1,043
Aircraft rentals 308 81 389
Landing fees and other rentals 959 54 1,013
Depreciation and amortization 715 20 735
Acquisition and integration 134 26 160
Other operating expenses 1,879 146 2,025
Total operating expenses 14,965 969 15,934
------ --- ------
OPERATING INCOME (LOSS) $693 $(31) $662
(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran, for periods prior to the May 2, 2011 acquisition
date. Results presented for Southwest represent previously reported results. See Note Regarding Use of Non-GAAP Financial Measures.
(2) Results presented for AirTran, on a standalone basis, represent periods prior to the May 2, 2011 acquisition date, conformed to Southwest's financial statement classification where appropriate.
SUPPLEMENTAL COMBINED STATEMENT IV
SOUTHWEST AIRLINES CO.
COMBINED OPERATING STATISTICS
(unaudited)
Year ended
December 31,
------------
2012 2011 (1) Change
---- ------- ------
Revenue passengers carried 109,346,509 110,151,572 (0.7)%
Enplaned passengers 133,978,100 135,274,464 (1.0)%
Revenue passenger miles (RPMs) (000s) 102,874,979 103,864,488 (1.0)%
Available seat miles (ASMs) (000s) 128,137,110 128,518,201 (0.3)%
Load factor 80.3% 80.8% (0.5) pts
Average length of passenger haul (miles) 941 943 (0.2)%
Average aircraft stage length (miles) 693 684 1.3%
Trips flown 1,361,558 1,399,644 (2.7)%
Average passenger fare $147.17 $141.31 4.1%
Passenger revenue yield per RPM (cents) 15.64 14.99 4.3%
RASM (cents) 13.34 12.91 3.3%
PRASM (cents) 12.56 12.11 3.7%
CASM (cents) 12.85 12.40 3.6%
CASM, excluding fuel (cents) 8.07 7.73 4.4%
CASM, excluding fuel and profitsharing (cents) 7.98 7.66 4.2%
CASM, excluding special items (cents) 12.68 12.26 3.4%
CASM, excluding fuel and special items (cents) 7.93 7.59 4.5%
CASM, excluding fuel, profitsharing, and special items (cents) 7.84 7.51 4.4%
Fuel costs per gallon, including fuel tax (unhedged) $3.21 $3.15 1.9%
Fuel costs per gallon, including fuel tax $3.30 $3.18 3.8%
Fuel costs per gallon, including fuel tax (economic) $3.28 $3.18 3.1%
Fuel consumed, in gallons (millions) 1,847 1,887 (2.1)%
PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
RASM (unit revenue) - Operating revenue yield per ASM
CASM (unit costs) - Operating expenses per ASM
(1) Selected operating statistics presented in this schedule on a combined basis include operations for Southwest and AirTran for all periods presented, including prior to the May 2, 2011 acquisition date. These combined results include the impact of purchase accounting as of
May 2, 2011. AirTran's historical operating statistics included in the combined presentation have been conformed to Southwest's presentation where appropriate.
NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES
The Company's 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 and accounting associated with 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, 2011, as well as subsequent quarterly filings.
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. These also include a 2011 charge of $17 million (before the impact of profitsharing and/or taxes) for an asset impairment related to the Company's decision not to equip its Classic (737-300/500) aircraft with Required Navigation Performance (RNP) capabilities. 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 other supplemental non-GAAP financial information on a "combined basis." This supplemental non-GAAP financial information on a "combined basis" includes specified combined financial results of the Company and AirTran for periods prior to May 2, 2011, as if the acquisition had occurred prior to the beginning of the applicable reporting period, but excludes any impact of purchase accounting prior to May 2, 2011. AirTran's historical financial information included in the combined presentation has been conformed to the Company's financial statement classification where appropriate. The Company believes that evaluation of its financial performance can be enhanced by a presentation of combined results in order to evaluate its prior, current or future period results on a more meaningful, consistent year-over-year basis.
The Company has also provided free cash flow, which is a non-GAAP financial measure. 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 year ended December 31, 2012, the Company generated $716 million in free cash flow, calculated as operating cash flows of $2.064 billion less capital expenditures of $1.348 billion.
SOURCE Southwest Airlines Co.
