Exhibit 99.1
CONTACT: Investor Relations (214) 792-4415
SOUTHWEST AIRLINES REPORTS FOURTH QUARTER EARNINGS AND
35TH CONSECUTIVE YEAR OF PROFITABILITY
DALLAS, TEXAS – January 23, 2008 – Southwest Airlines (NYSE:LUV) today reported its fourth quarter and full year 2007 results. Net income for fourth quarter 2007 was $111 million, or $.15 per diluted share, compared to $57 million, or $.07 per diluted share, for fourth quarter 2006. Excluding special items, fourth quarter 2007 net income was $87 million compared to $100 million in fourth quarter 2006, or $.12 per diluted share in both years. The fourth quarter 2007 results, excluding special items, exceed First Call’s mean estimate of $.10 per diluted share. Refer to the reconciliation in the accompanying tables for further information regarding special items.
For the full year 2007, net income was $645 million, or $.84 per diluted share, compared to $499 million, or $.61 per diluted share, for 2006. Excluding special items, full year 2007 net income was $471 million, or $.61 per diluted share, compared to $578 million, or $.70 per diluted share for full year 2006.
Gary C. Kelly, CEO, stated: “While fourth quarter and full year results fell short of our earnings goals, I am very proud of what our Employees accomplished during 2007. Although we were well prepared, 2007 was much more difficult than anticipated due to rising energy prices throughout the year and softer demand for domestic air travel. Given higher energy costs and signs of domestic economic weakness, we took the necessary steps to slow our planned aircraft fleet growth. In June, we reduced our planned growth for fourth quarter 2007 and for 2008. In December, we further reduced our 2008 planned growth, pruning our flight schedule for May 2008.
“I am especially proud of our operations during 2007. Despite air traffic congestion, unusually difficult weather, and security-related challenges, we had an exceptional year of operations, delivering excellent Customer Service. We also have made great progress with our efforts to further enhance our already outstanding Customer Experience. In fall 2007, we launched our new Business Select product; Rapid Rewards frequent flyer program enhancements; new boarding method; and our extreme gate makeover. We are delighted with the Customer response.
“We are also excited to announce today our agreement with Row 44 to install equipment on four aircraft this summer to test inflight internet connectivity. This is just one more way Southwest Airlines intends to make Customers more productive.
"In addition to our efforts to further strengthen our exceptional brand, we continue to optimize our capital structure, repurchasing 66 million shares of common stock for a total of $1.0 billion during 2007. Last week, we announced a new share repurchase program to acquire up to $500 million of the Company's common stock. While we have more hard work ahead and a cautious view on the economy, I am extremely proud of what our People have accomplished, and we remain committed to our long-term financial targets and maximizing Shareholder value.
“Turning to our fourth quarter 2007 earnings performance, our net income per share, excluding special items, was flat year-over-year at $.12 per diluted share. Despite a softer domestic economy and our available seat mile (ASM) growth of 5.6 percent, we grew our operating unit revenues 3.7 percent. We are encouraged by our year-over-year comparative trends, which improved each month during fourth quarter 2007. Our new Business Select product and other revenue management initiatives are on track and contributing to favorable unit revenue comparisons thus far in first quarter 2008.
“Our fourth quarter 2007 unit costs, excluding special items, increased 4.1 percent from a year ago to 9.15 cents, which was driven in large part by higher jet fuel costs. Even with a superb fuel hedging position and higher than expected realized cash hedging gains of $300 million, our fourth quarter 2007 jet fuel costs increased 10.3 percent from a year ago to $1.72 per gallon (economic). We have derivative contracts in place for approximately 75 percent of our first quarter 2008 estimated fuel consumption, capped at an average crude-equivalent price of approximately $51 per barrel. Based on this derivative position and present market prices, we currently anticipate our first quarter 2008 jet fuel costs (economic) will approximate $2.00 per gallon. For the full year 2008, we have derivative contracts for approximately 70 percent of our estimated fuel consumption at an average crude-equivalent price of approximately $51 per barrel.
“Our fourth quarter 2007 unit costs, excluding fuel, increased 1.7 percent from a year ago to 6.57 cents, which was somewhat better than expected. Based on current cost trends and, especially, increasing aircraft engine maintenance costs, we expect our first quarter 2008 unit costs, excluding fuel and anticipated gains from the sale of aircraft, to exceed fourth quarter 2007’s 6.57 cents.
"We are intensely focused on improving the efficiency and profitability of our flight schedule, while continuing to bring low, friendly fares to our markets. Although we are taking a cautious approach to our overall fleet growth in 2008, we currently plan to grow our ASMs four to five percent on a year-over-year basis and remain well-positioned to respond quickly to favorable market opportunities. We will accept 29 new Boeing 737-700s scheduled for 2008 delivery, and currently plan to reduce our existing fleet by 22 aircraft, ending 2008 with 527 aircraft. Since third quarter 2007, we have exercised three Boeing 737-700 options for delivery in 2009, bringing our 2009 firm orders and options to 21 and seven, respectively.
“As we enter 2008, I am pleased with our longer-term prospects and could not be prouder of our Employees. They are the heart and soul of our great Company, and they continue to demonstrate the Warrior Spirit necessary to maintain our industry-leading competitive position and financial strength. Recent Southwest recognitions include receiving the distinctive honor of the Best Domestic Airline award by Travel Weekly. In addition, the Company ranked number one in the airline category of Corporate Research International’s customer service survey. Finally, the Company received top ranking in the Zagat Survey of Global Airlines in the categories for Frequent Flyer program and domestic website.”
Southwest will discuss its fourth quarter 2007 results on a conference call at11:30 a.m. Eastern Time today. A live broadcast of the conference call will be available at southwest.com.
Operating Results
Total operating revenues for fourth quarter 2007 increased 9.5 percent to $2.49 billion, compared to $2.28 billion for fourth quarter 2006. Total fourth quarter 2007 operating expenses were $2.37 billion, compared to $2.10 billion in fourth quarter 2006. Operating income for fourth quarter 2007 was $126 million, a decrease of 27.6 percent as compared to $174 million in fourth quarter 2006. Excluding special items, operating income increased 4.0 percent in fourth quarter 2007, to $180 million from $173 million in fourth quarter 2006.
Operating revenues for the year ended December 31, 2007 increased 8.5 percent, to $9.86 billion, from 2006, while operating expenses increased 11.3 percent to $9.07 billion, resulting in operating income of $791 million, a decrease of $143 million or 15.3 percent. Excluding special items, operating income was $853 million, a decrease of $122 million, or 12.5 percent. The Company’s 2007 jet fuel costs per gallon (economic) increased 11.3 percent to $1.67 from the same period in 2006, reflecting cash hedging gains of $727 million and $675 million in 2007 and 2006, respectively.
"Other income" was $267 million for 2007 versus "other expenses" of $144 million for 2006. The $411 million swing in total other expenses (income) primarily resulted from $292 million in “other gains” recognized in 2007 versus $151 million in “other losses” recognized in 2006. In both periods, these “other (gains) losses” primarily resulted from unrealized 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 $58 million in 2007 and $52 million in 2006 is also included in "other (gains) losses”. Net interest expense increased $32 million in 2007 compared to 2006, primarily due to decreased interest income resulting from a decrease in average cash and short-term investment balances on which the Company earns interest.
The fourth quarter and full year 2007 income tax rates were both approximately 39 percent compared to approximately 44 and 37 percent for fourth quarter and full year 2006, respectively. The fourth quarter 2006 income tax rate of 44 percent reflects a $4 million increase to income tax expense, which related to the State of Texas Franchise Tax law enacted in 2006. For the full year 2006, income tax expense decreased by $9 million due to this state law change. An August 2007 increase under a State of Illinois income tax law was reversed by the State of Illinois in January 2008. As a result of this 2008 change in Illinois state tax law, there will be a decrease to the first quarter 2008 deferred tax liability of approximately $11 million.
Net cash provided by operations for 2007 was $2.85 billion, which included a $1.46 billion increase in fuel derivative collateral deposits related to future periods. For the full year 2007, capital expenditures were $1.33 billion, and the Company also repurchased 66 million shares of its common stock for a total of $1.0 billion. On January 17, 2008, the Company’s Board of Directors authorized a new share repurchase program to acquire up to $500 million of the Company’s common stock. This new program represents the sixth authorized since January 2006. Over the past two years, Southwest has repurchased 116 million shares of common stock for a total of $1.8 billion.
During fourth quarter 2007, the Company issued $500 million in Pass Through Certificates secured by 16 aircraft. The Company also repaid $122 million in debt during 2007. Southwest ended the year with $2.8 billion in cash and short-term investments, which includes $2.0 billion in fuel derivative collateral deposits. In addition, the Company also had a fully available unsecured revolving credit line of $600 million.
This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Specific forward-looking statements include, without limitation, statements relating to (i) the Company's revenue and cost cutting initiatives; (ii) its financial targets and expectations regarding results of operations; and (iii) its plans for fleet growth. 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 price and availability of aircraft fuel; (ii) the Company's ability to timely and effectively prioritize its revenues initiatives and its related ability to timely implement and maintain the necessary information technology systems and infrastructure, and other techniques and processes to support these initiatives; (iii) the extent and timing of the Company’s investment of incremental operating expenses and capital expenditures to develop and implement its initiatives and its corresponding ability to effectively control its operating expenses; (iv) the Company's dependence on third party arrangements to assist with the implementation of certain of its initiatives; (v) competitor capacity and load factors; 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, 2006, and subsequent filings with the Securities and Exchange Commission. 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 news release.
