Exhibit 99.1
CONTACT: Investor Relations (214) 792-4415
SOUTHWEST AIRLINES REPORTS THIRD QUARTER FINANCIAL RESULTS
DALLAS, TEXAS – October 15, 2009 – Southwest Airlines (NYSE:LUV) today reported its third quarter 2009 financial results. Net loss for third quarter 2009 was $16 million, or $.02 loss per diluted share, compared to a net loss of $120 million, or $.16 loss per diluted share, for third quarter 2008. Third quarter 2009 results included special items (net of profitsharing and taxes) consisting of a charge of $27 million relating to the Company's early-out program and a net loss of $12 million, relating to non-cash, mark-to-market and other items associated with a portion of the Company’s fuel hedge portfolio. Additional information regarding these special items is included in this release and in the accompanying reconciliation tables. Excluding special items, third quarter 2009 net income was $23 million, or $.03 per diluted share, compared to $69 million, or $.09 per diluted share, for third quarter 2008. The third quarter 2009 net income, excluding special items, exceeded Thomson's First Call's mean estimate of $.02 per diluted share.
Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated: “I am extremely proud of our Southwest Employees. To produce a profit, excluding special items, in this environment is a remarkable accomplishment. Sixty days ago, even a modest profit seemed unattainable. Despite the continuation of a depressed economy, our People fought hard, and have staged an impressive revenue recovery from where we were in June. Our third quarter 2009 unit revenues declined 2.2 percent from a year ago, a substantial improvement from the six percent year-over-year decline experienced in second quarter. It is a true testament to their Warrior Spirits during these most challenging of times.
"A number of revenue initiatives were planned for 2009, and, because travel demand was much worse than planned, a number of audibles were called. First and foremost, through our sophisticated aircraft schedule optimization process, approximately 10 percent of our flights were eliminated from our system over the last year, which were unprofitable and less popular flights. We made the decision to keep our fleet essentially flat in 2009, to be prepared for weak travel demand. Even so, we produced available capacity through optimization efforts that was redeployed during the last year to substantial new markets: Minneapolis/St. Paul; New York La Guardia; and Boston Logan. These large markets fit well within our expansive route system, and have achieved instant success; and, we look forward to adding Milwaukee next month.
"Next, we recently upgraded our website, introducing a new and improved southwest.com. While this enhanced version lays the necessary foundation for future revenue generating features, it is already producing gains in average fares and achieving higher booking rates. Since second quarter, we also have implemented another round of enhancements to our revenue management structure and techniques. It, too, is already yielding returns that should strengthen our revenue trends, prospectively.
"Unplanned for this year, but producing nice returns, are our new pet fare, Unaccompanied Minor service charge, and our newest product, EarlyBird Check-in, which allows our Customers to automatically get an assigned boarding position before general check-in occurs. All of these products are meeting our expectations and made possible through technology upgrades and enhancements this year.
"In July, we launched a WOW! Sale for post-Labor Day travel, which set all-time booking records for daily sales, and helped drive our September monthly load factor up over 11 points from last year, setting a record for the month and quarter. Favorable year-over-year load factor comparisons are continuing thus far in October 2009, with month-to-date passenger unit revenues up approximately one percent from the respective year-ago period.
"Finally, we have enjoyed a positive reaction to our Bags Fly Free Campaign. Customer response has been tremendous, and we believe we are gaining a substantial amount of Customers and revenues by differentiating ourselves in a significant and meaningful way from other airlines and underscoring our commitment to Low Fares.
"While this is a significant amount of change to construct, implement, and manage, our People have simply done a marvelous job, and the results attest to it. Our Department of Transportation Customer Satisfaction ranking leads the industry, and our ontime performance is the best in years and near the top of the industry.
"With respect to our third quarter cost performance, despite the significant year-over-year benefit of lower energy prices, we are still experiencing substantial cost pressures that demand continued discipline and focus on containing costs and maximizing productivity. Excluding fuel and special items, our unit costs increased 6.6 percent from the same period a year ago. With our planned fourth quarter year-over-year capacity reduction of eight percent, we anticipate cost pressures to continue and presently expect our fourth quarter 2009 unit costs, excluding fuel and special items, to exceed third quarter 2009’s 7.11 cents."
Southwest will discuss its third quarter 2009 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.
Operating Results
Total operating revenues for third quarter 2009 decreased 7.8 percent to $2.7 billion, compared to $2.9 billion for third quarter 2008. Total third quarter 2009 operating expenses were $2.6 billion, compared to $2.8 billion in third quarter 2008. Operating income for third quarter 2009 was $22 million, compared to $86 million in third quarter 2008. Excluding special items, operating income was $129 million in third quarter 2009, compared to $147 million last year.
The Company’s third quarter 2009 total operating expenses decreased 5.7 percent from third quarter 2008 largely due to lower energy prices, and were down 7.5 percent, excluding special items. Even with approximately $78 million in unfavorable cash settlements from derivative contracts in third quarter 2009, economic fuel costs decreased 17.4 percent to $2.13 per gallon, including taxes. This excludes a reduction in premium expense of $13 million included in "other expenses" relating to the sale of call options relating to third quarter 2009. As of yesterday, the Company had derivative contracts in place for over 45 percent of its estimated fourth quarter 2009 consumption resulting in an estimated fourth quarter 2009 fuel cost per gallon, based on current market prices, in the $2.25 range (including taxes). For 2010, the Company has derivative contracts in place for over 65 percent of its estimated fuel consumption resulting in an estimated 2010 fuel cost per gallon, based on current market prices, in the $2.40 range (including taxes). The total market value (as of yesterday) of the Company's net fuel derivative contracts for the remainder of 2009 through 2013 reflects a net liability of approximately $526 million.
Third quarter 2009 total operating expenses included a special item related to the Company’s voluntary early-out program, in which approximately 1,400 Employees elected to participate. In accordance with the accounting guidance in ASC Topic 715 (originally issued as FAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”), the Company accrued the total cost of the program of approximately $66 million during third quarter 2009. Of this amount, approximately $32 million was paid out to Employees who left the Company prior to September 30, 2009, and the remaining $34 million will be paid out in subsequent periods. The Company expects annual savings in subsequent years from the program to exceed the cost of the program.
“Other expenses” were $42 million for third quarter 2009, compared to $291 million for third quarter 2008. The $249 million decrease in total other expenses primarily resulted from $2 million in “other losses” recognized in third quarter 2009 versus $269 million in “other losses” recognized in third quarter 2008. In both periods, these “other losses” primarily resulted from unrealized gains/losses associated with our fuel hedging program. The cost of the hedging program (which includes the premium costs of derivative contracts) of $35 million in third quarter 2009 and $20 million in third quarter 2008 is also included in "other (gains) losses." Third quarter 2009 interest expense increased $13 million from third quarter 2008 primarily due to financing transactions the Company completed since third quarter 2008. Lower market interest rates coupled with lower Boeing aircraft progress payments generated less capitalized interest in third quarter 2009 compared to the same period last year. Interest income also decreased versus third quarter 2008 due to lower market interest rates.
Net cash provided by operations for the nine months ended September 30, 2009 was $493 million, which was net of a $185 million increase in cash posted as collateral to the Company’s fuel hedge counterparties since December 31, 2008. Capital expenditures for the first nine months of 2009 were $471 million.
During third quarter 2009, the Company borrowed $124 million under a new term loan agreement secured by five Boeing 737-700 aircraft. The Company has minimal contractual debt obligations for the remainder of 2009.
At the end of third quarter 2009, the Company replaced its previous $600 million unsecured revolving credit facility with a new $600 million unsecured revolving credit facility that will expire in October 2012. In addition to this fully available $600 million revolving credit facility, as of yesterday, the Company had approximately $2.4 billion in cash and short-term investments, net of $355 million in cash collateral paid to its fuel hedge counterparties.
Total operating revenues for the nine months ended September 30, 2009 decreased 7.9 percent to $7.6 billion, while total operating expenses decreased 4.6 percent to $7.5 billion, resulting in operating income of $95 million for the first nine months of 2009 versus $380 million in the first nine months of 2008. Excluding special items, operating income was $342 million and $487 million, for the nine months ended September 30, 2009 and 2008, respectively. Net loss for the nine months ended September 30, 2009 was $16 million, or $.02 loss per diluted share, compared to net income of $234 million, or $.32 per diluted share, for the same period last year. Excluding special items, net income for the nine months ended September 30, 2009 was $61 million, or $.08 per diluted share, compared to $233 million, or $.32 per diluted share, for the same period last year.
Restatement of GAAP results
On October 14, 2009, the Company determined that its financial statements for the three and six month periods ended June 30, 2009 contained an error in the application of Accounting Standards Codification (ASC) Topic 815 to specific derivatives in the Company’s hedge portfolio. See Supplemental Schedule I for a reconciliation of previously reported GAAP results to the restated amounts.
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 relating to (i) the Company’s revenue and cost-cutting initiatives and its expectations related to such initiatives; (ii) its fleet plans and expectations; (iii) its growth plans and expectations; and (iv) its expectations regarding future 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 price and availability of aircraft fuel, the impact of hedge accounting, and any changes to the Company’s strategies for addressing fuel price volatility; (ii) continued economic uncertainty, which could continue to impact the demand for air travel and the Company’s ability to adjust fares; (iii) the impact of fuel prices and economic conditions on the Company’s overall business plan and strategies; (iv) competitor capacity decisions; (v) the Company's ability to timely and effectively prioritize its revenue and cost reduction initiatives and its related ability to timely implement, transition, and maintain the necessary information technology systems and infrastructure to support these initiatives; (vi) the results of labor negotiations; 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, 2008, and under the heading “Forward-looking statements” in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009, and June 30, 2009.
