Southwest Airlines (LUV) 10-Q 26 Apr 10 2010 Q1 Quarterly report Financial data

Condensed Consolidated Balance

Condensed Consolidated Balance Sheet (USD $)
In Millions	Mar. 31, 2010	Dec. 31, 2009
Current assets:
Cash and cash equivalents	$1,110	$1,114
Short-term investments	1,663	1,479
Accounts and other receivables	235	169
Inventories of parts and supplies, at cost	227	221
Deferred income taxes	291	291
Prepaid expenses and other current assets	95	84
Total current assets	3,621	3,358
Property and equipment, at cost:
Flight equipment	13,824	13,719
Ground property and equipment	1,965	1,922
Deposits on flight equipment purchase contracts	234	247
Property and equipment, at cost	16,023	15,888
Less allowance for depreciation and amortization	5,402	5,254
Property and equipment, net	10,621	10,634
Other assets	288	277
Total assets	14,530	14,269
Current liabilities
Accounts payable	691	746
Accrued liabilities	657	715
Air traffic liability	1,400	1,044
Current maturities of long-term debt	170	190
Total current liabilities	2,918	2,695
Long-term debt less current maturities	3,305	3,325
Deferred income taxes	2,250	2,200
Deferred gains from sale and leaseback of aircraft	98	102
Other non-current liabilities	423	493
Stockholders' equity:
Common stock	808	808
Capital in excess of par value	1,218	1,216
Retained earnings	4,973	4,971
Accumulated other comprehensive loss	(518)	(578)
Treasury stock, at cost	(945)	(963)
Total stockholders' equity	5,536	5,454
Total liabilities and stockholders' equity	$14,530	$14,269

Condensed Consolidated Statemen

Condensed Consolidated Statement of Operations (USD $)
In Millions, except Per Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
OPERATING REVENUES:
Passenger	$2,495	$2,252
Freight	30	30
Other	105	75
Total operating revenues	2,630	2,357
OPERATING EXPENSES:
Salaries, wages, and benefits	864	836
Fuel and oil	821	698
Maintenance materials and repairs	166	184
Aircraft rentals	47	45
Landing fees and other rentals	190	166
Depreciation and amortization	154	150
Other operating expenses	334	328
Total operating expenses	2,576	2,407
OPERATING INCOME (LOSS)	54	(50)
OTHER EXPENSES (INCOME):
Interest expense	41	44
Capitalized interest	(5)	(6)
Interest income	(3)	(4)
Other (gains) losses, net	4	23
Total other expenses (income)	37	57
INCOME (LOSS) BEFORE INCOME TAXES	17	(107)
PROVISION (BENEFIT) FOR INCOME TAXES	6	(16)
NET INCOME (LOSS)	$11	($91)
NET INCOME (LOSS) PER SHARE, BASIC	0.01	-0.12
NET INCOME (LOSS) PER SHARE, DILUTED	0.01	-0.12
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	743	740
Diluted	744	740

1_Condensed Consolidated Statem

Condensed Consolidated Statement of Cash Flow (USD $)
In Millions	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)	$11	($91)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	154	150
Unrealized loss on fuel derivative instruments	21	70
Deferred income taxes	12	(21)
Amortization of deferred gains on sale and leaseback of aircraft	(3)	(3)
Share-based compensation expense	3	3
Excess tax benefits from share-based compensation arrangements	2	3
Changes in certain assets and liabilities:
Accounts and other receivables	(67)	(22)
Other current assets	(18)	10
Accounts payable and accrued liabilities	(85)	0
Air traffic liability	356	288
Cash collateral received from (provided to) fuel derivative counterparties	5	(60)
Other, net	(18)	(41)
Net cash provided by operating activities	373	286
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net	(139)	(85)
Purchases of short-term investments	(1,380)	(1,697)
Proceeds from sales of short-term investments	1,197	1,144
Net cash used in investing activities	(322)	(638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback transactions	0	173
Proceeds from Employee stock plans	12	4
Payments of long-term debt and capital lease obligations	(60)	(35)
Payments of cash dividends	(7)	(7)
Excess tax benefits (obligations) from share-based compensation arrangements	(2)	(3)
Other, net	2	(3)
Net cash provided by (used in) financing activities	(55)	129
NET CHANGE IN CASH AND CASH EQUIVALENTS	(4)	(223)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	1,114	1,368
CASH AND CASH EQUIVALENTS AT END OF PERIOD	1,110	1,145
CASH PAYMENTS FOR:
Interest, net of amount capitalized	34	36
Income taxes	$0	$1

BASIS OF PRESENTATION

BASIS OF PRESENTATION
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
BASIS OF PRESENTATION	1.BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Southwest Airlines Co. (Company or Southwest) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.The unaudited condensed consolidated financial statements for the interim periods ended March 31, 2010 and 2009, include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.This includes all normal and recurring adjustments, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.Financial results for the Company, and airlines in general, can be seasonal in nature.In many years, the Companys revenues, as well as its overall financial performance, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters.Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers, unemployment levels, and corporate travel budgets.These and other factors, such as the price of jet fuel in some periods, the nature of the Companys fuel hedging program, the periodic volatility of commodities used by the Company for hedging jet fuel, and the requirements related to hedge accounting, have created, and may continue to create, significant volatility in the Companys results in certain fiscal periods.See Note 5 for further information on fuel and the Companys hedging program. Operating results for the three months ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.For further information, refer to the consolidated financial statements and footnotes thereto included in the Southwest Airlines Co. Annual Report on Form 10-K for the year ended December 31, 2009. Certain prior period amounts have been reclassified to conform to the current presentation.In theunaudited Condensed ConsolidatedStatement of Cash Flows for the period ended March 31, 2009,the Company has reclassified certain unrealized noncash gains recorded on fuel derivative instruments and the cash collateral received from counterparties to its fuel hedging program, in order to conform to the current year presentation.These reclassifications had no impact on net cash flows provided by operations.Also see Note 2.

ACCOUNTING CHANGE

ACCOUNTING CHANGE
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
ACCOUNTING CHANGE	2.ACCOUNTING CHANGE Effective January 1, 2010, the Company made a change in its accounting for frequent flyer benefits to begin accruing for partially earned frequent flyer awards as part of the Companys incremental cost method of accounting for frequent flyer benefits.The term partial awards refers to credits earned by Customers for flights taken on Southwest Airlines that in the aggregate total less than 16, the number required to earn an award for free travel.Previously, the Company only accrued for fully earned frequent flyer awards.Although the prior policy is an acceptable method under accounting principles generally accepted in the United States, the Company believes accruing for partially earned awards is preferable to its former method because it is a better representation of the Companys liability as awards are in the process of being earned since a portion of the partially earned awards will eventually turn into fully earned awards.Additionally, accruing for partially earned awards is more consistent with the Companys accounting for fully earned awards, and it is consistent with the accounting policy used by several of the Companys competitors that utilize the incremental cost approach to account for frequent flyer awards. In accordance with accounting requirements associated with voluntary changes in accounting, the comparative unaudited Condensed Consolidated Balance Sheet has been adjusted to apply the new method of accounting retrospectively.Theadjustment from thechange in accounting principle at December 31, 2009 was as follows: (i)Accrued liabilities increased $19 million; (ii)Deferred income tax liability decreased $7 million; and (iii) Retained earnings decreased $12 million. The Companys unaudited Condensed Consolidated Statement of Operations and unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2009, were not retrospectively adjusted as the impact was immaterial.In addition, this elective change in accounting did not have a material impact on the Companys earnings or cash flows for the three months ended March 31, 2010.

NEW ACCOUNTING PRONOUNCEMENTS

NEW ACCOUNTING PRONOUNCEMENTS
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
NEW ACCOUNTING PRONOUNCEMENTS	3.NEW ACCOUNTING PRONOUNCEMENTS In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) Topic 810 (originally issued as Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. (FIN) 46(R)).Among other items, ASC 810 responds to concerns about an enterprises application of certain key provisions of FIN 46(R), including those regarding the transparency of the enterprises involvement with variable interest entities.ASC 810 is effective for calendar yearend companies beginning on January 1, 2010.The Company adopted the standard for the interim period ended March 31, 2010.There was no impact on the Companys financial position, results of operations, cash flows, or disclosures. On September 23, 2009, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables.EITF 08-1 requires the allocation of consideration among separately identified deliverables contained within an arrangement, based on their related selling prices.The Company utilizes current accounting guidance, also titled Revenue Arrangements with Multiple Deliverables, in the timing of recognition of revenue associated with the sale of frequent flyer credits to business partners.Specifically, the Company applies the residual method, as currently allowed, but which will be prohibited under EITF 08-1.EITF 08-1 will be effective for annual reporting periods beginning January 1, 2011.The Company is currently evaluating the impact of EITF 08-1 on its financial position, results of operations, cash flows, and disclosures. In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements an amendment to ASC Topic 820, Fair Value Measurements and Disclosures.This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements. ASU No. 2010-06 is effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The Company has adopted this ASU in full with respect to the interim period ended March 31, 2010.See Note 10.

NET INCOME

NET INCOME (LOSS) PER SHARE
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
NET INCOME (LOSS) PER SHARE	4.NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share (in millions except per share amounts): Three months ended March 31, 2010 2009 NUMERATOR: Net income (loss) $ 11 $ (91 ) DENOMINATOR: Weighted-average shares outstanding, basic 743 740 Dilutive effect of Employee stock options 1 - Adjusted weighted-average shares outstanding, diluted 744 740 NET INCOME (LOSS) PER SHARE: Basic $ .01 $ (.12 ) Diluted $ .01 $ (.12 ) The Company has excluded 75 million shares from its calculation of net income per share, diluted, for the three months ended March 31, 2010, as they represent antidilutive stock options.

FINANCIAL DERIVATIVE INSTRUMENT

FINANCIAL DERIVATIVE INSTRUMENTS
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
FINANCIAL DERIVATIVE INSTRUMENTS	5.FINANCIAL DERIVATIVE INSTRUMENTS Fuel Contracts Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices.Jet fuel and oil consumed during first quarter 2010 and 2009 represented approximately 32 percent and 29 percent of the Companys operating expenses, respectively.The Companys operating expenses have been extremely volatile in recent years due to dramatic increases and declines in energy prices.The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program.Because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel.However, the Company has found that financial derivative instruments in other commodities, such as crude oil, and refined products such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility.The Company does not purchase or hold any derivative financial instruments for trading purposes. The Company has used financial derivative instruments for both short-term and long-term time frames, and typically uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), and fixed price swap agreements in its portfolio. The Company evaluates its hedge volumes strictly from an economic standpoint and thus does not consider whether the hedges qualified or will qualify for special hedge accounting.The Company defines its economic hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting.For first quarter 2010, the Company had fuel derivatives in place related to approximately 47 percent of its fuel consumption.As of March 31, 2010, the Company had fuel derivative instruments in place to provide coverage on a large portion of its remaining 2010 estimated fuel consumption at varying price levels.For the remainder of 2010, the Company currently has fuel derivative contracts in place for approximately 44 percent of estimated fuel consumption at prices up to approximately $100 per barrel.Coverage falls to approximately 17 percent if market prices settle in the $100 to $120 per barrel range and increases to approximately 36 percent if market prices exceed $120 per barrel. The following table provides information about the Companys volume of fuel hedging for the remainder of 2010 (including first quarter actuals), as well as the years 2011 through 2013. Fuel hedged as Forecasted % of March 31, 2010 of jet fuel Period (by year) (gallons in millions) consumption 2010 543 38 % * 2011 489 35 % 2012 522 37 % 2013 98 7 % * Coverage declines to approximately 20 percent above $100 per barrel, then increases to 35 percent above $120 per barrel. Upon proper qualification, the Company accounts for its fuel derivative instruments as c

COMPREHENSIVE INCOME

COMPREHENSIVE INCOME (LOSS)
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
COMPREHENSIVE INCOME (LOSS)	6.COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments, which qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Companys postretirement benefit obligation.The differences between net income (loss) and comprehensive income (loss) for the three months ended March 31, 2010 and 2009, were as follows: Three months ended March 31, (In millions) 2010 2009 Net income (loss) $ 11 $ (91 ) Unrealized gain (loss) on derivative instruments, net of deferred taxes of $39 and $36 59 58 Other, net of deferred taxes of $0 and $3 1 4 Total other comprehensive income 60 62 Comprehensive income (loss) $ 71 $ (29 ) A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, 2010 and 2009: Fuel Interest Accumulated other hedge rate comprehensive (In millions) derivatives derivatives Other income (loss) Balance at December 31, 2009 $ (580 ) $ (19 ) $ 21 $ (578 ) 2010 changes in fair value (16 ) (1 ) 2 (15 ) Reclassification to earnings 75 - - 75 Balance at March 31, 2010 $ (521 ) (20 ) 23 $ (518 )

ACCRUED LIABILITIES

ACCRUED LIABILITIES
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
ACCRUED LIABILITIES	7.ACCRUED LIABILITIES March 31, December 31, (In millions) 2010 2009 (As adjusted-Note 2) Retirement plans $ 38 $ 32 Aircraft rentals 74 112 Vacation pay 193 190 Advances and deposits 29 32 Fuel derivative contracts - 32 Workers compensation 135 130 Other 188 187 Accrued liabilities $ 657 $ 715

DIVIDENDS

DIVIDENDS
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
DIVIDENDS	8.DIVIDENDS During the three month period ended March 31, 2010, dividends of $.0045 per share were declared on the 744 million shares of Common Stock then outstanding.During the three month period ended March 31, 2009, dividends of $.0045 per share were declared on the 740 million shares of Common Stock then outstanding.

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
COMMITMENTS AND CONTINGENCIES	9.COMMITMENTS AND CONTINGENCIES The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service (IRS). The Company's management does not expect that the outcome in any of its currently ongoing legal proceedings or the outcome of any proposed adjustments presented to date by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow. During 2008, the City of Dallas approved the Love Field Modernization Program (LFMP), a project to reconstruct Dallas Love Field (Airport) with modern, convenient air travel facilities.Pursuant to a Program Development Agreement (PDA) with the City of Dallas, the Company is managing this project, and major construction is expected to commence during mid-2010, with completion scheduled for the second half of 2014.Although subject to change, at the current time the project is expected to include the renovation of the Airport airline terminals and complete replacement of gate facilities with a new 20-gate facility, including infrastructure, systems and equipment, aircraft parking apron, fueling system, roadways and terminal curbside, baggage handling systems, passenger loading bridges and support systems, and other supporting infrastructure. The PDA authorizes reimbursement to the Company of up to $75 million for early LFMP expenditures the Company has incurred from April 25, 2008, until the issuance of bonds that will be used as funding for ongoing construction.The source of such reimbursement will be the proceeds of those bonds.As of March 31, 2010, the Company had spent a total of $41 million of its own funds on a portion of the LFMP project, and the Company has classified this amount as Ground property and equipment in its unaudited Condensed Consolidated Balance Sheet. The Company has agreed to manage the majority of the LFMP project, and as a result, will be evaluating its ongoing accounting requirements in consideration of accounting guidance provided for lessees involved in asset construction.As of the current time, the Company has not yet made a final determination of its accounting for the LFMP.It is currently expected that the bonds being utilized to finance the majority of the LFMP will be issued during second quarter 2010, at which time the Company will be able to finalize its conclusions regarding its ongoing accounting treatment for the LFMP.The Company will guaranty principal, premium (if any), and interest on the bonds.

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS
	3 Months Ended Mar. 31, 2010
Notes to Financial Statements [Abstract]
FAIR VALUE MEASUREMENTS	10.FAIR VALUE MEASUREMENTS Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. As of March 31, 2010, the Company held certain items that are required to be measured at fair value on a recurring basis.These included cash equivalents, short-term investments (primarily treasury bills and certificates of deposit), certain noncurrent investments, interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities.Noncurrent investments consist of certain auction rate securities, primarily those collateralized by student loan portfolios, which are guaranteed by the U.S. Government.Other available-for-sale securities primarily consist of investments associated with the Companys excess benefit plan. The Companys fuel and interest rate derivative instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange.Fuel derivative instruments include both swaps as well as different types of option contracts, whereas interest rate derivatives consist of swap agreements.See Note 5 for further information on the Companys derivative instruments and hedging activities.The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.Therefore, the Company has categorized these swap contracts as Level 2.The Company determines the value of option contracts utilizing a standard option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are quoted by financial institutions that trade these contracts.Because certain of the inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3.The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values.The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds. The Companys investments associated with its excess benefit plan consist of mutual funds that are publicly traded and for which market prices are readily available.This plan is a deferred compensation plan designed to hold Employee contributions in excess of limits established by Section 415 of the Internal Revenue Code.This plan is funded through qualifying Employee contributions and it impacts the Companys earnings through changes in the fair value of plan assets. All of the Companys auction

Document Information

Document Information
	3 Months Ended Mar. 31, 2010
Document Information [Text Block]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-03-31

Entity Information

Entity Information (USD $)
	3 Months Ended Mar. 31, 2010	Apr. 20, 2010	Jun. 30, 2009
Entity [Text Block]
Entity Registrant Name	Southwest Airlines Co.
Entity Central Index Key	0000092380
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Public Float			$4,984,514,098
Entity Common Stock, Shares Outstanding		744,447,409
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1