CONTACT: Investor Relations (214) 792-4415
SOUTHWEST AIRLINES REPORTS THIRD QUARTER EARNINGS OF $119 MILLION;
54th CONSECUTIVE QUARTER OF PROFITABILITY
DALLAS, TEXAS -- October 14, 2004 -- Southwest Airlines' net income for
third quarter 2004 increased 12.3 percent to $119 million, compared to $106
million in third quarter 2003. Net income per diluted share was $.15 for
third quarter 2004, compared to $.13 in third quarter 2003.
"Despite the weak airline industry revenue environment and higher fuel
prices, Southwest achieved a double-digit improvement in earnings," stated
Gary C. Kelly, Chief Executive Officer. "Our third quarter operating cost
performance was excellent, which significantly contributed to these results.
I am extremely proud of our Employees and their enormous efforts to lower our
cost structure and raise our productivity. Even with average fuel prices up
over 10 percent, third quarter 2004 unit costs increased only 1.3 percent.
Our hedging program greatly mitigated record-high fuel prices, which resulted
in a reduction in operating expenses of $131 million (or $73 million net of
profitsharing and income tax effects) for third quarter 2004.
"Excluding fuel, our unit costs were flat with the year ago quarter and
well below first half 2004, which represents a significant improvement in
cost trends. We are on track with our cost reduction targets and expect
fourth quarter 2004 unit costs, excluding fuel, to decline from fourth
quarter 2003's performance of 6.51 cents.
"In today's airline industry, low costs are imperative to remain
profitable. Low fares are our most important competitive weapon and what
Customers demand. We are determined to maintain our position as the low cost
producer and the Low Fare Airline in America.
"Although we were impacted by airline industry capacity increases,
pricing pressures, and hurricanes in the Southeastern U.S., our revenue
growth managed to keep pace with our capacity growth. The revenue
environment has softened since July, and recent trends, along with more
competitive capacity, suggest fourth quarter 2004 unit revenue may decline
from fourth quarter 2003 unit revenue of 8.29 cents. Although bookings for
October are fine, our passenger revenue yield per revenue passenger mile
continues to fall below year ago levels. While the current revenue
environment is challenging, Southwest is pleased with its competitive
position in the airline market place and plans to continue to press the
development of its route system."
Southwest will discuss results on a conference call at 11:30 a.m.
Eastern Time today. A live broadcast of the conference call will be
available at www.southwest.com/jp/luvhome.shtml?src=IR_071404
Operating Results
Total operating revenues for third quarter 2004 increased 7.8 percent
to $1.67 billion, compared to $1.55 billion for third quarter 2003.
Operating income was $191 million, compared to $185 million in third quarter
2003. Revenue passenger miles (RPMs) increased 10.4 percent in third
<Page>
quarter 2004, compared to a 7.0 percent increase in available seat miles
(ASMs), resulting in a load factor of 72.7 percent versus the third quarter
2003 load factor of 70.5 percent. The passenger revenue yield per
RPM decreased 2.8 percent to 11.38 cents from 11.71 cents in third quarter
2003. Operating revenue per ASM (RASM) increased .7 percent to 8.59 cents
from 8.53 cents in third quarter 2003.
Total third quarter 2004 operating expenses were $1.48 billion, an
increase of 8.4 percent, compared to $1.37 billion in third quarter 2003.
Operating expenses per ASM (CASM) for third quarter 2004 increased 1.3
percent to 7.61 cents from 7.51 cents in third quarter 2003. The Company's
hedging program resulted in an offset to fuel and oil expense of $131 million
in third quarter 2004. The Company is over 80 percent hedged for fourth
quarter 2004 with prices capped below $24 per barrel; over 80 percent in 2005
at $25 per barrel; 60 percent in 2006 at $31 per barrel; and over 40 percent
at $30 per barrel in 2007. Excluding fuel, CASM for third quarter 2004 was
6.34 cents, which was flat with the year ago quarter.
Net cash provided by operations was $1.21 billion and capital
expenditures were $1.37 billion for the nine months ended September 30, 2004.
We ended third quarter 2004 with $1.88 billion cash on hand plus our fully
available unsecured revolving credit line of $575 million. In September
2004, Southwest issued $350 million of senior unsecured Notes due 2014. In
November 2004, the Company will redeem $175 million of Aircraft Secured
Notes.
The Company repurchased approximately 7.9 million of its common shares
during third quarter 2004, bringing the total to 17 million shares, or $246
million, pursuant to the Company's previously announced $300 million
repurchase program.
During third quarter 2004, Southwest exercised one Boeing 737-700
option for 2006 delivery. This change brings our 2006 firm orders and
options to 23 and 11, respectively.
Total operating revenues for the nine months ended September 30, 2004
increased 10.3 percent to $4.88 billion while total operating expenses
increased 9.7 percent to $4.44 billion, resulting in operating income in 2004
of $435 million versus $372 million for the nine-month period ended September
30, 2003. Excluding the profitsharing impact of last year's government
grant, operating expenses for the nine months ended September 30, 2004
increased 10.8 percent, resulting in a 5.3 percent increase in operating
income. Net income for the nine-month period was $258 million in 2004 versus
$376 million in 2003. Net income per diluted share for the nine-month
period was $.32 in 2004 versus $.46 in 2003. Excluding the impact of last
year's government grant, net income for the nine months ended September 30,
2003 was $233 million.
The results for the nine months ended 2004 included $41 million (or $22
million net of profitsharing and income tax effects) for costs associated
with the consolidation of the Company's reservation operations; the pay, per
diem, and benefit increases retroactive to May 2002 related to the agreement
reached with our Flight Attendants; and our company-wide early out offer.
This news release contains forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. All forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from the plans, intentions, and expectations reflected in
or suggested by the forward-looking statements. Additional information
concerning the factors which could cause actual results to differ materially
from the forward-looking statements is contained in the Company's periodic
filings with the Securities and Exchange Commission, including without
limitation, the Company's Annual Report on Form 10-K for the year ended 2003.
<Page>
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 press release.
<Page>
<Table>
<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
Percent Percent
2004 2003 Change 2004 2003 Change
OPERATING REVENUES:
Passenger $1,612 $1,503 7.3 $4,694 $4,275 9.8
Freight 28 23 21.7 82 70 17.1
Other 34 27 25.9 99 75 32.0
Total
operating revenues 1,674 1,553 7.8 4,875 4,420 10.3
OPERATING EXPENSES:
Salaries, wages,
and benefits 612 554 10.5 1,823 1,657 10.0
Fuel and oil 247 214 15.4 723 616 17.4
Maintenance materials
and repairs 113 111 1.8 351 321 9.3
Agency commissions - 11 n.a. 2 36 n.a.
Aircraft rentals 45 46 (2.2) 134 137 (2.2)
Landing fees
and other rentals 104 95 9.5 306 276 10.9
Depreciation and
amortization 108 97 11.3 318 285 11.6
Other operating expenses 254 240 5.8 783 720 8.8
Total operating
expenses 1,483 1,368 8.4 4,440 4,048 9.7
OPERATING INCOME 191 185 3.2 435 372 16.9
OTHER EXPENSES (INCOME):
Interest expense 21 21 - 62 71 (12.7)
Capitalized interest (10) (8) 25.0 (30) (23) 30.4
Interest income (5) (6) (16.7) (14) (18) (22.2)
Other (gains)
losses, net 4 7 n.a. 16 (265) n.a.
Total other
expenses (income) 10 14 n.a. 34 (235) n.a.
INCOME BEFORE INCOME TAXES 181 171 5.8 401 607 (33.9)
PROVISION FOR INCOME TAXES 62 65 (4.6) 143 231 (38.1)
NET INCOME $119 $106 12.3 $258 $376 (31.4)
NET INCOME PER SHARE:
Basic $ .15 $ .14 7.1 $ .33 $ .48 (31.3)
Diluted $ .15 $ .13 15.4 $ .32 $ .46 (30.4)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 781 784 784 781
Diluted 812 827 815 818
</Table>
/more
<Page>
<Table>
<Caption>
SOUTHWEST AIRLINES CO.
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
(unaudited)
Nine months ended
September 30,
(In millions, except per share and per ASM amounts) Percent
2004 2003 Change
Operating expenses, as reported $4,440 $4,048
Profitsharing impact of government grant - (41)
Operating expenses, excluding grant impact $4,440 $4,007 10.8
Operating expenses per ASM, as reported $.0784 $.0757
Profitsharing impact of government grant - (.0008)
Operating expenses per ASM, excluding
grant impact $.0784 $.0749 4.7
Operating expenses per ASM excluding $.0656 $.0642
fuel, as reported
Profitsharing impact of government grant - (.0008)
Operating expenses per ASM, excluding
fuel and grant impact $.0656 $.0634 3.5
Operating income, as reported $435 $372
Profitsharing impact of government grant - 41
Operating income, excluding grant impact $435 $413 5.3
Net income, as reported $258 $376
Government grant, net of income taxes
and profitsharing - (143)
Net income, excluding grant impact $258 $233 10.7
Net income per share, diluted, as reported $.32 $.46
Government grant, net of income taxes
and profitsharing - (.18)
Net income per share, diluted, excluding
grant impact $.32 $.28 14.3
NOTE: The above schedule reconciles the financial measures, excluding
special items, included in this press release to the most comparable GAAP
financial measures. The special item was a $271 million Wartime Act grant
received in second quarter 2003 pursuant to the April 2003 Emergency Wartime
Supplemental Appropriations Act. The $271 million Wartime Act grant was
received as a result of the war with Iraq and is recorded in "Other gains."
In management's view, comparative analysis of results can be enhanced by
excluding the impact of this special item. The item is not indicative of the
Company's ongoing operating performance for the applicable period, nor should
it be considered in developing trend analysis for future periods.
/more
<Page>
<Table>
<Caption>
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
(unaudited)
Three months ended
September 30,
2004 2003 Change
Revenue passengers carried 18,334,448 17,243,250 6.3 %
Enplaned passengers 21,102,752 19,708,171 7.1 %
Revenue passenger miles (RPMs) (000s) 14,164,101 12,832,340 10.4 %
Available seat miles (ASMs) (000s) 19,486,103 18,204,357 7.0 %
Load factor 72.7% 70.5% 2.2 pts.
Average length of passenger haul (miles) 773 744 3.9 %
Average aircraft stage length (miles) 576 558 3.2 %
Trips flown 248,981 240,912 3.3 %
Average passenger fare $87.90 $87.16 0.8 %
Passenger revenue yield per RPM (cents) 11.38 11.71 (2.8)%
Operating revenue yield per ASM (cents) 8.59 8.53 0.7 %
Operating expenses per ASM (cents) 7.61 7.51 1.3 %
Operating expenses per ASM,
excluding fuel (cents) 6.34 6.34 -
Fuel costs per gallon,
excluding fuel tax (cents) 80.3 72.8 10.3 %
Fuel consumed, in gallons (millions) 306 292 4.8 %
Number of Employees at period-end 30,657 32,563 (5.9)%
Size of fleet at period-end 415 385 7.8 %
</Table>
<Table>
<Caption>
Nine months ended
September 30,
2004 2003 Change
Revenue passengers carried 53,193,484 49,384,070 7.7 %
Enplaned passengers 60,921,204 56,324,276 8.2 %
Revenue passenger miles (RPMs) (000s) 40,282,260 36,278,706 11.0 %
Available seat miles (ASMs) (000s) 56,641,218 53,497,254 5.9 %
Load factor 71.1% 67.8% 3.3 pts.
Average length of passenger haul (miles) 757 735 3.0 %
Average aircraft stage length (miles) 572 555 3.1 %
Trips flown 729,836 711,517 2.6 %
Average passenger fare $88.23 $86.56 1.9 %
Passenger revenue yield per RPM (cents) 11.65 11.78 (1.1)%
Operating revenue yield per ASM (cents) 8.61 8.26 4.2 %
Operating expenses per ASM (cents) 7.84 7.57 3.6 %
Operating expenses per ASM,
excluding fuel (cents) 6.56 6.42 2.2 %
Fuel costs per gallon,
excluding fuel tax (cents) 80.6 71.6 12.6 %
Fuel consumed, in gallons (millions) 891 855 4.2 %
Number of Employees at period-end 30,657 32,563 (5.9)%
Size of fleet at period-end 415 385 7.8 %
</Table>
/more
<Page>
<Table>
<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, December 31,
(in millions) 2004 2003
ASSETS
Current assets:
Cash and cash equivalents $1,876 $1,865
Accounts and other receivables 252 132
Inventories of parts and supplies,
at cost 112 93
Fuel hedge contracts 558 164
Prepaid expenses and
other current assets 74 59
Total current assets 2,872 2,313
Property and equipment, at cost:
Flight equipment 9,742 8,646
Ground property and equipment 1,175 1,117
Deposits on flight equipment
purchase contracts 769 787
11,686 10,550
Less allowance for depreciation
and amortization 3,242 3,107
8,444 7,443
Other assets 415 122
$11,731 $9,878
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $418 $405
Accrued liabilities 1,026 650
Air traffic liability 644 462
Current maturities of long-term debt 317 206
Total current liabilities 2,405 1,723
Long-term debt less current maturities 1,606 1,332
Deferred income taxes 1,860 1,420
Deferred gains from sale and
leaseback of aircraft 156 168
Other deferred liabilities 200 183
Stockholders' equity:
Common stock 790 789
Capital in excess of par value 263 258
Retained earnings 4,084 3,883
Accumulated other comprehensive income 520 122
Treasury stock, at cost (153) -
Total stockholders' equity 5,504 5,052
$11,731 $9,878
</Table>
/more
<Page>
<Table>
<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Three months ended Nine months ended
September 30, September 30,
(in millions) 2004 2003 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $119 $106 $258 $376
Adjustments to reconcile
net income to cash provided by
operating activities:
Depreciation and amortization 108 97 318 285
Deferred income taxes 60 29 141 177
Amortization of deferred gains
on sale and leaseback
of aircraft (4) (4) (12) (12)
Amortization of scheduled
airframe inspections
& repairs 13 13 40 37
Changes in certain assets and liabilities:
Accounts and other
receivables (24) (15) (74) 32
Other current assets (21) (7) (33) (15)
Accounts payable and
accrued liabilities 111 (72) 393 (20)
Air traffic liability (15) (7) 182 156
Income taxes payable - (6) - 5
Other 13 7 (7) 25
Net cash provided by
operating activities 360 141 1,206 1,046
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment, net (496) (337) (1,366) (855)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 350 - 408 -
Proceeds from Employee stock plans 12 30 52 61
Payments of long-term debt and
capital lease obligations (1) (1) (22) (21)
Payments of cash dividends (4) (4) (14) (14)
Repurchase of common stock (110) - (246) -
Other, net (3) 1 (7) 2
Net cash provided by
financing activities 244 26 171 28
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 108 (170) 11 219
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,768 2,204 1,865 1,815
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,876 $2,034 $1,876 $2,034
</Table>
/more
<Page>
<Table>
<Caption>
Southwest Airlines Co.
Boeing 737-700 Delivery Schedule
As of September 30, 2004
Prior Schedule Current Schedule
Firm Options* Firm Options*
2004 47 - 47** -
2005 34 - 34 -
2006 22 12 23 11
2007 25 29 25 29
2008 6 45 6 45
2009-2012 - 177 - 177
Total 134 263 134 263
</Table>
*Includes purchase rights
**37 aircraft were received during first nine months of 2004, including one
leased aircraft
***