CONTACT: Investor Relations (214) 792-4415
SOUTHWEST AIRLINES REPORTS FOURTH QUARTER EARNINGS AND 32nd
CONSECUTIVE YEAR OF PROFITABILITY
DALLAS, TEXAS - January 19, 2005 - Southwest Airlines (NYSE:LUV) today
reported its fourth quarter results. Net income for fourth quarter 2004 was
$56 million, or $.07 per diluted share, compared to $66 million, or $.08 per
diluted share, for fourth quarter 2003.
The Company also reported its 32nd consecutive year of profitability,
with annual net income of $313 million, or $.38 per diluted share, compared
to 2003 net income of $442 million, or $.54 per diluted share. Excluding
last year's government grant, 2003 net income was $298 million, or $.36 per
diluted share.
Gary C. Kelly, CEO, stated: "I am very proud of our Employees and their
strenuous efforts to lower our cost structure. Although our fourth quarter
2004 earnings declined 15.2 percent due to significantly higher energy costs,
our unit costs, excluding fuel, declined 4.5 percent. As a result of our low
cost competitive advantage and ongoing efforts to improve productivity, we
have been able to offer the low fares our Customers demand while sustaining
our profitability and growing our route system during these difficult airline
industry times. Based on current cost trends, we expect our first quarter
2005 unit costs, excluding fuel, to decline from first quarter 2004's unit
costs, excluding fuel, of 6.57 cents.
"Even though jet fuel prices per gallon increased 20.1 percent, net of
hedging gains, our overall unit costs declined 1.3 percent in fourth quarter
2004. We also continue to mitigate record-high jet fuel prices with our
hedging program, which resulted in a reduction in fuel and oil expense of
$174 million during fourth quarter 2004. Although we are 85 percent hedged
in first quarter 2005 with prices capped at $26 per barrel, based on current
market conditions, we presently expect first quarter 2005 average jet fuel
cost per gallon to exceed fourth quarter 2004's 89.1 cents. We are 85
percent hedged for the remainder of 2005 with prices capped at $26 per
barrel; 65 percent in 2006 at $32 per barrel; over 45 percent in 2007 at $31
per barrel; 30 percent in 2008 at $33 per barrel; and over 25 percent in 2009
at $35 per barrel.
"The industry revenue environment continues to be a challenge due to
the glut of airline seats. On balance, our fourth quarter revenue challenges
are continuing into 2005. March 2005 results should benefit, however, from
the timing of the Easter holiday, which fell in April last year.
"In December, we completed a significant transaction with ATA Airlines,
Inc. Of primary importance to Southwest were the six Chicago Midway gates we
acquired and a six-bay aircraft maintenance hangar in Chicago, which will
close this month. In addition to the $40 million purchase price for these
assets, we agreed to the following in order to win the competitive bid in
bankruptcy court: a commitment to codeshare with ATA at Chicago Midway and
other points on our route system, subject to facility availability and
Customer convenience; a $40 million debtor-in-possession loan to ATA for
bankruptcy restructuring purposes; and a commitment to convert the debtor-in-
possession financing to a term loan and purchase $30 million in non-voting
senior convertible preferred stock upon ATA's emergence from bankruptcy. The
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codeshare to exchange passengers at Midway should begin to enhance our
revenues as early as February 2005.
"Barring any unforeseen events and assuming revenue trends somewhat
improve throughout the quarter, as described above, we expect to be
profitable again in first quarter 2005.
"While we are not immune to the challenging industry revenue
environment, our low costs and energetic People have allowed Southwest to
react quickly to market opportunities. We look forward to bringing our low
fares to Pittsburgh beginning May 2005 and the opportunity to soon increase
service to Chicago Midway with the six additional gates recently acquired
from ATA.
"We continue to be well positioned for growth and currently plan to add
29 net aircraft in 2005. During fourth quarter 2004, we exercised three
Boeing 737-700 options for 2006 delivery, bringing our 2006 firm orders and
options to 26 and 8, respectively.
"Despite industry challenges, our wonderful Employees consistently
deliver their well-known friendly, warm, and caring Customer Service. As a
result of their unwavering commitment to high-quality, low-fare service,
Southwest was recently named 'Best Low Cost Carrier' by Business Traveler
magazine."
Southwest will discuss results on a conference call at 10:30 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 2004 increased 9.1 percent
to $1.66 billion, compared to $1.52 billion for fourth quarter 2003.
Operating income increased 8.1 percent to $120 million from $111 million in
fourth quarter 2003. Revenue passenger miles (RPMs) increased 12.6 percent
in fourth quarter 2004, as compared to a 10.5 percent increase in available
seat miles (ASMs), resulting in a 1.2 point increase in load factor to 65.0
percent. The passenger revenue yield per RPM decreased 3.9 percent to 12.08
cents from 12.57 cents in fourth quarter 2003. Operating revenue yield
per ASM (RASM) decreased 1.3 percent to 8.18 cents from 8.29 cents in fourth
quarter 2003.
Total fourth quarter 2004 operating expenses were $1.54 billion, an
increase of 9.2 percent, compared to $1.41 billion in fourth quarter 2003.
Operating expenses per ASM (CASM) for fourth quarter 2004 decreased 1.3
percent to 7.59 cents, compared to 7.69 cents in fourth quarter 2003.
Excluding fuel, CASM for fourth quarter 2004 decreased 4.5 percent to 6.22
cents, compared to 6.51 cents for fourth quarter 2003.
"Other expenses" increased to $31 million in fourth quarter 2004 from
$10 million in fourth quarter 2003 primarily due to a $15 million ($.01 per
diluted share after profitsharing and income taxes) charge in "Other losses,"
which was recorded in accordance with Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Interest expense also increased 30 percent in fourth quarter
2004 primarily due to higher interest rates and $350 million in senior
unsecured Notes issued in September 2004.
Net cash provided by operations for 2004 was $1.16 billion and cash
expenditures for investing activities was $1.85 billion, which included a $34
million initial payment related to the assets acquired from ATA. As part of
the asset acquisition, the Company also provided $40 million of debtor-in-
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possession financing to ATA for bankruptcy restructuring purposes. During
fourth quarter 2004, the Company issued $112 million of debt secured by four
aircraft. We ended the year with $1.31 billion in cash plus our available
unsecured revolving credit line of $575 million. During first quarter 2005,
the Company will redeem $100 million of senior unsecured Notes due March
2005. Operating revenues for the year ended December 31, 2004 increased 10.0
percent to $6.53 billion while operating expenses increased 9.6 percent to
$5.98 billion, resulting in operating income of $554 million. Excluding the
2003 special item, operating expenses increased 10.4 percent.
Operating expenses for the year ended December 31, 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 Company-wide early out offer; and the pay, per diem, and
benefit increases retroactive to May 2002 related to the
agreement reached with our Flight Attendants.
Special Item
The Company believes it is helpful to management and investors to
evaluate ongoing operational performance and trends by excluding special
items, as described below, for comparative purposes. A reconciliation of key
financial measures, excluding the 2003 special item, is included in this
release, pursuant to Regulation G issued by the Securities and Exchange
Commission. There were no special items in 2004.
Pursuant to the April 2003 Emergency Wartime Supplemental
Appropriations Act, the Company received a $271 million cash payment from the
U.S. government, which is included as "Other gains" in its Condensed
Consolidated Statement of Income for 2003. This special item, which was
recorded in second quarter 2003, resulted in an increase of approximately $40
million to Employee profitsharing expense, included in "Salaries, wages, and
benefits."
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 are 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.
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.
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<Table>
<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(unaudited)
Three months ended Year Ended
December 31, December 31,
Percent Percent
2004 2003 Change 2004 2003 Change
OPERATING REVENUES:
Passenger $1,587 $1,467 8.2 $6,280 $5,741 9.4
Freight 34 24 41.7 117 94 24.5
Other 34 26 30.8 133 102 30.4
Total operating revenues 1,655 1,517 9.1 6,530 5,937 10.0
OPERATING EXPENSES:
Salaries, wages, and benefits 619 566 9.4 2,443 2,224 9.8
Fuel and oil 277 214 29.4 1,000 830 20.5
Maintenance materials
and repairs 107 109 (1.8) 458 430 6.5
Agency commissions - 12 n.a. 2 48 (95.8)
Aircraft rentals 45 46 (2.2) 179 183 (2.2)
Landing fees and other rentals 102 96 6.3 408 372 9.7
Depreciation and amortization 113 99 14.1 431 384 12.2
Other operating expenses 272 264 3.0 1,055 983 7.3
Total operating expenses 1,535 1,406 9.2 5,976
5,454 9.6
OPERATING INCOME 120 111 8.1 554 483 14.7
OTHER EXPENSES (INCOME):
Interest expense 26 20 30.0 88 91 (3.3)
Capitalized interest (9) (10) (10.0) (39) (33) 18.2
Interest income (7) (6) 16.7 (21) (24 (12.5)
Other (gains) losses, net 21 6 n.a. 37 (259) n.a.
Total other expenses (income) 31 10 n.a. 65 (225) n.a.
INCOME BEFORE INCOME TAXES 89 101 (11.9) 489 708 (30.9)
PROVISION FOR INCOME TAXES 33 35 (5.7) 176 266 (33.8)
NET INCOME $56 $66 (15.2) $313 $442 (29.2)
NET INCOME PER SHARE:
Basic $.07 $.08 $.40 $.56
Diluted $.07 $.08 $.38 $.54
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 782 788 783 783
Diluted 813 833 815 822
</Table>
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<Table>
<Caption>
SOUTHWEST AIRLINES CO.
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
(In millions, except per share and per ASM amounts)
(unaudited)
Year ended
December 31,
Percent
2004 2003 Change
Operating expenses, as reported $5,976 $5,454
Profitsharing impact of government grant - (40)
Operating expenses, excluding grant impact $5,976 $5,414 10.4
Operating expenses per ASM, as reported $.0777 $.0760
Profitsharing impact of government grant - (.0006)
Operating expenses per ASM, excluding
grant impact $.0777 $.0754 3.1
Operating expenses per ASM excluding $.0647 $.0644
fuel, as reported
Profitsharing impact of government grant - (.0006)
Operating expenses per ASM, excluding
fuel and grant impact $.0647 $.0638 1.4
Operating income, as reported $554 $483
Profitsharing impact of government grant - 40
Operating income, excluding grant impact $554 $523 5.9
Net income, as reported $313 $442
Government grant, net of income taxes
and profitsharing - (144)
Net income, excluding grant impact $313 $298 5.0
Net income per share, diluted, as reported $.38 $.54
Government grant, net of income taxes
and profitsharing - (.18)
Net income per share, diluted, excluding
grant impact $.38 $.36 5.6
</Table>
NOTE: The above schedule reconciles the financial measures, excluding a 2003
special item, 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.
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<Table>
<Caption>
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
(unaudited)
Three months ended
December 31,
2004 2003 Change
Revenue passengers carried 17,709,289 16,289,875 8.7 %
Enplaned passengers 20,144,834 18,395,064 9.5 %
Revenue passenger miles (RPMs) (000s) 13,136,093 11,664,359 12.6 %
Available seat miles (ASMs) (000s) 20,220,077 18,293,171 10.5 %
Load factor 65.0% 63.8% 1.2 pts.
Average length of passenger haul (miles) 742 716 3.6 %
Average aircraft stage length (miles) 590 566 4.2 %
Trips flown 251,755 238,365 5.6 %
Average passenger fare $89.59 $90.03 (0.5)%
Passenger revenue yield per RPM (cents) 12.08 12.57 (3.9)%
Operating revenue yield per ASM (cents) 8.18 8.29 (1.3)%
Operating expenses per ASM (cents) 7.59 7.69 (1.3)%
Operating expenses per ASM,
excluding special item n.a. n.a. n.a.
Operating expenses per ASM,
excluding fuel (cents) 6.22 6.51 (4.5)%
Operating expenses per ASM,
excluding fuel and special item n.a. n.a. n.a.
Fuel costs per gallon,
excluding fuel tax (cents) 89.1 74.2 20.1 %
Fuel consumed, in gallons (millions) 309 288 7.3 %
Number of Employees at period-end 31,011 32,847 (5.6)%
Size of fleet at period-end 417 388 7.5 %
</Table>
(a) Amounts exclude profitsharing impact of $271 million Wartime Act grant in
second quarter 2003.
<Table>
<Caption>
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
(unaudited)
Year Ended
December 31,
2004 2003 Change
Revenue passengers carried 70,902,773 65,673,945 8.0 %
Enplaned passengers 81,066,038 74,719,340 8.5 %
Revenue passenger miles (RPMs) (000s) 53,418,353 47,943,066 11.4 %
Available seat miles (ASMs) (000s) 76,861,296 71,790,425 7.1 %
Load factor 69.5% 66.8% 2.7 pts.
Average length of passenger haul (miles) 753 730 3.2 %
Average aircraft stage length (miles) 576 558 3.2 %
Trips flown 981,591 949,882 3.3 %
Average passenger fare $88.57 $87.42 1.3 %
Passenger revenue yield per RPM (cents) 11.76 11.97 (1.8)%
Operating revenue yield per ASM (cents) 8.50 8.27 2.8 %
Operating expenses per ASM (cents) 7.77 7.60 2.2 %
Operating expenses per ASM,
excluding special item (cents) 7.77 7.54(a) 3.1 %
Operating expenses per ASM,
excluding fuel (cents) 6.47 6.44 0.5 %
Operating expenses per ASM,
excluding fuel and special item (cents) 6.47 6.38(a) 1.4 %
Fuel costs per gallon,
excluding fuel tax (cents) 82.8 72.3 14.5 %
Fuel consumed, in gallons (millions) 1,201 1,143 5.1 %
Number of Employees at period-end 31,011 32,847 (5.6)%
Size of fleet at period-end 417 388 7.5 %
</Table>
(a) Amounts exclude profitsharing impact of $271 million Wartime Act grant in
second quarter 2003.
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<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
(unaudited)
December 31,
2004 2003
ASSETS
Current assets:
Cash and cash equivalents $1,305 $1,865
Accounts and other receivables 248 132
Inventories of parts and supplies,
at cost 137 93
Fuel hedge contracts 428 164
Prepaid expenses and other
current assets 54 59
Total current assets 2,172 2,313
Property and equipment, at cost:
Flight equipment 10,037 8,646
Ground property and equipment 1,202 1,117
Deposits on flight equipment
purchase contracts 682 787
11,921 10,550
Less allowance for depreciation
and amortization 3,198 3,107
8,723 7,443
Other assets 442 122
$11,337 $9,878
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $420 $405
Accrued liabilities 1,047 650
Air traffic liability 529 462
Current maturities of long-term debt 146 206
Total current liabilities 2,142 1,723
Long-term debt less current maturities 1,700 1,332
Deferred income taxes 1,610 1,420
Deferred gains from sale and
leaseback of aircraft 152 168
Other deferred liabilities 209 183
Stockholders' equity:
Common stock 790 789
Capital in excess of par value 299 258
Retained earnings 4,089 3,883
Accumulated other comprehensive income 417 122
Treasury stock, at cost (71) -
Total stockholders' equity 5,524 5,052
$11,337 $9,878
</Table>
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<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(unaudited)
Three months ended Year ended
December 31, December 31,
2004 2003 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $56 $66 $313 $442
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 113 99 431 384
Deferred income taxes 42 7 183 183
Amortization of deferred gains
on sale and leaseback of
aircraft (4) (4) (16) (16)
Amortization of scheduled airframe
inspections & repairs 12 12 52 49
Income tax benefit from Employee
stock option exercises 35 41 35 41
Changes in certain
assets and liabilities:
Accounts and other receivables (2) 11 (75) 43
Other current assets (11) (4) (44) (19)
Accounts payable and
accrued liabilities (162) 149 231 129
Air traffic liability (114) (106) 68 50
Income taxes payable - (5) - -
Other (14) 25 (21) 50
Net cash provided by (used in)
operating activities (49) 291 1,157 1,336
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property
and equipment, net (409) (383) (1,775) (1,238)
Initial payment for assets of
ATA Airlines, Inc. (34) - (34) -
Debtor in possession loan to
ATA Airlines, Inc. (40) - (40) -
Other, net (1) - (1) -
Cash flows used in
investing activities (484) (383) (1,850) (1,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 112 - 520 -
Proceeds from Employee stock plans 36 31 88 93
Payments of long-term debt and
capital lease obligations (185) (109) (207) (130)
Payments of cash dividends - - (14) (14)
Repurchase of common stock - - (246) -
Other, net (1) 1 (8) 3
Net cash provided by (used in)
financing activities (38) (77) 133 (48)
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (571) (169) (560) 50
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,876 2,034 1,865 1,815
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,305 $1,865 $1,305 $1,865
</Table>
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<Table>
<Caption>
Southwest Airlines Co.
Boeing 737-700 Delivery Schedule
As of December 31, 2004
Prior Schedule Current Schedule
Firm Options* Firm Options*
2005 34 - 34 -
2006 23 11 26 8
2007 25 29 25 29
2008 6 45 6 45
2009-2012 - 177 - 177
Total 88 262 91 259
</Table>
*Includes purchase rights