Exhibit 99.1
CONTACT: Investor Relations (214) 792-4415
SOUTHWEST AIRLINES REPORTS FOURTH QUARTER EARNINGS AND
33rd CONSECUTIVE YEAR OF PROFITABILITY
DALLAS, TEXAS - January 18, 2006 - Southwest Airlines (NYSE:LUV)
today reported its fourth quarter and full year 2005 results. Net income for
fourth quarter 2005 was $86 million, or $.10 per diluted share, compared to
$56 million, or $.07 per diluted share, for fourth quarter 2004. The
Company's fourth quarter 2005 and 2004 results included unrealized losses,
recorded in "Other gains/losses," associated with derivative instruments that
will settle in future accounting periods recorded as a result of Statement of
Financial Accounting Standard 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," as amended. Excluding SFAS 133 items
in fourth quarter 2005 and 2004, respectively, net income was $98 million, or
$.12 per diluted share, compared to $68 million, or $.08 per diluted share.
See the attached reconciliation for further information on these items.
The Company's fourth quarter 2005 results included $24 million (before
profitsharing and income taxes) in additional 2005 federal airport security
expenses due to a retroactive assessment by the Transportation Security
Administration (TSA) made, without notice or opportunity to protest, in
January 2006. This assessment was completely unexpected, and the Company
believes it is improper and plans to vigorously contest it.
For the full year 2005, net income was $548 million, or $.67 per
diluted share, compared to 2004 net income of $313 million, or $.38 per
diluted share. Excluding SFAS 133 items in both years, 2005 net income was
$489 million, or $.60 per diluted share, compared to 2004 net income of $324
million, or $.40 per diluted share.
Gary C. Kelly, CEO, stated: "I am pleased to report a significantly
improved earnings performance for the fourth quarter and full year 2005,
which represented our 33rd consecutive year of profitability. Despite the
totally unexpected TSA security fee assessment and the 38.8 percent increase
in our hedged fuel costs per gallon, our fourth quarter 2005 earnings were up
over 40 percent.
"We continue to be optimistic about our revenue trends and were very
pleased with our record fourth quarter 2005 operating revenues of $1.99
billion. As a result of strong Customer demand, we achieved a record fourth
quarter load factor of 69.6 percent at improved yields, which were up 4.2
percent. Unit revenues grew 11.7 percent with only modest fare increases,
reaffirming our Low Fare Leadership.
"Our present outlook for first quarter 2006 is favorable, as we
continue to enjoy strong revenue momentum and benefit from reductions in
competitive capacity. Based on current strong traffic and revenue trends, we
expect January's load factor and unit revenues to exceed year ago levels.
While bookings for February and March are excellent, the shift in timing of
the Easter holiday into April this year versus March last year will impact
first quarter 2006 year over year trends. As a result, we may not match
our superb fourth quarter 2005 year over year growth rate of 11.7 percent in
first quarter 2006.
"Our unit costs were up more than expected, primarily due to the
unexpected $24 million TSA security fee assessment not received until January
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2006. We believe this surprise assessment is inappropriate.
"Our fourth quarter 2005 jet fuel cost per gallon included a $258
million hedging benefit. Still, the fourth quarter 2005 jet fuel cost
increased 38.8 percent to $1.22 per gallon. For first quarter 2006, we are
over 75 percent hedged with prices capped at $36 per barrel, but presently
expect our hedged first quarter 2006 fuel price to approximate $1.45 per
gallon. We are over 70 percent hedged for the remainder of 2006 at $36 per
barrel; over 60 percent in 2007 at $39 per barrel; over 35 percent in 2008 at
$38 per barrel; and about 30 percent in 2009 at $39 per barrel.
"Excluding fuel but including the surprise TSA assessment, our fourth
quarter 2005 unit costs increased 5.6 percent. While we had cost pressures
in fourth quarter 2005 and will continue our intense cost control efforts, I
am proud of what our Employees have accomplished on the cost side. As a
result of their hard work and productivity improvements, we reduced our full
year unit costs, excluding fuel, by 1.5 percent.
"As a reminder, the Company plans to adopt Statement of Financial
Accounting Standards (SFAS) No. 123R, Share-Based Payment (stock option
expensing), in first quarter 2006. The adoption of SFAS 123R is expected to
increase first quarter 2006 salaries, wages, and benefits by a non-cash
charge of approximately $20 million. As a result of the adoption of SFAS
123R, we expect first quarter 2006 unit cost, excluding fuel, to exceed first
quarter 2005, but improve from fourth quarter 2005's 6.57 cents.
"We continue to grow our fleet and route system and are pleased with
the performance of our two new cities in 2005: Ft. Myers and Pittsburgh. We
are excited about our return to the Denver market. On January 3, 2006, we
initiated service at Denver International Airport with 13 daily nonstop
flights, increasing to 20 daily nonstop flights by March 2006. Initial
Customer response has been excellent.
"We also continue to grow our existing network. Our efforts to rebuild
New Orleans continue, and we will be up to 18 daily flights in March. We
have increased our capacity at Chicago Midway nearly 60 percent since third
quarter 2004 and plan to continue to add service in this market. In
December 2005, we completed a transaction with ATA Airlines, Inc. to acquire
the leasehold rights to four additional gates at Chicago Midway, in exchange
for a $20 million reduction in our debtor-in-possession loan to ATA.
In addition, we enhanced our codeshare arrangement with ATA, subject to
certain conditions, including ATA's confirmed Plan of Reorganization, which
must be fulfilled by February 28, 2006. We recently expanded our codeshare
agreement to include ATA flights from DFW International Airport to Chicago
Midway. Based on current codeshare markets, we estimate first quarter 2006
codeshare revenues to be approximately $10 million.
"After 23 years of serving the state of Missouri, we are thrilled that
we were granted permission to initiate new nonstop service to St. Louis and
Kansas City from Dallas. The new service, which began December 13, 2005,
resulted from the enactment of a 2005 federal transportation appropriations
bill containing language, initiated by Missouri Senator Kit Bond, that
exempts Missouri from federal flight restrictions placed on Dallas' Love
Field airport in 1979.
"We continue to be well-poised to take advantage of growth
opportunities and currently plan to add over 30 aircraft in 2006 for an
estimated eight percent available seat mile growth. Whether or not we add
another new city in 2006 will depend heavily on the service needs of a number
of our existing cities. We recently exercised two Boeing 737-700 options for
delivery in 2007, bringing our 2007 firm orders and options to 29 and 7,
respectively."
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American Small Business Travelers Alliance ranked Southwest as the Best
Airline based on the carrier's treatment of small business travelers.
Southwest Airlines was also named in the 2006 Hispanic Magazine Corporate 100
for the eighth year in a row.
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 southwest.com .
Operating Results
Total operating revenues for fourth quarter 2005 increased 20.1 percent
to $1.99 billion, compared to $1.66 billion for fourth quarter 2004.
Operating income increased 35.8 percent to $163 million from $120 million in
fourth quarter 2004. Revenue passenger miles (RPMs) increased 15.3 percent
in fourth quarter 2005, as compared to a 7.6 percent increase in available
seat miles (ASMs), resulting in a 4.6 point increase in load factor to 69.6
percent, a fourth quarter record for the Company. The passenger revenue
yield per RPM increased 4.2 percent to 12.59 cents from 12.08 cents in fourth
quarter 2004. Operating revenue yield per ASM (RASM) increased 11.7 percent
to 9.14 cents from 8.18 cents in fourth quarter 2004, the highest quarterly
year-over-year gain in over 13 years.
Total fourth quarter 2005 operating expenses were $1.82 billion, an
increase of 18.8 percent, compared to $1.54 billion in fourth quarter 2004.
Operating expenses per ASM (CASM) for fourth quarter 2005 increased 10.5
percent to 8.39 cents, compared to 7.59 cents in fourth quarter 2004.
Excluding SFAS 133 items, CASM for fourth quarter 2005 increased 11.2 percent
to 8.42 cents, compared to 7.57 cents for fourth quarter 2004. CASM,
excluding fuel, for fourth quarter 2005 increased 5.6 percent to 6.57 cents,
compared to 6.22 cents for fourth quarter 2004, partially due to the $24
million surprise assessment from the TSA in January 2006.
Net cash provided by operations for 2005 was $2.23 billion, which
included a $620 million increase in fuel hedge-related collateral deposits.
Capital expenditures were $1.2 billion for 2005. The Company ended 2005 with
$2.5 billion in cash and short-term investments. In addition, the Company
had a fully available unsecured revolving credit line of $600 million. The
Company will redeem $601 million of its debt maturing in 2006.
Operating revenues for the year ended December 31, 2005 increased 16.1
percent to $7.58 billion, while operating expenses increased 13.2 percent to
$6.76 billion, resulting in operating income of $820 million.
"Other income" was $54 million for 2005 versus "other expenses" of $65
million for 2004. The $119 million swing in "other income" resulted
primarily from SFAS 133 items, recorded in "other gains," for 2005, offset
by an $8 million increase in net interest expense, primarily due to higher
interest rates. For 2005, the SFAS 133 items primarily related to unrealized
gains of $86 million recorded on derivative contracts that settle in future
periods. 2004 included $14 million of SFAS 133 unrealized losses on
derivative contracts that settle in future periods. See the attached
reconciliation for further information on these items.
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.
This news release contains forward-looking statements as defined in the
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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 2004
and subsequent filings. 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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<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
2005 2004 Change 2005 2004 Change
<s> <c> <c> <c> <c> <c> <c>
OPERATING REVENUES
Passenger $1,906 $1,587 20.1 $7,279 $6,280 15.9
Freight 35 34 2.9 133 117 13.7
Other 46 34 35.3 172 133 29.3
Total operating revenues 1,987 1,655 20.1 7,584 6,530 16.1
OPERATING EXPENSES:
Salaries, wages, and
Benefits 702 619 13.4 2,702 2,443 10.6
Fuel and oil 395 277 42.6 1,342 1,000 34.2
Maintenance materials
and repairs 112 106 5.7 430 457 (5.9)
Aircraft rentals 42 45 (6.7) 163 179 (8.9)
Landing fees and other
Rentals 109 102 6.9 454 408 11.3
Depreciation and amortization 121 113 7.1 469 431 8.8
Other operating expenses 343 273 25.6 1,204 1,058 13.8
Total operating expenses 1,824 1,535 18.8 6,764 5,976 13.2
OPERATING INCOME 163 120 35.8 820 554 48.0
OTHER EXPENSES (INCOME):
Interest expense 32 26 23.1 122 88 38.6
Capitalized interest (11) (9) 22.2 (39) (39) 0.0
Interest income (16) (7) 128.6 (47) (21) 123.8
Other (gains) losses, net 22 21 n.a. (90) 37 n.a.
Total other expenses (income) 27 31 n.a. (54) 65 n.a.
INCOME BEFORE INCOME TAXES 136 89 52.8 874 489 78.7
PROVISION FOR INCOME TAXES 50 33 51.5 326 176 85.2
NET INCOME $86 $56 53.6 $548 $313 75.1
NET INCOME PER SHARE:
Basic $ .11 $ .07 57.1 $ .70 $ .40 75.0
Diluted $ .10 $ .07 42.9 $ .67 $ .38 76.3
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 797 782 789 783
Diluted 823 813 814 815
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<Table>
<Caption>
SOUTHWEST AIRLINES CO
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
(unaudited)
Three Months Ended Year Ended
December 31, December 31,
(In millions, except Percent Percent
per share amounts) 2005 2004 Change 2005 2004 Change
<s> <c> <c> <c> <c> <c> <c>
Mark-to-market (gains)
losses on fuel contracts
settling in future periods $9 $4 $(77) $7
Ineffectiveness from fuel
hedges settling in future
periods 10 13 (9) 7
Realized fuel contract
settlements included in
Other (gains) losses 5 (2) (24) (1)
Total impact of fuel
contracts included in
Other (gains) losses, net $24 $15 n.a. $(110) $13 n.a
Other (gains) losses,
net, as reported $22 $21 $(90) $37
Less: impact of fuel
Contracts (24) (15) 110 (13)
Other (gains) losses,
net - economic fuel basis $(2) $6 n.a. $20 $24 n.a
Net income, as reported $86 $56 $548 $313
Less: impact of fuel
contracts, net of
income taxes 12 12 (59) 11
Net income - economic
fuel basis $98 $68 44.1 $489 $324 50.9
Net income per share,
diluted, as reported $.10 $.07 $.67 $.38
Less: impact of fuel
contracts, net of
income taxes .02 .01 (.07) .02
Net income per share,
diluted - economic fuel
basis $.12 $.08 50.0 $.60 $.40 50.0
Fuel and oil expense
- - unhedged $660 $451 $2,234 $1,455
Less: fuel hedge gains
included in fuel and
oil expense (265) (174) (892) (455)
GAAP fuel and oil expense 395 277 42.6 1,342 1,000 34.2
Add/(Deduct): losses/(gains)
on settled contracts included
in Other (gains) losses, net 5 (2) (24) (1)
Add/(Deduct): fuel contract
losses/(gains) recognized in
earnings in prior periods for
contracts settling in the
current period 2 (2) 10 (3)
Fuel and oil expense -
economic basis $402 $273 47.3 $1,328 $996 33.3
</Table>
NOTE: The above schedule reconciles the non-GAAP financial measures
included in this press release to the most comparable GAAP financial measures.
The special items consist primarily of unrealized gains or losses (before income
taxes) for derivative instruments that will settle in future accounting periods,
recorded as a result of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended. The majority of these amounts relate to
ineffectiveness, as defined, for future period instruments and the change in
market value for future period deriviatives that no longer qualified for
special hedge accounting, as defined in SFAS 133.
In management's view, comparative analysis of results can be enhanced by
excluding the impact of these items. The amounts are not indicative of
the Company's operating performance for the applicable period, nor
should they be considered in developing trend analysis for future
periods. In addition, since fuel expense is such a large part of the
Company's operating costs and is subject to extreme volatility, the
Company believes it is useful to provide investors with the Company's
true economic cost of fuel for the periods presented, based on cash settlements
from hedging activities, but excluding the unrealized impact of hedges that
will settle in future periods or were recognized in prior periods.
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<Caption>
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
(unaudited)
Three months ended
December 31,
2005 2004 Change
Revenue passengers carried 19,485,341 17,709,289 10.0 %
Enplaned passengers 22,225,745 20,144,834 10.3 %
Revenue passenger miles (RPMs) (000s) 15,139,361 13,136,093 15.3 %
Available seat miles (ASMs) (000s) 21,748,689 20,220,077 7.6 %
Load factor 69.6% 65.0% 4.6 pts.
Average length of passenger haul (miles) 777 742 4.7 %
Average aircraft stage length (miles) 615 590 4.2 %
Trips flown 259,377 251,755 3.0 %
Average passenger fare $97.83 $89.59 9.2 %
Passenger revenue yield per RPM (cents) 12.59 12.08 4.2 %
Operating revenue yield per ASM (cents) 9.14 8.18 11.7 %
Operating expenses per ASM (GAAP, in cents) 8.39 7.59 10.5 %
Operating expenses per ASM
(economic, in cents) 8.42 7.57 11.2 %
Operating expenses per ASM,
excluding fuel (cents) 6.57 6.22 5.6 %
Fuel costs per gallon,
excluding fuel tax (unhedged) $2.006 $1.453 38.1 %
Fuel costs per gallon,
excluding fuel tax (GAAP) $1.195 $.891 34.1 %
Fuel costs per gallon,
excluding fuel tax (economic) $1.217 $.877 38.8 %
Fuel consumed, in gallons (millions) 327 309 5.8 %
Number of Employees at period-end 31,729 31,011 2.3 %
Size of fleet at period-end 445 417 6.7 %
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<Caption>
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
(unaudited)
Year ended
December 31,
2005 2004 Change
Revenue passengers carried 77,693,875 70,902,773 9.6 %
Enplaned passengers 88,379,900 81,066,038 9.0 %
Revenue passenger miles (RPMs) (000s) 60,223,100 53,418,353 12.7 %
Available seat miles (ASMs) (000s) 85,172,795 76,861,296 10.8 %
Load factor 70.7% 69.5% 1.2 pts.
Average length of passenger haul (miles) 775 753 2.9 %
Average aircraft stage length (miles) 607 576 5.4 %
Trips flown 1,028,639 981,591 4.8 %
Average passenger fare $93.68 $88.57 5.8 %
Passenger revenue yield per RPM (cents) 12.09 11.76 2.8 %
Operating revenue yield per ASM (cents) 8.90 8.50 4.7 %
Operating expenses per ASM (GAAP, in cents) 7.94 7.77 2.2 %
Operating expenses per ASM
(economic, in cents) 7.93 7.77 2.1 %
Operating expenses per ASM,
excluding fuel (cents) 6.37 6.47 (1.5)%
Fuel costs per gallon,
excluding fuel tax (unhedged) $1.726 $1.207 43.0 %
Fuel costs per gallon,
excluding fuel tax (GAAP) $1.033 $.828 24.8 %
Fuel costs per gallon,
excluding fuel tax (economic) $1.023 $.825 24.0 %
Fuel consumed, in gallons (millions) 1,287 1,201 7.2 %
Number of Employees at period-end 31,729 31,011 2.3 %
Size of fleet at period-end 445 417 6.7 %
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<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
December 31,
(in millions) 2005 2004
ASSETS
Current assets:
Cash and cash equivalents $2,280 $1,048
Short-term investments 251 257
Accounts and other receivables 258 248
Inventories of parts and supplies, at cost 150 137
Fuel hedge contracts 641 428
Prepaid expenses and other current assets 40 54
Total current assets 3,620 2,172
Property and equipment, at cost:
Flight equipment 10,999 10,037
Ground property and equipment 1,256 1,202
Deposits on flight equipment
purchase contracts 660 682
12,915 11,921
Less allowance for depreciation
and amortization 3,488 3,198
9,427 8,723
Other assets 1,171 442
$14,218 $11,337
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $524 $420
Accrued liabilities 2,074 1,047
Air traffic liability 649 529
Current maturities of long-term debt 601 146
Total current liabilities 3,848 2,142
Long-term debt less current maturities 1,394 1,700
Deferred income taxes 1,896 1,610
Deferred gains from sale and
leaseback of aircraft 136 152
Other deferred liabilities 269 209
Stockholders' equity:
Common stock 802 790
Capital in excess of par value 424 299
Retained earnings 4,557 4,089
Accumulated other comprehensive income 892 417
Treasury stock, at cost - (71)
Total stockholders' equity 6,675 5,524
$14,218 $11,337
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<Caption>
SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Three months ended Year ended
December 31, December 31,
(in millions) 2005 2004 2005 2004
<s> <c> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $86 $56 $548 $313
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation and
Amortization 121 113 469 431
Deferred income taxes (14) 42 257 184
Amortization of deferred
gains on sale and
leaseback of aircraft (4) (4) (16) (16)
Amortization of scheduled
airframe inspections
& repairs 13 12 49 52
Income tax benefit from
Employee stock option
Exercises 65 35 65 35
Changes in certain assets
and liabilities:
Accounts and other
receivables 76 (2) (9) (75)
Other current assets 34 (11) (59) (44)
Accounts payable and
accrued liabilities (152) (162) 855 231
Air traffic liability (126) (114) 120 68
Other (26) (14) (50) (22)
Net cash provided by
(used in) operating
activities 73 (49) 2,229 1,157
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment, net (218) (409) (1,210) (1,775)
Change in short-term
investments, net (66) 88 6 124
Payment for assets of
ATA Airlines, Inc. - (34) (6) (34)
Debtor in possession loan
to ATA Airlines, Inc. - (40) - (40)
Other investing activities, net - (1) - (1)
Net cash used in
investing activities (284) (396) (1,210) (1,726)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 112 300 520
Proceeds from Employee
stock plans 74 36 132 88
Payments of long-term debt
and capital lease obligations (12) (185) (149) (207)
Payments of cash dividends - - (14) (14)
Repurchase of common stock - - (55) (246)
Other, net 1 (1) (1) (8)
Net cash provided by
(used in) financing
activities 63 (38) 213 133
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (148) (483) 1,232 (436)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,428 1,531 1,048 1,484
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $2,280 $1,048 $2,280 $1,048
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
In December 2005, the Company obtained the rights to four of ATA Airlines, Inc.
(ATA) leased Chicago Midway Airport gates in exchange for a $20 million
reduction of the Debtor in possession loan to ATA:
Rights to Chicago Midway Gates acquired $20
Debtor in possession loan to ATA reduction $(20)
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