EX-99.1 2 ex99_1.htm EXHIBIT 99.1 4TH QUARTER 2011 FINANCIAL RESULTS ex99_1.htm
 
Ex 99.1
 
 
 
CONTACT:                      Investor Relations                                (214) 792-4415
 

 
SOUTHWEST AIRLINES REPORTS FOURTH QUARTER RESULTS AND
39TH CONSECUTIVE YEAR OF PROFITABILITY

DALLAS, TEXAS – January 19, 2012 – Southwest Airlines Co. (NYSE:LUV) (the “Company”) today reported its fourth quarter and full year 2011 results.  Fourth quarter 2011 net income was $152 million, or $.20 per diluted share, which included $86 million (net) of favorable special items.  This compared to net income of $131 million, or $.18 per diluted share, for fourth quarter 2010, which included favorable special items totaling $16 million (net).  Excluding special items, fourth quarter 2011 net income was $66 million, or $.09 per diluted share, compared to net income of $115 million, or $.15 per diluted share, in fourth quarter 2010.  This exceeded Thomson’s First Call mean estimate of $.08 per diluted share for fourth quarter 2011.  Additional information regarding special items is included in this release and in the accompanying reconciliation tables.
For the full year 2011, net income was $178 million, or $.23 per diluted share, which included $152 million (net) of unfavorable special items. This compared to $459 million, or $.61 per diluted share, for full year 2010, which included $91 million (net) of unfavorable special items.  Excluding special items, full year 2011 net income was $330 million, or $.43 per diluted share, compared to net income of $550 million, or $.74 per diluted share, for full year 2010.
Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, “Excluding special items, fourth quarter 2011 net income was $66 million, and full year 2011 net income was $330 million.  We had an outstanding revenue performance.  Our fourth quarter operating revenues were a record $4.1 billion.  Fourth quarter passenger revenues were strong, driven by record yields and continued high load factors.  Compared to the prior year, our fourth quarter passenger unit revenues increased 8.2 percent (on a combined basis, as defined below).  Based on current traffic and booking trends, we expect another strong passenger revenue performance in first quarter of 2012.
“While it is always disappointing to report a year-over-year decline in profits (excluding special items), the fourth quarter and full year declines were primarily caused by significantly higher fuel prices.  Our fourth quarter economic fuel costs per gallon increased 33.7 percent to $3.29, compared to our combined fuel costs of $2.46 per gallon in fourth quarter last year.  Our full year 2011 combined economic fuel costs were $3.18 per gallon, an increase of 34.7 percent, compared to our combined fuel costs of $2.36 per gallon last year.  Based on market prices as of January 13th, our first quarter 2012 economic fuel costs, including fuel taxes, are estimated to be approximately $3.35 per gallon, compared to our combined economic fuel costs, including fuel taxes, of $2.95 per gallon in first quarter last year.  High energy prices demand continued focus on improving productivity and eliminating waste.
 “Despite the decline in earnings, 2011 was a momentous year at Southwest Airlines.  We celebrated our 40th year of providing legendary low fare, high quality, domestic air travel and delivered our 39th consecutive year of profits to our Shareholders.  We launched service to Greenville-Spartanburg and Charleston, South Carolina and Newark, New Jersey within two weeks time, increasing Southwest’s domestic footprint to 72 cities.  In March, we launched our All-New Rapid Rewards® program.  The completely revamped, industry-leading frequent flyer program continues to grow at a strong pace.  Results, thus far, are well beyond our expectations.
“On May 2nd, we acquired AirTran Airways, increasing our fleet by 140 aircraft, and extending our combined network into key markets we didn’t previously serve, such as Atlanta and Washington, D.C., via Ronald Reagan National Airport, as well as many smaller domestic cities and leisure markets in the Caribbean and Mexico.   We also expanded our presence at New York LaGuardia, Boston, Milwaukee, and Baltimore/Washington.
“While it will take several years to fully integrate AirTran into Southwest Airlines, I am very proud of the tremendous progress in only eight months’ time.  We are on track to obtain our single operating certificate this quarter. The Southwest Airlines Pilots’ Association and the Air Line Pilots Association took the lead on negotiating a seniority list integration (SLI) agreement that was ratified by both Pilot groups.  The Flight Attendants’, Mechanics’, and Flight Instructors’ unions have tentative SLI agreements, currently out for vote by the memberships.  As a result of the superb efforts of our People, we are already producing over $200 million of net annualized pre-tax synergies, which is 50 percent of our $400 million target by 2013 (excluding acquisition and integration expenses).  For 2011, we realized $80 million in net pre-tax synergies, and the acquisition was modestly accretive to our 2011 results, excluding special items, as planned.”
The Company incurred $134 million in expenses (before taxes) associated with the acquisition and integration of AirTran during 2011, including $37 million in fourth quarter 2011.  The Company expects total acquisition and integration expenses will be approximately $500 million.
Kelly continued, “In December, we unveiled our fleet modernization plans, including the launch of the B737-MAX aircraft beginning in 2017, representing our fourth time as Boeing’s launch customer.  Our agreements with Boeing afford us significant flexibility to replace our older, less efficient aircraft with new Boeing 737-700/800 aircraft and the B737-MAX aircraft.  During 2012, we will take delivery of 33 737-800s, with the first delivery of the -800 model to Southwest scheduled for March.  Earlier this week, we announced the final prong of our fleet modernization plans.  Leveraging the new Boeing Sky Interior from the -800 model, we decided to retrofit our -700 fleet with an updated cabin interior.  Evolve: The New Southwest Experience is a -700 cabin refresh intended to enhance Customer comfort, personal space, and the overall travel experience.  It allows for the added benefit of six additional seats, along with more climate-friendly and cost-effective materials.  Our fleet modernization plans have been designed to drive significant value in the near and long term.
“Operationally, we finished the year strong with our highest December ontime performance in 15 years.  Our People continue to deliver outstanding levels of Customer Service, as recognized by Southwest Airlines being named the 2011 Customer Service Champion by J.D. Powers, and the Customer Satisfaction Leader in Consumer Reports’ list of airline ratings.
 “I commend each of our 45,000+ Warriors for their hard work and notable accomplishments.  We accomplished everything we set out to do in 2011, with soaring fuel costs the only disappointment.  As we prepare for our next 40 years, our target is fixed on a 15 percent pretax return on invested capital.  Capital commitments for 2012 are approximately $1.3 billion, our 2012 capacity is estimated to be flat with 2011, and we currently plan to end 2012 with 691 aircraft in our fleet.  Future capital spending will be carefully monitored with a focus on generating free cash flow.  We are committed to providing exceptional Customer Service at everyday low fares; focused on investing in the Customer Experience while preserving our low cost position; and engaged in our strategic initiatives to drive Shareholder value.”

Financial Results and Outlook
AirTran Airways, Inc. became a wholly-owned subsidiary of the Company on May 2, 2011. Results discussed in this release and provided in the accompanying unaudited Condensed Consolidated Financial Statements and Comparative Consolidated Operating Statistics include the results of operations and cash flows for AirTran from May 2 through December 31, 2011, including the impact of purchase accounting.  Periods presented prior to the acquisition date do not include AirTran’s results.  However, the Company believes the analysis of specified financial results on a “combined basis” provides more meaningful year-over-year comparability.  Financial information presented on a “combined basis” is the sum of the historical financial results of the Company and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting only as of May 2, 2011.  Supplemental financial information presented on a “combined basis” and the accompanying reconciliations have been included in this release.
The Company’s total operating revenues in fourth quarter 2011 increased 31.9 percent to $4.1 billion, compared to $3.1 billion in fourth quarter 2010, and increased 9.3 percent compared to $3.8 billion for combined fourth quarter 2010 total operating revenues.  Operating unit revenues increased 7.0 percent from fourth quarter 2010, on a combined basis.
 Total fourth quarter 2011 operating expenses were $4.0 billion, compared to $2.9 billion in fourth quarter 2010, and compared to $3.5 billion for combined fourth quarter 2010 total operating expenses.  Excluding special items in both periods, fourth quarter 2011 unit costs increased 10.8 percent from fourth quarter 2010 combined unit costs, largely due to a 33.7 percent year-over-year increase in economic fuel costs per gallon.   Fourth quarter 2011 economic fuel costs of $3.29 per gallon included $0.12 per gallon in unfavorable cash settlements for fuel derivative contracts; however, fuel derivative contract premiums are down significantly year-over-year, as described below in other income.  Additional information regarding the Company’s fuel derivative contracts is included in the accompanying tables.
Excluding fuel and special items in both periods, fourth quarter 2011 unit costs increased 0.5 percent from fourth quarter 2010’s combined 7.72 cents.  Based on current cost trends, the Company expects another year-over-year increase in its first quarter 2012 unit costs, compared to first quarter 2011’s combined unit costs of 7.83 cents, excluding fuel and special items in both periods.
Operating income for fourth quarter 2011 was $147 million, compared to $216 million in fourth quarter 2010.  Excluding special items in both periods, operating income was $167 million for fourth quarter 2011, compared to $263 million in fourth quarter 2010, and compared to $278 million for combined fourth quarter 2010 operating income.
Other income for the fourth quarter was $108 million compared to $3 million of other expenses for fourth quarter 2010.  This $111 million swing primarily resulted from $153 million in gains recognized in fourth quarter 2011, compared to $31 million in gains recognized in fourth quarter 2010.  In both periods, these gains primarily resulted from unrealized gains/losses associated with a portion of the Company’s fuel hedging portfolio.  Excluding these special items, other losses were primarily attributable to the premium costs associated with the Company’s fuel derivative contracts.  Fourth quarter 2011 premium costs were $14 million, compared to $44 million in fourth quarter 2010, on a combined basis. First quarter 2012 premium costs are currently estimated to be approximately $6 million, compared to combined premium costs of $36 million in first quarter 2011.
Total operating revenues for the year ended December 31, 2011, increased 29.4 percent to $15.7 billion, while total operating expenses increased 34.6 percent to $15.0 billion, resulting in operating income of $693 million, compared to $988 million for the year ended 2010.  Excluding special items in both periods, operating income was $839 million for the year ended December 31, 2011, compared to $1.2 billion in 2010.  On a combined basis, total operating revenues for 2011 increased 12.7 percent to $16.6 billion, while total operating expenses increased 17.3 percent to $15.9 billion, resulting in combined operating income for 2011 of $662 million, compared to $1.1 billion for 2010.  Excluding special items in both periods, combined operating income for 2011 was $834 million, compared to $1.3 billion for 2010.
The Company’s return on invested capital (before taxes and excluding special items) was approximately seven percent for the year ended December 31, 2011, including AirTran’s results beginning May 2, 2011.  Additional information regarding pretax return on invested capital is included in the accompanying reconciliation tables. 

Liquidity
Net cash provided by operations for 2011 was $1.4 billion, and capital expenditures were $968 million.  As a result, the Company generated over $400 million in free cash flow* in 2011.
On August 5, 2011, the Company’s Board of Directors authorized a share repurchase program to acquire up to $500 million of the Company’s common stock. During 2011, the Company purchased approximately 27.5 million shares of common stock for approximately $225 million.  The Company repaid $638 million in debt during 2011, and is scheduled to repay approximately $560 million debt in 2012, including $430 million in first quarter 2012.  After this planned first quarter debt payment, the Company will have reduced debt by approximately $1 billion since acquiring AirTran in May 2011.  As of January 18th, the Company had approximately $3.5 billion in cash and short-term investments.   In addition, the Company also had a fully available unsecured revolving credit line of $800 million.

 
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2011 Awards and Recognitions
 
·  
Named the fourth most admired Company in the world in FORTUNE magazine’s 2011 survey of corporate reputations
·  
Voted best low-cost carrier in North America by Business Traveler Magazine subscribers
·  
Named the 2011 Customer Service Champion by J.D. Powers based on customer feedback regarding service excellence
·  
Named Brand of the Year in Harris Poll EquiTrend’s airline category based on equity, customer connection, commitment, brand behavior, brand advocacy, and trust
·  
Ranked third in the Top 10 Business Thought Leaders by TLG Communications
·  
Received first place for Best Overall Customer Experience in the Keynote Competitive Research Industry Study examining U.S. Air Travel Websites
·  
Named Airline of the Year by Express Delivery and Logistics Association, the tenth consecutive year for Southwest Airlines Cargo to receive the recognition; also recognized for Excellence in Web Site and Technology for the second year in a row
·  
Southwest Cargo was also named Domestic Carrier of the Year for 2011 by the Airforwarders Association for the second consecutive year and was recently recognized for excellence in Air Cargo World’s annual Air Cargo Excellence (ACE) Survey
·  
Recognized by PR News with several awards including the 2011 PR News Corporate Responsibility Awards for Diversity Communications, the Corporate Social Responsibility Award for Best Report, and honorable mention for the Social Corporate Responsibility Award for Corporate/Nonprofit Partnership
·  
Named the Greenest Airline by ClimateCounts.org
·  
Voted the Customer Satisfaction Leader in Consumer Reports’ list of airline ratings receiving the highest rankings in check-in ease, cabin crew service, cabin cleanliness, baggage handling, and seating comfort
·  
Ranked sixth in the  2011 Customer Service Hall of Fame by MSN Money, the only airline to make the top ten
·  
Named one of the 100 Top Military Friendly Employers by GI Jobs magazine
·  
Recognized for Best Practices in Supplier Diversity by the Dallas Fort Worth Minority Business Council
·  
Named the Stevie Award Winner for the Company of the Year-Transportation by The International Business Awards for outstanding performance and Customer Service
·  
Received the 2011 Quest for Quality Award for Excellence in Air Cargo from Logistics Management Magazine; ranked first in ontime performance, value, and Customer Service
·  
Recognized as one of the top ten safest airlines in the Holistic Safety Rating 2011 by the Air Transport Rating Agency
·  
Recognized as one of the 50 best places to work by the Glassdoors.com Employees’ Choice Awards
 
Southwest will discuss its fourth quarter and full year 2011 results on a conference call at 12:30 p.m. Eastern Time today.  A live broadcast of the conference call will also be available at southwest.investorroom.com.

 
*See Note Regarding use of Non-GAAP financial measures.
 

 
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Cautionary Statement Regarding Forward-Looking Statements
 
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 related to (i) the Company’s financial targets, outlook, and projected results of operations; (ii) the Company’s plans and expectations relating to its acquisition of AirTran, including without limitation anticipated integration timeframes and expected costs, synergies, and other financial results associated with the acquisition; (iii) the Company’s fleet modernization plans and related expectations; and (iv) the Company’s capacity plans. 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) changes in fuel prices, the impact of hedge accounting, and any changes to the Company’s fuel hedging strategies and positions; (ii) the Company’s ability to successfully integrate AirTran and realize the expected synergies and other benefits from the acquisition; (iii) the impact of the economy on demand for air travel and the impact of fuel prices, economic conditions, and actions of competitors on the Company’s business decisions, plans, and strategies; (iv) the Company’s dependence on third parties with respect to certain of its initiatives; (v) the Company’s ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; and (vi) 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, 2010.


 
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SOUTHWEST AIRLINES CO.
   
 
 
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)
   
 
 
(in millions, except per share amounts)
   
 
 
(unaudited)
   
 
 
 
 
 
   
 
   
 
   
 
     
 
   
 
 
 
 
Three months ended
   
 
   
Year ended
   
 
 
 
 
December 31,
   
 
   
December 31,
   
 
 
 
 
2011
   
2010
   
Percent Change
   
2011
     
2010
   
Percent Change
 
OPERATING REVENUES:
 
 
   
 
   
 
   
 
     
 
   
 
 
Passenger
  $ 3,860     $ 2,945       31.1     $ 14,735   (2)   $ 11,489       28.3  
Freight
    36       32       12.5       139         125       11.2  
Other
    212       137       54.7       784   (2)     490       60.0  
Total operating revenues
    4,108       3,114       31.9       15,658         12,104       29.4  
 
                                                 
OPERATING EXPENSES:
                                                 
Salaries, wages, and benefits
    1,145       955       19.9       4,371         3,704       18.0  
Fuel and oil
    1,494       940       58.9       5,644         3,620       55.9  
Maintenance materials and repairs
    239       195       22.6       955         751       27.2  
Aircraft rentals
    93       45       106.7       308         180       71.1  
Landing fees and other rentals
    254       201       26.4       959         807       18.8  
Depreciation and amortization
    192       160       20.0       715         628       13.9  
Acquisition and integration
    37       7    
n.a.
      134         8    
n.a.
 
Other operating expenses
    507       395       28.4       1,879         1,418       32.5  
Total operating expenses
    3,961       2,898       36.7       14,965         11,116       34.6  
 
                                                 
OPERATING INCOME
    147       216       (31.9 )     693         988       (29.9 )
 
                                                 
OTHER EXPENSES (INCOME):
                                                 
Interest expense
    51       41       24.4       194         167       16.2  
Capitalized interest
    (4 )     (4 )     -       (12 )       (18 )     (33.3 )
Interest income
    (2 )     (3 )     (33.3 )     (10 )       (12 )     (16.7 )
Other (gains) losses, net
    (153 )     (31 )  
n.a.
      198         106    
n.a
 
Total other expenses (income)
    (108 )     3    
n.a.
      370         243       52.3  
 
                                                 
INCOME BEFORE INCOME TAXES
    255       213       19.7       323         745       (56.6 )
PROVISION FOR INCOME TAXES
    103       82       25.6       145         286       (49.3 )
 
                                                 
NET INCOME
  $ 152     $ 131       16.0     $ 178       $ 459       (61.2 )
 
                                                 
 
                                                 
NET INCOME PER SHARE
                                                 
Basic
  $ 0.20     $ 0.18             $ 0.23       $ 0.62          
Diluted
  $ 0.20     $ 0.18             $ 0.23       $ 0.61          
 
                                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                                                 
Basic
    777       747               774         746          
Diluted
    783       750               775         747          
 
                                                 
 
                                                 
(1) Includes May through December 2011 financial results for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement I for selected financial information on a combined basis, including AirTran for periods prior to the acquisition date.
 
 
                                                 
(2) The Company made a fourth quarter 2011 correction to change the allocation of revenues between Passenger and Other from its sale of frequent flyer points associated with its co-branded Chase Visa card. As part of this correction, the Company has reclassified $46 million in revenues for the period from January 2011 through September 2011 from Other revenue to Passenger revenue to conform to the current presentation. Periods prior to 2011 were not adjusted due to immateriality.
 
 
 
 

 
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SOUTHWEST AIRLINES CO.
 
RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (1)
 
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
 
(in millions, except per share amounts)
 
(unaudited)
 
 
 
Three months ended
   
 
   
Year ended
   
 
 
 
 
December 31,
   
 
   
December 31,
   
 
 
 
 
2011
   
2010
   
Percent Change
   
2011
   
2010
   
Percent Change
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Fuel and oil expense, unhedged
  $ 1,455     $ 886    
 
    $ 5,580     $ 3,296    
 
 
Add: Fuel hedge losses included in Fuel and oil expense
    39       54    
 
      64       324    
 
 
Fuel and oil expense, as reported
  $ 1,494     $ 940    
 
    $ 5,644     $ 3,620    
 
 
Add (Deduct): Net impact from fuel contracts (2)
    17       (40 )  
 
      -       (172 )  
 
 
Fuel and oil expense, economic
  $ 1,511     $ 900       67.9     $ 5,644     $ 3,448       63.7  
 
                                               
Total operating expenses, as reported
  $ 3,961     $ 2,898             $ 14,965     $ 11,116          
Add (Deduct): Net impact from fuel contracts (2)
    17       (40 )             -       (172 )        
Total operating expenses, economic
  $ 3,978     $ 2,858             $ 14,965     $ 10,944          
(Deduct): Charge for Asset impairment, net (3)
    -       -               (12 )     -          
(Deduct): Charge for Acquisition and integration costs, net (4)
    (37 )     (7 )             (134 )     (7 )        
Total operating expenses, non-GAAP
  $ 3,941     $ 2,851       38.2     $ 14,819     $ 10,937       35.5  
 
                                               
Operating income, as reported
  $ 147     $ 216             $ 693     $ 988          
Add (Deduct): Net impact from fuel contracts (2)
    (17 )     40               -       172          
Operating income, economic
  $ 130     $ 256             $ 693     $ 1,160          
Add: Charge for Asset impairment, net (3)
    -       -               12       -          
Add: Charge for Acquisition and integration costs, net (4)
    37       7               134       7          
Operating income, non-GAAP
  $ 167     $ 263       (36.5 )   $ 839     $ 1,167       (28.1 )
 
                                               
Other (gains) losses, net, as reported
  $ (153 )   $ (31 )           $ 198     $ 106          
Add (Deduct): Net impact from fuel contracts (2)
    168       71               (89 )     33          
Other losses, net, non-GAAP
  $ 15     $ 40       (62.5 )   $ 109     $ 139       (21.6 )
 
                                               
Income before income taxes, as reported
  $ 255     $ 213             $ 323     $ 745          
Add (Deduct): Net impact from fuel contracts (2)
    (185 )     (31 )             89       139          
 
  $ 70     $ 182             $ 412     $ 884          
Add: Charge for Asset impairment, net (3)
    -       -               12       -          
Add: Charge for Acquisition and integration costs, net (4)
    37       7               134       7          
Income before income taxes, non-GAAP
  $ 107     $ 189       (43.4 )   $ 558     $ 891       (37.4 )
 
                                               
Net income as reported
  $ 152     $ 131             $ 178     $ 459          
Add (Deduct): Net impact from fuel contracts (2)
    (185 )     (31 )             89       139          
Income tax impact of fuel contracts
    78       12               (31 )     (52 )        
 
  $ 45     $ 112             $ 236     $ 546          
Add: Charge for Asset impairment, net (5)
    -       -               8       -          
Add: Charge for Acquisition and integration costs, net (5)
    21       3               86       4          
Net income, non-GAAP
  $ 66     $ 115       (42.6 )   $ 330     $ 550       (40.0 )
 
                                               
Net income per share, diluted, as reported
  $ 0.20     $ 0.18             $ 0.23     $ 0.61          
Add (Deduct): Net impact from fuel contracts
    (0.10 )     (0.03 )             0.07       0.12          
 
  $ 0.10     $ 0.15             $ 0.30     $ 0.73          
Add: Impact of special items, net (5)
    (0.01 )     -               0.13       0.01          
Net income per share, diluted, non-GAAP
  $ 0.09     $ 0.15       (40.0 )   $ 0.43     $ 0.74       (41.9 )
 
                                               
(1) Includes May through December 2011 financial results for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement II for a reconciliation of selected combined amounts to non-GAAP items, including AirTran for periods prior to the acquisition date.
 
(2) See Reconciliation of Impact from Fuel Contracts.
 
(3) Net of profitsharing impact.
 
(4) Amounts net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
 
(5) Amounts net of tax and profitsharing impact (see footnote (4) above).
 

 
  /more

 

SOUTHWEST AIRLINES CO.
 
RECONCILIATION OF IMPACT FROM FUEL CONTRACTS (1)
 
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
   
 
   
 
 
 
 
Three months ended
   
Year ended
 
 
 
December 31,
   
December 31,
 
 
 
2011
   
2010
   
2011
   
2010
 
Fuel and Oil Expense
 
 
   
 
   
 
   
 
 
Reclassification between Fuel and Oil and Other (gains)
 
 
   
 
   
 
   
 
 
losses, net, associated with current period settled contracts
  $ 41     $ (14 )   $ 35     $ (1 )
Contracts settling in the current period, but for which gains
                               
and/or (losses) have been recognized in a prior period *
    (24 )     (26 )     (35 )     (171 )
Impact from fuel contracts to Fuel and oil expense
  $ 17     $ (40 )   -     $ (172 )
 
                               
 
                               
Operating Income
                               
Reclassification between Fuel and Oil and Other (gains)
                               
losses, net, associated with current period settled contracts
  $ (41 )   $ 14     $ (35 )   $ 1  
Contracts settling in the current period, but for which gains
                               
and/or (losses) have been recognized in a prior period *
    24       26       35       171  
Impact from fuel contracts to Operating Income
  (17 )   40     -     172  
 
                               
 
                               
Other (gains) losses, net
                               
Mark-to-market impact from fuel contracts
                               
settling in future periods
  $ 127     $ 24     $ (21 )   $ 21  
Ineffectiveness from fuel hedges settling in future periods
    82       33       (33 )     11  
Reclassification between Fuel and oil and Other (gains)
                               
losses, net, associated with current period settled contracts
    (41 )     14       (35 )     1  
Impact from fuel contracts to Other (gains) losses, net
  168     $ 71     (89 )   33  
 
                               
 
                               
Net Income
                               
Mark-to-market impact from fuel contracts
                               
settling in future periods
  $ (127 )   $ (24 )   $ 21     $ (21 )
Ineffectiveness from fuel hedges settling in future periods
    (82 )     (33 )     33       (11 )
Other net impact of fuel contracts settling in the
                               
current or a prior period (excluding reclassifications)
    24       26       35       171  
Impact from fuel contracts to Net Income **
  (185 )   (31 )   89     139  
 
                               
(1) Includes May through December 2011 financial results for AirTran.
 
* As a result of prior hedge ineffectiveness and/or contracts marked-to-market through the income statement.
 
** Excludes income tax impact of unrealized items.
 

 
 /more

 

SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS (1)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Year ended
 
 
December 31,
 
December 31,
 
 
2011
 
2010
Change
 
2011
 
2010
Change
Revenue passengers carried
 
 
27,536,128
 
 
 
22,451,968
 
22.6
%
 
 
103,973,759
 
 
 
88,191,322
 
17.9
%
Enplaned passengers
 
 
33,510,920
 
 
 
27,163,960
 
23.4
%
 
 
127,551,012
 
 
 
106,227,521
 
20.1
%
Revenue passenger miles (RPMs) (000s)
 
 
25,180,506
 
 
 
20,005,943
 
25.9
%
 
 
97,582,530
 
 
 
78,046,967
 
25.0
%
Available seat miles (ASMs) (000s)
 
 
31,297,561
 
 
 
24,788,095
 
26.3
%
 
 
120,578,736
 
 
 
98,437,092
 
22.5
%
Load factor
 
 
80.5
%
 
 80.7
%
(0.2)
pts
80.9
%
 
 79.3
%
1.6
pts
Average length of passenger haul (miles)
 
 
914
 
 
 
891
 
2.6
%
 
 
939
 
 
 
885
 
6.1
%
Average aircraft stage length (miles)
 
 
679
 
 
 
653
 
4.0
%
 
 
679
 
 
 
648
 
4.8
%
Trips flown
 
 
343,756
 
 
 
278,137
 
23.6
%
 
 
1,317,977
 
 
 
1,114,451
 
18.3
%
Average passenger fare
 
$
140.18
 
 
$
131.17
 
6.9
%
 
$
141.72
 
 
$
130.27
 
8.8
%
Passenger revenue yield per RPM (cents)
 
 
15.33
 
 
 
14.72
 
4.1
%
 
 
15.10
 
 
 
14.72
 
2.6
%
RASM (cents)
 
 
13.13
 
 
 
12.56
 
4.5
%
 
 
12.99
 
 
 
12.30
 
5.6
%
PRASM (cents)
 
 
12.33
 
 
 
11.88
 
3.8
%
 
 
12.22
 
 
 
11.67
 
4.7
%
CASM (cents)
 
 
12.66
 
 
 
11.69
 
8.3
%
 
 
12.41
 
 
 
11.29
 
9.9
%
CASM, excluding fuel (cents)
 
 
7.89
 
 
 
7.90
 
(0.1)
%
 
 
7.73
 
 
 
7.61
 
1.6
%
CASM, excluding special items (cents)
 
 
12.59
 
 
 
11.51
 
9.4
%
 
 
12.29
 
 
 
11.11
 
10.6
%
CASM, excluding fuel and special items (cents)
 
 
7.76
 
 
 
 7.88
 
(1.5)
%
 
 
 7.61
 
 
 
 7.61
 
-
%
Fuel costs per gallon, including fuel tax (unhedged)
 
$
3.17
 
 
$
2.44
 
29.9
%
 
$
3.16
 
 
$
2.29
 
38.0
%
Fuel costs per gallon, including fuel tax
 
$
3.25
 
 
$
2.59
 
25.5
%
 
$
3.19
 
 
$
2.51
 
27.1
%
Fuel costs per gallon, including fuel tax (economic)
 
$
3.29
 
 
$
2.48
 
32.7
%
 
$
3.19
 
 
$
2.39
 
33.5
%
Fuel consumed, in gallons (millions)
 
 
458
 
 
 
361
 
26.9
%
 
 
1,764
 
 
 
1,437
 
22.8
%
Active fulltime equivalent Employees
 
 
45,392
 
 
 
34,901
 
30.1
%
 
 
45,392
 
 
 
34,901
 
30.1
%
Aircraft in service at period-end
 
 
698
 
 
 
548
 
27.4
%
 
 
698
 
 
 
548
 
27.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
RASM (unit revenue) - Operating revenue yield per ASM
CASM (unit costs) - Operating expenses per ASM
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes May through December 2011 operating statistics for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement V for consolidated operating statistics on a combined basis, including AirTran for periods prior to the acquisition date.

 
  /more

 

SOUTHWEST AIRLINES CO.
 
SELECTED CONSOLIDATING FINANCIAL INFORMATION
 
DETAIL OF AIRLINE FOURTH QUARTER 2011 RESULTS AND PURCHASE ACCOUNTING IMPACT
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
   
 
   
 
 
 
 
Three months ended December 31, 2011
 
 
 
 
   
 
   
Purchase
   
 
 
 
 
Southwest (1)
   
AirTran (2)
   
Accounting (3)
   
Consolidated
 
OPERATING REVENUES:
 
 
   
 
   
 
   
 
 
Passenger
  $ 3,239     $ 619     $ 2     $ 3,860  
Freight
    36       -       -       36  
Other
    126       86       -       212  
Total operating revenues
    3,401       705       2       4,108  
 
                               
OPERATING EXPENSES:
                               
Salaries, wages, and benefits
    1,003       142       -       1,145  
Fuel and oil
    1,213       281       -       1,494  
Maintenance materials and repairs
    175       64       -       239  
Aircraft rentals
    44       59       (10 )     93  
Landing fees and other rentals
    210       44       -       254  
Depreciation and amortization
    167       15       10       192  
Acquisition and integration
    35       2       -       37  
Other operating expenses
    420       87       -       507  
Total operating expenses
    3,267       694       -       3,961  
 
                               
OPERATING INCOME
  $ 134     $ 11     $ 2     $ 147  
 
                               
(1) Results presented for Southwest exclude AirTran results and the impact of purchase accounting.
 
(2) Results presented for AirTran exclude Southwest results and the impact of purchase accounting.
 
(3) Represents the impact of purchase accounting.
 

 
  /more

 

SOUTHWEST AIRLINES CO.
 
RECONCILIATION OF SELECTED CONSOLIDATING FINANCIAL INFORMATION TO NON-GAAP ITEMS (1)
 
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
 
 
Three months ended
 
 
December 31, 2011
 
 
 
Southwest
   
AirTran
 
 
 
 
   
 
 
Fuel and oil expense, standalone unhedged
  $ 1,169     $ 286  
Add/(Deduct): Fuel hedge (gains) losses included in Fuel and oil expense
    44       (5 )
Fuel and oil expense, standalone (2)
  $ 1,213     $ 281  
Deduct: Net impact from fuel contracts (3)
    17       -  
Fuel and oil expense, standalone economic
  $ 1,230     $ 281  
 
               
Total operating expenses, standalone (2)
  $ 3,267     $ 694  
Deduct: Net impact from fuel contracts (3)
    17       -  
Total operating expenses, standalone economic
  $ 3,284     $ 694  
Deduct: Charge for Acquisition and integration costs (4)
    (35 )     (2 )
Total operating expenses, standalone non-GAAP
  $ 3,249     $ 692  
 
               
Operating income, standalone (2)
  $ 136     $ 11  
Add: Net impact from fuel contracts (3)
    (17 )     -  
Operating income, standalone economic
  $ 119     $ 11  
Add: Charge for Acquisition and integration costs (4)
    35       2  
Operating income, standalone non-GAAP
  $ 154     $ 13  
 
               
 
               
(1) Selected amounts presented in this schedule are standalone non-GAAP financial results for each of Southwest and AirTran. These standalone results exclude the results of the other airline, and the impact of purchase accounting.
 
(2) See Selected Consolidating Financial Information - Detail of Airline Fourth Quarter 2011 Results and Purchase Accounting Impact for the detail of standalone airline results and the purchase accounting impact.
 
(3) See Reconciliation of Impact from Fuel Contracts.
               
(4) No profitsharing impact. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
 
 
               

 
  /more

 

SOUTHWEST AIRLINES CO.
 
 
   
 
 
RETURN ON INVESTED CAPITAL (1)
 
 
   
 
 
(in millions)
 
 
   
 
 
(unaudited)
 
 
   
 
 
 
 
 
   
 
 
 
Year Ended
 
Year Ended
 
 
December 31, 2011
 
December 31, 2010
 
Operating Income, as reported
  $ 693     $ 988  
Add: Net impact from fuel contracts
    -       172  
Add: Acquisition and integration costs, net (2)
    146       7  
Operating Income, non-GAAP
  $ 839     $ 1,167  
Net adjustment for aircraft leases (3)
    131       84  
Adjustment for fuel hedge accounting
    (107 )     (134 )
Adjusted Operating Income, non-GAAP
  $ 863     $ 1,117  
 
               
 
               
Average Invested Capital (4)
  $ 12,372     $ 10,431  
Equity adjustment for fuel hedge accounting
    203       434  
Adjusted Average Invested Capital
  $ 12,575     $ 10,865  
 
               
ROIC, pretax
    7 %     10 %
 
               
(1) Calculation includes the impact of the AirTran acquisition as of May 2, 2011.
 
(2) Net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
 
(3) Net adjustment related to presumption that all aircraft in fleet are owned.
 
(4) Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.
 
 
               

 
/more 

 

SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
(unaudited)
     
    December 31,  
 
 
2011
   
2010
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 829     $ 1,261  
Short-term investments
    2,315       2,277  
Accounts and other receivables
    299       195  
Inventories of parts and supplies, at cost
    401       243  
Deferred income taxes
    263       214  
Prepaid expenses and other current assets
    238       89  
Total current assets
    4,345       4,279  
 
               
Property and equipment, at cost:
               
Flight equipment
    15,542       13,991  
Ground property and equipment
    2,423       2,122  
Deposits on flight equipment purchase contracts
    456       230  
 
    18,421       16,343  
Less allowance for depreciation and amortization
    6,294       5,765  
 
    12,127       10,578  
Goodwill
    970       -  
Other assets
    626       606  
 
  $ 18,068     $ 15,463  
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,057     $ 739  
Accrued liabilities
    996       863  
Air traffic liability
    1,836       1,198  
Current maturities of long-term debt
    644       505  
Total current liabilities
    4,533       3,305  
 
               
Long-term debt less current maturities
    3,107       2,875  
Deferred income taxes
    2,566       2,493  
Deferred gains from sale and leaseback of aircraft
    75       88  
Other noncurrent liabilities
    910       465  
Stockholders' equity:
               
Common stock
    808       808  
Capital in excess of par value
    1,222       1,183  
Retained earnings
    5,395       5,399  
Accumulated other comprehensive loss
    (224 )     (262 )
Treasury stock, at cost
    (324 )     (891 )
Total stockholders' equity
    6,877       6,237  
 
  $ 18,068     $ 15,463  

 
/more 

 

SOUTHWEST AIRLINES CO.
   
 
   
 
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)
   
 
   
 
 
(in millions)
   
 
   
 
 
(unaudited)
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Three months ended
   
Year ended
 
 
 
December 31,
   
December 31,
 
 
 
2011
   
2010
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
   
 
   
 
   
 
 
Net income
  $ 152     $ 131     $ 178     $ 459  
Adjustments to reconcile net income to
                               
cash provided by (used in) operating activities:
                               
Depreciation and amortization
    192       160       715       628  
Unrealized (gain) loss on fuel derivative instruments
    (185 )     (31 )     90       139  
Deferred income taxes
    90       38       123       133  
Amortization of deferred gains on sale and
                               
leaseback of aircraft
    (3 )     (3 )     (13 )     (14 )
Changes in certain assets and liabilities, net of acquisition:
                               
Accounts and other receivables
    70       39       (26 )     (26 )
Other current assets
    (16 )     (2 )     (196 )     (8 )
Accounts payable and accrued liabilities
    (13 )     3       253       193  
Air traffic liability
    (222 )     (226 )     262       153  
Cash collateral received from (provided to)
                               
derivative counterparties
    234       115       (195 )     265  
Other, net
    102       45       194       (361 )
Net cash provided by operating activities
    401       269       1,385       1,561  
 
                               
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Payment to acquire AirTran, net of AirTran cash on hand
    -       -       (35 )     -  
Payments for purchase of property and equipment, net
    (420 )     (94 )     (968 )     (493 )
Purchases of short-term investments
    (574 )     (1,293 )     (5,362 )     (5,624 )
Proceeds from sales of short-term investments
    900       1,367       5,314       4,852  
Net cash used in investing activities
    (94 )     (20 )     (1,051 )     (1,265 )
 
                               
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Proceeds from Employee stock plans
    4       10       39       55  
Proceeds from termination of interest rate
                               
derivative instrument
    -       -       76       -  
Payments of long-term debt and capital lease obligations
    (447 )     (31 )     (557 )     (155 )
Payments of convertible debt
    -       -       (81 )       (44
Payments of cash dividends
    1       -       (14 )     (13 )
Repurchase of common stock
    (50 )     -       (225 )     8  
Other, net
    -       1       (4 )     -  
Net cash used in financing activities
    (492 )     (20 )     (766 )     (149 )
 
                               
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (185 )     229       (432 )     147  
 
                               
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    1,016       1,031       1,261       1,114  
 
                               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 831     $ 1,260     $ 829     $ 1,261  
 
                               
 
                               
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
 
Fair value of equity consideration given to acquire AirTran
  $ -     $ -     $ 523     $ -  
Fair value of common stock issued for conversion of debt
  $ -     $ -     $ 78     $ -  
 
                               
(1) Includes the impact of the AirTran acquisition as of May 2, 2011.
 
 
                               

 
 /more

 

 
 
 
 
 
 
 
 
 
 
SOUTHWEST AIRLINES CO.
 
 
 
 
     FUEL DERIVATIVE CONTRACTS        
     AS OF JANUARY 13, 2012        
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of estimated fuel consumption covered by fuel derivative contracts
 
 
Average WTI Crude Oil
 
 
 
 
 
 
 
price per barrel
First Half 2012
 
Second Half 2012
 
 
 
 
 
 
 
 
 
 
$80 to $100
 
 
 
 
10-20% range
     $100 to $125         approx. 50%
     $125 to $150    (1)      approx. 20%
     Above $150          less than 5%
               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated difference in economic jet fuel price per gallon,
 
 
 
above/(below) unhedged market prices, including taxes
 
 
Average WTI Crude Oil
 
 
 
 
 
 
 
price per barrel
1Q 2012
 
2Q 2012
 
Second Half 2012
 
 
 
 
 
 
 
 
 
 
$75
$0.12
 
$0.12
 
$0.15
 
 
$90
$0.12
 
$0.09
 
$0.11
 
 
$99 (2)
$0.12
 
$0.06
 
$0.06
 
 
$115
$0.12
 
$0.06
 
($0.11)
 
 
$130
$0.11
 
$0.06
 
($0.28)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of estimated fuel consumption
 
 
 
 
 
covered by fuel derivative contracts at
 
 
 
 
Period
 varying WTI crude-equivalent price levels
 
 
 
 
 
 
 
 
 
 
 
 
2013
over 50%
 
 
 
 
2014
over 40%
 
 
 
 
2015
over 10%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
 For first half 2012, the Company's current estimated fuel consumption covered by fuel derivative contracts is minimal, with various fuel derivative contracts at WTI crude-equivalent intervals between $80 and $150 per barrel.
 
 
 
 
 
 
 
 
 
 
(2)
 Based on the first quarter 2012 average WTI forward curve and market prices as of January 13, 2012, and current estimated fuel consumption covered by fuel derivative contracts, first quarter 2012 economic fuel price per gallon, including taxes, is estimated to be approximately $3.35 per gallon, or $.12 above market prices.
 
 
 
 
 
 
 
 

 
  /more

 

SOUTHWEST AIRLINES CO.
 
 
 
 
 
 
 
 
737 FUTURE DELIVERY SCHEDULE
 
 
 
 
 
 
 
 
AS OF JANUARY 18, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Boeing Company
 
The Boeing Company
 
 
737 NG
 
 
 
737 MAX
 
 
 
-700
Firm Orders
 
 
-800
Firm Orders
 
Options
 
Additional
-800s
 
Firm Orders
 
 
Options
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
 
 28
 
  
 
 5
 
  
 
 
 
 
 33
2013
  
 
 
 41
 
  
 
  
 
  
 
 
 
 
 41
2014
 35
 
 
 4
 
 15
 
  
 
  
 
 
 
 
 54
2015
 36
 
 
  
 
 12
 
  
 
  
 
 
 
 
 48
2016
 31
 
 
  
 
 12
 
  
 
  
 
 
 
 
 43
2017
 15
 
 
  
 
 25
 
  
 
 4
 
 
 
 
 44
2018
 10
 
 
  
 
 28
 
  
 
 15
 
 
 
 
 53
2019
  
 
 
  
 
  
 
  
 
 33
 
 
 
 
 33
2020
  
 
 
  
 
  
 
  
 
 34
 
 
 
 
 34
2021
  
 
 
  
 
  
 
  
 
 34
 
 
18
 
 52
2022
  
 
 
  
 
  
 
  
 
 30
 
 
19
 
 49
2023
  
 
 
  
 
  
 
  
 
  
 
 
23
 
 23
2024
  
 
 
  
 
  
 
  
 
  
 
 
23
 
 23
Through 2027
  
 
 
  
 
  
 
  
 
  
 
 
67
 
 67
 
127
(a)
 
73
 
92
 
5
(b)
150
(c)
 
150
 
597
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) The Company has flexibility to substitute 737-800s in lieu of 737-700 firm orders
 
 
 
 
 
(b) New delivery leased aircraft
 
 
 
 
 
(c) The Company has flexibility to accept MAX 7 or MAX 8 deliveries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 /more

 

SUPPLEMENTAL COMBINED STATEMENT I
 
SOUTHWEST AIRLINES CO.
 
SELECTED COMBINED FINANCIAL INFORMATION (1)
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
   
 
   
 
     
 
   
 
 
 
Three months ended
   
 
 
Year ended
   
 
 
 
December 31,
   
 
 
December 31,
   
 
 
 
 
 
   
 
   
Percent
   
 
     
 
   
Percent
 
 
2011
 
2010
   
Change
 
2011
   
2010
   
Change
 
OPERATING REVENUES:
 
 
   
 
   
 
   
 
     
 
   
 
 
Passenger
  $ 3,860     $ 3,492       10.5     $ 15,547   (2)   $ 13,729       13.2  
Freight
    36       32       12.5       139         125       11.2  
Other
    212       236       (10.2 )     910   (2)     869       4.7  
Total operating revenues
    4,108       3,760       9.3       16,596         14,723       12.7  
 
                                                 
OPERATING EXPENSES:
                                                 
Salaries, wages, and benefits
    1,145       1,091       4.9       4,564         4,232       7.8  
Fuel and oil
    1,494       1,156       29.2       6,005         4,447       35.0  
Maintenance materials and repairs
    239       251       (4.8 )     1,043         981       6.3  
Aircraft rentals
    93       106       (12.3 )     389         422       (7.8 )
Landing fees and other rentals
    254       240       5.8       1,013         970       4.4  
Depreciation and amortization
    192       175       9.7       735         687       7.0  
Acquisition and integration
    37       16       131.3       160         17    
n.a.
 
Other operating expenses
    507       501       1.2       2,025         1,827       10.8  
Total operating expenses
    3,961       3,536       12.0       15,934         13,583       17.3  
 
                                                 
OPERATING INCOME
  $ 147     $ 224       (34.4 )   $ 662       $ 1,140       (41.9 )
 
                                                 
(1) Selected financial information for the three months ended December 31, 2011, is presented on a consolidated basis. All other selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. AirTran's historical financial information included in the combined presentation has been conformed to Southwest's financial statement classification where appropriate. See Note Regarding Use of Non-GAAP Financial Measures.
 
(2) The Company made a fourth quarter 2011 correction to change the allocation of revenues between Passenger and Other from its sale of frequent flyer points associated with its co-branded Chase Visa card. As part of this correction, the Company has reclassified $46 million in revenues for the period from January 2011 through September 2011 from Other revenue to Passenger revenue to conform to the current presentation. Prior periods were immaterial.
 

 
  /more

 

SUPPLEMENTAL COMBINED STATEMENT II
 
SOUTHWEST AIRLINES CO.
 
RECONCILIATION OF SELECTED COMBINED AMOUNTS FROM SUPPLEMENTAL COMBINED STATEMENT I TO NON-GAAP ITEMS (1)
 
(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
 
 
   
 
   
 
   
 
 
 
 
Three months ended
 
 
   
Year ended
   
 
 
 
 
December 31,
 
 
   
December 31,
   
 
 
 
 
 
   
 
 
Percent
   
 
   
 
   
Percent
 
 
 
2011
   
2010
 
Change
   
2011
   
2010
   
Change
 
 
 
 
   
 
 
 
   
 
   
 
   
 
 
Fuel and oil expense, combined unhedged
  $ 1,455     $ 1,109  
 
    $ 5,959     $ 4,146    
 
 
Add: Fuel hedge losses included in Fuel and oil expense
    39       47  
 
      46       301    
 
 
Fuel and oil expense, as presented on Supplemental Combined Statement I
  $ 1,494     $ 1,156  
 
    $ 6,005     $ 4,447    
 
 
Add (Deduct): Net impact from fuel contracts
    17       (40 )
 
      -       (172 )  
 
 
Fuel and oil expense, combined economic
  $ 1,511     $ 1,116     35.4     $ 6,005     $ 4,275       40.5  
 
                                             
Total operating expenses, as presented on Supplemental Combined Statement I
  $ 3,961     $ 3,536           $ 15,934     $ 13,583          
Add (Deduct): Net impact from fuel contracts
    17       (40 )           -       (172 )        
Total operating expenses, combined economic
  $ 3,978     $ 3,496           $ 15,934     $ 13,411          
Deduct: Charge for Asset impairment, net (2)
    -       -             (12 )     -          
Deduct: Charge for Acquisition and integration costs, net (3)
    (37 )     (14 )           (160 )     (16 )        
Total operating expenses, combined non-GAAP
  $ 3,941     $ 3,482     13.2     $ 15,762     $ 13,395       17.7  
 
                                             
Operating income, as presented on Supplemental Combined Statement I
  $ 147     $ 224           $ 662     $ 1,140          
Add (Deduct): Net impact from fuel contracts
    (17 )     40             -       172          
Operating income, combined economic
  $ 130     $ 264           $ 662     $ 1,312          
Add: Charge for Asset impairment, net (2)
    -       -             12       -          
Add: Charge for Acquisition and integration costs, net (3)
    37       14             160       16          
Operating income, combined non-GAAP
  $ 167     $ 278     (39.9 )   $ 834     $ 1,328       (37.2 )
 
                                             
 
                                             
 
                                             
(1) Selected financial information for the three months ended December 31, 2011, is presented on a consolidated basis. All other selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. AirTran's historical financial information included in the combined presentation has been conformed to Southwest's financial statement classification where appropriate.
 
(2) Net of profitsharing impact.
                                             
(3) Amounts net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.
 

 
  /more

 

SUPPLEMENTAL COMBINED STATEMENT III
 
SOUTHWEST AIRLINES CO.
 
SELECTED CONSOLIDATING COMBINED 2011 FINANCIAL INFORMATION (1)
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
   
 
 
 
 
Year ended December 31, 2011
 
 
 
Southwest
   
 
   
 
 
 
 
Airlines Co.
   
 
   
 
 
 
 
(as reported)
   
AirTran (2)
   
Combined
 
OPERATING REVENUES:
 
 
   
 
   
 
 
Passenger
  $ 14,735     $ 812     $ 15,547  
Freight
    139       -       139  
Other
    784       126       910  
Total operating revenues
    15,658       938       16,596  
 
                       
OPERATING EXPENSES:
                       
Salaries, wages, and benefits
    4,371       193       4,564  
Fuel and oil
    5,644       361       6,005  
Maintenance materials and repairs
    955       88       1,043  
Aircraft rentals
    308       81       389  
Landing fees and other rentals
    959       54       1,013  
Depreciation and amortization
    715       20       735  
Acquisition and integration
    134       26       160  
Other operating expenses
    1,879       146       2,025  
Total operating expenses
    14,965       969       15,934  
 
                       
OPERATING INCOME (LOSS)
  $ 693     $ (31 )   $ 662  
 
                       
 
                       
(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. See Note Regarding Use of Non-GAAP Financial Measures.
 
(2) Results presented for AirTran, on a standalone basis, include periods prior to the acquisition date, conformed to Southwest's financial statement classification where appropriate.
 

 
  /more

 

SUPPLEMENTAL COMBINED STATEMENT IV
 
SOUTHWEST AIRLINES CO.
 
SELECTED CONSOLIDATING COMBINED 2010 FINANCIAL INFORMATION (1)
 
(in millions)
 
(unaudited)
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
 
 
Three months ended December 31, 2010
   
Year ended December 31, 2010
 
 
 
(as reported)
   
 
   
(as reported)
   
 
 
 
 
Southwest
   
AirTran
   
 
   
Southwest
   
AirTran
   
 
 
 
 
Airlines Co.
   
(as conformed)
   
Combined
   
Airlines Co.
   
(as conformed)
   
Combined
 
OPERATING REVENUES:
 
 
   
 
   
 
   
 
   
 
   
 
 
Passenger
  $ 2,945     $ 547     $ 3,492     $ 11,489     $ 2,240     $ 13,729  
Freight
    32       -       32       125       -       125  
Other
    137       99       236       490       379       869  
Total operating revenues
    3,114       646       3,760       12,104       2,619       14,723  
 
                                               
OPERATING EXPENSES:
                                               
Salaries, wages, and benefits
    955       136       1,091       3,704       528       4,232  
Fuel and oil
    940       216       1,156       3,620       827       4,447  
Maintenance materials and repairs
    195       56       251       751       230       981  
Aircraft rentals
    45       61       106       180       242       422  
Landing fees and other rentals
    201       39       240       807       163       970  
Depreciation and amortization
    160       15       175       628       59       687  
Acquisition and integration
    7       9       16       8       9       17  
Other operating expenses
    395       106       501       1,418       409       1,827  
Total operating expenses
    2,898       638       3,536       11,116       2,467       13,583  
 
                                               
OPERATING INCOME
  $ 216     $ 8     $ 224     $ 988     $ 152     $ 1,140  
 
                                               
(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. Results presented for Southwest and AirTran, on a standalone basis, represent previously reported results. AirTran's historical financial information has been conformed to Southwest's financial statement classification where appropriate. See Note Regarding Use of Non-GAAP Financial Measures.
 
 
                                               
 
                                               
 
                                               

 
  /more

 

SUPPLEMENTAL COMBINED STATEMENT V
SOUTHWEST AIRLINES CO.
COMBINED OPERATING STATISTICS (1)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Year ended
 
 
 
December 31,
 
December 31,
 
 
 
2011
 
2010
Change
 
2011
 
2010
Change
                       
Revenue passengers carried
 
 
27,536,128
 
 
 
27,330,796
 
0.8
%
 
 
110,151,572
 
 
 
107,605,957
 
2.4
%
Enplaned passengers
 
 
33,510,920
 
 
 
33,276,264
 
0.7
%
 
 
135,274,464
 
 
 
130,921,515
 
3.3
%
Revenue passenger miles (RPMs) (000s)
 
 
25,180,506
 
 
 
24,713,320
 
1.9
%
 
 
103,864,488
 
 
 
97,597,121
 
6.4
%
Available seat miles (ASMs) (000s)
 
 
31,297,561
 
 
 
30,626,416
 
2.2
%
 
 
128,518,201
 
 
 
122,460,579
 
4.9
%
Load factor
 
 
80.5
%
 
 
80.7
%
(0.2)
pts
 
80.8
%
 
 
79.7
%
1.1
pts
Average length of passenger haul (miles)
 
 
914
 
 
 
904
 
1.1
%
 
 
943
 
 
 
907
 
4.0
%
Average aircraft stage length (miles)
 
 
679
 
 
 
670
 
1.3
%
 
 
684
 
 
 
668
 
2.4
%
Trips flown
 
 
343,756
 
 
 
340,597
 
0.9
%
 
 
1,399,644
 
 
 
1,366,826
 
2.4
%
Average passenger fare
 
$
140.18
 
 
$
127.76
 
9.7
%
 
$
141.14
 
 
$
127.59
 
10.6
%
Passenger revenue yield per RPM (cents)
 
 
15.33
 
 
 
14.13
 
8.5
%
 
 
14.97
 
 
 
14.07
 
6.4
%
RASM (cents)
 
 
13.13
 
 
 
12.27
 
7.0
%
 
 
12.91
 
 
 
12.02
 
7.4
%
PRASM (cents)
 
 
12.33
 
 
 
11.40
 
8.2
%
 
 
12.10
 
 
 
11.21
 
7.9
%
CASM (cents)
 
 
12.66
 
 
 
11.54
 
9.7
%
 
 
12.40
 
 
 
11.09
 
11.8
%
CASM, excluding fuel (cents)
 
 
7.89
 
 
 
7.77
 
1.5
%
 
 
7.73
 
 
 
7.46
 
3.6
%
CASM, excluding special items (cents)
 
 
12.59
 
 
 
11.36
 
10.8
%
 
 
12.26
 
 
 
10.94
 
12.1
%
CASM, excluding fuel and special items (cents)
 
 
 7.76
 
 
 
 7.72
 
0.5
%
 
 
 7.59
 
 
 
 7.45
 
1.9
%
Fuel costs per gallon, including fuel tax (unhedged)
 
$
3.17
 
 
$
2.45
 
29.4
%
 
$
3.15
 
 
$
2.28
 
38.2
%
Fuel costs per gallon, including fuel tax
 
$
3.25
 
 
$
2.55
 
27.5
%
 
$
3.18
 
 
$
2.45
 
29.8
%
Fuel costs per gallon, including fuel tax (economic)
 
$
3.29
 
 
$
2.46
 
33.7
%
 
$
3.18
 
 
$
2.36
 
34.7
%
Fuel consumed, in gallons (millions)
 
 
458
 
 
 
451
 
1.4
%
 
 
1,887
 
 
 
1,810
 
4.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
RASM (unit revenue) - Operating revenue yield per ASM
CASM (unit costs) - Operating expenses per ASM
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Selected operating statistics for the three months ended December 31, 2011, are presented on a consolidated basis. All other selected operating statistics presented in this schedule on a combined basis include operations for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. AirTran's historical operating statistics included in the combined presentation have been conformed to Southwest's presentation where appropriate.

 
  /more

 



NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES
 
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges the Company believes are not indicative of its ongoing operational performance.
 
As a result, the Company also provides financial information in this release that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information, including results that it refers to as “economic,” which the Company’s management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company’s economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts--all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. These economic results provide a better measure of the impact of the Company’s fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company’s management, as well as investors, to consistently assess the Company’s operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.
 
Further information on (i) the Company’s fuel hedging program, (ii) the requirements and accounting associated with accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as subsequent quarterly filings.
 
In addition to its “economic” financial measures, as defined above, the Company has also provided other non-GAAP financial measures as a result of items that the Company believes are not indicative of its ongoing operations.  These include charges for the three months and year ended December 31, 2011 of $37 million and $134 million, respectively (before the impact of profitsharing and/or taxes) related to expenses associated with the Company’s acquisition and integration of AirTran.  These also include a 2011 charge of $17 million (before the impact of profitsharing and/or taxes) for an asset impairment related to the Company’s recent decision not to equip its Classic (737-300/500) aircraft with Required Navigation Performance (RNP) capabilities.  The Company believes that evaluation of its financial performance can be enhanced by a presentation of results that exclude the impact of these items in order to evaluate the results on a comparative basis with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods.  As a result of the Company’s acquisition of AirTran, which closed on May 2, 2011, the Company has incurred and expects to continue to incur substantial charges associated with integration of the two companies.  While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the charges as special items in its future presentation of non-GAAP results.
 
The Company has also provided other supplemental non-GAAP financial information on a “combined basis.”  This supplemental non-GAAP financial information on a “combined basis” includes specified combined financial results of the Company and AirTran for periods prior to May 2, 2011, as if the acquisition had occurred prior to the beginning of the applicable reporting period, but excludes any impact of purchase accounting prior to May 2, 2011.  AirTran’s historical financial information included in the combined presentation has been conformed to the Company’s financial statement classification where appropriate.  The Company believes that evaluation of its financial performance can be enhanced by a presentation of combined results in order to evaluate its prior, current or future period results on a more meaningful, consistent year-over-year basis.
 
The Company has also provided free cash flow, which is a non-GAAP financial measure.  The Company believes free cash flow is a meaningful measure because it demonstrates the Company’s ability to service its debt, pay dividends and make investments to enhance shareholder value.  Although free cash flow is a commonly used as measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow.   For the year ended December 31, 2011, the Company generated over $400 million in free cash flow, calculated as operating cash flows of $1.4 billion less capital expenditures of $968 million.
 




 
  /more