Southwest Airlines Reports First Quarter Results

[lreynolds]

Southwest Airlines (NYSE:LUV) today reported a first quarter 2009 net loss of $91 million, or $.12 loss per diluted share, compared to net income of $34 million, or $.05 per diluted share, for first quarter 2008.   First quarter 2009 results included special charges totaling $71 million (net), relating to non-cash, mark-to-market and other items associated with a portion of the Company’s fuel hedge portfolio.   Refer to the reconciliation in the accompanying tables for further information regarding special items.   Excluding special items, first quarter 2009 net loss was $20 million, or $.03 loss per diluted share, compared to net income of $43 million, or $.06 per diluted share, in first quarter 2008.  The first quarter 2009 results, excluding special items, of $.03 loss per diluted share compares to Thomson's First Call mean estimate of $.01 loss per diluted share.   Operating loss for first quarter 2009 was $50 million compared to operating income of $88 million in first quarter 2008.  Excluding special items, operating income was $31 million in first quarter 2009 compared to $99 million for the same period last year.    First Quarter 2009 Financial Highlights:

• Operating income, excluding special items, of $31 million
• Net loss, excluding special items, of $20 million
• Net loss per diluted share, excluding special items, of $.03

• Cash flow from operations of $286 million
• Raised $173 million through aircraft financing activities
• Record first quarter load factor

  Gary C. Kelly, CEO, stated: “Our first quarter 2009 financial results are disappointing, but not surprising given the current economic environment.   We face the toughest revenue environment in our history.  A rapid weakening in passenger demand during first quarter, particularly among business travelers, led to our first quarter net loss.  Although competitively strong and financially resilient, we are not immune to the challenges the worldwide recession is having on air travel.   “Still, I am very proud of the efforts of our People.  Our operations and Customer Service delivery continues to be outstanding.  Our revenue trends continue to outperform our U.S. competitors. These revenue results demonstrate the strength of our Low Fare brand, the benefits of our aggressive flight schedule optimization, and the effectiveness of our Marketing and Revenue Management efforts.  “We have acted to reduce our spending, but also maintain our intense focus on previously announced initiatives to grow revenues.  We plan to follow through with the investment in and construction of these strategic revenue initiatives that we believe are vital to our future.  However, overall, we have significantly reduced planned capital spending by approximately $1.4 billion for 2009 and 2010 combined by deferring aircraft deliveries, accelerating aircraft retirements, and suspending plans to grow our capacity.  As announced to our Employees earlier this morning, we intend to reduce and align headcount to current capacity needs by offering a systemwide voluntary early-out program.   Virtually all Employees are eligible under the early-out program and must make their election to participate by June 19, 2009.   We also have a hiring freeze in place and have frozen pay for our officers and senior management.  While our balance sheet is strong, we believe these actions, along with our previous decision to suspend growth plans, and our ongoing efforts to bolster our cash reserves, will enable us to weather the current financial storm and remain strong.   “Our recent promotions and discounting activities have been successful in stimulating traffic.  Our first quarter 2009 load factor of 69.9 percent was a record first quarter performance, despite the impact of Easter shifting to April this year versus March last year.  We continue to enhance our strong brand, Customer Experience, and traffic through our No Hidden Fees campaign.  However, yields were down 2.8 percent from a year ago, resulting in a unit revenue decline of 2.9 percent.  Although our April results should benefit from the timing of the Easter holiday, we currently expect another year-over-year decline in our second quarter 2009 operating unit revenues, based on revenue and booking trends thus far.   “We benefited from significantly lower year-over-year economic jet fuel costs in first quarter 2009.  Even with $65 million in unfavorable cash settlements from derivative contracts, our first quarter 2009 economic jet fuel costs decreased 16.2 percent to $1.76 per gallon.   With oil prices rising, we have begun to rebuild our 2009 and 2010 hedge positions, using purchased call options, to provide protection against significant fuel price spikes.  These new positions present no additional exposure to cash collateral requirements.  Furthermore, we have modified our major fuel hedge counterparty agreements to allow us to use collateral other than cash to limit our cash collateral exposure to comfortable levels.  Based on our second quarter derivative position and market energy prices as of April 14, 2009, we currently anticipate our second quarter 2009 economic jet fuel costs, including taxes, to be in line with first quarter 2009 (or the $1.75 per gallon range).” The Company has derivative contracts in place for approximately 50 percent of its second quarter 2009 estimated fuel consumption, capped at a weighted average crude-equivalent price of approximately $66 per barrel; approximately 40 percent for the remainder of 2009 capped at a weighted average crude-equivalent price of approximately $71 per barrel; and approximately 30 percent in 2010 capped at a weighted average crude-equivalent price of approximately $77 per barrel.  The Company has modest fuel hedge positions in 2011 through 2013.  The current market value (as of April 14, 2009) of its net fuel derivative contracts for 2009 through 2013 reflects a net liability of approximately $950 million.               Gary Kelly stated, “Our plans to reduce staffing via our voluntary early-out program will help mitigate cost pressures next year.  Our first quarter 2009 unit costs, excluding fuel, increased 8.4 percent over last year, which was in line with our expectations.  We were very pleased to have reached tentative agreements with our Flight Attendants and Pilots during the quarter.  In addition, our Ramp, Operations, Provisioning, and Freight Agents and our Mechanics voted to ratify their tentative agreements.  These Employees demonstrated their commitment to maintain Southwest's competitive position while enabling the Company to sustain its financial strength in an increasingly tough economy.  Based on these agreements and current cost trends, we expect our second quarter 2009 unit costs, excluding fuel, to be in line with first quarter 2009.  “Presently, we still plan to accept 13 new Boeing 737-700s in 2009, and retire 15 aircraft by the end of the year.  Through continued focus on maximizing the efficiency and profitability of each published flight schedule, we have the ability to grow in exciting new and developing markets, such as Denver, Minneapolis-St. Paul, New York LaGuardia, and Boston Logan, while reducing our available seat miles, currently estimated to decline in the five percent range versus 2008.”            The Company previously announced its service from New York LaGuardia airport to begin with five flights to Chicago Midway and three flights to Baltimore/Washington on June 28, 2009; and its Boston Logan service to begin on August 16, 2009 with five flights to both Chicago Midway and Baltimore/Washington.            For the thirteenth year in a row, Fortune magazine recognized Southwest Airlines in its annual survey of corporate reputations.  Among all industries, Southwest Airlines was named the seventh most admired Company in the World, making it the only U.S. airline to make the list of the World's Top 50 Most Admired Companies.  Institutional Investor magazine once again named Southwest Airlines as America’s Most Shareholder-Friendly Airline in its survey of investors and analysts.  Finally, Southwest Airlines Cargo was recently named “Airline of the Year” by the Express Delivery & Logistics Association, for the fifth consecutive year in a row, honoring its excellence in air cargo delivery service.Southwest will discuss its first quarter 2009 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 ResultsTotal operating revenues for first quarter 2009 decreased 6.8 percent to $2.4 billion, compared to $2.5 billion for first quarter 2008.  Total first quarter 2009 operating expenses were $2.4 billion, in line with first quarter 2008.              “Other expenses” were $57 million for first quarter 2009, compared to $51 million for first quarter 2008.   In both periods, “other losses” included unrealized gains/losses associated with our fuel hedging program.  The cost of the hedging program (which includes the premium costs of derivative contracts) of $32 million in first quarter 2009 and $14 million in first quarter 2008 is also included in "other (gains) losses.”  First quarter 2009 interest expense increased 57.1 percent over first quarter 2008 due to financing transactions the Company completed in second and fourth quarter 2008.  Interest income decreased versus first quarter 2008 due to lower market interest rates and lower rates earned from more conservative investments.  Lower interest rates coupled with lower Boeing aircraft progress payments also generated less capitalized interest in first quarter 2009 compared to the same period last year. The first quarter 2009 tax rate was impacted by the Company’s current projections for financial results for the year and the related impact that permanent tax differences have on these projections. The first quarter 2008 income tax rate of approximately 9 percent was primarily the result of a decrease in deferred tax liabilities of approximately $12 million as a result of a January 2008 reversal of an August 2007 tax increase under a State of Illinois income tax law.Net cash provided by operations for first quarter 2009 was $286 million, which was net of a $60 million increase in cash posted as collateral to a fuel hedge counterparty since December 31, 2008.  First quarter 2009 capital expenditures were $85 million.   The Company’s planned capital expenditures are still estimated to be in the $750 million range for 2009 and in the $800 to $900 million range for 2010.In its continued effort to structure counterparty agreements to minimize liquidity exposure, the Company replaced an existing fuel hedging agreement with a major fuel hedge counterparty, effective April 8, 2009.  Previously, Southwest became obligated to post cash or letters of credit as security to this counterparty upon a noninvestment grade credit rating.  Under the new agreement, the Company posts cash as collateral for obligations in amounts of up to $125 million.  For amounts between $125 million and $625 million, the Company’s obligation is satisfied by its pledge of 29 Boeing 737-700 aircraft (or cash or letters of credit in lieu of the pledged aircraft).  For amounts above $625 million, the Company may post cash and/or letters of credit.   This agreement is in addition to the previously announced amendment to another major counterparty agreement that became effective January 1, 2009.  As of April 14, 2009, the Company had posted a total of $425 million in cash collateral and approximately $350 million in aircraft collateral to its fuel hedge counterparties.  During the first quarter 2009, the Company closed on the second five aircraft tranche of the sale and leaseback transaction entered into at the end of 2008 for ten of the Company’s Boeing 737-700 aircraft.  Including the $173 million in proceeds from this transaction and net of the $300 million the Company posted in cash collateral with a counterparty at March 31, 2009, the Company ended the quarter with $2.1 billion in unrestricted cash and short-term investments.  The Company had posted $240 million in cash collateral with a counterparty at December 31, 2008.  In addition, the Company has $200 million of borrowing availability remaining on its $600 million unsecured revolving credit line.   Following first quarter 2009, the Company executed and closed the first tranche of what is expected to be a two tranche sale and leaseback transaction for six of the Company's Boeing 737-700 aircraft.  The first three aircraft tranche closed on April 2, 2009 for approximately $105 million and the second tranche is expected to be executed and closed in second quarter 2009 with similar terms and proceeds.   

                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 relating to (i) the Company’s strategic initiatives and related expectations, (ii) its growth plans and expectations, and (iii) its expectations regarding future results of operations. 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) continued unfavorable economic conditions, which could continue to impact the demand for air travel and the Company’s ability to adjust fares; (ii) the price and availability of aircraft fuel and any changes to the Company’s fuel hedging strategies and positions; (iii) the Company's ability to timely and effectively prioritize its revenue and cost reduction initiatives and its related ability to timely implement, transition, and maintain the necessary information technology systems and infrastructure to support these initiatives; (iv) competitor capacity and load factors; and (v) 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, 2008.

[Rick29]

Changing your business model to favor business class has us leisure travelers very upset. Your rates have gone way up. Go back to yourold ways and junk this new model and you will again be profitable.

[pberg]

Rick - We hate to hear that you are upset with us for changing our business model...particularly since we haven't. Features like high flight frequency and no change fees have always appealed to business travelers, and our low fees appeal to just about everyone. Dramatic increases in energy costs have had a dramatic impact on our costs, requiring us to persue additional revenues. And, business travelers do typically purchase closer-in or full fare tickets. However, we have offered more fare sales in the first several months of this year than in all of 2008. In fact, we have recently offered fares for spring travel as low as $39 each way. Of course, it is our lowest fares that sell out first. If you are having trouble securing our lowest fares, I reccommend signing up to receive our Click 'n Save emails or DING Alerts, which send our best deals directly to you. To sign up, visit: http://www.southwest.com/specialoffers/signup.html?ref=cns_ding_hp. Again, I am sorry to hear that you are upset with us. Your business is important to us, and we are doing everything we can to stay strong and financially stable so that we can continue to give you and all of America the Freedom to Fly. Paula Berg Southwest Airlines

[Rob10]

I'm an ex Southwest Employee and I miss the best airline in the world and with time I know Southwest will pull threw. Then I'll have to return to the company. I left the company thanks to a lottery winning and I own two companies at this time. I'd still go back to work for the company heck I would go back there and work for free if I was able too. One of my companies is kinda slow, but my other one is picking up and making money. I'm about to actually own my own Boeing Business Jet! Heck I would let SWA use that but it doesn't seat a lot of people maybe about 20. I emailed Gary about me helping the company with new aircraft, yet I haven't had much time to talk with the person that Gary put me in contact with. Its a very busy time for myself and the other company with many upgrades and so on. I know everyone would love for Southwest to go back to the old ways, but we do have to make money. Gosh I still call it we since I still feel apart of the SWA Family. All companies need to figure out how to survive in this new world now. I never had to worry about this till now with my own companies. I have faith in what ever Southwest needs to try and do to keep going. Southwest gets all these awards and what not threw Fortune 500 and other publications and sources because Southwest has always pulled threw no matter what. Its us the employees that help the company to keep cost down and to help our customers be happy so you the customer return over and over again. Plus the customers help us by passing their good experience on to others and they want to fly us. Southwest you guys do what ever you need to do to keep going! I support you no matter what and will try my best to help with what ever I can. I'd love to see our customers to continue to do their best to keep fling with us and passing the word around. Other airlines charge for everything on the plane and I'm sure they'll probably start charging you for your seat belt, and I know Southwest won't charge for that. Last I remember we don't charge for anything extra. Everyone needs to keep positive and help the little company that CAN!!! Soon in the new cities the Southwest Affect will happen! Thanks for your time here..

[Anonymous2671]

As a fromer SWA employee that has always wanted to see SWA succeed, the money situation is so sad. NEVER would Herb have continued to over expand if the money wasn't there. Gary Kelly has grown the company too fast and he is going to ruin so many lives my his greed. The company that I worked for is an Urban Legend at this point...No more "Nuts", thats for sure. Keep going Gary and your gonna mess up a great thing tat Hern and Colleen had....no wonder they got completely out!