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Southwest Reports Second Quarter Earnings

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Southwest Airlines Reports Second Quarter Earnings
DALLAS, July 21 /PRNewswire-FirstCall/ -- Southwest Airlines (NYSE: LUV) today reported its second quarter 2009 results. Net income for second quarter 2009 was $54 million, or $.07 per diluted share, compared to $321 million, or $.44 per diluted share, for second quarter 2008. Excluding special items, second quarter 2009 net income was $59 million, or $.08 per diluted share, compared to $121 million, or $.16 per diluted share, for second quarter 2008. The second quarter 2009 results, excluding special items, of $.08 per diluted share exceeded Thomson's First Call mean estimate of $.07 per diluted share. Refer to the reconciliation in the accompanying tables for further information regarding special items.

    Second Quarter 2009 Financial Highlights:
    --  Total operating revenues of $2.6 billion
    --  Net income, excluding special items, of $59 million
    --  Net income per diluted share, excluding special items, of $.08
    --  Cash flow from operations of $135 million
    --  Raised $540 million through financing activities

    --  Repaid $400 million borrowed in 2008 on our $600 million revolving
        credit facility


    Second Quarter 2009 Awards & Recognitions:
    --  For the sixteenth year in a row, Southwest led the airline industry in
        Customer Satisfaction according to the American Customer Satisfaction
        Index
    --  Ranked among the top ten companies in MSN Money's Customer Service
        Hall of Fame
    --  Named the Best Low-Cost Carrier and Best Domestic Airline Customer
        Service in Executive Travel Magazine's annual Leading Edge Awards
    --  Recognized as one of the Top 50 Companies for Supplier Diversity
        nationwide by the U.S. Hispanic Chamber of Commerce and PODER 360
        magazine
    --  Included in BusinessWeek's ranking of the 50 Most Innovative Companies
        in the world

    --  Southwest Airlines' Rapid Rewards program was again honored in
        InsideFlyer magazine's Annual Freddie Awards for Best Award
        Redemption, a distinction awarded to Southwest every year since that
        award category was introduced eleven years ago


Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated: "In second quarter 2009, we reported a profit. In, without a doubt, one of the worst revenue environments for the airlines, ever, this is an enormous achievement by the Employees of Southwest Airlines. I am exceptionally proud of them, their Warrior Spirits, and their terrific operational and Customer Service results. We continue to stay focused on weathering this economic storm and managing alarming jet fuel price volatility. Thanks to the superb efforts of our People, we have a tremendous body of work completed, underway, and planned to sustain our financial health by enhancing the Customer Experience and generating substantial new revenue opportunities. In that regard, we recently implemented several programs and processes and have more planned for the fall, including the launch of a new and improved southwest.com, and several related products and initiatives.

"While our second quarter unit revenue trends outperformed the industry, our total operating revenues were down almost nine percent from a year ago and six percent on a unit basis. Demand for business travel remains weak, and we continue to stimulate traffic with more discounted and promotional fares. Unless demand rebounds significantly, we expect third quarter 2009 unit revenues to decline year-over-year more than the second quarter decline of six percent due to more difficult comparisons.

"Our second quarter 2009 unit costs, excluding special items, declined 4.6 percent from second quarter 2008. Even with approximately $60 million in unfavorable cash settlements from derivative contracts in the second quarter 2009, our economic fuel costs decreased 22.8 percent to $1.79 per gallon, including taxes. Although market prices have continued to trend higher since the beginning of the year, we continue to benefit from the decline in energy prices from last year's unprecedented levels. Consequently, based on our third quarter derivative position and current market energy prices, we anticipate our third quarter 2009 economic jet fuel costs, including taxes, to decline significantly year-over-year to the $2.15 per gallon range."

As of yesterday, the Company had derivative contracts in place for over 30 percent of its estimated third quarter 2009 fuel consumption and over 45 percent of its estimated fourth quarter 2009 fuel consumption capped at a weighted average crude-equivalent price in the low $70 per barrel range; approximately 50 percent in 2010 capped at a weighted average crude-equivalent price in the mid $70 per barrel range; and modest positions in 2011 through 2013. The total market value (as of yesterday) of the Company's net fuel derivative contracts for the remainder of 2009 through 2013 reflects a net liability of approximately $805 million.

Gary Kelly stated, "Excluding fuel, second quarter 2009 unit costs increased 5.8 percent from a year ago, which was better than we anticipated. In addition to other cost containment measures, our hiring freeze remains in place as well as a pay freeze for our officers and senior management. In an effort to better align our staffing with our current capacity needs, we launched a voluntary early-out program during the second quarter and approximately 1,400 Employees have elected to participate. Employee departure dates will fall between July 31, 2009 and April 15, 2010, based on the operational needs of particular work locations and departments. We currently anticipate incurring approximately $70 million ($40 million and $30 million during 2009 and 2010, respectively) in additional costs for the early-out program. We expect annual savings in subsequent years from the program should eventually exceed the cost of the program. We were very pleased that our Flight Attendants, Customer Support and Services, and airport Customer Service Employees voted to ratify their contracts during the second quarter, demonstrating their commitment to sustain the financial strength of the Company. Excluding any charge from the voluntary early-out program, and based on current cost trends and lower available seat miles, we expect our third quarter 2009 unit costs, excluding fuel and special items, to increase from second quarter 2009's 6.91 cents.

"We continue our diligent cost control efforts and remain committed to maintaining our competitive cost advantage to sustain our strong low fare brand. However, we are not immune to the effects of the debilitating economic environment. Based on weak travel demand and fuel price volatility, we cannot predict a profitable third quarter 2009. We will continue to take the vital steps we believe are necessary to strategically and financially position ourselves to be able to return to prosperity once travel demand rebounds.

"While we plan to reduce our 2009 available seat miles in the five to six percent range versus last year, our continued focus on maximizing the efficiency and profitability of each published flight schedule has positioned us to take advantage of strategic growth opportunities even in this challenging economic environment. We were thrilled to introduce the Southwest brand to the New York market with our inaugural service from LaGuardia on June 28, 2009, and look forward to our service to Boston Logan International, which is scheduled to begin next month, followed by Milwaukee in November. We began service to Minneapolis/St. Paul in March, and both Minneapolis/St. Paul and LaGuardia are off to a strong start."

Southwest will discuss its second 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 http://www.southwest.com/?src=INVRINV2Q09000000090721.

Operating Results

Total operating revenues for second quarter 2009 decreased 8.8 percent to $2.6 billion, compared to $2.9 billion for second quarter 2008. Total second quarter 2009 operating expenses were $2.5 billion, compared to $2.7 billion in second quarter 2008. Operating income for second quarter 2009 was $123 million, compared to $205 million in second quarter 2008. Excluding special items, operating income was $183 million in second quarter 2009, compared to $242 million last year.

"Other expenses" was $73 million for second quarter 2009, compared to other income of $324 million for second quarter 2008. The $397 million swing in total other expenses (income) primarily resulted from $34 million in "other losses" recognized in second quarter 2009 versus $345 million in "other gains" recognized in second quarter 2008. In both periods, these "other (gains) losses" primarily resulted from unrealized gains/losses associated with our fuel hedging program. The cost of the hedging program (which includes the premium costs of derivative contracts) of $37 million in second quarter 2009 and $14 million in second quarter 2008 is also included in "other (gains) losses." Second quarter 2009 interest expense increased $15 million from second quarter 2008 primarily due to financing transactions the Company completed since second quarter 2008. Lower market interest rates coupled with lower Boeing aircraft progress payments generated less capitalized interest in second quarter 2009 compared to the same period last year. Interest income also decreased versus second quarter 2008 due to lower market interest rates.

Net cash provided by operations for the six months ended June 30, 2009 was $420 million, which was net of a $185 million increase in cash posted as collateral to the Company's fuel hedge counterparties since December 31, 2008. Capital expenditures for the first half of 2009 were $272 million.

During second quarter 2009, the Company borrowed $332 million under a new term loan secured by 14 Boeing 737-700 aircraft and raised $208 million from the sale and leaseback of six 737-700 aircraft. In May 2009, the Company fully repaid the $400 million it had previously borrowed in 2008 under its available revolving credit facility, and as a result, the entire $600 million is fully available. The Company has minimal contractual debt obligations for the remainder of 2009.

Following second quarter 2009, the Company borrowed $124 million under a new term loan agreement secured by five Boeing 737-700 aircraft. As of yesterday, the Company has approximately $2.4 billion in cash and short-term investments, net of $425 million in cash collateral paid to its fuel hedge counterparties. The Company's total fuel hedge collateral obligations as of yesterday also required approximately $310 million of aircraft collateral.

Total operating revenues for the six months ended June 30, 2009 decreased 7.9 percent to $5.0 billion, while total operating expenses decreased 4.1 percent to $4.9 billion, resulting in operating income in first half 2009 of $73 million versus $293 million in first half 2008. Excluding special items, operating income for first half 2009 was $213 million, a decrease of $128 million, or 37.5 percent. Net loss for the six months ended June 30, 2009 was $37 million, or $.05 loss per diluted share, compared to net income of $355 million, or $.48 per diluted share, for the same period last year. Excluding special items, net income for the six months ended June 30, 2009 was $38 million, or $.05 per diluted share, compared to $164 million, or $.22 per diluted share, for the same period last year.

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 revenue, cost-cutting, and other initiatives and its expectations related to such initiatives; (ii) the Company's growth plans and expectations; and (iii) the Company's 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) continued volatility in the price and availability of aircraft fuel and any changes in 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; (v) any changes to the Company's business plan and strategies; 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, 2008, and under the heading "Forward-looking statements" in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

 


    SOUTHWEST AIRLINES CO.
    CONDENSED CONSOLIDATED STATEMENT OF INCOME
    (in millions, except per share amounts)
    (unaudited)

                     Three months ended          Six months ended
                         June 30,                   June 30,
                         --------                   --------
                                       Percent                    Percent
                       2009    2008    Change     2009    2008    Change
                       ----    ----   --------    ----    ----   --------

    OPERATING
     REVENUES:
      Passenger      $2,506  $2,747       (8.8) $4,758  $5,161       (7.8)
      Freight            29      37      (21.6)     58      71      (18.3)
      Other              81      85       (4.7)    156     167       (6.6)
                        ---     ---                ---     ---
        Total
         operating
         revenues     2,616   2,869       (8.8)  4,972   5,399       (7.9)

    OPERATING
     EXPENSES:
      Salaries,
       wages, and
       benefits         863     839        2.9   1,699   1,639        3.7
      Fuel and oil      726     945      (23.2)  1,423   1,745      (18.5)
      Maintenance
       materials and
       repairs          190     191       (0.5)    373     333       12.0
      Aircraft
       rentals           47      38       23.7      93      76       22.4
      Landing fees
       and other
       rentals          179     159       12.6     345     330        4.5
      Depreciation
       and
       amortization     150     148        1.4     300     293        2.4
      Other
       operating
       expenses         338     344       (1.7)    666     690       (3.5)
                        ---     ---                ---     ---
        Total
         operating
         expenses     2,493   2,664       (6.4)  4,899   5,106       (4.1)
                      -----   -----              -----   -----

    OPERATING INCOME    123     205      (40.0)     73     293      (75.1)

    OTHER EXPENSES
     (INCOME):
      Interest
       expense           47      32       46.9      92      60       53.3
      Capitalized
       interest          (5)     (6)     (16.7)    (11)    (14)     (21.4)
      Interest
       income            (3)     (5)     (40.0)     (8)    (12)     (33.3)
      Other (gains)
       losses, net       34    (345)      n.a.      57    (307)      n.a.
                        ---    ----                ---    ----
        Total other
         expenses
         (income)        73    (324)      n.a.     130    (273)      n.a.
                        ---    ----                ---    ----


    INCOME (LOSS)
     BEFORE INCOME
     TAXES               50     529      (90.5)    (57)    566     (110.1)
    PROVISION
     (BENEFIT) FOR
     INCOME TAXES        (4)    208     (101.9)    (20)    211     (109.5)
                        ---     ---                ---     ---


    NET INCOME
     (LOSS)             $54    $321      (83.2)   $(37)   $355     (110.4)
                        ===    ====               ====    ====


    NET INCOME
     (LOSS) PER
     SHARE:
      Basic            $.07    $.44              ($.05)   $.48
      Diluted          $.07    $.44              ($.05)   $.48

    WEIGHTED AVERAGE
     SHARES
     OUTSTANDING:
      Basic             741     732                741     733
      Diluted           741     737                741     736

 

    SOUTHWEST AIRLINES CO.
    RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
    (in millions, except per share amounts)
    (unaudited)

    Note regarding use of non-GAAP financial measures
    The financial results provided in this news release "excluding special
    items" are non-GAAP results that are provided as supplemental information.
    These results should not be relied upon as alternative measures to
    Generally Accepted Accounting Principles (GAAP) and primarily reflect
    items calculated on an "economic" basis, which contains differences for
    specific items recorded as a result of SFAS 133, "Accounting for
    Derivative Instruments and Hedging Activities," as amended. Items
    calculated on an "economic" basis include only cash settlement gains or
    losses for derivative instruments that settled in the current accounting
    period, and exclude certain gains or losses associated with derivatives
    that settled in a prior period or will settle in a future period.  The
    items excluded from economic results primarily include ineffectiveness as
    defined, for future period instruments, and changes in market value for
    future period derivatives that no longer qualify for special hedge
    accounting, as defined in SFAS 133. Management believes it should take
    special items into consideration to more accurately measure and monitor
    the Company's comparative performance on a consistent basis; therefore,
    management wants to provide the transparency to Investors regarding its
    views as to a more accurate reflection of the Company's on-going
    operations.

    The Company's management utilizes both the GAAP and the non-GAAP results
    in this news release to evaluate the Company's performance and believes
    that comparative analysis of results can be enhanced by excluding the
    impact of the unrealized items. In part, 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, which
    reflects the cash settlements from derivative contracts for the applicable
    period.

 

                             Three Months Ended       Six Months Ended
                                  June 30,                June 30,
                                  --------                --------
                                         Percent                  Percent
                           2009    2008   Change    2009    2008   Change
                           ----    ----   ------    ----    ----   ------


    Fuel and oil expense -
     unhedged              $607  $1,419           $1,158  $2,511
    Less: Fuel hedge
     (gains) losses
     included in fuel
     and oil expense        119    (474)             265    (766)
                            ---    ----              ---    ----
    Fuel and oil expense
     - GAAP                $726    $945    (23.2) $1,423  $1,745    (18.5)
    Add/(Deduct): Net
     impact from fuel
     contracts (1)          (60)    (37)            (140)    (48)
                            ---     ---             ----     ---
    Fuel and oil expense -
     economic              $666    $908    (26.7) $1,283  $1,697    (24.4)
                           ----    ----           ------  ------


    Operating income, as
     reported              $123    $205              $73    $293
    Add/(Deduct): Net
     impact from fuel
     contracts (1)           60      37              140      48
                            ---     ---              ---     ---
    Operating income,
     non-GAAP              $183    $242    (24.4)   $213    $341    (37.5)
                           ----    ----             ----    ----


    Other (gains) losses,
     net, as reported       $34   $(345)             $57   $(307)
    Add/(Deduct): Net
     impact from fuel
     contracts (1)            6     361               16     337
                            ---     ---              ---     ---
    Other losses, net,
     non-GAAP               $40     $16    150.0     $73     $30    143.3
                            ---     ---              ---     ---


    Net income (loss), as
     reported               $54    $321             $(37)   $355
    Add/(Deduct): Net
     impact from fuel
     contracts (1)           54    (324)             124    (289)
    Income tax impact
     of fuel contracts      (49)    124              (49)    110
                            ---     ---              ---     ---
                            $59    $121              $38    $176
    Add (Deduct):
     Change in Illinois
     state income tax
     law, net                 -       -                -     (12)
                            ---     ---              ---     ---
    Net income, non-GAAP    $59    $121    (51.2)    $38    $164    (76.8)
                            ---    ----              ---    ----

    Net income (loss) per
     share, diluted, as
     reported              $.07    $.44            $(.05)   $.48
    Add/(Deduct): Net
     impact from fuel
     contracts              .01    (.28)             .10    (.24)
                            ---    ----              ---    ----
                           $.08    $.16             $.05    $.24
    Add: Impact of special
     items, net               -       -                -    (.02)
                            ---     ---              ---    ----
    Net income per share,
     diluted, non-GAAP     $.08    $.16    (50.0)   $.05    $.22    (77.3)
                           ----    ----             ----    ----

    (1) See Reconciliation of Impact from Fuel Contracts

 

    SOUTHWEST AIRLINES CO.
    RECONCILIATION OF IMPACT FROM FUEL CONTRACTS (SEE PREVIOUS NOTE)
    (in millions)
    (unaudited)


                                                   Three Months  Six Months
                                                      Ended        Ended
                                                     June 30,     June 30,
                                                     --------     --------
                                                   2009   2008   2009   2008
                                                   ----   ----   ----   ----

    Fuel & Oil Expense
    ------------------
    Add/(Deduct): Impact from current
     period settled contracts
     included in Other (gains) losses, net          $(2)   $(6)  $(23)   $17
    Add/(Deduct): Other impact of fuel
     contracts settling in the
     current or a prior period                      (58)   (31)  (117)   (65)
                                                    ---    ---   ----    ---
    Impact from fuel contracts to
     Fuel & Oil Expense                            $(60)  $(37) $(140)  $(48)
                                                   ----   ----  -----   ----


    Operating Income
    ----------------
    Add/(Deduct): Impact from current
     period settled contracts
     included in Other (gains) losses, net           $2     $6    $23   $(17)
    Add/(Deduct): Other impact of fuel
     contracts settling in the
     current or a prior period                       58     31    117     65
                                                    ---    ---    ---    ---
    Impact from fuel contracts to Operating Income  $60    $37   $140    $48
                                                    ---    ---   ----    ---


    Other (gains) losses
    --------------------
    Add/(Deduct): Mark-to-market impact
     from fuel contracts
     settling in future periods                    $(20)  $369   $(18)  $373
    Add/(Deduct): Ineffectiveness from fuel hedges
     settling in future periods                      24    (14)    11    (19)
    Add/(Deduct): Impact from current
     period settled contracts
     included in Other (gains) losses, net            2      6     23    (17)
                                                    ---    ---    ---    ---
    Impact from fuel contracts to
     Other (gains) losses                            $6   $361    $16   $337
                                                    ---   ----    ---   ----


    Net Income
    ----------
    Add/(Deduct): Mark-to-market impact
     from fuel contracts
     settling in future periods                     $20  $(369)   $18  $(373)
    Add/(Deduct): Ineffectiveness from fuel hedges
     settling in future periods                     (24)    14    (11)    19
    Add/(Deduct): Other impact of fuel
     contracts settling in the
     current or a prior period                       58     31    117     65
                                                    ---    ---    ---    ---
    Impact from fuel contracts to
     Net Income (loss) *                            $54  $(324)  $124  $(289)
                                                    ---  -----   ----  -----

    * Excludes income tax impact of unrealized items

 

    SOUTHWEST AIRLINES CO.
    COMPARATIVE CONSOLIDATED OPERATING STATISTICS
    (unaudited)

                 Three months ended               Six months ended
                      June 30,                        June 30,
                      --------                        --------
                  2009        2008      Change     2009      2008     Change
                  ----        ----      ------     ----      ----     ------

    Revenue
     passengers
     carried    22,676,171  23,993,342   (5.5)% 42,435,861 45,498,163   (6.7)%
    Enplaned
     passengers 26,505,438  27,550,957   (3.8)% 49,555,428 52,259,572   (5.2)%
    Revenue
     passenger
     miles
     (RPMs)
     (000s)     19,683,479  19,811,541   (0.6)% 36,575,108 37,403,700   (2.2)%
    Available
     seat miles
     (ASMs)
     (000s)     25,552,927  26,335,085   (3.0)% 49,724,602 51,528,522   (3.5)%
    Load factor      77.0%       75.2% 1.8 pts.      73.6%      72.6% 1.0 pts.
    Average
     length of
     passenger
     haul (miles)      868         826     5.1%        862        822    4.9%
    Average
     aircraft
     stage length
     (miles)           647         636     1.7%        641        632    1.4%
    Trips flown    289,573     303,432    (4.6)%   568,708    598,222   (4.9)%
    Average
     passenger
     fare          $110.52     $114.48    (3.5)%   $112.13    $113.42   (1.1)%
    Passenger
     revenue
     yield per
     RPM (cents)     12.73       13.86    (8.2)%     13.01      13.80   (5.7)%
    Operating
     revenue
     yield per
     ASM (cents)     10.24       10.89    (6.0)%     10.00      10.48   (4.6)%
    CASM, GAAP
     (cents)          9.76       10.12    (3.6)%      9.85       9.91   (0.6)%
    CASM, GAAP
     excluding
     fuel (cents)     6.91        6.53     5.8%       6.99       6.52    7.2%
    CASM,
     excluding
     special
     items
     (cents)          9.52        9.98    (4.6)%      9.57       9.82   (2.5)%
    CASM,
     excluding
     fuel and
     special
     items
     (cents)          6.91        6.53     5.8%       6.99       6.52    7.2%
    Fuel costs
     per gallon,
     including
     fuel tax
     (unhedged)      $1.63       $3.64   (55.2)%     $1.60      $3.29  (51.4)%
    Fuel costs
     per gallon,
     including
     fuel tax
     (GAAP)          $1.95       $2.42   (19.4)%     $1.97      $2.28  (13.6)%
    Fuel costs
     per gallon,
     including
     fuel tax
     (economic)      $1.79       $2.32   (22.8)%     $1.77      $2.22  (20.3)%
    Fuel
     consumed, in
     gallons
     (millions)        371         388    (4.4)%       721        761   (5.3)%
    Fulltime
     equivalent
     Employees at
     period-end *   35,296      34,936     1.0%     35,296     34,936    1.0%
    Aircraft in
     service at
     period-end        543         535     1.5%        543        535    1.5%

    CASM (unit costs) - Operating expenses per ASM
    RASM (unit revenue) - Operating revenue yield per ASM
    * Headcount is defined as "Active" fulltime equivalent Employees for both
    periods presented.

 

    SOUTHWEST AIRLINES CO.
    CONDENSED CONSOLIDATED BALANCE SHEET
    (in millions)
    (unaudited)

                                        June 30,    December 31,
                                          2009          2008
                                          ----          ----

    ASSETS
    Current assets:
      Cash and cash equivalents            $946        $1,368
      Short-term investments              1,252           435
      Accounts and other
       receivables                          237           209
      Inventories of parts and
       supplies, at cost                    200           203
      Deferred Income Taxes                 365           365
      Prepaid expenses and
       other current assets                  94            73
                                             --            --
        Total current assets              3,094         2,653

    Property and equipment, at cost:
      Flight equipment                   13,690        13,722
      Ground property and
       equipment                          1,849         1,769
      Deposits on flight
       equipment purchase
       contracts                            204           380
                                            ---           ---
                                         15,743        15,871
      Less allowance for
       depreciation and
       amortization                       5,082         4,831
                                          -----         -----
                                         10,661        11,040
    Other assets                            272           375
                                            ---           ---
                                        $14,027       $14,068
                                        =======       =======

    LIABILITIES & STOCKHOLDERS' EQUITY
    Current liabilities:
      Accounts payable                     $732          $668
      Accrued liabilities                 1,029         1,012
      Air traffic liability               1,207           963
      Current maturities of
       long-term debt                       105           163
                                            ---           ---
        Total current
         liabilities                      3,073         2,806

    Long-term debt less current
     maturities                           3,278         3,498
    Deferred income taxes                 1,921         1,904
    Deferred gains from sale
     and leaseback of aircraft              128           105
    Other deferred liabilities              481           802
    Stockholders' equity:
      Common stock                          808           808
      Capital in excess of par
       value                              1,223         1,215
      Retained earnings                   4,863         4,919
      Accumulated other
       comprehensive loss                  (762)         (984)
      Treasury stock, at cost              (986)       (1,005)
                                           ----        ------
        Total stockholders' equity        5,146         4,953
                                          -----         -----
                                        $14,027       $14,068
                                        =======       =======

 

    SOUTHWEST AIRLINES CO.
    CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
    (in millions)
    (unaudited)
                                             Three months     Six months
                                                ended           ended
                                               June 30,        June 30,
                                               --------        ---------
                                              2009    2008    2009    2008
                                              ----    ----    ----    ----

    CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income (loss)                      $54    $321    $(37)   $355
        Adjustments to reconcile net
         income (loss) to cash provided by
         operating activities:
            Depreciation and amortization      150     148     300     293
            Unrealized loss (gain) on fuel
             derivative instruments             54    (324)    124    (290)
            Deferred income taxes               (4)    135     (25)    129
            Amortization of deferred
             gains on sale and
             leaseback of aircraft              (4)     (3)     (7)     (6)
            Share-based
             compensation expense                3       5       6       9
            Excess tax benefits
             from share-based
             compensation arrangements          (5)      3      (1)      3
            Changes in certain assets
             and liabilities:
              Accounts and other
               receivables                      (6)    (97)    (28)   (167)
              Other current assets             (28)    (37)    (18)    (50)
              Accounts payable and
               accrued liabilities             104     286     104     333
              Air traffic liability            (43)    105     244     372
              Cash collateral received from
               (provided to) fuel
                derivative counterparties     (125)  1,865    (185)  2,435
              Other, net                       (15)    (71)    (57)   (116)
                                               ---     ---     ---     ---
                Net cash provided by
                 operating activities          135   2,336     420   3,300

    CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchases of property and
         equipment, net                       (187)   (223)   (272)   (587)
        Purchases of short-term investments (1,394) (2,226) (3,090) (3,447)
        Proceeds from sales of short-
         term investments                    1,203   1,185   2,347   2,645
        Other, net                               1       -       1       -
                                               ---     ---     ---     ---
              Net cash used in
               investing activities           (377) (1,264) (1,014) (1,389)

    CASH FLOWS FROM FINANCING ACTIVITIES:
        Proceeds from sale and
         leaseback transactions                208       -     381       -
        Issuance of Long-term debt             332     600     332     600
        Proceeds from Employee stock plans       4      17       8      27
        Payments of long-term debt and
         capital lease obligations              (7)     (6)    (41)    (25)
        Payment of revolving
         credit facility                      (400)      -    (400)      -
        Payment of credit line borrowing       (91)      -     (91)      -
        Payments of cash dividends              (3)     (3)    (10)    (10)
        Repurchase of common stock               -       -       -     (54)
        Excess tax benefits
         from share-based
          compensation arrangements              5      (3)      1      (3)
       Other, net                               (5)     (6)     (8)     (6)
                                               ---     ---     ---     ---
               Net cash provided by
                financing activities            43     599     172     529
                                                --     ---     ---     ---

    NET INCREASE (DECREASE) IN CASH
     AND CASH EQUIVALENTS                     (199)  1,671    (422)  2,440
    CASH AND CASH EQUIVALENTS AT
     BEGINNING OF PERIOD                     1,145   2,982   1,368   2,213
                                             -----   -----   -----   -----

    CASH AND CASH EQUIVALENTS
     AT END OF PERIOD                         $946  $4,653    $946  $4,653
                                              ====  ======    ====  ======

 

SOURCE  Southwest Airlines