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SOUTHWEST AIRLINES REPORTS FIRST QUARTER PROFIT

lreynolds
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DALLAS, TEXAS – April 22, 2010 – Southwest Airlines (NYSE:LUV) today reported  first quarter 2010 net income of $11 million, or $.01 per diluted share, compared to a net loss of $91 million, or $.12 loss per diluted share, for first quarter 2009.   First quarter 2010 results included special items (net of taxes) of $13 million, related to non-cash, mark-to-market, and other items associated with a portion of the Company’s fuel hedge portfolio.   Excluding special items for both periods, first quarter 2010 net income was $24 million, or $.03 per diluted share, compared to a net loss of $20 million, or $.03 loss per diluted share, in first quarter 2009.  The first quarter 2010 net income per diluted share, excluding special items, is in line with Thomson's First Call mean estimate of $.03 net income per diluted share.   Additional information regarding special items is included in this release and in the accompanying reconciliation tables.


Gary C. Kelly, CEO, stated: “We are extremely pleased to report a profitable start to the year, especially in this challenging economic environment exacerbated by persistently high energy costs.  As the quarter progressed, we began to see modest improvement in demand for business travel, as measured by the increase in full-fare traffic.  Overall demand for our Low Fares and high quality Customer Service remained strong, resulting in a record first quarter performance for load factor, passenger yield, and passenger revenues.  Furthermore, first quarter 2010 operating unit revenues, and the corresponding 19.3 percent year-over-year increase, represent all-time quarterly records.  To achieve this revenue performance in, seasonally, the weakest quarter, is notable.  To do so in a recovering economic environment is truly remarkable.  Thus far, strong load factor and yield trends have continued in April and, assuming trends continue, we expect another significant year-over-year unit revenue gain in second quarter 2010.


“Our network optimization and revenue management efforts continue to contribute significantly to this industry-leading revenue performance.  Efforts to enhance our already exceptional Brand and Customer Experience also have contributed.  We were recently recognized by Business Week in its fourth annual listing of Customer Service Champs.  As the only domestic airline to receive an award, the publication attributed our Bags Fly Free policy and proactive Customer Service as the primary reasons for our recognition.”  
As anticipated, first quarter 2010 economic fuel costs increased 33 percent year-over-year to $2.34 per gallon, which included approximately $44 million in unfavorable cash settlements from derivative contracts.  For the remainder of 2010, including second quarter, Southwest currently has derivative contracts in place for approximately 65 percent of estimated fuel consumption at crude-equivalent prices up to approximately $100 per barrel; approximately 40 percent if market prices settle in the $100 to $120 per barrel range; and approximately 60 percent if market prices exceed $120 per barrel.  Based on the current 2010 fuel hedge portfolio and market prices (as of April 20, 2010), the Company estimates economic fuel costs, including fuel taxes, for second quarter will be in the $2.40 to $2.45 per gallon range.  Beyond 2010, the Company has derivative contracts in place for over 60 percent of its estimated 2011 fuel consumption; approximately 50 percent for 2012; approximately 25 percent for 2013, and a modest position for 2014.


Excluding fuel, first quarter 2010 unit costs increased 9.8 percent from the same period a year ago, largely due to a 6.4 percent decline in first quarter year-over-year available seat miles (capacity).  Based on current cost trends and flat year-over-year capacity, the Company anticipates second quarter 2010 unit costs, excluding fuel, will exceed second quarter 2009’s 6.91 cents.  
 “As part of our continual efforts to adapt to dramatically higher energy prices, we remain focused on improving productivity to combat cost pressures, with a three percent reduction in headcount per aircraft over first quarter last year,” stated Kelly.  “We anticipate year-over-year nonfuel cost pressures will be more in the first half of 2010, but should ebb, somewhat, in the second half of the year with modest capacity additions.  


 “We have made great progress on numerous strategic revenue initiatives, and work continues on enhancements to our frequent flyer, southwest.com, and revenue management systems.   Although we announced last week that we are terminating our Canadian codeshare agreement with WestJet, our efforts continue uninterrupted to enable international connecting itineraries to Mexico with Volaris.


 “Operationally, our People continued to deliver outstanding levels of Customer Service, despite severe weather resulting in significant cancellations during first quarter 2010.  I am very grateful to all of our 35,000 hard-working and resilient Employees for their tremendous efforts.  It is because of their unwavering Warrior Spirits that Southwest Airlines continues to lead the industry and be recognized for excellence.”


For the fourteenth consecutive year, FORTUNE magazine recognized Southwest Airlines in its annual survey of corporate reputations.  Among all industries, Southwest Airlines was named the twelfth most admired Company in the world.  It is the only U.S. airline to make this list of the World's Top 50 Most Admired Companies.  For the second year in a row, Southwest Airlines was named the top-rated corporate brand in American City Business Journals’ brand ranking survey.  Southwest Airlines Cargo was recently recognized by Air Cargo World in its sixth annual Air Cargo Excellence Survey, receiving the highest overall score and leading all airlines in the Performance and Value categories.  The Southwest Airlines’ Leadership team received the honor of being ranked number two on the 2009 top 20 Best Companies for Leadership List presented by Business Week, in partnership with The Hay Group.  And, in the February 2010 issue of Institutional Investor Magazine, Gary Kelly and Laura Wright were both named to the 2010 All-America Executive Team as the top performing CEO and CFO, respectively, in the airline sector.
The Company has previously announced its plans to begin service on May 23, 2010, to the Northwest Florida Beaches International Airport near Panama City Beach, Florida with eight daily nonstop flights.  


Southwest will discuss its first quarter 2010 results on a conference call at
12:30 p.m. Eastern Time today.  A live broadcast of the conference call will be available at southwest.com/investor_relations.

Operating Results


Total operating revenues for first quarter 2010 increased 11.6 percent to $2.63 billion, compared to $2.36 billion for first quarter 2009.  Total first quarter 2010 operating expenses were $2.58 billion, compared to $2.41 billion in first quarter 2009.  Operating income for first quarter 2010 was $54 million, compared to an operating loss of $50 million in first quarter 2009.  Excluding special items, operating income was $102 million in first quarter 2010, compared to $31 million for the same period last year.  
           

“Other expenses” were $37 million for first quarter 2010, compared to $57 million for first quarter 2009, a decline of $20 million, primarily due to the decrease in “other losses, net”.   In first quarter 2010 and first quarter 2009, “other losses, net” included net unrealized gains associated with the Company’s fuel hedging program of $27 million and $10 million, respectively.  It also included hedging program costs of $31 million in first quarter 2010 and $32 million in first quarter 2009.


 The first quarter 2010 effective tax rate was 35 percent compared to 15 percent for the same period last year.  The first quarter 2009 tax rate was impacted by the Company’s projections for full year 2009 financial results and the related impact that permanent tax differences were expected to have on those projections.


Net cash provided by operations for first quarter 2010 was $373 million compared to $286 million provided by operations for the same period last year.  First quarter 2010 capital expenditures were $139 million, and the Company’s planned 2010 capital expenditures remain in the $600 to $700 million range.  In addition to a fully available, unsecured, revolving credit facility of $600 million, the Company currently has approximately $3 billion in cash and short-term investments.  

 
The Company's unaudited Condensed Consolidated Balance Sheet as of December 31, 2009, has been adjusted to retroactively apply an elective change in accounting method for frequent flyer benefits.  With this change, the Company now makes an accrual for partially earned frequent flyer awards.  Previously, the Company only accrued for fully earned frequent flyer awards. The impact of this change to the Company's first quarter 2010 and first quarter 2009 unaudited Condensed Consolidated Statement of Operations and Cash Flows, respectively, was not material.  

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 growth plans and expectations; (ii) its financial and operating strategies and initiatives and related 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) the price and availability of aircraft fuel, the impact of hedge accounting, and any changes to the Company’s strategies for addressing fuel price volatility; (ii) continued economic uncertainty, which could continue to impact the demand for air travel and the Company’s ability to adjust fares; (iii) the impact of fuel prices and economic conditions on the Company’s overall business plan and strategies; (iv) competitor capacity decisions; (v) the Company’s ability to timely and effectively prioritize its initiatives and related expenditures and its ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its initiatives; (vi) the Company’s dependence on third parties to assist with implementation of certain of its initiatives; (vii) the impact of governmental regulations on the Company’s operations; and (viii) 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, 2009.

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