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Southwest Airlines Reports Fourth Quarter Earnings and 33rd Consecutive Year of Profitability

DALLAS, Jan. 18 /PRNewswire-FirstCall/ -- Southwest Airlines (NYSE: LUV) today reported its fourth quarter and full year 2005 results. Net income for fourth quarter 2005 was $86 million, or $.10 per diluted share, compared to $56 million, or $.07 per diluted share, for fourth quarter 2004. The Company's fourth quarter 2005 and 2004 results included unrealized losses, recorded in "Other gains/losses," associated with derivative instruments that will settle in future accounting periods recorded as a result of Statement of Financial Accounting Standard 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended. Excluding SFAS 133 items in fourth quarter 2005 and 2004, respectively, net income was $98 million, or $.12 per diluted share, compared to $68 million, or $.08 per diluted share. See the attached reconciliation for further information on these items.

The Company's fourth quarter 2005 results included $24 million (before profit sharing and income taxes) in additional 2005 federal airport security expenses due to a retroactive assessment by the Transportation Security Administration (TSA) made, without notice or opportunity to protest, in January 2006. This assessment was completely unexpected, and the Company believes it is improper and plans to vigorously contest it.

For the full year 2005, net income was $548 million, or $.67 per diluted share, compared to 2004 net income of $313 million, or $.38 per diluted share. Excluding SFAS 133 items in both years, 2005 net income was $489 million, or $.60 per diluted share, compared to 2004 net income of $324 million, or $.40 per diluted share.

Gary C. Kelly, CEO, stated: "I am pleased to report a significantly improved earnings performance for the fourth quarter and full year 2005, which represented our 33rd consecutive year of profitability. Despite the totally unexpected TSA security fee assessment and the 38.8 percent increase in our hedged fuel costs per gallon, our fourth quarter 2005 earnings were up over 40 percent.

"We continue to be optimistic about our revenue trends and were very pleased with our record fourth quarter 2005 operating revenues of $1.99 billion. As a result of strong Customer demand, we achieved a record fourth quarter load factor of 69.6 percent at improved yields, which were up 4.2 percent. Unit revenues grew 11.7 percent with only modest fare increases, reaffirming our Low Fare Leadership.

"Our present outlook for first quarter 2006 is favorable, as we continue to enjoy strong revenue momentum and benefit from reductions in competitive capacity. Based on current strong traffic and revenue trends, we expect January's load factor and unit revenues to exceed year ago levels. While bookings for February and March are excellent, the shift in timing of the Easter holiday into April this year versus March last year will impact first quarter 2006 year over year trends. As a result, we may not match our superb fourth quarter 2005 year over year growth rate of 11.7 percent in first quarter 2006.

"Our unit costs were up more than expected, primarily due to the unexpected $24 million TSA security fee assessment not received until January 2006. We believe this surprise assessment is inappropriate.

"Our fourth quarter 2005 jet fuel costs per gallon included a $258 million hedging benefit. Still, the fourth quarter 2005 jet fuel costs increased 38.8 percent to $1.22 per gallon. For first quarter 2006, we are over 75 percent hedged with prices capped at $36 per barrel, but presently expect our hedged first quarter 2006 fuel price to approximate $1.45 per gallon. We are over 70 percent hedged for the remainder of 2006 at $36 per barrel; over 60 percent in 2007 at $39 per barrel; over 35 percent in 2008 at $38 per barrel; and about 30 percent in 2009 at $39 per barrel.

"Excluding fuel but including the surprise TSA assessment, our fourth quarter 2005 unit costs increased 5.6 percent. While we had cost pressures in fourth quarter 2005 and will continue our intense cost control efforts, I am proud of what our Employees have accomplished on the cost side. As a result of their hard work and productivity improvements, we reduced our full year unit costs, excluding fuel, by 1.5 percent.

"As a reminder, the Company plans to adopt Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (stock option expensing), in first quarter 2006. The adoption of SFAS 123R is expected to increase first quarter 2006 salaries, wages, and benefits by a non-cash charge of approximately $20 million. As a result of the adoption of SFAS 123R, we expect first quarter 2006 unit cost, excluding fuel, to exceed first quarter 2005, but improve from fourth quarter 2005's 6.57 cents.

"We continue to grow our fleet and route system and are pleased with the performance of our two new cities in 2005: Ft. Myers and Pittsburgh. We are excited about our return to the Denver market. On January 3, 2006, we initiated service at Denver International Airport with 13 daily nonstop flights, increasing to 20 daily nonstop flights by March 2006. Initial Customer response has been excellent.

"We also continue to grow our existing network. Our efforts to rebuild New Orleans continue, and we will be up to 18 daily flights in March. We have increased our capacity at Chicago Midway nearly 60 percent since third quarter 2004 and plan to continue to add service in this market. In December 2005, we completed a transaction with ATA Airlines, Inc. to acquire the leasehold rights to four additional gates at Chicago Midway, in exchange for a $20 million reduction in our debtor-in-possession loan to ATA. In addition, we enhanced our codeshare arrangement with ATA, subject to certain conditions, including ATA's confirmed Plan of Reorganization, which must be fulfilled by February 28, 2006. We recently expanded our codeshare agreement to include ATA flights from DFW International Airport to Chicago Midway. Based on current codeshare markets, we estimate first quarter 2006 codeshare revenues to be approximately $10 million.

"After 23 years of serving the state of Missouri, we are thrilled that we were granted permission to initiate new nonstop service to St. Louis and Kansas City from Dallas. The new service, which began December 13, 2005, resulted from the enactment of a 2005 federal transportation appropriations bill containing language, initiated by Missouri Senator Kit Bond, that exempts Missouri from federal flight restrictions placed on Dallas' Love Field airport in 1979.

"We continue to be well-poised to take advantage of growth opportunities and currently plan to add over 30 aircraft in 2006 for an estimated eight percent available seat mile growth. Whether or not we add another new city in 2006 will depend heavily on the service needs of a number of our existing cities. We recently exercised two Boeing 737-700 options for delivery in 2007, bringing our 2007 firm orders and options to 29 and 7, respectively."

American Small Business Travelers Alliance ranked Southwest as the Best Airline based on the carrier's treatment of small business travelers. Southwest Airlines was also named in the 2006 Hispanic Magazine Corporate 100 for the eighth year in a row.

Southwest will discuss results on a conference call at 11:30 a.m. Eastern Time today. A live broadcast of the conference call will be available at http://www.southwest.com/jp/luvhome.shtml?src=IR_011806.

Operating Results

Total operating revenues for fourth quarter 2005 increased 20.1 percent to $1.99 billion, compared to $1.66 billion for fourth quarter 2004. Operating income increased 35.8 percent to $163 million from $120 million in fourth quarter 2004. Revenue passenger miles (RPMs) increased 15.3 percent in fourth quarter 2005, as compared to a 7.6 percent increase in available seat miles (ASMs), resulting in a 4.6 point increase in load factor to 69.6 percent, a fourth quarter record for the Company. The passenger revenue yield per RPM increased 4.2 percent to 12.59 cents from 12.08 cents in fourth quarter 2004. Operating revenue yield per ASM (RASM) increased 11.7 percent to 9.14 cents from 8.18 cents in fourth quarter 2004, the highest quarterly year-over-year gain in over 13 years.

Total fourth quarter 2005 operating expenses were $1.82 billion, an increase of 18.8 percent, compared to $1.54 billion in fourth quarter 2004. Operating expenses per ASM (CASM) for fourth quarter 2005 increased 10.5 percent to 8.39 cents, compared to 7.59 cents in fourth quarter 2004. Excluding SFAS 133 items, CASM for fourth quarter 2005 increased 11.2 percent to 8.42 cents, compared to 7.57 cents for fourth quarter 2004. CASM, excluding fuel, for fourth quarter 2005 increased 5.6 percent to 6.57 cents, compared to 6.22 cents for fourth quarter 2004, partially due to the $24 million surprise assessment from the TSA in January 2006.

Net cash provided by operations for 2005 was $2.23 billion, which included a $620 million increase in fuel hedge-related collateral deposits. Capital expenditures were $1.2 billion for 2005. The Company ended 2005 with $2.5 billion in cash and short-term investments. In addition, the Company had a fully available unsecured revolving credit line of $600 million. The Company will redeem $601 million of its debt maturing in 2006.

Operating revenues for the year ended December 31, 2005 increased 16.1 percent to $7.58 billion, while operating expenses increased 13.2 percent to $6.76 billion, resulting in operating income of $820 million.

"Other income" was $54 million for 2005 versus "other expenses" of $65 million for 2004. The $119 million swing in "other income" resulted primarily from SFAS 133 items, recorded in "other gains," for 2005, offset by an $8 million increase in net interest expense, primarily due to higher interest rates. For 2005, the SFAS 133 items primarily related to unrealized gains of $86 million recorded on derivative contracts that settle in future periods. 2004 included $14 million of SFAS 133 unrealized losses on derivative contracts that settle in future periods. See the attached reconciliation for further information on these items.

Operating expenses for the year ended December 31, 2004 included $41 million (or $22 million net of profit sharing and income tax effects) for costs associated with the consolidation of the Company's reservation operations; the Company-wide early out offer; and the pay, per diem, and benefit increases retroactive to May 2002 related to the agreement reached with our Flight Attendants.

This news release contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the plans, intentions, and expectations reflected in or suggested by the forward-looking statements. Additional information concerning the factors which could cause actual results to differ materially from the forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended 2004 and subsequent filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this press release.



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

                              Three months ended         Year Ended
                                 December 31,           December 31,
                                            Percent                Percent
                              2005    2004   Change  2005    2004   Change

    OPERATING REVENUES:
      Passenger              $1,906  $1,587   20.1  $7,279  $6,280   15.9
      Freight                    35      34    2.9     133     117   13.7
      Other                      46      34   35.3     172     133   29.3
        Total operating
         revenues             1,987   1,655   20.1   7,584   6,530   16.1

    OPERATING EXPENSES:
      Salaries, wages, and
       benefits                 702     619   13.4   2,702   2,443   10.6
      Fuel and oil              395     277   42.6   1,342   1,000   34.2
      Maintenance materials
       and repairs              112     106    5.7     430     457   (5.9)
      Aircraft rentals           42      45   (6.7)    163     179   (8.9)
      Landing fees and other
       rentals                  109     102    6.9     454     408   11.3
      Depreciation and
       amortization             121     113    7.1     469     431    8.8
      Other operating
       expenses                 343     273   25.6   1,204   1,058   13.8
        Total operating
         expenses             1,824   1,535   18.8   6,764   5,976   13.2

    OPERATING INCOME            163     120   35.8     820     554   48.0

    OTHER EXPENSES (INCOME):
      Interest expense           32      26   23.1     122      88   38.6
      Capitalized interest      (11)     (9)  22.2     (39)    (39)   0.0
      Interest income           (16)     (7) 128.6     (47)    (21) 123.8
      Other (gains) losses, net  22      21    n.a.    (90)     37    n.a.
        Total other expenses
         (income)                27      31    n.a.    (54)     65    n.a.


    INCOME BEFORE INCOME
     TAXES                      136      89   52.8     874     489   78.7
    PROVISION FOR INCOME
     TAXES                       50      33   51.5     326     176   85.2

    NET INCOME                  $86     $56   53.6    $548    $313   75.1

    NET INCOME PER SHARE:
        Basic                  $.11    $.07   57.1    $.70    $.40   75.0
        Diluted                $.10    $.07   42.9    $.67    $.38   76.3

    WEIGHTED AVERAGE SHARES
     OUTSTANDING:
        Basic                   797     782            789     783
        Diluted                 823     813            814     815



    SOUTHWEST AIRLINES CO.
    RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE)
    (unaudited)

                                      Three Months Ended     Year Ended
                                         December 31,        December 31,

    (In millions, except per share amounts)
                                                   Percent            Percent
                                         2005 2004 Change  2005   2004 Change

    Mark-to-market (gains) losses
     on fuel contracts settling
     in future periods                    $9    $4         $(77)    $7
    Ineffectiveness from fuel hedges
     settling in future periods           10    13           (9)     7
    Realized fuel contract settlements
     included in Other (gains) losses      5    (2)         (24)    (1)
    Total impact of fuel contracts
     included in Other (gains)
     losses, net                         $24   $15  n.a.  $(110)   $13   n.a.

    Other (gains) losses, net,
     as reported                         $22   $21         $(90)   $37
    Less: impact of fuel contracts       (24)  (15)         110    (13)
    Other (gains) losses, net -
     economic fuel basis                 $(2)   $6  n.a.    $20    $24   n.a.

    Net income, as reported              $86   $56         $548   $313
    Less: impact of fuel contracts,
     net of income taxes                  12    12          (59)    11
    Net income - economic fuel basis     $98   $68  44.1   $489   $324   50.9

    Net income per share, diluted,
     as reported                        $.10  $.07         $.67   $.38
    Less: impact of fuel contracts,
     net of income taxes                 .02   .01         (.07)   .02
    Net income per share, diluted -
     economic fuel basis                $.12  $.08  50.0   $.60   $.40   50.0

    Fuel and oil expense - unhedged     $660  $451       $2,234 $1,455
    Less: fuel hedge gains included
     in fuel and oil expense            (265) (174)        (892)  (455)
    GAAP fuel and oil expense            395   277  42.6  1,342  1,000   34.2
    Add/(Deduct): losses/(gains)
     on settled contracts included
     in Other (gains) losses, net          5    (2)         (24)    (1)
    Add/(Deduct): fuel contract losses/
     (gains) recognized in earnings
     in prior periods for contracts
     settling in the current period        2    (2)          10     (3)
    Fuel and oil expense -
     economic basis                     $402  $273  47.3 $1,328   $996   33.3

NOTE: The above schedule reconciles the non-GAAP financial measures included in this press release to the most comparable GAAP financial measures. The special items consist primarily of unrealized gains or losses (before income taxes) for derivative instruments that will settle in future accounting periods, recorded as a result of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. The majority of these amounts relate to ineffectiveness, as defined, for future period instruments and the change in market value for future period derivatives that no longer qualified for special hedge accounting, as defined in SFAS 133.

In management's view, comparative analysis of results can be enhanced by excluding the impact of these items. The amounts are not indicative of the Company's operating performance for the applicable period, nor should they be considered in developing trend analysis for future periods. In addition, since fuel expense is such a large part of the Company's operating costs and is subject to extreme volatility, the Company believes it is useful to provide investors with the Company's true economic cost of fuel for the periods presented, based on cash settlements from hedging activities, but excluding the unrealized impact of hedges that will settle in future periods or were recognized in prior periods.



    SOUTHWEST AIRLINES CO.
    COMPARATIVE CONSOLIDATED OPERATING STATISTICS
    (unaudited)

                                                 Three months ended
                                                    December 31,
                                             2005         2004      Change

    Revenue passengers carried             19,485,341   17,709,289   10.0 %
    Enplaned passengers                    22,225,745   20,144,834   10.3 %
    Revenue passenger miles (RPMs) (000s)  15,139,361   13,136,093   15.3 %
    Available seat miles (ASMs) (000s)     21,748,689   20,220,077    7.6 %
    Load factor                                 69.6%        65.0%    4.6 pts.
    Average length of passenger haul (miles)      777          742    4.7 %
    Average aircraft stage length (miles)         615          590    4.2 %
    Trips flown                               259,377      251,755    3.0 %
    Average passenger fare                     $97.83       $89.59    9.2 %
    Passenger revenue yield per RPM (cents)     12.59        12.08    4.2 %
    Operating revenue yield per ASM (cents)      9.14         8.18   11.7 %
    Operating expenses per ASM (GAAP, in cents)  8.39         7.59   10.5 %
    Operating expenses per ASM (economic,
     in cents)                                   8.42         7.57   11.2 %
    Operating expenses per ASM, excluding
     fuel (cents)                                6.57         6.22    5.6 %
    Fuel costs per gallon, excluding fuel
     tax (unhedged)                            $2.006       $1.453   38.1 %
    Fuel costs per gallon, excluding fuel
     tax (GAAP)                                $1.195        $.891   34.1 %
    Fuel costs per gallon, excluding fuel
     tax (economic)                            $1.217        $.877   38.8 %
    Fuel consumed, in gallons (millions)          327          309    5.8 %
    Number of Employees at period-end          31,729       31,011    2.3 %
    Size of fleet at period-end                   445          417    6.7 %


    SOUTHWEST AIRLINES CO.
    COMPARATIVE CONSOLIDATED OPERATING STATISTICS
    (unaudited)

                                                    Year ended
                                                    December 31,
                                             2005         2004      Change

    Revenue passengers carried             77,693,875   70,902,773    9.6 %
    Enplaned passengers                    88,379,900   81,066,038    9.0 %
    Revenue passenger miles (RPMs) (000s)  60,223,100   53,418,353   12.7 %
    Available seat miles (ASMs) (000s)     85,172,795   76,861,296   10.8 %
    Load factor                                 70.7%        69.5%  1.2 pts.
    Average length of passenger haul (miles)      775          753    2.9 %
    Average aircraft stage length (miles)         607          576    5.4 %
    Trips flown                             1,028,639      981,591    4.8 %
    Average passenger fare                     $93.68       $88.57    5.8 %
    Passenger revenue yield per RPM (cents)     12.09        11.76    2.8 %
    Operating revenue yield per ASM  (cents)     8.90         8.50    4.7 %
    Operating expenses per ASM (GAAP, in
     cents)                                      7.94         7.77    2.2 %
    Operating expenses per ASM (economic,
     in cents)                                   7.93         7.77    2.1 %
    Operating expenses per ASM, excluding
     fuel (cents)                                6.37         6.47   (1.5)%
    Fuel costs per gallon, excluding fuel
     tax (unhedged)                            $1.726       $1.207   43.0 %
    Fuel costs per gallon, excluding fuel
     tax (GAAP)                                $1.033        $.828   24.8 %
    Fuel costs per gallon, excluding fuel
     tax (economic)                            $1.023        $.825   24.0 %
    Fuel consumed, in gallons (millions)        1,287        1,201    7.2 %
    Number of Employees at period-end          31,729       31,011    2.3 %
    Size of fleet at period-end                   445          417    6.7 %



    SOUTHWEST AIRLINES CO.
    CONDENSED CONSOLIDATED BALANCE SHEET
    (unaudited)

                                                           December 31,
    (in millions)                                    2005                2004

    ASSETS
    Current assets:
      Cash and cash equivalents                    $2,280              $1,048
      Short-term investments                          251                 257
      Accounts and other receivables                  258                 248
      Inventories of parts and supplies, at cost      150                 137
      Fuel hedge contracts                            641                 428
      Prepaid expenses and other current assets        40                  54
          Total current assets                      3,620               2,172

    Property and equipment, at cost:
      Flight equipment                             10,999              10,037
      Ground property and equipment                 1,256               1,202
      Deposits on flight equipment
       purchase contracts                             660                 682
                                                   12,915              11,921
      Less allowance for depreciation and
       amortization                                 3,488               3,198
                                                    9,427               8,723
    Other assets                                    1,171                 442
                                                  $14,218             $11,337

    LIABILITIES & STOCKHOLDERS' EQUITY
    Current liabilities:
      Accounts payable                               $524                $420
      Accrued liabilities                           2,074               1,047
      Air traffic liability                           649                 529
      Current maturities of long-term debt            601                 146
          Total current liabilities                 3,848               2,142

    Long-term debt less current maturities          1,394               1,700
    Deferred income taxes                           1,896               1,610
    Deferred gains from sale and
     leaseback of aircraft                            136                 152
    Other deferred liabilities                        269                 209
    Stockholders' equity:
      Common stock                                    802                 790
      Capital in excess of par value                  424                 299
      Retained earnings                             4,557               4,089
      Accumulated other comprehensive income          892                 417
      Treasury stock, at cost                         ---                 (71)
           Total stockholders' equity               6,675               5,524
                                                  $14,218             $11,337



    SOUTHWEST AIRLINES CO.
    CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
    (unaudited)
                                           Three months ended    Year ended
                                              December 31,      December 31,
    (in millions)                            2005     2004     2005     2004
    CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                              $86      $56     $548     $313
      Adjustments to reconcile net income
       to cash provided by operating
       activities:
         Depreciation and amortization        121      113      469      431
         Deferred income taxes                (14)      42      257      184
         Amortization of deferred gains
          on sale and leaseback of aircraft    (4)      (4)     (16)     (16)
         Amortization of scheduled airframe
          inspections & repairs                13       12       49       52
         Income tax benefit from Employee
          stock option exercises               65       35       65       35
         Changes in certain assets and
          liabilities:
          Accounts and other receivables       76       (2)      (9)     (75)
          Other current assets                 34      (11)     (59)     (44)
          Accounts payable and accrued
           liabilities                       (152)    (162)     855      231
          Air traffic liability              (126)    (114)     120       68
         Other                                (26)     (14)     (50)     (22)
          Net cash provided by (used in)
           operating activities                73      (49)   2,229    1,157

    CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property
       and equipment, net                    (218)    (409)  (1,210)  (1,775)
      Change in short-term investments, net   (66)      88        6      124
      Payment for assets
       of ATA Airlines, Inc.                  ---      (34)      (6)     (34)
      Debtor in possession loan
       to ATA Airlines, Inc.                  ---      (40)     ---      (40)
      Other investing activities, net         ---       (1)     ---       (1)
          Net cash used in investing
           activities                        (284)    (396)  (1,210)  (1,726)

    CASH FLOWS FROM FINANCING ACTIVITIES:
      Issuance of long-term debt              ---      112      300      520
      Proceeds from Employee stock plans       74       36      132       88
      Payments of long-term debt and
       capital lease obligations              (12)    (185)    (149)    (207)
      Payments of cash dividends              ---      ---      (14)     (14)
      Repurchase of common stock              ---      ---      (55)    (246)
      Other, net                                1       (1)      (1)      (8)
          Net cash provided by (used in)
           financing activities                63      (38)     213      133

    NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS                        (148)    (483)   1,232     (436)
    CASH AND CASH EQUIVALENTS AT
     BEGINNING OF PERIOD                    2,428    1,531    1,048    1,484

    CASH AND CASH EQUIVALENTS AT END OF
     PERIOD                                $2,280   $1,048   $2,280   $1,048

    SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
    In December 2005, the Company obtained the rights to four of ATA
    Airlines, Inc. (ATA) leased Chicago Midway
    Airport gates in exchange for a $20 million reduction of the Debtor in
    possession loan to ATA:
        Rights to Chicago  Midway Gates acquired    $          20
        Debtor in possession loan to ATA reduction  $         (20)

SOURCE Southwest Airlines Co.
01/18/2006

CONTACT: Investor Relations of Southwest Airlines Co., 1-214-792-4415

4927 01/18/2006 06:45 EST http://www.prnewswire.com

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