Southwest Airlines Reports Second Quarter Earnings

Aug 04, 2011, 07:25 ET from Southwest Airlines Co.

DALLAS, Aug. 4, 2011 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the “Company”) today reported second quarter 2011 net income of $161 million, or $.21 per diluted share, compared to net income of $112 million, or $.15 per diluted share, for second quarter 2010.  Operating income was $207 million for second quarter 2011, compared to $363 million for second quarter 2010.  The 2011 results include the results of AirTran since the May 2, 2011, acquisition date.  Prior periods do not include AirTran’s results.

Both periods’ results included special items related to non-cash, mark-to-market, and other items associated with a portion of the Company’s fuel hedge portfolio.   In addition, second quarter 2011 results included approximately $40 million (net of taxes) in charges primarily related to financial advisory fees and severance payments in association with the Company’s acquisition and integration of AirTran. Excluding special items in both periods, second quarter 2011 net income was $121 million, or $.15 per diluted share, compared to $216 million, or $.29 per diluted share, for second quarter 2010.  Additional information regarding special items is included in this release and in the accompanying reconciliation tables.  

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, “With energy prices surging, and Brent crude oil near $120 a barrel, significant revenue growth was critical to achieve second quarter 2011 operating income of $276 million and net income of $121 million (both excluding special items).  Record load factors and record passenger yields resulted in a record $3.9 billion in passenger revenues.  Still, with our economic fuel costs rising 72 percent, our year-over-year revenue growth could not keep pace.  However, total operating revenues of $4.1 billion, another record, is a notable accomplishment.  

“Southwest Airlines celebrated a momentous milestone this quarter with the closing of our AirTran acquisition, and it couldn’t have come at a more critical time with volatile fuel prices and economic uncertainty.  We have the opportunity to optimize AirTran’s flight schedule to boost its profitability. Ultimately, integrating their network into Southwest’s provides even more substantial opportunities to boost combined revenues and profits.  The acquisition has the dual benefit of positioning the Company for future growth in an improving economic environment or cushioning it against worsening economic conditions.  As we undertake the multi-year effort to successfully integrate AirTran into Southwest Airlines, we will continue to focus on our safe, efficient, and reliable operations; strong Culture; and outstanding Customer Service.”

AirTran became a wholly-owned subsidiary of the Company on May 2, 2011. Second quarter 2011 results discussed in this release and provided in the accompanying unaudited Condensed Consolidated Financial Statements and Comparative Consolidated Operating Statistics include the results of operations and cash flows for AirTran from May 2, 2011 through June 30, 2011, including the impact of purchase accounting.  Periods presented prior to the acquisition date do not include AirTran’s results.  However, the Company believes the analysis of specified financial results on a “combined basis” provides more meaningful year-over-year comparability.  Financial information on a “combined basis” is the sum of the historical financial results of the Company and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting only as of May 2, 2011.  Supplemental financial information on a “combined basis” and accompanying reconciliations have been included in this release and at southwest.com/investor_relations.  

Financial Results

The Company’s total operating revenues for second quarter 2011 increased 30.6 percent to $4.1 billion, compared to $3.2 billion for second quarter 2010.  Operating unit revenues increased 5.7 percent compared to second quarter 2010.  On a combined basis, operating unit revenues increased 7.4 percent from second quarter 2010.  Based on bookings and revenue trends thus far, the Company expects third quarter 2011 unit revenues to improve from third quarter 2010’s combined unit revenue performance of 12.13 cents.  

Total second quarter 2011 operating expenses were $3.9 billion, compared to $2.8 billion in second quarter 2010.  Excluding special items, second quarter 2011 unit costs increased 13.5 percent from second quarter 2010, mostly due to a 38.4 percent year-over-year increase in economic fuel costs per gallon.   Second quarter 2011 economic fuel costs of $3.28 per gallon included $.03 per gallon in favorable cash settlements for fuel derivative contracts.  Based on the Company’s third quarter 2011 fuel hedge position and market prices (as of August 1st), third quarter 2011 economic fuel costs, including fuel taxes, are estimated to be approximately $3.30 per gallon.  Additional information regarding the Company’s fuel derivative contracts is included in the accompanying tables.  

Excluding fuel and special items in both periods, second quarter 2011 unit costs increased 1.4 percent from second quarter 2010.  On a combined basis, nonfuel unit costs, excluding special items, increased 3.1 percent from second quarter last year.  Based on current cost trends, the Company expects its third quarter 2011 unit costs, excluding fuel and special items, to increase slightly from third quarter 2010’s combined unit costs, excluding fuel and special items, of 7.27 cents.

Operating income for second quarter 2011 was $207 million, compared to $363 million in second quarter 2010.  Excluding special items in both periods, operating income was $276 million for second quarter 2011, compared to $414 million for second quarter 2010.  On a combined basis, second quarter 2011 operating income, excluding special items, was $295 million, compared to $488 million in second quarter 2010.  

The second quarter year-over-year $259 million swing in “Other (gains) losses, net” primarily resulted from unrealized gains/losses associated with the Company’s fuel hedging program.  Excluding these special items, “Other losses, net” primarily consisted of premium costs associated with the Company’s fuel derivative contracts of $26 million in second quarter 2011, compared to $30 million in second quarter 2010.  On a combined basis, second quarter 2011 “Other gains” was $125 million compared to “Other losses” of $187 million in second quarter 2010.  Excluding special items and on a combined basis, “Other losses, net” primarily consisted of premium costs totaling $28 million in second quarter 2011, compared to $37 million in second quarter 2010. 

Total operating revenues for the six months ended June 30, 2011 increased 24.8 percent to $7.2 billion, while total operating expenses increased 28.5 percent to $6.9 billion, resulting in operating income in first half 2011 of $321 million, versus $417 million in first half 2010.  Excluding special items in both periods, operating income was $387 million for first half 2011, compared to $516 million for the same period last year.  On a combined basis, total operating revenues for the six months ended June 30, 2011 increased 15.1 percent to $8.2 billion, while total operating expenses increased 19.5 percent to $7.9 billion, resulting in combined operating income in first half 2011 of $290 million, versus $503 million in first half 2010 .  Excluding special items in both periods, combined operating income for first half 2011 was $382 million, compared to $602 million for the same period last year.

Net income for first half 2011 was $166 million, or $.22 per diluted share, compared to $123 million, or $.17 per diluted share, for the same period last year.  Excluding special items, net income for first half 2011 was $142 million, or $.19 per diluted share, compared to $239 million, or $.32 per diluted share, for the same period last year.  

The Company’s return on invested capital (before taxes and excluding special items) was approximately nine percent for the twelve months ended June 30, 2011, including AirTran’s results beginning May 2, 2011.  Additional information regarding pretax return on invested capital is included in the accompanying reconciliation tables.

AirTran Acquisition

“Of course, the highlight of the quarter was welcoming AirTran to the Southwest family on May 2nd,” stated Kelly.  “Our integration efforts are well underway, and I am pleased with our progress thus far.  We implemented a new leadership structure for the combined companies following the acquisition, and Employee communication channels were enhanced to ensure Employees of both airlines remain well-informed of the integration plans and progress.  We have streamlined a number of corporate functions and renegotiated many contracts, which will produce approximately $50 million (before taxes and profitsharing) in annualized cost synergies.

“Our labor workgroups are making good progress on seniority list integration discussions. The Pilot negotiating committees of the Southwest Airlines Pilots’ Association (SWAPA) and the Air Line Pilots Association (ALPA) have agreed on a framework for seniority list integration.  The agreement has been unanimously approved by the SWAPA Board.  If approved by the ALPA Board, the agreement will go to the memberships for ratification.  I commend our Pilots for their dedication and leadership to have already accomplished this integral step towards a successful integration.

“Although AirTran is expected to operate under the AirTran brand for another couple of years, stations with a dual airline presence are being transitioned to locate ticket counters and gates in closer proximity. We will begin transitioning aircraft, airports, and Employees next year.  We expect to receive our single operating certificate from the Federal Aviation Administration in first quarter 2012.

“These accomplishments, among many others, are noteworthy in just three months time.  I thank all of our hard-working Employees for their unwavering efforts as we integrate these two great companies, and position Southwest for an exciting and healthy future.”  

The Company has incurred $75 million in costs associated with the acquisition and integration of AirTran during 2011, of which $58 million were in second quarter 2011.  The Company expects total acquisition and integration costs will be approximately $500 million.  Including the anticipated benefit of net synergies, but excluding the impact of acquisition and integration costs, the Company expects the acquisition to be accretive to its fully-diluted earnings per share in 2011, as it was in second quarter 2011.  The Company currently estimates that net annual pre-tax synergies will exceed $400 million by 2013.

Capacity Plans

Kelly continued, “Given the pessimistic near-term outlook for fuel prices and the U.S. economy, we have re-evaluated our capacity plans.  We trimmed our 2012 winter schedule, published last week, which began to coordinate the Southwest and AirTran networks.  We have reduced our planned 2012 capacity to be equal to or less than our 2011 combined available seat miles.  We will be aggressive in our efforts to optimize our combined networks and redeploy capacity more profitably.”  

The Company expects its 2011 combined available seat miles to grow in the four to five percent range as compared to its 2010 combined capacity.

Liquidity

Net cash provided by operations for second quarter 2011 was $237 million and capital expenditures were $215 million.  The acquisition of AirTran was funded with $518 million of cash on hand, and 44 million shares of the Company’s common stock.   After considering the cash balances acquired from AirTran, the net cash outlay was $35 million. Subsequent to the acquisition date, a portion of the convertible notes previously held by AirTran note holders were either converted or called by the Company for an aggregate of approximately seven million shares of the Company’s common stock and $81 million in cash.  The Company’s $600 million bank credit facility, which was due to expire in October 2012, was replaced during the second quarter with a new, five-year, $800 million unsecured revolving credit line.  The Company also terminated AirTran’s $100 million combined revolving credit and letter of credit facility.  As of June 30, 2011, the Company had $4.4 billion in unrestricted cash and short-term investments, which did not include $85 million in net cash collateral held by its fuel hedge counterparties.  

Net cash provided by operations for first half 2011 was $1.2 billion, and capital expenditures were $272 million, resulting in approximately $900 million in free cash flow.  The Company repaid $143 million in debt during first half 2011, and is scheduled to repay approximately $494 million in debt for the remainder of 2011, and approximately $560 million in 2012.  The Company expects to generate free cash flow for all of 2011, based on current trends and projected 2011 capital expenditures of approximately $900 million.  

Awards and recognitions

  • Voted the Customer Satisfaction Leader in Consumer Reports’ list of airline ratings receiving the highest rankings in check-in ease, cabin crew service, cabin cleanliness, baggage handling, and seating comfort
  • Named first in the American Customer Satisfaction Index in the Transportation sector
  • Ranked sixth in the  2011 Customer Service Hall of Fame by MSN Money, the only airline to make the top ten
  • Ranked second in the J.D. Power and Associates 2011 North America Airlines Satisfaction Study based on overall customer satisfaction with cost and fees, inflight service, flight crew, aircraft, boarding & baggage, check-in, and reservations
  • Recognized by Glassdoor as one of the best companies for work-life balance
  • Named one of the 100 Top Military Friendly Employers by GI Jobs magazine
  • Awarded for Best Practices in Supplier Diversity by the Dallas Fort Worth Minority Business Council
  • Recognized as a 2011 Stevie Award Winner in the Transportation category by The International Business Awards for outstanding performance in the workplace worldwide

Southwest will discuss its second quarter 2011 results on a conference call at 11:30 a.m. Eastern Time today.  A live broadcast of the conference call will also be available at southwest.com/investor_relations.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Specific forward-looking statements include, without limitation, statements related to (i) the Company’s growth plans and expectations, including network and capacity plans and expectations; (ii) the Company’s financial outlook; (iii) the Company’s plans and expectations related to managing risk associated with changing jet fuel prices; (iv) the Company’s plans and expectations with respect to its acquisition of AirTran, including the expected costs and benefits of the acquisition, as well as the Company’s integration plans and expectations; and (v) the Company’s expectations with respect to liquidity. These forward-looking statements are based on the Company's current intent, expectations, and projections and are not guarantees of future performance.  These statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them.  Factors include, among others, (i) changes in the price of aircraft fuel, the impact of hedge accounting, and any changes to the Company’s fuel hedging strategies and positions; (ii) the impact of the economy on demand for air travel and fluctuations in consumer demand generally for the Company’s services; (iii) the impact of fuel prices and economic conditions on the Company’s overall business plan and strategies; (iv) the Company’s ability to successfully integrate AirTran and realize the expected synergies from the transaction; (v) actions of competitors, including without limitation pricing, scheduling, and capacity decisions, and consolidation and alliance activities; (vi) the Company’s ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; (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, 2010.

SOUTHWEST AIRLINES CO.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)

(in millions, except per share amounts)

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

2011

2010

Percent Change

2011

2010

Percent Change

OPERATING REVENUES:

Passenger

$

3,876

$

3,016

28.5

$

6,814

$

5,511

23.6

Freight

36

33

9.1

67

63

6.3

Other

224

119

88.2

357

224

59.4

Total operating revenues

4,136

3,168

30.6

7,238

5,798

24.8

OPERATING EXPENSES:

Salaries, wages, and benefits

1,125

946

18.9

2,078

1,810

14.8

Fuel and oil

1,527

933

63.7

2,565

1,754

46.2

Maintenance materials and repairs

246

194

26.8

444

360

23.3

Aircraft rentals

79

45

75.6

125

92

35.9

Landing fees and other rentals

247

206

19.9

448

396

13.1

Depreciation and amortization

176

154

14.3

332

308

7.8

Acquisition and integration

58

-

n.a.

75

-

n.a.

Other operating expenses

471

327

44.0

850

661

28.6

Total operating expenses

3,929

2,805

40.1

6,917

5,381

28.5

OPERATING INCOME

207

363

(43.0)

321

417

(23.0)

OTHER EXPENSES (INCOME):

Interest expense

51

42

21.4

94

83

13.3

Capitalized interest

(2)

(5)

(60.0)

(5)

(10)

(50.0)

Interest income

(4)

(4)

-

(7)

(6)

16.7

Other (gains) losses, net

(113)

146

n.a.

(54)

150

n.a.

Total other (income) expenses

(68)

179

n.a.

28

217

n.a.

INCOME BEFORE INCOME TAXES

275

184

49.5

293

200

46.5

PROVISION FOR INCOME TAXES

114

72

58.3

127

77

64.9

NET INCOME

$

161

$

112

43.8

$

166

$

123

35.0

NET INCOME PER SHARE:

Basic

$

0.21

$

0.15

$

0.22

$

$0.17

Diluted

$

0.21

$

0.15

$

0.22

$

$0.17

WEIGHTED AVERAGE SHARES OUTSTANDING:

Basic

780

745

764

744

Diluted

787

746

765

745

(1) Includes May and June 2011 financial results for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement I for selected financial information on a combined basis, including AirTran for periods prior to the acquisition date.

SOUTHWEST AIRLINES CO.

RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions, except per share amounts)

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

2011

2010

Percent Change

2011

2010

Percent Change

Fuel and oil expense, unhedged

$

1,533

843

$

2,577

1,573

Add/(Deduct): Fuel hedge (gains) losses included in Fuel and oil expense

(6)

90

(12)

181

Fuel and oil expense, as reported

$

1,527

933

$

2,565

1,754

Add/(Deduct): Net impact from fuel contracts (2)

(11)

(51)

6

(99)

Fuel and oil expense, economic

$

1,516

882

71.9

$

2,571

1,655

55.3

Total operating expenses, as reported

$

3,929

2,805

$

6,917

5,381

Add/(Deduct): Net impact from fuel contracts (2)

(11)

(51)

6

(99)

Total operating expenses, economic

$

3,918

2,754

$

6,923

5,282

Add: Charge for Acquisition and integration costs, net (3)

(58)

-

(72)

-

Total operating expenses, non-GAAP

$

3,860

2,754

40.2

$

6,851

5,282

29.7

Operating income (loss), as reported

$

207

363

$

321

417

Add/(Deduct): Net impact from fuel contracts (2)

11

51

(6)

99

Operating income, economic

$

218

414

$

315

516

Add: Charge for Acquisition and integration costs, net (3)

58

-

72

-

Operating income, non-GAAP

$

276

414

(33.3)

$

387

516

(25.0)

Other (gains) losses, net, as reported

$

(113)

146

$

(54)

150

Add/(Deduct): Net impact from fuel contracts (2)

140

(115)

111

(88)

Other losses, net, non-GAAP

$

27

31

(12.9)

$

57

62

(8.1)

Income before income taxes, as reported

$

275

184

$

293

200

Add/(Deduct): Net impact from fuel contracts (2)

(129)

166

(117)

187

$

146

350

$

176

387

Add: Charge for Acquisition and integration costs, net (3)

58

-

72

-

Income before income taxes, non-GAAP

$

204

350

(41.7)

$

248

387

(35.9)

Net income, as reported

$

161

112

$

166

123

Add/(Deduct): Net impact from fuel contracts (2)

(129)

166

(117)

187

Income tax impact of fuel contracts

49

(62)

45

(71)

$

81

216

$

94

239

Add: Charge for Acquisition and integration costs, net (4)

40

-

48

-

Net income, non-GAAP

$

121

216

(44.0)

$

142

239

(40.6)

Net income per share, diluted, as reported

$

0.21

0.15

$

0.22

0.17

Add/(Deduct): Net impact from fuel contracts

(0.10)

0.14

(0.09)

0.15

$

0.11

0.29

$

0.13

0.32

Add: Impact of special items, net (4)

0.04

-

0.06

-

Net income per share, diluted, non-GAAP

$

0.15

0.29

(48.3)

$

0.19

0.32

(40.6)

(1) Includes May and June 2011 financial results for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement II for a reconciliation of selected combined amounts to non-GAAP items, including AirTran for periods prior to the acquisition date.

(2) See Reconciliation of Impact from Fuel Contracts.

(3) Amounts net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.

(4) Amounts net of taxes and profitsharing as described in footnote (3) above.

SOUTHWEST AIRLINES CO.

RECONCILIATION OF IMPACT FROM FUEL CONTRACTS  (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions)

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

2011

2010

2011

2010

Fuel & Oil Expense

Add/(Deduct): Reclassification between Fuel & Oil and Other (gains)

losses, net, associated with current period settled contracts

$

(11)

$

7

$

(9)

$

11

Add/(Deduct): Contracts settling in the current period, but for which gains

and/or (losses) have been recognized in a prior period *

-

(58)

15

(110)

Impact from fuel contracts to Fuel & oil expense

(11)

(51)

6

(99)

Operating Income

Add/(Deduct): Reclassification between Fuel & Oil and Other (gains)

losses, net, associated with current period settled contracts

$

11

$

(7)

$

9

$

(11)

Add/(Deduct): Contracts settling in the current period, but for which gains

and/or (losses) have been recognized in a prior period *

-

58

(15)

110

Impact from fuel contracts to Operating Income

11

51

(6)

99

Other (gains) losses

Add/(Deduct): Mark-to-market impact from fuel contracts

settling in current and future periods

$

136

$

(57)

$

139

$

(31)

Add/(Deduct): Ineffectiveness from fuel hedges settling in future periods

(7)

(51)

(37)

(46)

Add/(Deduct): Reclassification between Fuel and oil and Other (gains)

losses, net, associated with current period settled contracts

11

(7)

9

(11)

Impact from fuel contracts to Other (gains) losses

140

(115)

111

(88)

Net Income

Add/(Deduct): Mark-to-market impact from fuel contracts

settling in current and future periods

$

(136)

$

57

$

(139)

$

31

Add/(Deduct): Ineffectiveness from fuel hedges settling in future periods

7

51

37

46

Add/(Deduct): Other net impact of fuel contracts settling in the

current or a prior period (excluding reclassifications)

-

58

(15)

110

Impact from fuel contracts to Net Income **

(129)

166

(117)

187

(1) Includes May and June 2011 financial results for AirTran.

* As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings

** Excludes income tax impact of unrealized items

SOUTHWEST AIRLINES CO.

COMPARATIVE CONSOLIDATED OPERATING STATISTICS (1)

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

2011

2010

Change

2011

2010

Change

Revenue passengers carried

27,114,480

22,883,422

18.5

%

48,229,595

42,860,257

12.5

%

Enplaned Passengers

33,430,914

27,554,201

21.3

%

59,030,032

51,248,665

15.2

%

Revenue passenger miles (RPMs) (000s)

25,883,849

20,206,229

28.1

%

45,079,735

37,367,943

20.6

%

Available seat miles (ASMs) (000s)

31,457,412

25,471,845

23.5

%

55,963,085

48,091,305

16.4

%

Load Factor

82.3

%

79.3

%

3.0

pts

80.6

%

77.7

%

2.9

pts

Average length of passenger haul (miles)

955

883

8.2

%

935

872

7.2

%

Average aircraft stage length (miles)

685

650

5.4

%

672

642

4.7

%

Trips flown

340,768

287,222

18.6

%

614,591

549,114

11.9

%

Average passenger fare

$

142.94

$

131.82

8.4

%

$

141.29

$

128.60

9.9

%

Passenger revenue yield per RPM (cents)

14.97

14.93

0.3

%

15.12

14.75

2.5

%

RASM (cents)

13.15

12.44

5.7

%

12.93

12.06

7.2

%

PRASM (cents)

12.32

11.84

4.1

%

12.18

11.46

6.3

%

CASM (cents)

12.49

11.01

13.4

%

12.36

11.19

10.5

%

CASM , excluding fuel (cents)

7.63

7.35

3.8

%

7.77

7.54

3.1

%

CASM, excluding special items (cents)

12.27

10.81

13.5

%

12.24

10.98

11.5

%

CASM, excluding fuel and special items (cents)

7.45

7.35

1.4

%

7.64

7.54

1.3

%

Fuel costs per gallon, including fuel tax (unhedged)

$

3.31

$

2.26

46.5

%

$

3.15

$

2.24

40.6

%

Fuel costs per gallon, including fuel tax

$

3.30

$

2.50

32.0

%

$

3.13

$

2.49

25.7

%

Fuel costs per gallon, including fuel tax (economic)

$

3.28

$

2.37

38.4

%

$

3.14

$

2.35

33.6

%

Fuel consumed, in gallons (millions)

462

372

24.2

%

817

701

16.5

%

Active fulltime equivalent Employees

43,805

34,636

26.5

%

43,805

34,636

26.5

%

Aircraft in service at period-end

694

544

27.6

%

694

544

27.6

%

PRASM (Passenger unit revenue) - Passenger revenue yield per ASM

RASM (unit revenue) - Operating revenue yield per ASM

CASM (unit costs) - Operating expenses per ASM

(1) Includes May and June 2011 operating statistics for AirTran, and the impact of purchase accounting as of May 2, 2011. See Supplemental Combined Statement V for consolidated operating statistics on a combined basis, including AirTran for periods prior to the acquisition date.

SOUTHWEST AIRLINES CO.

RETURN ON INVESTED CAPITAL (1)

(in millions)  

(unaudited)

12 Months Ended

12 Months Ended

June 30, 2011

June 30, 2010

Operating Income, as reported

$

892

$

607

Add/(Deduct): Net impact from fuel contracts

65

181

Add: Acquisition and integration costs, net (2)

79

-

Add: Charge for voluntary early out program, net

-

56

Operating Income, Non-GAAP

$

1,036

$

844

Net adjustment for aircraft leases (3)

96

90

Adjustment for fuel hedge accounting

(130)

(141)

Adjusted Operating Income, Non-GAAP

$

1,002

$

793

Average Invested Capital (4)

$

11,134

$

10,057

Equity adjustment for fuel hedge accounting

224

604

Adjusted Average Invested Capital

$

11,358

$

10,661

.

ROIC, pretax

9%

7%

(1) Calculation includes the impact of the AirTran acquisition as of May 2, 2011.

(2) Net of profitsharing impact on charges incurred through March 31, 2011.  The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013.  The profitsharing impact will be realized in 2014 and beyond.

(3) Net adjustment related to presumption that all aircraft in fleet are owned.

(4) Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.

SOUTHWEST AIRLINES CO.

CONDENSED CONSOLIDATED BALANCE SHEET (1)

(in millions)      

(unaudited)

June 30,

December 31,

2011

2010

ASSETS

Current assets:

Cash and cash equivalents

$

1,595

$

1,261

Short-term investments

2,779

2,277

Accounts and other receivables

389

195

Inventories of parts and supplies, at cost

394

243

Deferred income taxes

-

214

Prepaid expenses and other current assets

264

89

Total current assets

5,421

4,279

Property and equipment, at cost:

Flight equipment

15,255

13,991

Ground property and equipment

2,286

2,122

Deposits on flight equipment purchase contracts

226

230

17,767

16,343

Less allowance for depreciation and amortization

6,046

5,765

11,721

10,578

Goodwill

971

-

Other assets

832

606

$

18,945

$

15,463

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

1,049

$

739

Accrued liabilities

1,130

863

Air traffic liability

2,149

1,198

Current maturities of long-term debt

990

505

Total current liabilities

5,318

3,305

Long-term debt less current maturities

3,242

2,875

Deferred income taxes

2,263

2,493

Deferred gains from sale and leaseback of aircraft

82

88

Other non-current liabilities

838

465

Stockholders' equity:

Common stock

808

808

Capital in excess of par value

1,219

1,183

Retained earnings

5,398

5,399

Accumulated other comprehensive loss

(107)

(262)

Treasury stock, at cost

(116)

(891)

Total stockholders' equity

7,202

6,237

$

18,945

$

15,463

(1) June 30, 2011 balances include the impact of the AirTran acquisition and the preliminary purchase accounting allocation.

SOUTHWEST AIRLINES CO.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)

(in millions)  

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

2011

2010

2011

2010

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

161

$

112

$

166

$

123

Adjustments to reconcile net income to

cash provided by operating activities:

Depreciation and amortization

176

154

332

308

Unrealized (gain) loss on fuel derivative instruments

(129)

166

(119)

187

Deferred income taxes

95

63

123

75

Amortization of deferred gains on sale and

leaseback of aircraft

(3)

(3)

(7)

(7)

Changes in certain assets and liabilities, net of acquisition:

Accounts and other receivables

(21)

(42)

(107)

(108)

Other current assets

(46)

5

(138)

(14)

Accounts payable and accrued liabilities

67

279

305

195

Air traffic liability

64

86

576

442

Cash collateral received from (provided to) fuel

derivative counterparties

(49)

130

(20)

135

Other, net

(78)

(410)

91

(423)

Net cash provided by operating activities

237

540

1,202

913

CASH FLOWS FROM INVESTING ACTIVITIES:

Payment to acquire AirTran, net of AirTran cash on hand

(35)

-

(35)

-

Payments for purchase of property and equipment, net

(215)

(159)

(272)

(298)

Purchases of short-term investments

(1,779)

(1,800)

(3,263)

(3,180)

Proceeds from sales of short-term investments

1,440

1,349

2,750

2,546

Net cash used in investing activities

(589)

(610)

(820)

(932)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Employee stock plans

27

23

31

35

Proceeds from termination of interest rate

derivative instrument

-

-

76

-

Payments of long-term debt and capital lease obligations

(32)

(25)

(62)

(85)

Payments of convertible debt

(81)

-

(81)

-

Payment of credit line borrowing

-

(44)

-

(44)

Payments of cash dividends

(3)

(3)

(10)

(10)

Other, net

(3)

(2)

(2)

(2)

Net cash used in financing activities

(92)

(51)

(48)

(106)

NET CHANGE IN CASH AND CASH EQUIVALENTS

(444)

(121)

334

(125)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

2,039

1,110

1,261

1,114

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,595

$

989

$

1,595

$

989

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

Fair value of equity consideration given to acquire AirTran

$

523

$

-

$

523

$

-

Fair value of common stock issued for conversion of debt

$

78

$

-

$

78

$

-

(1) Includes the impact of the AirTran acquisition as of May 2, 2011.

SOUTHWEST AIRLINES CO.

FUEL DERIVATIVE CONTRACTS

AS OF AUGUST 1, 2011

Percent of estimated fuel consumption

covered by fuel derivative contracts

Average WTI Crude Oil

price per barrel

3Q 2011

4Q 2011

Up to $90

approx. 55%

approx. 60%

$90 to $95

approx. 45%

approx. 60%

$95 to $110 (1)

approx. 55%

approx. 45%

$110 to $120 (2)

approx. 70%

approx. 75%

Above $120 (2)

approx. 65%

approx. 65%

Estimated difference in economic jet

fuel price per gallon, above/(below)

unhedged market prices, including taxes

Average WTI Crude Oil

price per barrel

3Q 2011

4Q 2011

$85

$0.04

$0.09

$96 (1)

($0.03)

($0.02)

$115

($0.16)

($0.19)

$130

($0.33)

($0.42)

Percent of estimated fuel consumption

covered by fuel derivative contracts at

Full Year

varying WTI crude-equivalent price levels

Second Half 2011

approx. 50% (2)

2012

approx. 65% (3)

2013

over 50%

2014

over 40%

2015

over 10%

(1) Based on the third quarter 2011 average WTI forward curve and market prices as of August 1, 2011, and current estimated fuel consumption covered by fuel derivative contracts, third quarter 2011 economic fuel price per gallon, including taxes, is estimated to be approximately $3.30 per gallon, or $0.03 below market prices.

(2) Based on the second half 2011 average WTI forward curve and market prices as of August 1, 2011, the Company has approximately 50% of its estimated second half 2011 fuel consumption covered by fuel derivative contracts. If prices settle between $110 and $120 per barrel, the estimated second half 2011 fuel consumption covered by fuel derivative contracts increases to approximately 75%, and if prices settle above $120 per barrel, the coverage decreases to approximately 65%.

(3) Based on the 2012 average WTI forward curve and market prices as of August 1, 2011, the Company has approximately 65% of its estimated 2012 fuel consumption covered by fuel derivative contracts.  If prices settle between $110 and $120 per barrel, the estimated 2012 fuel consumption covered by fuel derivative contracts increases to approximately 85%; if prices settle between $120 and $130 per barrel, the coverage decreases to approximately 55%; and if prices settle above $130 per barrel, the coverage decreases to approximately 35%.

SOUTHWEST AIRLINES CO.

737 FUTURE DELIVERY SCHEDULE (a)

AS OF AUGUST 3, 2011

The Boeing Company

-700

-800

Purchase

Additional

Firm Orders

Firm Orders

Options

Rights

-800s

Total

2011

6

6(b)

2012

6

20

2

5

33

2013

25

6

31

2014

29

6

35

2015

26

1

27

2016

31

7

38

2017

5

17

22

Through 2021

98

98

Total

128(c)

20

39

98

5

290

(a) Includes AirTran's future firm orders and options from Boeing.

(b) The Company has already taken delivery of  14 737-700 aircraft through August 2, 2011.

(c) The Company is evaluating substituting 737-800s in lieu of 737-700 firm orders currently scheduled for 2012 through 2017.

SUPPLEMENTAL COMBINED STATEMENT I

SOUTHWEST AIRLINES CO.

SELECTED COMBINED FINANCIAL INFORMATION (1)

(in millions)

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

Percent

Percent

2011

2010

Change

2011

2010

Change

OPERATING REVENUES:

Passenger

$

4,113

$

3,621

13.6

$

7,627

$

6,631

15.0

Freight

36

33

9.1

67

63

6.3

Other

258

215

20.0

483

410

17.8

Total operating revenues

4,407

3,869

13.9

8,177

7,104

15.1

OPERATING EXPENSES:

Salaries, wages, and benefits

1,173

1,077

8.9

2,271

2,072

9.6

Fuel and oil

1,631

1,152

41.6

2,925

2,160

35.4

Maintenance materials and repairs

269

251

7.2

532

476

11.8

Aircraft rentals

99

106

(6.6)

206

213

(3.3)

Landing fees and other rentals

260

251

3.6

502

480

4.6

Depreciation and amortization

182

169

7.7

352

337

4.5

Acquisition and integration

79

-

n.a.

101

-

n.a.

Other operating expenses

509

426

38.0

998

863

27.3

Total operating expenses

4,202

3,432

22.4

7,887

6,601

19.5

OPERATING INCOME

205

437

(53.1)

290

503

(42.3)

OTHER EXPENSES (INCOME):

Interest expense

56

65

(13.8)

115

128

(10.2)

Capitalized interest

(3)

(6)

(50.0)

(6)

(11)

(45.5)

Interest income

(3)

(5)

(40.0)

(7)

(7)

-

Other (gains) losses, net

(125)

187

n.a.

(97)

192

n.a.

Total other (income) expenses

(75)

241

n.a.

5

302

n.a.

INCOME BEFORE INCOME TAXES

$

280

$

196

42.9

$

285

$

201

41.8

(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. AirTran's historical financial information included in the combined presentation has been conformed to Southwest's financial statement classification where appropriate.  See Note Regarding Use of Non-GAAP Financial Measures.

SUPPLEMENTAL COMBINED STATEMENT II

SOUTHWEST AIRLINES CO.

RECONCILIATION OF SELECTED COMBINED AMOUNTS FROM SUPPLEMENTAL COMBINED STATEMENT I TO NON-GAAP ITEMS (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions)

(unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

Percent

Percent

2011

2010

Change

2011

2010

Change

Fuel and oil expense, combined unhedged

$

1,646

1,068

$

2,955

1,993

Add/(Deduct): Fuel hedge (gains) losses included in Fuel and oil expense

(15)

84

(30)

167

Fuel and oil expense, as presented on Supplemental Combined Statement I

$

1,631

1,152

$

2,925

2,160

Add/(Deduct): Net impact from fuel contracts

(11)

(51)

6

(99)

Fuel and oil expense, combined economic

$

1,620

1,101

47.1

$

2,931

2,061

42.2

Total operating expenses, as presented on Supplemental Combined Statement I

$

4,202

3,432

$

7,887

6,601

Add/(Deduct): Net impact from fuel contracts

(11)

(51)

6

(99)

Total operating expenses, combined economic

$

4,191

3,381

$

7,893

6,502

Add: Charge for Acquisition and integration costs, net (2)

(79)

-

(98)

-

Total operating expenses, combined non-GAAP

$

4,112

3,381

21.6

$

7,795

6,502

19.9

Operating income, as presented on Supplemental Combined Statement I

$

205

437

$

290

503

Add/(Deduct): Net impact from fuel contracts

11

51

(6)

99

Operating income, combined economic

$

216

488

$

284

602

Add: Charge for Acquisition and integration costs, net (2)

79

-

98

-

Operating income, combined non-GAAP

$

295

488

(39.5)

$

382

602

(36.5)

Other (gains) losses, net, as presented on Supplemental Combined Statement I

$

(125)

187

$

(97)

192

Add/(Deduct): Net impact from fuel contracts

155

(149)

162

(116)

Other losses, net, combined non-GAAP

$

30

38

(21.1)

$

65

76

(14.5)

Income (loss) before income taxes, as presented on Supplemental Combined Statement I

$

280

196

$

285

201

Add/(Deduct): Net impact from fuel contracts

(144)

200

(168)

215

$

136

396

$

117

416

Add: Charge for Acquisition and integration costs, net (2)

79

-

98

-

Income before income taxes, combined non-GAAP

$

215

396

(45.7)

$

215

416

(48.3)

(1) Selected combined amounts presented in this schedule include financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. AirTran's historical financial information included in the combined presentation has been conformed to Southwest's financial statement classification where appropriate.

(2) Amounts net of profitsharing impact on charges incurred through March 31, 2011.  The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013. The profitsharing impact will be realized in 2014 and beyond.

SUPPLEMENTAL COMBINED STATEMENT III

SOUTHWEST AIRLINES CO.

SELECTED CONSOLIDATING COMBINED 2011 FINANCIAL INFORMATION (1)

(in millions)

(unaudited)

Three months ended June 30, 2011

Six months ended June 30, 2011

Southwest

Southwest

Airlines Co.

Airlines Co.

(as reported)

AirTran (2)

Combined

(as reported)

AirTran (2)

Combined

OPERATING REVENUES:

Passenger

$

3,876

$

237

$

4,113

$

6,814

$

812

$

7,627

Freight

36

-

36

67

-

67

Other

224

34

258

357

126

483

Total operating revenues

4,136

271

4,407

7,238

938

8,177

OPERATING EXPENSES:

Salaries, wages, and benefits

1,125

49

1,173

2,078

193

2,271

Fuel and oil

1,527

104

1,631

2,565

361

2,925

Maintenance materials and repairs

246

23

269

444

88

532

Aircraft rentals

79

20

99

125

81

206

Landing fees and other rentals

247

14

260

448

54

502

Depreciation and amortization

176

6

182

332

20

352

Acquisition and integration

58

21

79

75

26

101

Other operating expenses

471

38

509

850

146

998

Total operating expenses

3,929

275

4,202

6,917

969

7,887

OPERATING INCOME (LOSS)

207

(4)

205

321

(31)

290

OTHER EXPENSES (INCOME):

Interest expense

51

5

56

94

21

115

Capitalized interest

(2)

-

(3)

(5)

-

(6)

Interest income

(4)

-

(3)

(7)

-

(7)

Other (gains) losses, net

(113)

(12)

(125)

(54)

(43)

(97)

Total other expenses (income)

(68)

(7)

(75)

28

(22)

5

INCOME (LOSS) BEFORE INCOME TAXES

$

275

$

3

$

280

$

293

$

(9)

$

285

(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date. These combined results include the impact of purchase accounting as of May 2, 2011. See Note Regarding Use of Non-GAAP Financial Measures.

(2) Results presented for AirTran, on a standalone basis, represent periods prior to the acquisition date, conformed to Southwest's financial statement classification where appropriate.

SUPPLEMENTAL COMBINED STATEMENT IV

SOUTHWEST AIRLINES CO.

SELECTED CONSOLIDATING COMBINED FINANCIAL INFORMATION (1)

DETAIL OF AIRLINE SECOND QUARTER 2011 RESULTS AND PURCHASE ACCOUNTING IMPACT

(in millions)

(unaudited)

Three months ended June 30, 2011

Purchase

Southwest (2)

AirTran (3)

Accounting (4)

Combined (5)

OPERATING REVENUES:

Passenger

$

3,413

$

704

$

(4)

$

4,113

Freight

36

-

-

36

Other

151

107

-

258

Total operating revenues

3,600

811

(4)

4,407

OPERATING EXPENSES:

Salaries, wages, and benefits

1,027

146

-

1,173

Fuel and oil

1,310

321

-

1,631

Maintenance materials and repairs

201

68

-

269

Aircraft rentals

45

60

(6)

99

Landing fees and other rentals

217

43

-

260

Depreciation and amortization

160

16

6

182

Acquisition and integration

34

45

-

79

Other operating expenses

406

103

-

509

Total operating expenses

3,400

802

-

4,202

OPERATING INCOME (LOSS)

200

9

(4)

205

OTHER EXPENSES (INCOME):

Interest expense

44

13

(1)

56

Capitalized interest

(2)

(1)

-

(3)

Interest income

(3)

-

-

(3)

Other (gains) losses, net

(163)

38

-

(125)

Total other (income) expenses

(124)

50

(1)

(75)

INCOME (LOSS) BEFORE INCOME TAXES

$

324

$

(41)

$

(3)

$

280

(1) See Note Regarding Use of Non-GAAP Financial Measures.

(2) Results presented for Southwest exclude AirTran results for May and June 2011, and exclude the impact of purchase accounting.

(3) Results presented for AirTran include all three months, before and after the acquisition date, and exclude the impact of purchase accounting.

(4) Represents the impact of purchase accounting as of May 2, 2011.

(5) See Supplemental Combined Statement III for a reconciliation of this combined information to our historical GAAP reported amounts.

SUPPLEMENTAL COMBINED STATEMENT V

SOUTHWEST AIRLINES CO.

RECONCILIATION OF  SELECTED STANDALONE AMOUNTS FROM SUPPLEMENTAL COMBINED STATEMENT IV TO NON-GAAP ITEMS (1)

(SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)

(in millions, except per share amounts)

(unaudited)

Three Months Ended June 30, 2011

Southwest

AirTran

Fuel and oil expense, standalone unhedged

$

1,307

$

339

Add/(Deduct): Fuel hedge (gains) losses included in Fuel and oil expense

3

(18)

Fuel and oil expense, standalone as presented on Supplemental Combined Statement IV (2)

$

1,310

$

321

Add/(Deduct): Net impact from fuel contracts

(11)

-

Fuel and oil expense, standalone economic

$

1,299

$

321

Total operating expenses, standalone as presented on Supplemental Combined Statement IV (2)

$

3,400

$

802

Add/(Deduct): Net impact from fuel contracts

(11)

-

Total operating expenses, standalone economic

$

3,389

$

802

Add: Charge for Acquisition and integration costs (3)

(34)

(45)

Total operating expenses, standalone non-GAAP

$

3,355

$

757

Operating income, standalone as presented on Supplemental Combined Statement IV (2)

$

200

$

9

Add/(Deduct): Net impact from fuel contracts

11

-

Operating income, standalone economic

$

211

$

9

Add: Charge for Acquisition and integration costs (3)

34

45

Operating income, standalone non-GAAP

$

245

$

54

Other (gains) losses, net, standalone as presented on Supplemental Combined Statement IV (2)

$

(163)

$

38

Add/(Deduct): Net impact from fuel contracts

190

(35)

Other losses, net, standalone non-GAAP

$

27

$

3

Income (loss) before income taxes, standalone as presented on Supplemental Combined Schedule IV (2)

$

324

$

(41)

Add/(Deduct): Net impact from fuel contracts

(179)

35

$

145

$

(6)

Add: Charge for Acquisition and integration costs (3)

34

45

Income before income taxes, standalone non-GAAP

$

179

$

39

(1) Selected amounts presented in this schedule are standalone non-GAAP financial results for each of Southwest and AirTran.  These standalone results exclude the results of the other airline, and the impact of purchase accounting.

(2) See Supplemental Combined Schedule IV for the detail of standalone airline results and the purchase accounting impact as of May 2, 2011.

(3) No profitsharing impact. The Company amended its profitsharing plan during second quarter 2011 to defer the profitsharing impact of integration costs incurred from April 1, 2011 through December 31, 2013.  The profitsharing impact will be realized in 2014 and beyond.

SUPPLEMENTAL COMBINED STATEMENT VI

SOUTHWEST AIRLINES CO.

SELECTED CONSOLIDATING COMBINED 2010 FINANCIAL INFORMATION (1)

(in millions)

(unaudited)

Three months ended June 30, 2010

Six months ended June 30, 2010

(as reported)

(as reported)

Southwest

AirTran

Southwest

AirTran

Airlines Co.

(as conformed)

Combined

Airlines Co.

(as conformed)

Combined

OPERATING REVENUES:

Passenger

$

3,016

$

605

$

3,621

$

5,511

$

1,120

$

6,631

Freight

33

-

33

63

-

63

Other

119

96

215

224

186

410

Total operating revenues

3,168

701

3,869

5,798

1,306

7,104

OPERATING EXPENSES:

Salaries, wages, and benefits

946

131

1,077

1,810

262

2,072

Fuel and oil

933

219

1,152

1,754

406

2,160

Maintenance materials and repairs

194

57

251

360

116

476

Aircraft rentals

45

61

106

92

121

213

Landing fees and other rentals

206

45

251

396

84

480

Depreciation and amortization

154

15

169

308

29

337

Other operating expenses

327

99

426

661

202

863

Total operating expenses

2,805

627

3,432

5,381

1,220

6,601

OPERATING INCOME

363

74

437

417

86

503

OTHER EXPENSES (INCOME):

Interest expense

42

23

65

83

45

128

Capitalized interest

(5)

(1)

(6)

(10)

(1)

(11)

Interest income

(4)

(1)

(5)

(7)

-

(7)

Other (gains) losses, net

146

41

187

150

42

192

Total other expenses

179

62

241

216

86

302

INCOME BEFORE INCOME TAXES

$

184

$

12

$

196

$

201

$

-

$

201

(1) Selected financial information presented in this schedule on a combined basis includes financial results for Southwest and AirTran for all periods presented, including AirTran for periods prior to the acquisition date.  Results presented for Southwest and AirTran, on a standalone basis, represent previously reported results.  AirTran's historical financial information has been conformed to Southwest's financial statement classification where appropriate. See Note Regarding Use of Non-GAAP Financial Measures.

SUPPLEMENTAL COMBINED STATEMENT VII

SOUTHWEST AIRLINES CO.

COMBINED OPERATING STATISTICS (1)

(unaudited)

Three months ended

Six months ended

June 30, 2011

June 30, 2011

2011

2010

Change

2011

2010

Change

Revenue passengers carried

28,826,013

27,997,507

3.0

%

54,407,408

52,308,579

4.0

%

Enplaned passengers

35,559,232

34,084,746

4.3

%

66,753,484

63,298,260

5.5

%

Revenue passenger miles (RPMs) (000s)

27,646,263

25,403,035

8.8

%