Southwest Airlines Reports 36th Consecutive Year of Profitability and Fourth Quarter Results

DALLAS , Jan. 22 /PRNewswire-FirstCall/ -- Southwest Airlines (NYSE: LUV) today reported full year 2008 net income of $178 million, or $.24 per diluted share, compared to $645 million, or $.84 per diluted share, for full year 2007. Excluding special items, full year 2008 net income was $294 million, or $.40 per diluted share, compared to $471 million, or $.61 per diluted share, for full year 2007. Results for 2008 included $1.3 billion of fuel hedging cash settlement gains. Refer to the reconciliation in the accompanying tables for further information regarding special items.

Including special charges totaling $117 million (net), relating to noncash, mark-to-market and other items associated with a portion of the Company's future fuel hedge portfolio required by Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, fourth quarter 2008 net loss was $56 million, or $.08 loss per diluted share compared to net income of $111 million, or $.15 per diluted share, for fourth quarter 2007. Excluding these special charges and other items, fourth quarter 2008 net income was $61 million, or $.08 per diluted share, compared to $87 million, or $.12 per diluted share, in fourth quarter 2007. The fourth quarter 2008 results, excluding special items, of $.08 per diluted share exceeded Thomson's First Call's mean estimate of $.05.

Fourth Quarter 2008 Financial Highlights:

Gary C. Kelly , CEO, stated: "We are very proud to report another profitable year in one of the most difficult years in aviation's 100-year-plus history. We certainly had our challenges in 2008, but thanks to the extraordinary efforts and Warrior Spirit of our People, we persevered to report our 36th consecutive year of profitability.

"We celebrated many operational successes throughout 2008 and enhanced our already exceptional Brand and Customer Experience. With one full year of our new boarding system and Business Select product offering, the Customer response has been overwhelmingly favorable. We've made significant advancements in our revenue management and network optimization capabilities. And, we've made great progress on the technology side to lay the foundation for improved Customer Service, a new southwest.com, a new Rapid Rewards program, and international codeshare agreements with WestJet to Canada and Volaris to Mexico .

"Despite the difficult credit markets, we were able to boost our liquidity by $1.1 billion during fourth quarter 2008 through several financing transactions to end the year with $1.8 billion in unrestricted cash and short-term investments. After yearend, we raised an additional $173 million in cash upon the closing of the second tranche of our sale and leaseback transaction for an additional five of our 737-700 aircraft.

"Due to the rapid collapse in energy prices during fourth quarter 2008, we substantially reduced our net fuel hedge position to approximately ten percent of our estimated fuel gallons in each year from 2009 through 2013. Based on this current 2009 portfolio and future market prices for energy (as of January 20, 2009 ), we estimate our economic fuel costs per gallon, including fuel taxes, to be approximately $1.80 and under $1.90, for first quarter and full year 2009, respectively. This current full year 2009 projection is more than $1 billion lower than we were projecting last summer for 2009.

"The current market value (as of January 20, 2009 ) of our net fuel derivative contracts for 2009 through 2013 reflects a net liability of approximately $1.0 billion. Based on this market value (which reflects forward market prices and assumes no change to our current fuel hedge portfolio), we currently estimate our economic jet fuel costs per gallon could exceed market (or unhedged) prices by approximately $.16 to $.17 in each year from 2009 to 2011, $.10 in 2012, and $.08 in 2013. Even so, we currently expect our 2009 economic jet fuel costs per gallon to substantially decline from 2008 based on current market prices.

"We also amended one of our fuel hedge counterparty agreements to reduce cash required for collateral. As of January 20, 2009 , our total cash collateral posted was $300 million.

"Although we ended the year with a superb revenue performance and fuel hedging cash settlement gains, fourth quarter 2008 net income, excluding special items, declined 30 percent year-over-year due primarily to higher fuel costs. Despite the onset of a deep economic recession, we produced record fourth quarter 2008 operating revenues, up almost ten percent, or 8.8 percent per available seat mile. We were especially pleased with our revenue performance over the holidays, with revenue per available seat mile (RASM) up year-over-year approximately seven percent for November/ December 2008 , combined. Based on booking and revenue trends thus far, we estimate a similar growth rate for the month of January. Although it is too early to accurately predict first quarter 2009 traffic and revenues, we have seen notable softness in post-January bookings. Based on the current booking and revenue trends and taking into consideration the Easter shift to April this year (versus March last year), we are not confident January's strong run-rate will continue throughout first quarter 2009.

"Our fourth quarter 2008 unit costs, excluding special items, increased 10.9 percent from a year ago to 10.15 cents, driven in large part by substantially higher economic jet fuel prices. Even though we realized actual cash settlement gains of $32 million from our fourth quarter fuel hedge resulting in an economic fuel cost of $2.27 per gallon (including fuel taxes), compared to the market unhedged price of $2.36, our economic fuel costs increased 24 percent over fourth quarter 2007. Excluding fuel and fuel taxes, our unit costs increased 6.9 percent from a year ago to 6.86 cents. Based on current cost trends and the forecasted 4.4 percent decline in first quarter year-over-year capacity, we expect our first quarter 2009 unit costs, excluding fuel and fuel taxes, to exceed fourth quarter 2008's 6.86 cents.

"We remain intensely focused on maximizing the efficiency and profitability of each published flight schedule. Through our optimization efforts in 2008, we were able to grow key markets like Denver and San Francisco , while simultaneously pruning unpopular, and thus unproductive, flights. While we remain cautious about our 2009 growth and currently plan to reduce our available seat miles by approximately four percent versus 2008, we remain well-positioned to respond quickly to favorable market opportunities, such as our launch into Minneapolis-St. Paul beginning March 2009 and our bid to acquire rights to 14 slots at New York's LaGuardia airport.

"Our current 2009 fleet plan includes taking delivery of 13 new Boeing 737-700 aircraft, including three aircraft originally scheduled for delivery in 2008 that were delayed to 2009 due to Boeing machinists' 2008 strike. Two 737-300 lease returns that were planned for fourth quarter 2008 were deferred to first quarter 2009. Including these two lease returns, we currently plan to return or retire fifteen aircraft, to end the year with 535 aircraft.

"Today, we announce our revised Boeing 737-700 delivery schedule. We have reduced our 2010 aircraft deliveries to ten firm orders from 22 (16 firm, 6 options) and have made adjustments to our schedule beyond 2010. The revised Boeing 737-700 Delivery Schedule is included in the accompanying tables. Since the beginning of 2008, we have reduced our aircraft capital spending requirements by almost $700 million in 2009 and by the same amount in 2010.

"Despite a roller coaster year, our Employees' Warrior Spirits prevailed, and I could not be more proud of their accomplishments. Our People continue to deliver exceptional Customer Service and were recognized throughout 2008 for it."

Some of Southwest Airlines 2008 recognitions and honors include:

Southwest will discuss its fourth quarter 2008 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=INVRINV4QER000000090122 .

Operating Results

Total operating revenues for fourth quarter 2008 increased 9.7 percent to $2.7 billion, compared to $2.5 billion for fourth quarter 2007. Total fourth quarter 2008 operating expenses were $2.7 billion, compared to $2.4 billion in fourth quarter 2007. The Company's fourth quarter 2008 Fuel and oil expense includes approximately $39 million in fuel sales and excise taxes. During fourth quarter 2008, the Company reclassified fuel sales and excise taxes from Other operating expenses to Fuel and oil expense in the Condensed Consolidated Statement of Income for current and prior periods to enhance comparability. (A reconciliation of prior periods in 2008 to conform to the fourth quarter 2008 and full year 2008 presentation has been provided in the accompanying tables.)

Operating income for fourth quarter 2008 was $70 million, a decrease of 44.4 percent as compared to $126 million in fourth quarter 2007. Excluding special items, operating income decreased 16.7 percent in fourth quarter 2008, to $150 million from $180 million in fourth quarter 2007.

Operating revenues for the year ended December 31, 2008 , increased 11.8 percent to $11.0 billion from 2007, while operating expenses increased 16.6 percent to $10.6 billion, resulting in operating income of $449 million, a decrease of $342 million or 43.2 percent. Excluding special items, operating income was $636 million, a decrease of $217 million, or 25.4 percent. The Company's 2008 economic jet fuel costs per gallon (including fuel taxes) increased 31.1 percent to $2.32 from the same period in 2007, including cash hedging gains of $1.3 billion and $727 million in 2008 and 2007, respectively.

"Other expenses" was $171 million for 2008 versus "other income" of $267 million for 2007. The $438 million swing in total other expenses (income) primarily resulted from $92 million in "other losses" recognized in 2008 versus $292 million in "other gains" recognized in 2007. In both periods, these "other (gains) losses" primarily resulted from unrealized gains/losses associated with Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The cost of the hedging program (the premium costs of derivative contracts) of $69 million in 2008 and $58 million in 2007 is also included in "other (gains) losses". Full year 2008 interest expense increased 9.2 percent over prior year due to financing transactions the Company completed in late 2007 and during 2008. Interest income for 2008 decreased $18 million versus the same period prior year primarily due to lower market interest rates and lower rates earned from more conservative investments. Lower Boeing aircraft progress payments also generated less capitalized interest in 2008 compared to prior year.

The full year 2008 income tax rate was approximately 36 percent compared to approximately 39 percent for full year 2007. An August 2007 increase under a State of Illinois income tax law was reversed by the State of Illinois in January 2008 . As a result of this 2007 change in Illinois state tax law and subsequent 2008 reversal, both periods reflect substantially offsetting impacts.

Net cash used in operations for 2008 was $1.5 billion, substantially driven by the $2.2 billion change in cash collateral requirements. Capital expenditures for 2008 were $923 million. On January 17, 2008 , the Company's Board of Directors authorized a new share repurchase program to acquire up to $500 million of the Company's common stock, of which $54 million (4.4 million shares of common stock) was purchased during first quarter 2008. The Company has not repurchased any common stock since February 15, 2008 , and currently does not believe it is prudent to repurchase shares considering today's unstable financial markets and weak economy.

During the fourth quarter of 2008, the Company completed several financing transactions to significantly boost its liquidity. The Company accessed $400 million under its available $600 million revolving credit facility in October 2008 . In addition, the Company borrowed $400 million under a new term loan secured by 17 aircraft and borrowed $91 million under a new line of credit secured by a portion of its auction rate securities in December 2008 . The Company also entered into a two tranche sale and leaseback transaction for ten of the Company's Boeing 737-700 aircraft. The first five aircraft tranche closed in December 2008 and the second tranche closed in January 2009 , each for a total of $173 million. The Company repaid $55 million in debt during 2008 and currently has minimal contractual debt payment obligations in 2009. After posting $240 million in cash collateral at December 31, 2008 , the Company ended the year with $1.8 billion in unrestricted cash and short-term investments. In addition, the Company had its remaining fully available unsecured revolving credit line of $200 million.

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 the Company's anticipated revenues and costs and its growth strategies and expectations. 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 and any changes to the Company's fuel hedging strategies and positions; (ii) uncertainties surrounding domestic economic conditions, which can impact the demand for air travel and the Company's ability to adjust fares; (iii) competitor capacity and load factors; (iv) the Company's ability to timely and effectively prioritize its revenue and cost reduction initiatives and its related ability to timely implement and maintain the necessary information technology systems and infrastructure to support these initiatives; (v) the impact of governmental regulations and inquiries on the Company's operating costs, as well as its operations generally; and (vi) other factors, as described in the Company's filings with the Securities and Exchange the Company's Commission, including the detailed factors discussed under the heading "Risk Factors" in Annual Report on Form 10-K for the fiscal year ended December 31, 2007 .

SOURCE Southwest Airlines



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