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.