Southwest Airlines Reports First Quarter Earnings

DALLAS, April 21, 2011 /PRNewswire via COMTEX/ —

Southwest Airlines (NYSE: LUV) today reported first quarter 2011 net income of $5 million, or $.01 per diluted share, compared to net income of $11 million, or $.01 per diluted share, for first quarter 2010. 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, first quarter 2011 results included approximately $9 million in charges (net of profitsharing and taxes) primarily related to consulting fees in association with the Company’s proposed acquisition of AirTran Holdings, Inc.* Excluding special items in both periods, first quarter 2011 net income was $20 million, or $.03 per diluted share, compared to $24 million, or $.03 per diluted share, for first quarter 2010. Operating income was $114 million for first quarter 2011, compared to $54 million for first quarter 2010. Excluding special items in both periods, operating income was $110 million for first quarter 2011, compared to $102 million for first 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, “While escalating jet fuel prices and inclement weather challenged our first quarter profitability, our People prevailed. We are very pleased to report first quarter 2011 operating income of $110 million and net income of $20 million (each excluding special items). Record monthly load factors, combined with solid passenger revenue yields, resulted in a 17.8 percent year-over-year increase in passenger revenues. Passenger unit revenues increased almost nine percent, compared to first quarter last year, representing the sixth consecutive quarter of record passenger unit revenues. Since first quarter 2007, passenger unit revenues have increased 34 percent. Other operating revenues also grew a healthy 26.7 percent, compared to a year ago, largely due to growth in our EarlyBird Check-In™ revenues, which nearly doubled. All in all, a solid start to our 40th year of service.”

Based on bookings and revenue trends thus far, the Company expects another solid unit revenue improvement in second quarter 2011*, even with the continuation of difficult year-over-year comparisons.

First quarter 2011 unit costs, excluding special items, increased 9.2 percent from first quarter 2010, mostly due to a 26.5 percent year-over-year increase in economic fuel costs per gallon. First quarter 2011 economic fuel costs of $2.96 per gallon included $13 million, or $0.03 per gallon, in unfavorable cash settlements for fuel derivative contracts. Based on the Company’s second quarter 2011 fuel hedge position and market prices (as of April 19th), second quarter 2011 economic fuel costs*, including fuel taxes, are estimated to be approximately $3.35 per gallon, which includes $0.04 per gallon in favorable cash settlements for fuel derivative contracts. Additional information regarding the Company’s fuel derivative contracts is included in the accompanying tables.

Excluding fuel and special items in both periods, first quarter 2011 unit costs increased 1.9 percent from first quarter 2010, as anticipated. Based on current cost trends, the Company expects the year-over-year increase in its second quarter 2011 nonfuel unit costs*, excluding special items, will exceed first quarter 2011’s year-over-year increase, largely due to advertising related to the launch of its All-New Rapid Rewards® program. However, full year 2011 nonfuel unit costs*, excluding special items, currently are estimated to increase approximately two percent from 2010.

In the first quarter, the Company was able to grow revenues sufficient to cover soaring jet fuel prices. Traffic and revenue trends remained strong, offsetting the impact of a 36.7 percent year-over-year increase in first quarter 2011 economic fuel and oil expense. For 2011*, the Company is planning to increase its available seat mile capacity in the five to six percent range, as compared to 2010, primarily as a function of increased aircraft utilization. However, given the current outlook of continually rising jet fuel prices, the Company is planning cautiously for 2012.

Kelly continued, "First quarter 2011 was very active for Southwest, and it was very gratifying. After years in development, we launched our All-New Rapid Rewards® program. Growth in our program has been strong and surpassed our system averages. We launched new service to Charleston and Greenville-Spartanburg airports very successfully. Those markets have been underserved and overpriced, and we were welcomed enthusiastically by the people of South Carolina. We jumped at the opportunity to acquire slots and terminal facilities in Newark, where we also were warmly welcomed when we launched service there last month. Much progress was made towards the 2012 introduction of the Boeing 737-800 model to our fleet. Finally, we made tremendous progress in our integration planning for the acquisition of AirTran Airways. I am very proud of what our hard-working People accomplished already in 2011.

“With the overwhelming approval of AirTran stockholders in March, we are ready to move forward with the closing of the transaction, now planned forMay 2nd. We anticipate that all regulatory approvals needed to move forward will be obtained by that date. We look forward to that milestone day, first and foremost, to finally welcome the AirTran Crew Members to the Southwest family. Together, we can then begin the exciting work to integrate AirTran into Southwest.”

On September 27, 2010, Southwest Airlines announced a definitive agreement to acquire all of the outstanding common stock of AirTran Holdings, Inc., the parent company of AirTran Airways (AirTran), for a combination of cash and Southwest Airlines’ common stock. The acquisition will significantly expand Southwest Airlines’ low-fare service to many more Customers in many more domestic markets. Moreover, the transaction has the potential to yield net annual synergies of more than $400 million by 2013. Excluding one-time acquisition and integration costs estimated to be approximately $500 million, the transaction is expected to be accretive to Southwest’s fully-diluted earnings per share within the first twelve months following the close of the transaction, and strongly accretive, thereafter, upon full realization of the estimated net synergies.

“Operationally, the Employees of Southwest Airlines exhibited their exceptional resilience to successfully manage over 3,000 flight cancellations from weather interruptions in the first quarter,” stated Kelly. “It is their resolve to provide outstanding Customer Service that continues to gain us honors and recognition, such as recently being named the fourth most admired Company in the world in FORTUNE magazine’s 2011 survey of corporate reputations.”

Other Southwest Airlines’ recognitions and honors include:

Voted best low-cost carrier in North America by Business Traveler Magazine subscribers
Recently ranked fifth and most improved in the 2010 Airline Quality Rating compiled by Purdue University and Wichita State University

Named the 2011 Customer Service Champion by J.D. Powers based on customer feedback regarding service excellence

Named Brand of the Year in Harris Poll EquiTrend’s airline category based on equity, customer connection, commitment, brand behavior, brand advocacy, and trust

Ranked third in the Top 10 Business Thought Leaders by TLG Communications

southwest.com received first place for Best Overall Customer Experience in the Keynote Competitive Research Industry Study examining U.S. Air Travel Websites

Named Airline of the Year by Express Delivery and Logistics Association, the tenth consecutive year for Southwest Airlines Cargo to receive the recognition; also awarded for Excellence in Web Site and Technology for the second year in a row

Southwest Cargo was also named Domestic Carrier of the Year for 2011 by the Airforwarders Association for the second consecutive year and was recently recognized for excellence in Air Cargo World’s annual Air Cargo Excellence (ACE) Survey

Recognized by PR News with several awards including the 2011 PR News Corporate Responsibility Awards for Diversity Communications, the Corporate Social Responsibility Award for Best Report, and honorable mention for the Social Corporate Responsibility Award for Corporate/Nonprofit Partnership
Recently ranked first among North American airlines and fourth in the world among 65 global airlines in GreenHorizon Aviation’s 2010 World Airline Environmental Rankings for excellent environmental performance and initiatives

Named the Greenest Airline by ClimateCounts.org based on the review and reduction of company environmental impact, policy stance, and public information available

Southwest will discuss its first quarter 2011 results on a conference call at 12:30 p.m. Eastern Time today. A live broadcast of the conference call will also be available at southwest.com/investor_relations.

Operating Results

Total operating revenues for first quarter 2011 increased 18.0 percent to $3.1 billion, compared to $2.6 billion for first quarter 2010. Total first quarter 2011 operating expenses were $3.0 billion, compared to $2.6 billion in first quarter 2010. Operatingincome for first quarter 2011 was$114 million, compared to $54 million in first quarter 2010. Excluding special items in both periods, operating income was $110 million for first quarter 2011 compared to $102 million for first quarter 2010. The Company’s return on invested capital (before taxes and excluding special items) was approximately ten percent for the twelve months ended March 31, 2011, compared to approximately five percent for the twelve months ended March 31, 2010. Additional information regarding pretax return on invested capital is included in the accompanying reconciliation tables.

“Other expenses” increased to $96 million in first quarter 2011 from $37 millionin first quarter 2010. The $59 million increase in total other expenses primarily resulted from $29 million in “other losses” recognized in first quarter 2011 versus $27 million in “other gains” recognized in first quarter 2010. In both periods, these “other gains/losses” primarily resulted from unrealized gains/losses associated with the Company’s fuel hedging program. “Other losses, net” also included premium costs associated with the Company’s fuel derivative contracts of $31 million in both first quarter 2011 and first quarter 2010.

The Company’s effective tax rate was approximately 72 percent in first quarter 2011 compared to 35 percent in first quarter 2010. The higher rate in first quarter 2011 primarily was due to a $5 million increase in income tax expense from an IRS settlement during first quarter 2011 related to tax years 2007 through 2009, and a $2 million increase from a State of Illinois tax law change that occurred during the first quarter 2011. The Company projects a full year 2011* effective tax rate of approximately 40 percent based on currently forecasted financial results.

Net cash provided by operations for first quarter 2011 was $965 million, and capital expenditures were $57 million, resulting in over $900 million in free cash flow. In addition to a fully available, unsecured, revolving credit facility of $600 million, the Company currently has over $4 billion in cash and short-term investments.

• The closing of the proposed acquisition of AirTran is anticipated to occur on May 2, 2011. Forward looking commentary in this release and the accompanying tables including, but not limited to, revenues, costs, fuel consumption, fleet, and available seat miles for 2011 and beyond, excludes any potential impact of the acquisition.