Southwest Airlines Reports Third Quarter Results

Record operating revenues of $4.3 billion

Third quarter operating income of $225 million

Mark-down in 2012 through 2015 fuel hedge portfolio drives GAAP net loss

Third quarter profit, excluding special items

Oct 20, 2011

DALLAS, Oct. 20, 2011 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the “Company”) today reported its third quarter 2011 results.  The Company reported a third quarter 2011 net loss of $140 million, or $.18 per share, which included $262 million (net) of unfavorable special items.  This compared to net income of $205 million, or $.27 per diluted share, for third quarter 2010, which included favorable special items totaling $10 million (net).  The Company’s operating income was $225 million for third quarter 2011, compared to $355 million for third quarter 2010.  Excluding special items, third quarter 2011 net income was $122 million, or $.15 per diluted share, compared to net income of $195 million, or $.26 per diluted share, in third quarter 2010.  This exceeded Thomson’s First Call mean estimate of $.14 per diluted share for third quarter 2011.  Additional information regarding special items is included in this release and in the accompanying reconciliation tables.  

As required by generally accepted accounting principles (GAAP) and accounting pronouncements pertaining to derivative instruments and hedging, the Company’s third quarter 2011 results include $227 million (net) in unrealized, noncash mark-downs relating to a portion of the Company’s fuel hedges for future periods.  Actual net cash settlements paid to counterparties for the Company's third quarter 2011 hedging activities were $13 million.  The Company believes it is more meaningful to provide its financial results on an “economic” basis reflecting its actual net cash outlays for fuel consumed during the current period, inclusive of settled fuel derivative contracts, as current market prices are not always indicative of actual future settlements.  As a result, the Company also provides its financial results, excluding these unrealized, noncash special items, to provide a better measure of the impact of the Company’s fuel hedges on its current period operating performance and liquidity.  The actual cash impact of hedges related to fuel to be consumed in future periods will be reported in the applicable future economic results.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, “Excluding special items, third quarter 2011 operating income was $285 million, and third quarter 2011 net income was $122 million.  Total third quarter operating revenues were very strong and reached an all-time quarterly record of $4.3 billion.  Passenger revenues were driven by strong load factors, revenue yields, and unit revenues, which were all third quarter records.  Third quarter passenger unit revenues increased approximately six percent, compared to third quarter last year (on a combined basis as defined below).  Despite the cautious economic outlook, our booking trends remain strong.  Importantly, business travel has remained stable since spring.  Based on October traffic and booking trends, thus far, we expect solid passenger unit revenue year-over-year growth in the fourth quarter.  Also, third quarter 2011 Other revenues grew approximately 18 percent, compared to third quarter last year (on a combined basis as defined below), largely due to the All-New Rapid Rewards® program and continued growth in our EarlyBird Check-In™ revenues.  While it is disappointing to report a decline in earnings excluding special items, I was pleased with our strong third quarter revenue performance.

“In accordance with fuel hedge accounting rules, our third quarter GAAP net results included $227 million of unrealized, noncash mark-downs relating to future periods’ fuel hedges.  These special items resulted in a GAAP net loss for the quarter; however, since September 30th, market prices have rebounded, and our future fuel hedge portfolio has gained back over $300 million in fair value.  Our economic fuel costs per gallon, which excludes this GAAP mark-down, increased approximately 34 percent compared to third quarter last year.  This surge in fuel costs caused our quarterly profits to decline despite record revenue results.”

AirTran became a wholly-owned subsidiary of the Company on May 2, 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 September 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 presented 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 presented on a “combined basis” and the accompanying reconciliations have been included in this release.

Financial Results and Outlook

The Company’s total operating revenues for third quarter 2011 increased 35.1 percent to $4.3 billion, compared to $3.2 billion for third quarter 2010.  Operating unit revenues increased 3.6 percent, compared to third quarter 2010.  Operating unit revenues increased 6.7 percent from third quarter 2010's combined unit revenues.  

Total third quarter 2011 operating expenses were $4.1 billion, compared to $2.8 billion in third quarter 2010.  Excluding special items, third quarter 2011 unit costs increased 10.1 percent from third quarter 2010, largely due to a 34 percent year-over-year increase in economic fuel costs per gallon.   Third quarter 2011 economic fuel costs of $3.18 per gallon included $.02 per gallon in unfavorable cash settlements for fuel derivative contracts, and a $.04 per gallon benefit from refunds of fuel sales taxes.  Based on the Company’s fourth quarter 2011 fuel hedge position and market prices (as of October 17th), fourth 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, third quarter 2011 unit costs decreased 1.2 percent from third quarter 2010.  Excluding fuel and special items in both periods, third quarter 2011 unit costs increased 1.5 percent from third quarter 2010's combined 7.27 cents.  Based on current cost trends, the Company expects another modest year-over-year increase in its fourth quarter 2011 unit costs, compared to fourth quarter 2010’s combined unit costs of 7.72 cents, excluding fuel and special items in both periods.

Operating income for third quarter 2011 was $225 million, compared to $355 million in third quarter 2010.  Excluding special items in both periods, operating income was $285 million for third quarter 2011, compared to $389 million for third quarter 2010, and compared to $447 million for third quarter 2010 on a combined basis.  

Other expenses were $451 million for third quarter 2011, compared to $23 million for third quarter 2010.  The $428 million increase in total other expenses primarily resulted from $405 million in Other losses recognized in third quarter 2011, compared to $13 million in Other gains recognized in third quarter 2010.  In both periods, these net Other gains/losses primarily resulted from unrealized gains/losses associated with a portion of the Company’s fuel hedging portfolio.  Excluding these special items, Other losses were $36 million in third quarter 2011 and $37 million in third quarter 2010, each attributable to the premium costs associated with the Company’s fuel derivative contracts.  Fourth quarter 2011 premium costs are currently estimated to be approximately $14 million.  Third quarter 2011 net interest expense increased approximately $10 million from third quarter 2010 primarily due to additional debt held by the Company as a result of the AirTran acquisition.

Total operating revenues for the nine months ended September 30, 2011 increased 28.5 percent to $11.6 billion, while total operating expenses increased 33.9 percent to $11 billion, resulting in operating income of $546 million, versus $772 million for the comparable period in 2010.  Excluding special items in both periods, operating income was $672 million for the nine months ended September 30, 2011, compared to $905 million for the same period last year.  On a combined basis, total operating revenues for the nine months ended September 30, 2011 increased 13.9 percent to $12.5 billion, while total operating expenses increased 19.2 percent to $12 billion, resulting in combined year-to-date operating income for 2011 of $515 million, compared to $916 million for the same period last year.  Excluding special items in both periods, combined operating income for nine months ended September 30, 2011 was $667 million, compared to $1.1 billion for the same period last year.

Net income for the nine months ended September 30, 2011 was $26 million, or $.03 per diluted share, compared to $328 million, or $.44 per diluted share, for the same period last year.  Excluding special items, year-to-date net income for 2011 was $263 million, or $.34 per diluted share, compared to $436 million, or $.58 per diluted share, for the same period last year.  

The Company’s return on invested capital (before taxes and excluding special items) was approximately eight percent for the twelve months ended September 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

“I am pleased with the overall progress we are making on our AirTran integration,” stated Kelly.  “We continue to work with the Federal Aviation Administration to obtain our single operating certificate, which we expect to receive in first quarter 2012.  We expect to have the capability to connect the networks of both airlines in first half 2012; however, we have already begun to optimize the coordinated flight schedules.

“The negotiating committees and respective boards of the Southwest Airlines Pilots’ Association and the Air Line Pilots Association approved a framework for Pilot seniority list integration, and the agreement has gone to the memberships for vote.  I commend the Flight Attendants’ unions from both airlines for recently agreeing on a process agreement, laying the framework to reach a seniority list integration agreement.  

“Although we have much work ahead, much has already been accomplished.  Thus far, we have produced $60 million (before taxes and profitsharing) in annualized cost synergies, primarily attributable to renegotiation of certain AirTran contracts and reduction of corporate overhead.  We remain focused on achieving our target of net annual pre-tax synergies in excess of $400 million by 2013.”  

The Company has incurred $97 million in costs (before taxes) associated with the acquisition and integration of AirTran during 2011, including $22 million in third quarter 2011.  The Company expects total acquisition and integration expenses will be approximately $500 million.  

Including the anticipated benefit of net synergies, but excluding the impact of acquisition and integration expenses, the Company expects the acquisition to be accretive to its fully-diluted earnings per share for full year 2011.

Liquidity

Net cash provided by operations for the nine months ended September 30, 2011 was $985 million, which reflects the payment of $429 million in fuel hedge collateral deposits to counterparties related to the unfavorable change in the market value of the Company’s future periods’ fuel portfolio.  For the nine months ended September 30, 2011, capital expenditures were $548 million. As a result, the Company has generated approximately $400 million free cash flow* thus far in 2011. Based on current trends and projected 2011 capital expenditures of $800 to $900 million, the Company expects to generate free cash flow for the full year 2011.  

On August 5, 2011, the Company’s Board of Directors authorized a share repurchase program to acquire up to $500 million of the Company’s common stock. During third quarter 2011, the Company purchased approximately 21 million shares of common stock for approximately $175 million.  The Company also repaid $191 million in debt during the nine months ended September 30, 2011, and is scheduled to repay approximately $446 million in debt during fourth quarter 2011.  The Company ended third quarter 2011 with $3.7 billion in cash and short-term investments, net of $458 million in net cash collateral paid to its fuel hedge counterparties.  In addition, the Company also had a fully available unsecured revolving credit line of $800 million.    

Awards and recognitions

  • Named the Stevie Award Winner for the Company of the Year-Transportation by The International Business Awards for outstanding performance and Customer Service
  • Received the 2011 Quest for Quality Award for Excellence in Air Cargo from Logistics Management Magazine; ranked first in ontime performance, value, and Customer Service
  • Recognized as one of the top ten safest airlines in the Holistic Safety Rating 2011 by the Air Transport Rating Agency


Southwest will discuss its third 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.

*See Note Regarding use of Non-GAAP financial measures.

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 financial outlook; (ii) the Company’s plans and expectations related to managing risk associated with changing jet fuel prices; (iii) the Company’s plans and expectations relating to its acquisition of AirTran, including without limitation the Company’s integration and network plans and expectations, as well as expected costs, synergies, and other financial results associated with the acquisition; and (iv) 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 the impact of fuel prices, economic conditions, and actions of competitors on the Company’s business decisions, plans, and strategies; (iii) the Company’s ability to successfully integrate AirTran and realize the expected synergies and other benefits from the transaction; (iv) 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; and (v) 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




Nine months ended






September 30,




September 30,






2011


2010


Percent

Change


2011


2010


Percent

Change



















OPERATING REVENUES:

















Passenger

$

4,014


$

3,032


32.4


$

10,829


$

8,544


26.7


Freight


35



31


12.9



103



94


9.6


Other


262



129


103.1



618



352


75.6



Total operating revenues


4,311



3,192


35.1



11,550



8,990


28.5



















OPERATING EXPENSES:

















Salaries, wages, and benefits


1,146



938


22.2



3,226



2,748


17.4


Fuel and oil


1,586



926


71.3



4,150



2,681


54.8


Maintenance materials and repairs


272



196


38.8



717



556


29.0


Aircraft rentals


90



43


109.3



214



135


58.5


Landing fees and other rentals


257



210


22.4



705



606


16.3


Depreciation and amortization


191



161


18.6



523



469


11.5


Acquisition and integration


22



1


n.a.



97



1


n.a.


Other operating expenses


522



362


44.2



1,372



1,022


34.2



Total operating expenses


4,086



2,837


44.0



11,004



8,218


33.9



















OPERATING INCOME


225



355


(36.6)



546



772


(29.3)



















OTHER EXPENSES (INCOME):

















Interest expense


50



43


16.3



143



126


13.5


Capitalized interest


(3)



(5)


(40.0)



(8)



(15)


(46.7)


Interest income


(1)



(2)


(50.0)



(8)



(9)


(11.1)


Other (gains) losses, net


405



(13)


n.a.



351



138


n.a



Total other expenses


451



23


n.a.



478



240


99.2



















INCOME (LOSS) BEFORE INCOME TAXES


(226)



332


(168.1)



68



532


(87.2)

PROVISION (BENEFIT) FOR INCOME TAXES


(86)



127


(167.7)



42



204


(79.4)



















NET INCOME (LOSS)

$

(140)


$

205


(168.3)


$

26


$

328


(92.1)





































NET INCOME (LOSS) PER SHARE

















Basic

$

(0.18)


$

0.27




$

0.03


$

0.44




Diluted

$

(0.18)


$

0.27




$

0.03


$

0.44





















WEIGHTED AVERAGE SHARES OUTSTANDING:

















Basic


792



746





773



745




Diluted


792



747





774



746







































(1) Includes May through September 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




Nine months ended




September 30,




September 30,





2011


2010


Percent

Change



2011


2010


Percent

Change















Fuel and oil expense, unhedged

$

1,549

$

837




$

4,125

$

2,411



Add: Fuel hedge losses included in Fuel and oil expense


37


89





25


270



Fuel and oil expense, as reported

$

1,586

$

926




$

4,150

$

2,681



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


(24)


(33)





(17)


(132)



Fuel and oil expense, economic

$

1,562

$

893


74.9


$

4,133

$

2,549


62.1















Total operating expenses, as reported

$

4,086

$

2,837




$

11,004

$

8,218



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


(24)


(33)





(17)


(132)



Total operating expenses, economic

$

4,062

$

2,804




$

10,987

$

8,086



(Deduct): Charge for Asset impairment, net (3)


(14)


-





(14)


-



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


(22)


(1)





(95)


(1)



Total operating expenses, non-GAAP

$

4,026

$

2,803


43.6


$

10,878

$

8,085


34.5















Operating income, as reported

$

225

$

355




$

546

$

772



Add: Net impact from fuel contracts (2)


24


33





17


132



Operating income, economic

$

249

$

388




$

563

$

904



Add: Charge for Asset impairment, net (3)


14


-





14


-



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


22


1





95


1



Operating income, non-GAAP

$

285

$

389


(26.7)


$

672

$

905


(25.7)















Other (gains) losses, net, as reported

$

405


(13)




$

351


138



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


(369)


50





(257)


(39)



Other losses, net, non-GAAP

$

36

$

37


(2.7)


$

94

$

99


(5.1)















Income (loss) before income taxes, as reported

$

(226)

$

332




$

68

$

532



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


393


(17)





274


171




$

167

$

315




$

342

$

703



Add: Charge for Asset impairment, net (3)


14


-





14


-



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


22


1





95


1



Income before income taxes, non-GAAP

$

203

$

316


(35.8)


$

451

$

704


(35.9)















Net income (loss) as reported

$

(140)

$

205




$

26

$

328



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


393


(17)





274


171



Income tax impact of fuel contracts


(154)


7





(105)


(64)




$

99

$

195




$

195

$

435



Add: Charge for Asset impairment, net (5)


9


-





9


-



Add: Charge for Acquisition and integration costs, net (5)


14


-





59


1



Net income, non-GAAP

$

122

$

195


(37.4)


$

263

$

436


(39.7)















Net income (loss) per share, diluted, as reported

$

(0.18)


0.27




$

0.03


0.44



Add/(Deduct): Net impact from fuel contracts


0.30


(0.01)





0.22


0.14




$

0.12


0.26




$

0.25


0.58



Add: Impact of special items, net (5)


0.03


-





0.09


-



Net income per share, diluted, non-GAAP

$

0.15

$

0.26


(42.3)


$

0.34

$

0.58


(41.4)















(1) Includes May through September 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) Net of profitsharing impact.

(4) 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.

(5) Amounts net of tax and profitsharing impact (see footnote (4) 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


Nine months ended



September 30,


September 30,



2011


2010


2011


2010










Fuel & Oil Expense









Reclassification between Fuel & Oil and Other gains









(losses), net, associated with current period settled contracts

$

3

$

1

$

(6)

$

13

Contracts settling in the current period, but for which gains









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


(27)


(34)


(11)


(145)

Impact from fuel contracts to Fuel & oil expense


(24)


(33)


(17)


(132)



















Operating Income









Reclassification between Fuel & Oil and Other gains









(losses), net, associated with current period settled contracts

$

(3)

$

(1)

$

6

$

(13)

Contracts settling in the current period, but for which gains









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


27


34


11


145

Impact from fuel contracts to Operating Income


24


33


17


132



















Other (gains) losses









Mark-to-market impact from fuel contracts









settling in current and future periods

$

(288)

$

27

$

(148)

$

(4)

Ineffectiveness from fuel hedges settling in future periods


(78)


24


(115)


(22)

Reclassification between Fuel and oil and Other gains









(losses), net, associated with current period settled contracts


(3)


(1)


6


(13)

Impact from fuel contracts to Other (gains) losses


(369)


50


(257)


(39)



















Net Income









Mark-to-market impact from fuel contracts









settling in current and future periods

$

288

$

(27)

$

148

$

4

Ineffectiveness from fuel hedges settling in future periods


78


(24)


115


22

Other net impact of fuel contracts settling in the









current or a prior period (excluding reclassifications)


27


34


11


145

Impact from fuel contracts to Net Income **


393


(17)


274


171










(1) Includes May through September 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.

SELECTED CONSOLIDATING FINANCIAL INFORMATION

DETAIL OF AIRLINE THIRD QUARTER 2011 RESULTS AND PURCHASE ACCOUNTING IMPACT

(in millions)

(unaudited)



















Three months ended September 30, 2011












Purchase








Southwest (1)



AirTran (2)




Accounting (3)



Consolidated

OPERATING REVENUES:














Passenger

$

3,359


$

656


$

(1)


$

4,014


Freight


35



-




-



35


Other


160



102



-



262



Total operating revenues


3,554



758




(1)



4,311
















OPERATING EXPENSES:














Salaries, wages, and benefits


1,005



141




-



1,146


Fuel and oil


1,272



314



-



1,586


Maintenance materials and repairs


206



66




-



272


Aircraft rentals


41



59




(10)



90


Landing fees and other rentals


214



43




-



257


Depreciation and amortization


166



16




9



191


Acquisition and integration


19



3




-



22


Other operating expenses


424



98



-



522



Total operating expenses


3,347



740




(1)



4,086
















OPERATING INCOME


207



18




-



225














(1) Results presented for Southwest exclude AirTran results and the impact of purchase accounting.

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

(3) Represents the impact of purchase accounting.





SOUTHWEST AIRLINES CO.

RECONCILIATION OF SELECTED CONSOLIDATING FINANCIAL INFORMATION TO NON-GAAP ITEMS (1)

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

(in millions)

(unaudited)















Three months ended September 30, 2011




Southwest


AirTran








Fuel and oil expense, standalone unhedged

$

1,232

$

317


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


40


(3)


Fuel and oil expense, standalone (2)

$

1,272

$

314


Deduct: Net impact from fuel contracts (3)


(24)


-


Fuel and oil expense, standalone economic

$

1,248

$

314








Total operating expenses, standalone (2)

$

3,346

$

740


Deduct: Net impact from fuel contracts (3)


(24)


-


Total operating expenses, standalone economic

$

3,322

$

740


Deduct: Charge for Asset impairment, net (4)


(14)


-


Deduct: Charge for Acquisition and integration costs (5)


(19)


(3)


Total operating expenses, standalone non-GAAP

$

3,289

$

737








Operating income, standalone (2)

$

207

$

18


Add: Net impact from fuel contracts (3)


24


-


Operating income, standalone economic

$

231

$

18


Add: Charge for Asset impairment, net (4)


14


-


Add: Charge for Acquisition and integration costs (5)


19


3


Operating income, standalone non-GAAP

$

264

$

21








(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 Selected Consolidating Financial Information - Detail of Airline Third Quarter 2011 Results and Purchase Accounting Impact for the detail of standalone airline results and the purchase accounting impact.

(3) See Reconciliation of Impact from Fuel Contracts.






(4) Net of profitsharing impact.

(5) 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.





SOUTHWEST AIRLINES CO.

COMPARATIVE CONSOLIDATED OPERATING STATISTICS (1)

(unaudited)


























Three months ended


Nine months ended



September 30,


September 30,



2011


2010


Change


2011


2010


Change

Revenue passengers carried



28,208,036




22,879,097



23.3

%



76,437,631




65,739,354



16.3

%

Enplaned passengers



35,010,060




27,814,896



25.9

%



94,040,092




79,063,561



18.9

%

Revenue passenger miles (RPMs) (000s)



27,322,289




20,673,082



32.2

%



72,402,024




58,041,024



24.7

%

Available seat miles (ASMs) (000s)



33,318,089




25,557,692



30.4

%



89,281,174




73,648,997



21.2

%

Load factor



82.0

%


80.9

%


1.1

pts

81.1

%


78.8

%


2.3

pts

Average length of passenger haul (miles)



969




904



7.2

%



947




883



7.2

%

Average aircraft stage length (miles)



690




653



5.7

%



679




646



5.1

%

Trips flown



359,630




287,200



25.2

%



974,221




836,314



16.5

%

Average passenger fare


$

142.31



$

132.53



7.4

%


$

141.67



$

129.97



9.0

%

Passenger revenue yield per RPM (cents)



14.69




14.67



0.1

%



14.96




14.72



1.6

%

RASM (cents)



12.94




12.49



3.6

%



12.94




12.21



6.0

%

PRASM (cents)



12.05




11.86



1.6

%



12.13




11.60



4.6

%

CASM (cents)



12.26




11.10



10.5

%



12.32




11.16



10.4

%

CASM, excluding fuel (cents)



7.50




7.47



0.4

%



7.68




7.52



2.1

%

CASM, excluding special items (cents)



12.08




10.97



10.1

%



12.18




10.98



10.9

%

CASM, excluding fuel and special items (cents)



7.38




7.47



(1.2)

%



7.56




7.52



0.5

%

Fuel costs per gallon, including fuel tax (unhedged)


$

3.16



$

2.23



41.7

%


$

3.15



$

2.23



41.3

%

Fuel costs per gallon, including fuel tax


$

3.23



$

2.47



30.8

%


$

3.17



$

2.48



27.8

%

Fuel costs per gallon, including fuel tax (economic)


$

3.18



$

2.38



33.6

%


$

3.16



$

2.36



33.9

%

Fuel consumed, in gallons (millions)



490




375



30.7

%



1,307




1,075



21.6

%

Active fulltime equivalent Employees



45,112




34,836



29.5

%



45,112




34,836



29.5

%

Aircraft in service at period-end



699




547



27.8

%



699




547



27.8

%
























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 through September 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


September 30, 2011


September 30, 2010

Operating Income, as reported

$

761


$

939

Add: Net impact from fuel contracts


57



163

Add: Acquisition and integration costs, net (2)


117



1

Operating Income, non-GAAP

$

935


$

1,103

Net adjustment for aircraft leases (3)


109



86

Adjustment for fuel hedge accounting


(129)



(143)

Adjusted Operating Income, non-GAAP

$

915


$

1,046













Average Invested Capital (4)

$

11,910


$

10,279

Equity adjustment for fuel hedge accounting


202



534

Adjusted Average Invested Capital

$

12,112


$

10,813

.






ROIC, pretax


8%



10%







(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

(in millions)      

(unaudited)













September 30,


December 31,





2011


2010


ASSETS







Current assets:








Cash and cash equivalents

$

1,016


$

1,261



Short-term investments


2,640



2,277



Accounts and other receivables


369



195



Inventories of parts and supplies, at cost


459



243



Deferred income taxes


-



214



Prepaid expenses and other current assets


110



89




Total current assets


4,594



4,279











Property and equipment, at cost:








Flight equipment


15,451



13,991



Ground property and equipment


2,303



2,122



Deposits on flight equipment purchase contracts


229



230





17,983



16,343



Less allowance for depreciation and amortization


6,149



5,765






11,834



10,578


Goodwill


970



-


Other assets


487



606





$

17,885


$

15,463











LIABILITIES AND STOCKHOLDERS' EQUITY







Current liabilities:








Accounts payable

$

1,083


$

739



Accrued liabilities


1,193



863



Air traffic liability


2,058



1,198



Current maturities of long-term debt


986



505




Total current liabilities


5,320



3,305











Long-term debt less current maturities


3,220



2,875


Deferred income taxes


1,856



2,493


Deferred gains from sale and leaseback of aircraft


78



88


Other non-current liabilities


926



465


Stockholders' equity:








Common stock


808



808



Capital in excess of par value


1,222



1,183



Retained earnings


5,251



5,399



Accumulated other comprehensive loss


(513)



(262)



Treasury stock, at cost


(283)



(891)




Total stockholders' equity


6,485



6,237





$

17,885


$

15,463
























SOUTHWEST AIRLINES CO.







CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)







(in millions)  







(unaudited)


























Three months ended


Nine months ended





September 30,


September 30,





2011


2010


2011


2010
















CASH FLOWS FROM OPERATING ACTIVITIES:













Net income (loss)

$

(140)


$

205


$

26


$

328


Adjustments to reconcile net income (loss) to














cash provided by (used in) operating activities:














Depreciation and amortization


191



161



523



469



Unrealized (gain) loss on fuel derivative instruments


393



(17)



274



171



Deferred income taxes


(90)



20



33



96



Amortization of deferred gains on sale and















leaseback of aircraft


(3)



(3)



(10)



(10)



Changes in certain assets and liabilities, net of acquisition:















Accounts and other receivables


11



42



(96)



(66)




Other current assets


(42)



7



(180)



(6)




Accounts payable and accrued liabilities


(39)



(5)



266



189




Air traffic liability


(92)



(63)



485



379



Cash collateral received from (provided to)















derivative counterparties


(409)



15



(429)



150



Other, net


2



23



93



(408)


Net cash provided by (used in) operating activities


(218)



385



985



1,292
















CASH FLOWS FROM INVESTING ACTIVITIES:














Payment to acquire AirTran, net of AirTran cash on hand


-



-



(35)



-



Payments for purchase of property and equipment, net


(276)



(100)



(548)



(398)



Purchases of short-term investments


(1,525)



(1,151)



(4,788)



(4,331)



Proceeds from sales of short-term investments


1,664



939



4,414



3,484


Net cash used in investing activities


(137)



(312)



(957)



(1,245)
















CASH FLOWS FROM FINANCING ACTIVITIES:














Proceeds from Employee stock plans


4



10



35



45



Proceeds from termination of interest rate















derivative instrument


-



-



76



-



Payments of long-term debt and capital lease obligations


(48)



(39)



(110)



(123)



Payments of convertible debt


-



-



(81)



-



Payment of credit line borrowing


-



-



-



(44)



Payments of cash dividends


(3)



(3)



(14)



(13)



Repurchase of common stock


(175)



-



(175)



-



Other, net


(2)



1



(4)



5


Net cash used in financing activities


(224)



(31)



(273)



(130)
















NET CHANGE IN CASH AND CASH EQUIVALENTS


(579)



42



(245)



(83)
















CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


1,595



989



1,261



1,114
















CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,016


$

1,031


$

1,016


$

1,031































SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:


Fair value of equity consideration given to acquire AirTran

$

-


$

-


$

523


$

-


Fair value of common stock issued for conversion of debt

$

-


$

-


$

78


$

-
















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




















SOUTHWEST AIRLINES CO.



FUEL DERIVATIVE CONTRACTS



AS OF OCTOBER 17, 2011





























Percent of estimated fuel consumption covered by fuel derivative contracts


Average WTI Crude Oil







price per barrel

4Q 2011


First Half 2012


Second Half 2012









Up to $90



approx. 10%


approx. 10%


$90 to $100



approx. 15%


approx. 25%


$100 to $110

approx. 10%


approx. 20%


approx. 55%


$110 to $120

approx. 45%


approx. 25%


approx. 70%


Above $120 (1)

approx. 40%


approx. 20%


approx. 50%
























Estimated difference in economic jet fuel price per gallon,



above/(below) unhedged market prices, including taxes


Average WTI Crude Oil







price per barrel

4Q 2011


First Half 2012


Second Half 2012









$70

$0.11


$0.11


$0.20


$86 (2)

$0.11


$0.06


$0.07


$100

$0.11


$0.03


$0.00


$115

$0.08


($0.03)


($0.20)

















Percent of estimated fuel consumption





covered by fuel derivative contracts at




Period

varying WTI crude-equivalent price levels











2013

over 50%




2014

over 40%




2015

over 10%
























(1) For first half 2012 and second half 2012, if average WTI market prices exceed $150 per barrel and $175 per barrel, respectively, the current estimated fuel consumption covered by fuel derivative contracts in each period would decrease to less than 5%.








(2) Based on the fourth quarter 2011 average WTI forward curve and market prices as of October 17, 2011, and current estimated fuel consumption covered by fuel derivative contracts, fourth quarter 2011 economic fuel price per gallon, including taxes, is estimated to be approximately $3.30 per gallon, or $0.11 above market prices.












SOUTHWEST AIRLINES CO.





737 FUTURE DELIVERY SCHEDULE (a)





AS OF OCTOBER 19, 2011




























The Boeing Company






-700

-800




Purchase


Additional




Firm Orders

Firm Orders


Options


Rights


-800s


Total












2011

2









2(b)

2012


28






5


33

2013

23



8






31

2014

29



6






35

2015

26



1






27

2016

31



7






38

2017

5



17






22

Through 2021






98




98

Total

116(c)

28


39


98


5


286


































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

(b) The Company has already taken delivery of  18 737-700 aircraft through October 19, 2011.

(c) The Company is evaluating substituting 737-800s in lieu of 737-700 firm orders currently scheduled for 2013 through 2017.
















SUPPLEMENTAL COMBINED STATEMENT I

SOUTHWEST AIRLINES CO.

SELECTED COMBINED FINANCIAL INFORMATION (1)

(in millions)

(unaudited)






















Three months ended




Nine months ended






September 30,




September 30,












Percent








Percent




2011


2010


Change


2011


2010


Change



















OPERATING REVENUES:

















Passenger

$

4,014


$

3,606


11.3


$

11,641


$

10,237


13.7


Freight


35



31


12.9



103



94


9.6


Other


262



223


17.5



744



633


17.5



Total operating revenues


4,311



3,860


11.7



12,488



10,964


13.9



















OPERATING EXPENSES:

















Salaries, wages, and benefits


1,146



1,069


7.2



3,419



3,141


8.9


Fuel and oil


1,586



1,132


40.1



4,511



3,292


37.0


Maintenance materials and repairs


272



254


7.1



805



730


10.3


Aircraft rentals


90



103


(12.6)



295



316


(6.7)


Landing fees and other rentals


257



250


2.8



759



729


4.1


Depreciation and amortization


191



176


8.5



543



513


5.8


Acquisition and integration


22



1


n.a.



123



1


n.a.


Other operating expenses


522



462


13.0



1,518



1,326


14.5



Total operating expenses


4,086



3,447


18.5



11,973



10,048


19.2



















OPERATING INCOME


225



413


(45.5)



515



916


(43.8)

















(1) Selected financial information for the three months ended September 30, 2011, is presented on a consolidated basis.  All other 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.