Southwest Airlines Reports Record First Quarter Profit

Southwest Airlines Reports Record First Quarter Profit

Southwest Airlines Reports Record First Quarter Profit

The FINANCIAL -- Southwest Airlines Co. on April 23 reported its first quarter 2015 results:

Record first quarter net income, excluding special items1, of $451 million, or $.66 per diluted share, compared with first quarter 2014 net income, excluding special items, of $126 million, or $.18 per diluted share. This represented a 266.7 percent increase from first quarter 2014 and exceeded the First Call consensus estimate of $.65 per diluted share.

Record first quarter net income of $453 million, or $.66 per diluted share, which included $2 million (net) of favorable special items, compared with first quarter 2014 net income of $152 million, or $.22 per diluted share, which included $26 million (net) of favorable special items.

Record first quarter operating income of $780 million.  Excluding special items, record first quarter operating income of $770 million, resulting in an operating margin2 of 17.4 percent.

Strong free cash flow1 of $859 million used to return $381 million to Shareholders through dividends and share repurchases, and to repay $51 million in debt and capital lease obligations.

Return on invested capital, before taxes and excluding special items (ROIC)1, for the 12 months ended March 31, 2015, of 25.6 percent, compared with 14.2 percent for the 12 months ended March 31, 2014.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "We are thrilled to report an exceptionally strong first quarter 2015 earnings performance.  Our net income, excluding special items, of $451 million, or $.66 per diluted share, far surpasses any first quarter profit in our history and represents our eighth consecutive quarter of record profits.  Our first quarter 2015 operating income, excluding special items, increased over 200 percent year-over-year to $770 million, resulting in a first quarter record 17.4 percent operating margin.  Our ROIC for the 12 months ended March 31, 2015, was an outstanding 25.6 percent.  These superb results earned our 47,000 hard-working and dedicated Employees a first quarter record $126 million profitsharing accrual, up 334.5 percent from first quarter 2014.

"Total operating revenues were a first quarter record $4.4 billion, driven by a 6.2 percent year-over-year increase in passenger revenues and double-digit year-over-year percentage growth in freight revenues.  Customer demand was strong throughout first quarter 2015, resulting in a record first quarter load factor of 80.1 percent.  As expected, first quarter 2015 passenger revenues grew in line with our available seat mile (ASM) growth of 6.0 percent, year-over-year.  Considering the 4.1 percent increase in stage length and the 2.7 percent increase in seats per trip3 (gauge) from our fleet modernization, year-over-year, we are very pleased with our first quarter 2015 unit revenue performance.  Strong revenue and booking trends have continued thus far in April.  Second quarter 2015 year-over-year comparisons are more challenging, largely due to last year's exceptional and above-trend performance.  With the continuation of year-over-year increases in stage length and gauge, we currently expect our April 2015 passenger unit revenues to decline, year-over-year, approximately two percent.

"We are delighted also with our unit cost trends, which continue to benefit from increased stage length, increased gauge, lower maintenance costs, and substantially lower fuel prices.  Our first quarter 2015 unit costs, excluding special items, declined 12.4 percent year-over-year.  First quarter 2015 economic fuel costs were $2.00 per gallon, compared with $3.08 per gallon in first quarter 2014, resulting in over $450 million in economic fuel cost savings.  Based on our existing fuel derivative contracts and market prices as of April 16, 2015, we estimate second quarter 2015 economic fuel costs per gallon will be comparable to first quarter 2015's $2.00 per gallon.

"Setting fuel aside, the solid first quarter 2015 cost performance reflects our intense focus to control costs and maintain our competitive low-cost position.  Excluding fuel and oil expense and special items, our first quarter 2015 unit costs were comparable to first quarter last year.  Unit costs were down 3.6 percent, year-over-year, when also excluding first quarter 2015 profitsharing expense.  Based on current cost trends, and excluding fuel and oil expense, special items, and profitsharing, we expect second quarter 2015 unit costs to decline in the one-to-two percent range, and full year 2015 unit costs to decline approximately two percent, both compared with the same year-ago periods.

"Our network optimization is producing strong financial results, and we are pleased with the performance of our markets under development.  We continue to project roughly 700 aircraft by year-end, and an approximate seven percent year-over-year increase in ASMs versus 2014.  The full year effect of 2015's expansion is also estimated to increase 2016 ASMs approximately five percent, year-over-year, and we currently expect any further 2016 ASM year-over-year growth to be modest, with a focus on producing strong returns on our investments.  Our incremental fleet growth in 2016 is currently expected to approximate two percent, compared with 2015.

"The Customer response to our new Dallas Love Field service, which represents the majority of 2015 year-over-year ASM growth, is very strong, and first quarter 2015 Dallas traffic has increased 145.5 percent from year-ago levels.  In first quarter 2015, we acquired the rights to two additional gates, bringing our total gate occupancy to 18 at Dallas Love Field.  By August 2015, we are scheduled to operate 180 weekday departures to 50 nonstop destinations, representing a more than 50 percent increase in flight activity since the lifting of the Wright Amendment restrictions4 in October 2014.  We are very pleased to provide more competition, more travel options, and low fares for the Dallas market.

"Our international expansion also continued during first quarter 2015.  On March 7, 2015, Costa Rica became our sixth international country served with daily nonstop service between Baltimore/Washington and San Jose, Costa Rica.  We also launched international flying from Houston Hobby with seasonal Saturday service to Aruba5.  We remain on track to add an additional six international destinations from Hobby later this year with the planned October completion of the international terminal.  We look forward to beginning service to Puerto Vallarta, Mexico, in June 2015, and pending government approvals, Belize City, Belize, in October 2015.

"We are managing our invested capital aggressively and continue to provide healthy returns to our Shareholders.  During first quarter 2015, we returned $381 million through the payment of $81 million in dividends and the repurchase of $300 million in common stock.  And, we expect to complete the repurchase of the remaining $80 million under our existing $1 billion share repurchase authorization next month.  Our balance sheet, liquidity, and cash flows remain strong, and we ended first quarter 2015 with $3.4 billion in cash and short-term investments, with a fully available unsecured revolving credit line of $1 billion."

Financial Results and Outlook

The Company's first quarter 2015 total operating revenues increased 6.0 percent to $4.4 billion, on a 6.0 percent increase in ASMs, both compared with first quarter 2014, which resulted in operating unit revenues comparable to first quarter 2014.  The growth in total operating revenues was largely driven by strong first quarter 2015 passenger revenues of $4.2 billion.

Total operating expenses in first quarter 2015 decreased 8.0 percent to $3.6 billion, compared with first quarter 2014.  During first quarter 2015, the Company incurred costs (before profitsharing and taxes) associated with the acquisition and integration of AirTran of $23 million, and recorded a $37 million (before profitsharing and taxes) reduction to other operating expenses related to a favorable litigation settlement, both of which are special items.  Excluding special items in both periods, total operating expenses in first quarter 2015 decreased 7.1 percent to $3.6 billion, compared with first quarter 2014, according to Southwest Airlines.

First quarter 2015 economic fuel costs were $2.00 per gallon, including $.10 per gallon in unfavorable cash settlements from fuel derivative contracts, compared with $3.08 per gallon in first quarter 2014, including $.06 per gallon in favorable cash settlements from fuel derivative contracts.  Based on the Company's fuel derivative contracts and market prices as of April 16, 2015, second quarter 2015 economic fuel costs are expected to approximate first quarter 2015's $2.00 per gallon, compared with second quarter 2014's $3.02 per gallon.  As of April 16, 2015, the fair market value of the Company's fuel derivative contracts is a net liability of approximately $968 million for the fuel hedge portfolio through 2018, including a $225 million net liability related to the remainder of 2015.  Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.

Excluding fuel and oil expense and special items in both periods, first quarter 2015 operating costs increased 5.8 percent from first quarter 2014, largely due to the first quarter 2015 profitsharing expense of $126 million, compared with $29 million in first quarter 2014.  Excluding fuel and oil expense, special items, and profitsharing in both periods, first quarter 2015 operating costs increased 2.1 percent from first quarter 2014, and decreased 3.6 percent on a unit basis.

Operating income in first quarter 2015 was a first quarter record $780 million, compared with $215 million in first quarter 2014.  Excluding special items, operating income was a first quarter record $770 million in first quarter 2015, compared with $242 million in first quarter 2014.

Other expenses in first quarter 2015 were $57 million, compared with other income of $29 million in first quarter 2014.  The $86 million swing primarily resulted from $32 million in other losses recognized in first quarter 2015, compared with $53 million in other gains recognized in first quarter 2014.  In both periods, these gains/losses included ineffectiveness and unrealized mark-to-market amounts associated with a portion of the Company's fuel hedge portfolio, which are special items.  Excluding these special items, first quarter 2015 had $26 million in other losses, compared with $16 million in first quarter 2014, primarily attributable to the premium costs associated with the Company's fuel derivative contracts.  Second quarter 2015 premium costs related to fuel derivative contracts are currently estimated to be approximately $22 million, compared with $17 million in second quarter 2014.  Net interest expense in first quarter 2015 was $25 million, compared with $24 million in first quarter 2014.

Balance Sheet and Cash Flows

As of April 22, 2015, the Company had approximately $3.4 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1.0 billion.  Net cash provided by operations during first quarter 2015 was $1.45 billion, capital expenditures were $573 million, and assets constructed for others, net of reimbursements, were $20 million, resulting in free cash flow of $859 million.  The Company repaid $51 million in debt and capital lease obligations during first quarter 2015, and intends to repay an additional $133 million in debt and capital lease obligations during the remainder of 2015.

During first quarter 2015, the Company returned $381 million to its Shareholders through the payment of $81 million in dividends and the repurchase of $300 million in common stock, or 5.1 million shares, pursuant to an accelerated share repurchase (ASR) program executed during the quarter.  This ASR program was completed in early April, and the Company then received an additional 1.8 million shares, bringing the total shares repurchased under the first quarter 2015 ASR program to 6.9 million.  During first quarter 2015, the Company also received the remaining 1.1 million shares pursuant to the fourth quarter 2014 $200 million ASR program, bringing the total shares repurchased under that ASR program to 4.9 million.  The Company intends to complete the repurchase of the remaining $80 million under its existing $1.0 billion share repurchase authorization in May 2015.

Awards and Recognitions

Named to FORTUNE's 2015 list of World's Most Admired Companies for the 21st consecutive year. Southwest was ranked as the No. 7 Most Admired Company, and is the only commercial airline to make the Top Ten.
Named 2015 Airline of the Year by Air Transport World.
Selected as the Favorite Airline by TripAdvisor U.S. travelers.
Ranked as the top airline employer, and one of the top 20 best employers overall, according to Forbes' inaugural list of America's Best Employers for 2015.
Named to Chief Executive Magazine's Best Companies for Leaders.
Named Domestic Carrier of the Year by the Airforwarders Association for the sixth consecutive year.
Named Domestic Airline of the Year by Express Delivery and Logistics Association for the 15th year in a row.
Received the Air Cargo Excellence Diamond Award by Air Cargo World magazine.