Southwest Airlines Reports 1st Quarter Profit

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Southwest Airlines Reports First Quarter Earnings
Thursday April 17, 6:28 am ET


DALLAS, April 17 /PRNewswire-FirstCall/ -- Southwest Airlines (NYSE: LUV - News) today reported its first quarter 2008 results. Net income for first quarter 2008 was $34 million, or $.05 per diluted share, compared to $93 million, or $.12 per diluted share, for first quarter 2007. Excluding special items, first quarter 2008 net income was $43 million, or $.06 per diluted share, compared to $33 million, or $.04 per diluted share, in first quarter 2007. The first quarter 2008 results exceed First Call's mean estimate of $.01 per diluted share. Refer to the reconciliation in the accompanying tables for further information regarding special items.

First Quarter 2008 Financial Highlights:
-- Record first quarter revenues of $2.53 billion, up 15 percent
-- Net income, excluding special items, of $43 million, up 30 percent
-- Net income per diluted share, excluding special items, of $.06, up
50 percent


Gary C. Kelly, CEO, stated: "Considering the weak economy and soaring jet fuel prices, we are very pleased to report a 30 percent year-over-year increase in first quarter 2008 earnings, excluding special items. Our earnings growth resulted from record first quarter 2008 operating revenues of $2.53 billion, which increased a strong 15.1 percent from a year ago, or 8.2 percent on an available seat mile (ASM) basis. Benefiting from the Easter shift to March this year (versus April last year), this was the best quarterly performance since second quarter 2006. With our new revenue initiatives well underway, our load factor of 69.8 percent was a record first quarter performance, and our passenger yields per revenue passenger mile (RPM) were up 4.7 percent compared to first quarter 2007.

"Taking into account the Easter shift to March, traffic thus far in April has been solid, and bookings for the remainder of second quarter 2008 appear strong. Barring a further slowdown in the domestic economy, based on current trends, which include encouraging results from our revenue initiatives and the airline industry's domestic capacity outlook, we expect favorable year-over-year unit revenue results again in second quarter 2008.

"While we are pleased with our revenue performance, we are concerned about soaring energy costs. Our first quarter 2008 unit costs, excluding special items, increased 7.3 percent due largely to the significant increase in our economic jet fuel costs. Even with $302 million in favorable cash settlements from derivative contracts, our first quarter 2008 economic jet fuel costs increased 20.7 percent to $1.98 per gallon. We have derivative contracts in place for approximately 70 percent of our second quarter 2008 estimated fuel consumption, capped at an average crude-equivalent price of approximately $51 per barrel. Based on this derivative position and yesterday's market prices, we currently anticipate our second quarter 2008 economic jet fuel costs will be in the $2.35 per gallon range, significantly higher than first quarter even with anticipated hedging gains significantly higher than first quarter. For the full year 2008, we have derivative contracts for over 70 percent of our estimated fuel consumption at an average crude-equivalent price of approximately $51 per barrel.

"Our first quarter 2008 unit costs, excluding fuel, increased 2.4 percent over last year, which was better than we anticipated. Based on current cost trends, we expect our second quarter 2008 unit costs, excluding fuel, to increase from first quarter 2008's 6.70 cents.

"Although we are pleased with the progress of our revenue initiatives and optimistic that we can continue to grow revenues, we cannot ignore the threat of volatile and unprecedented jet fuel prices. We will continue to take steps to restore our profit margins, including an ongoing rigorous review of our flight schedule to eliminate nonproductive flying. Presently, we still plan to accept 29 new Boeing 737-700s in 2008, but we are reviewing our previous plan to retire 22 aircraft in light of this month's dramatic industry developments. We have flexibility to adjust our fleet plans and are well-positioned to respond to a rapidly changing environment.

"For 2009, we have decided to reduce our fleet growth. Prior to today's announcement, we had 28 737-700 aircraft (25 firm and three options) scheduled for delivery from Boeing in 2009. Our revised plan is to grow our fleet in 2009 by no more than 14 737-700 aircraft, which is half our previous plan, assuming no retirements, and will bring our 2009 year-over-year ASM capacity growth to two to three percent. As a result of this change, 14 aircraft deliveries (11 firm and three options) have been deferred to 2015. We have also moved 12 2010 deliveries into 2013-2015 (one option in 2013, eight options in 2014, and three options in 2015). Further, we have exercised a total of 12 options with Boeing for delivery in 2010-2012 (six firm in 2010, three firm in 2011, and three firm in 2012), bringing our firm orders for 2008 through 2015 to 125. We now have 67 options, with delivery positions available in 2010 through 2015, and 54 purchase rights for delivery through December 31, 2018 (see accompanying Revised 737-700 Delivery Schedule)."

Southwest will discuss its first 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=INVRINVFQPR000000080417.

Operating Results

Total operating revenues for first quarter 2008 increased 15.1 percent to $2.53 billion, compared to $2.20 billion for first quarter 2007. Total first quarter 2008 operating expenses were $2.44 billion, compared to $2.11 billion in first quarter 2007. Operating income for first quarter 2008 was $88 million compared to $84 million in first quarter 2007. Excluding special items, operating income was $99 million in first quarter 2008 compared to $70 million last year.

"Other expenses" were $51 million for first quarter 2008, compared to $65 million in "other income" for first quarter 2007. The $116 million swing resulted primarily from $23 million in "other losses" recognized in 2008 versus $83 million in "other gains" recognized in 2007. In both periods, these "other (gains) losses" principally 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 (which includes the premium costs of derivative contracts) of $14 million in first quarter 2008 and first quarter 2007 is also included in "other (gains) losses." The $10 million year-over-year increase in net interest expense for first quarter 2008 resulted from lower interest rates on cash, cash equivalents, and investments and lower Boeing aircraft progress payments, which generated reduced capitalized interest.

The first quarter 2008 income tax rate was approximately 9 percent compared to approximately 38 percent for first quarter 2007. The significant decrease in first quarter 2008's income tax rate was primarily due to a decrease in first quarter deferred tax liability by approximately $12 million as a result of a January 2008 reversal by the State of Illinois of an August 2007 increase under a State of Illinois income tax law.

Net cash provided by operations for first quarter 2008 was $964 million, which included a $570 million increase in fuel derivative collateral deposits related to future periods. Capital expenditures for the first quarter 2008 were $364 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 soaring fuel prices.

The Company ended first quarter 2008 with $3.1 billion in cash and short-term investments, which included $2.6 billion in fuel derivative cash collateral deposits. In addition, the Company had a fully available unsecured revolving credit line of $600 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 (i) the Company's expectations regarding future results of operations; and (ii) its plans for fleet growth. 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; (ii) the Company's ability to timely and effectively prioritize its revenues initiatives and its related ability to timely implement and maintain the necessary information technology systems and infrastructure, and other techniques and processes to support these initiatives; (iii) the impact of governmental regulations and inquiries on the Company's operating costs, as well as its operations generally; and (iv) 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, 2007.




SOUTHWEST AIRLINES CO.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
(unaudited)



Three months ended
March 31,
Percent
2008 2007 Change

OPERATING REVENUES:
Passenger $2,414 $2,112 14.3
Freight 34 30 13.3
Other 82 56 46.4
Total operating revenues 2,530 2,198 15.1

OPERATING EXPENSES:
Salaries, wages, and benefits 800 767 4.3
Fuel and oil 753 564 33.5
Maintenance materials and repairs 143 136 5.1
Aircraft rentals 38 39 (2.6)
Landing fees and other rentals 171 136 25.7
Depreciation and amortization 145 135 7.4
Other operating expenses 392 337 16.3
Total operating expenses 2,442 2,114 15.5

OPERATING INCOME 88 84 4.8

OTHER EXPENSES (INCOME):
Interest expense 28 29 (3.4)
Capitalized interest (8) (13) (38.5)
Interest income (7) (13) (46.2)
Other (gains) losses, net 38 (68) n.a.
Total other expenses (income) 51 (65) n.a.


INCOME BEFORE INCOME TAXES 37 149 (75.2)
PROVISION FOR INCOME TAXES 3 56 (94.6)


NET INCOME $34 $93 (63.4)

NET INCOME PER SHARE:
Basic $.05 $.12
Diluted $.05 $.12

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 733 786
Diluted 734 800