SOUTHWEST AIRLINES CO. DALLAS, April 21, 2016 /PRNewswire/ -- Southwest Airlines Co. (NYSE:LUV) (the "Company") today reported its first quarter 2016 results:
-- Record first quarter net income, excluding special items(1), of $567
million, or $.88 per diluted share, compared with first quarter 2015 net
income, excluding special items, of $451 million, or $.66 per diluted
share. This exceeded the First Call consensus estimate of $.84 per
diluted share.
-- Record first quarter GAAP(2) net income of $511 million, or $.79 per
diluted share, compared with first quarter 2015 GAAP net income of $453
million, or $.66 per diluted share.
-- Record first quarter GAAP operating income of $944 million. Excluding
special items, record first quarter operating income of $952 million,
resulting in a strong first quarter operating margin(3) of 19.7 percent.
-- Record first quarter free cash flow(1) of $1.2 billion; returned $596
million to Shareholders through the combination of dividends and share
repurchases.
-- Return on invested capital, before taxes and excluding special items
(ROIC)(1), for the 12 months ended March 31, 2016, of 33.4 percent,
compared with 25.6 percent for the 12 months ended March 31, 2015.
Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "We are delighted to report an outstanding start to 2016. Our first quarter net income, excluding special items, increased 25.7 percent to a first quarter record $567 million, or $.88 per diluted share. Our strong operating income produced a first quarter operating margin, excluding special items, of 19.7 percent, driven largely by record first quarter operating revenues and lower fuel prices. Our investment grade balance sheet, liquidity, and cash flow remain strong. We generated record first quarter free cash flow of $1.2 billion and returned $596 million to Shareholders through the combination of dividends and share buybacks during first quarter 2016. Next month, we expect to complete the repurchase of the remaining $200 million under our existing $1.5 billion share repurchase authorization. For the twelve months ended March 31, 2016, our ROIC was an exceptional 33.4 percent. My congratulations to our superb Employees on these tremendous results and their record first quarter profitsharing accrual of $155 million.
"As expected, operating revenues grew in line with our available seat mile growth of 9.2 percent, which is a very strong performance, especially considering the increase in stage length. The sustained strength of Customer demand for our one-of-a-kind service produced a record first quarter load factor of 80.5 percent. Solid bookings and revenue trends have continued, thus far, in April, and we currently expect modest operating unit revenue growth in second quarter 2016, year-over-year. We are very pleased with our industry outperformance and the ongoing response to our advertising campaign, which highlights Transfarency(SM): low fares; nothing to hide; no change fees; bags fly free(®); and free live TV(4). That's Transfarency!
"We are also pleased with our first quarter unit cost decrease, excluding special items, of 2.6 percent, which benefited primarily from lower jet fuel prices, and also from ongoing fleet modernization benefits and better ontime performance. First quarter economic fuel costs(1) declined 11.0 percent to $1.78 per gallon. We currently expect our second quarter 2016 economic fuel costs per gallon to be in the same range(5), and below the $2.02 per gallon in second quarter 2015. Excluding fuel, special items, and profitsharing, our first quarter unit costs declined slightly, and we continue to expect modest inflation in our annual 2016 unit costs, as compared with the same year-ago periods.
"In January, we announced our intention to retire our 'Classic' Boeing 737-300 fleet in 2018. Today, we are announcing the retirement date has been accelerated to 2017 to simplify our operations and resolve uncertainty surrounding Federal Aviation Administration (FAA) pilot training requirements for flying both the Classic and Boeing 737-8 (MAX) aircraft. We have been working with our Pilots' union, Southwest Airlines Pilots' Association (SWAPA), to mitigate this issue through segmenting the Classic flying, but that effort has been unsuccessful. Given the FAA is not expected to complete training requirements until next year, the only solution now is to avoid flying both the Classics and the MAX. Therefore, the Classics will be retired in 2017 prior to the MAX being placed into revenue service. Indeed, this is a viable and manageable solution, although not preferred. This accelerated retirement of the Classics will result in fewer aircraft and lower available seat mile (capacity) growth in 2017 than previously planned. We are evaluating our fleet plans and intend to continue managing to average annual fleet growth for the three-year period ending 2018 of no more than two percent. Our annual capacity growth over that period is still expected to fall below this year's five to six percent. We will evaluate future growth opportunities, and any resulting capital spending, in a prudent and disciplined manner.
"We reached another exciting milestone in our international expansion last week with the launch of daily service from Los Angeles International Airport to Liberia/Guanacaste, Costa Rica, creating our 13(th) mainland gateway serving Latin America and the Caribbean. We also filed an application with the U.S. Department of Transportation (DOT) during first quarter 2016 requesting governmental approval to serve Cuba. Subject to approval, we intend to initiate service to Cuba later this year. In addition, as the largest carrier of passengers journeying within and to/from California(6), we recently announced new daily service linking Long Beach Airport and Oakland, beginning June 2016. Long Beach will become our 10(th) airport within California, and the 98(th) destination in our network.
"Overall, we remain very pleased with the performance of our network. Based on current trends and our outlook for second quarter 2016, we expect another quarter of strong margins and cash flows. We are investing in our future and will remain diligent in our efforts to deliver sustained value to our Employees, Customers, and Shareholders. Congratulations again to our wonderful Employees on a terrific first quarter performance."
Financial Results
The Company's total operating revenues were a first quarter record $4.8 billion, a 9.3 percent increase compared with first quarter 2015, driven largely by first quarter 2016 passenger revenues of $4.4 billion. Operating unit revenues (RASM) were comparable to first quarter 2015, on a 9.2 percent year-over-year increase in available seat miles. Based on current trends, the Company expects modestly positive second quarter 2016 RASM, as compared with second quarter 2015 RASM.
First quarter 2016 total operating revenues included approximately $125 million recorded as a result of the amendment of the Company's co-branded credit card agreement with Chase Bank USA, N.A. (Chase) during third quarter 2015 and a resulting required change in accounting methodology. This $125 million net benefit reflects an approximate $175 million increase to other revenues offset by an approximate $50 million reduction to passenger revenues. An estimated second quarter 2016 total operating revenue benefit from the amended Chase agreement of approximately $125 million is included in the Company's second quarter 2016 RASM outlook.
Total operating expenses in first quarter 2016 increased 6.8 percent to $3.9 billion, compared with first quarter 2015. Excluding special items in both periods, total operating expenses increased 6.3 percent to $3.9 billion, compared with first quarter 2015. This cost performance includes the impact of the first quarter 2016 ratification of collective bargaining agreements with the Company's Ramp, Operations, Provisioning, and Cargo Agents, as well as its Flight Instructors.
First quarter 2016 economic fuel costs were $1.78 per gallon, including $.56 per gallon in unfavorable cash settlements from fuel derivative contracts, compared with $2.00 per gallon in first quarter 2015, including $.10 per gallon in unfavorable cash settlements from fuel derivative contracts. Based on the Company's existing fuel derivative contracts and market prices as of April 18, 2016, second quarter 2016 economic fuel costs are estimated to be in the $1.75 to $1.80 per gallon range, as compared with second quarter 2015's $2.02 per gallon. As of April 18, 2016, the fair market value of the Company's fuel derivative contracts for the remainder of 2016 was a net liability of approximately $740 million, and a net liability of $640 million for the hedge portfolio in 2017 and 2018, combined. 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 2016 operating costs increased 9.3 percent from first quarter 2015. First quarter 2016 profitsharing expense was $155 million, compared with $126 million in first quarter 2015. Excluding fuel and oil expense, special items, and profitsharing expense, first quarter 2016 operating costs increased 8.7 percent from first quarter 2015, and decreased 0.5 percent on a unit basis. Based on current trends and excluding fuel and oil expense, special items, and profitsharing expense, the Company expects its second quarter 2016 and annual 2016 unit costs to increase approximately two percent, and approximately one percent, respectively, as compared with the same year-ago periods and largely due to accelerated depreciation expense associated with the planned early retirement of the Classic fleet.
Operating income was a first quarter record $944 million, compared with $780 million in first quarter 2015. Excluding special items, operating income was a first quarter record $952 million, compared with $770 million in first quarter 2015.
Other expenses in first quarter 2016 were $128 million, compared with $57 million in first quarter 2015. The $71 million increase primarily resulted from $114 million in other losses recognized in first quarter 2016, compared with $32 million in first quarter 2015. In both periods, these 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 2016 had $34 million in other losses, compared with $26 million in first quarter 2015, primarily attributable to the premium costs associated with the Company's fuel derivative contracts. Second quarter 2016 premium costs related to fuel derivative contracts are currently estimated to be in the $45 million to $50 million range, compared with $22 million in second quarter 2015. Net interest expense in first quarter 2016 was $14 million, compared with $25 million in first quarter 2015.
Balance Sheet and Cash Flows
As of March 31, 2016, the Company had approximately $3.6 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1 billion. Net cash provided by operations during first quarter 2016 was $1.6 billion, capital expenditures were $438 million, and assets constructed for others, net of reimbursements, were $1 million, resulting in free cash flow of $1.2 billion. The Company repaid $56 million in debt and capital lease obligations during first quarter 2016, and intends to repay approximately $550 million in debt and capital lease obligations during the remainder of 2016. The Company will fund the $620 million ProfitSharing contribution as a result of its 2015 results to its ProfitSharing Plan in second quarter 2016.
During first quarter 2016, the Company returned $596 million to its Shareholders through the payment of $96 million in dividends and the repurchase of $500 million in common stock. During first quarter 2016, the Company repurchased $500 million in common stock pursuant to an accelerated share repurchase program launched during the quarter (first quarter 2016 ASR program), and received approximately 9.6 million shares, representing an estimated 75 percent of the shares expected to be repurchased. The Company intends to complete the first quarter 2016 ASR program by April 25, 2016, and subsequently launch an additional $200 million accelerated share repurchase program (second quarter 2016 ASR program), thereby completing its existing $1.5 billion share repurchase program authorized in May 2015. The Company intends to complete the second quarter 2016 ASR program next month.
Fleet
The Company ended first quarter 2016 with 714 aircraft in its fleet. This reflects the delivery of 7 new Boeing 737-800s and 13 pre-owned Boeing 737-700s, as well as the retirement of 10 Boeing 737 Classic aircraft during the first quarter. The Company continues to manage to a year-end 2016 fleet of roughly 720 aircraft. As announced in January 2016, the Company decided to accelerate the retirement of its Classic aircraft to no later than mid-2018. The planned retirement date of its Classic fleet has now been accelerated to no later than third quarter 2017. While the Company expects aircraft at the end of 2017 to decline from year-end 2016 as a result of this decision, it intends to manage to an average annual fleet growth for the three-year period ending 2018 of no more than two percent. Additional information regarding the Company's aircraft delivery schedule is included in the accompanying tables.
Awards and Recognitions
-- Named to FORTUNE's list of World's Most Admired Companies for the 22(nd)
consecutive year. Southwest was ranked as the #7 Most Admired Company,
and is the only commercial airline to make the Top Ten.
-- Named a Best Employer in Forbes' 2016 list.
-- Named Best Low-Cost Carrier in North America for the third consecutive
year in Premier Traveler's Best of 2015.
-- Received the Air Cargo Excellence Gold Award by Air Cargo World
magazine, making this the 12(th) consecutive year Southwest Airlines
Cargo® has been honored in the annual Air Cargo Excellence Survey.
-- Named Best Airline (Domestic) and Best Loyalty Airline Card in MONEY
Magazine's Best in Travel Awards.
-- Named among the top 10 on Chief Executive Magazine's Best Companies for
Leaders.
Conference Call
The Company will discuss its first quarter 2016 results on a conference call at 12:30 p.m. Eastern Time today. A live broadcast of the conference call also will be available at http://investors.southwest.com
(1)See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items, ROIC, and free cash flow. In addition, information regarding special items, ROIC, and economic results is included in the accompanying reconciliation tables.
(2)Generally Accepted Accounting Principles in the United States.
(3)Operating margin, excluding special items, is calculated as operating income, excluding special items, divided by operating revenues. See Note Regarding Use of Non-GAAP Financial Measures.
(4)Fare difference may apply. First and second checked bags. Weight and size limits apply. Limited time. Where available.
(5)Based on the Company's existing fuel derivative contracts and market prices as of April 18, 2016.
(6)Based on the latest statistics reported by the U.S. Department of Transportation.
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 expectations with respect to returning value to Shareholders; (ii) the Company's financial outlook, expectations, strategies, and projected results of operations, including specific factors expected to impact the Company's results of operations; (iii) the Company's fleet and capacity plans and expectations and the factors expected to impact such plans and expectations; (iv) the Company's expectations related to its management of risk associated with changing jet fuel prices; (v) the Company's network plans and opportunities; and (vi) the Company's expectations with respect to liquidity (including its plans for the repayment of debt and capital lease obligations) and capital expenditures. 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 demand for the Company's services and other changes in consumer behavior (including with respect to the Company's co-branded credit card); (ii) the impact of economic conditions, fuel prices, actions of competitors (including without limitation pricing, scheduling, and capacity decisions and consolidation), governmental actions, and other factors beyond the Company's control, on the Company's business decisions, plans, and strategies; (iii) the impact of labor matters on the Company's business decisions, plans, and strategies; (iv) the Company's dependence on third parties, in particular with respect to its fleet plans; (v) changes in aircraft fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; and (vi) 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, 2015.
Southwest Airlines Co.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)
Three months ended
March 31,
---------
2016 2015 Percent Change
---- ---- --------------
OPERATING REVENUES:
Passenger $4,398 $4,178 5.3
Freight 42 44 (4.5)
Other 386 192 101.0
--- ---
Total
operating
revenues 4,826 4,414 9.3
OPERATING EXPENSES:
Salaries,
wages, and
benefits 1,539 1,419 8.5
Fuel and oil 852 877 (2.9)
Maintenance
materials
and repairs 262 229 14.4
Aircraft
rentals 59 60 (1.7)
Landing fees
and other
rentals 302 285 6.0
Depreciation
and
amortization 290 244 18.9
Acquisition
and
integration - 23 n.m.
Other
operating
expenses 578 497 16.3
--- ---
Total
operating
expenses 3,882 3,634 6.8
OPERATING
INCOME 944 780 21.0
OTHER EXPENSES (INCOME):
Interest
expense 30 32 (6.3)
Capitalized
interest (11) (6) 83.3
Interest
income (5) (1) 400.0
Other
(gains)
losses, net 114 32 256.3
Total other
expenses 128 57 124.6
INCOME
BEFORE
INCOME
TAXES 816 723 12.9
PROVISION
FOR INCOME
TAXES 305 270 13.0
NET INCOME $511 $453 12.8
==== ====
NET INCOME PER SHARE:
Basic $0.80 $0.67 19.4
Diluted $0.79 $0.66 19.7
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 641 674 (4.9)
Diluted 648 682 (5.0)
Southwest Airlines Co.
Reconciliation of Reported Amounts to Non-GAAP Items
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions, except per share amounts)
(unaudited)
Three months ended
March 31,
---------
2016 2015 Percent Change
---- ---- --------------
Fuel and
oil
expense,
unhedged $577 $830
Add: Fuel
hedge
(gains)
losses
included
in Fuel
and oil
expense 275 47
--- ---
Fuel and
oil
expense,
as
reported $852 $877
Deduct: Net
impact
from fuel
contracts
(1) (8) (4)
Fuel and
oil
expense,
(economic) $844 $873 (3.3)
==== ====
Total
operating
expenses,
as
reported $3,882 $3,634
Deduct: Net
impact
from fuel
contracts
(1) (8) (4)
Deduct:
Acquisition
and
integration
costs - (23)
Add:
Litigation
settlement - 37
Total
operating
expenses,
non-GAAP $3,874 $3,644 6.3
Deduct:
Fuel and
oil
expense,
non-GAAP
(economic) (844) (873)
---- ----
Operating
expenses,
non-GAAP,
excluding
Fuel and
oil
expense $3,030 $2,771 9.3
Deduct:
Profitsharing
expense (155) (126)
Operating
expenses,
non-GAAP,
excluding
profitsharing
and Fuel
and oil
expense $2,875 $2,645 8.7
====== ======
Operating
income, as
reported $944 $780
Add: Net
impact
from fuel
contracts
(1) 8 4
Add:
Acquisition
and
integration
costs - 23
Deduct:
Litigation
settlement - (37)
Operating
income,
non-GAAP $952 $770 23.6
==== ====
Other
(gains)
losses,
net, as
reported $114 $32
Deduct: Net
impact
from fuel
contracts
(1) (80) (6)
Other
(gains)
losses,
net, non-
GAAP $34 $26 30.8
=== ===
Net income,
as
reported $511 $453
Add: Net
impact
from fuel
contracts
(1) 88 10
Deduct:
Income tax
impact of
fuel
contracts (32) (3)
Add:
Acquisition
and
integration
costs (2) - 14
Deduct:
Litigation
settlement
(2) - (23)
Net income,
non-GAAP $567 $451 25.7
==== ====
Net income
per share,
diluted,
as
reported $0.79 $0.66
Add: Net
impact
from fuel
contracts
(2) 0.09 0.01
Deduct:
Impact of
special
items (2) - (0.01)
Net income
per share,
diluted,
non-GAAP $0.88 $0.66 33.3
===== =====
(1) See Reconciliation of Impact from
Fuel Contracts.
(2) Amounts net of tax.
Southwest Airlines Co.
Reconciliation of Impact from Fuel Contracts
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions)
(unaudited)
Three months ended
March 31,
---------
2016 2015
---- ----
Fuel and oil expense
--------------------
Reclassification between
Fuel and oil and Other
(gains) losses, net,
associated with current
period settled contracts $ - $ -
Contracts settling in the
current period, but for
which gains have been
recognized in a prior
period (1) (8) (4)
Impact from fuel contracts
to Fuel and oil expense $(8) $(4)
=== ===
Operating Income
----------------
Reclassification between
Fuel and oil and Other
(gains) losses, net,
associated with current
period settled contracts $ - $ -
Contracts settling in the
current period, but for
which gains have been
recognized in a prior
period (1) 8 4
Impact from fuel contracts
to Operating Income $8 $4
=== ===
Other (gains) losses, net
-------------------------
Mark-to-market impact
from fuel contracts
settling in future periods $(76) $(19)
Ineffectiveness from fuel hedges
settling in future periods (4) 13
Reclassification between
Fuel and oil and Other
(gains) losses, net, - -
associated with current period settled
contracts
Impact from fuel contracts
to Other (gains) losses,
net $(80) $(6)
==== ===
Net Income
----------
Mark-to-market impact
from fuel contracts
settling in future periods $76 $19
Ineffectiveness from fuel
hedges settling in future
periods 4 (13)
Other net impact of fuel
contracts settling in the
current or a prior period
(excluding
reclassifications) 8 4
Impact from fuel contracts
to Net Income (2) $88 $10
=== ===
(1) As a result of prior hedge
ineffectiveness and/or contracts
marked-to-market through the
income statement.
(2) Before income tax impact of
unrealized items.
Southwest Airlines Co.
Comparative Consolidated Operating Statistics
(unaudited)
Three months ended
March 31,
---------
2016 2015 Change
---- ---- ------
Revenue
passengers
carried 28,603,479 26,442,996 8.2%
Enplaned
passengers 34,628,441 32,098,958 7.9%
Revenue
passenger
miles
(RPMs)
(000s)
(1) 28,408,164 25,860,866 9.9%
Available
seat
miles
(ASMs)
(000s)
(2) 35,268,149 32,297,465 9.2%
Load
factor
(3) 80.5% 80.1% 0.4 pts.
Average
length
of
passenger
haul
(miles) 993 978 1.5%
Average
aircraft
stage
length
(miles) 757 739 2.4%
Trips
flown 314,537 296,570 6.1%
Seats
flown
(4) 46,101,321 43,244,404 6.6%
Seats
per
trip
(5) 146.57 145.82 0.5%
Average
passenger
fare
(11) $153.75 $158.01 (2.7)%
Passenger
revenue
yield
per
RPM
(cents)
(6)(11) 15.48 16.16 (4.2)%
RASM
(cents)
(7) 13.68 13.67 0.1%
PRASM
(cents)
(8)(11) 12.47 12.94 (3.6)%
CASM
(cents)
(9) 11.01 11.25 (2.1)%
CASM,
excluding
Fuel
and
oil
expense
(cents) 8.59 8.53 0.7%
CASM,
excluding
special
items
(cents) 10.99 11.28 (2.6)%
CASM,
excluding
Fuel
and
oil
expense
and
special
items
(cents) 8.59 8.58 0.1%
CASM,
excluding (cents)
Fuel
and
oil
expense,
special
items,
and
profitsharing
expense 8.15 8.19 (0.5)%
Fuel
costs
per
gallon,
including
fuel
tax
(unhedged) $1.22 $1.90 (35.8)%
Fuel
costs
per
gallon,
including
fuel
tax $1.80 $2.01 (10.4)%
Fuel
costs
per
gallon,
including
fuel
tax
(economic) $1.78 $2.00 (11.0)%
Fuel
consumed,
in
gallons
(millions) 472 434 8.8%
Active
fulltime
equivalent
Employees 50,911 47,005 8.3%
Aircraft
at
end
of
period
(10) 714 679 5.2%
(1) A revenue passenger mile is one
paying passenger flown one
mile. Also referred to as
"traffic," which is a measure
of demand for a given period.
(2) An available seat mile is one
seat (empty or full) flown one
mile. Also referred to as
"capacity," which is a measure
of the space available to
carry passengers in a given
period.
(3) Revenue passenger miles divided
by available seat miles.
(4) Seats flown is calculated using
total number of seats
available by aircraft type
multiplied by the total trips
flown by the same aircraft
type during a particular
period.
(5) Seats per trip is calculated
using seats flown divided by
trips flown. Also referred to
as "gauge."
(6) Calculated as passenger revenue
divided by revenue passenger
miles. Also referred to as
"yield," this is the average
cost paid by a paying
passenger to fly one mile,
which is a measure of revenue
production and fares.
(7) RASM (unit revenue) -Operating
revenue yield per ASM,
calculated as operating
revenue divided by available
seat miles. Also referred to
as "operating unit revenues,"
this is a measure of operating
revenue production based on
the total available seat miles
flown during a particular
period.
(8) PRASM (Passenger unit revenue)
-Passenger revenue yield per
ASM, calculated as passenger
revenue divided by available
seat miles. Also referred to
as "passenger unit revenues,"
this is a measure of passenger
revenue production based on
the total available seat miles
flown during a particular
period.
(9) CASM (unit costs) -Operating
expenses per ASM, calculated
as operating expenses divided
by available seat miles. Also
referred to as "unit costs" or
"cost per available seat
mile," this is the average
cost to fly an aircraft seat
(empty or full) one mile,
which is a measure of cost
efficiencies.
(10) Aircraft in the Company's fleet
at period end.
(11) Refer to the Financial Results
section of this release for
additional information
regarding the impact from the
July 2015 amended co-branded
credit card agreement with
Chase.
Southwest Airlines Co.
Return on Invested Capital (ROIC)
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions)
(unaudited)
Twelve months ended Twelve months ended
March 31, 2016 March 31, 2015
-------------- --------------
Operating
income,
as
reported $4,280 $2,790
Special
revenue
adjustment
(1) (172) -
Union
contract
bonuses 334 9
Net
impact
from
fuel
contracts (319) 23
Acquisition
and
integration
costs 16 132
Litigation
settlement - (37)
Operating
income,
non-
GAAP $4,139 $2,917
------ ------
Net
adjustment
for
aircraft
leases
(2) 115 123
Adjustment
for
fuel
hedge
accounting (133) (71)
---- ---
Adjusted
Operating
income,
non-
GAAP $4,121 $2,969
Average
invested
capital
(3) $11,250 $11,288
Equity
adjustment
for
hedge
accounting 1,082 289
----- ---
Adjusted
average
invested
capital $12,332 $11,577
ROIC,
pre-
tax 33.4% 25.6%
(1) One-time adjustment related to
the amendment of the Company's
co-branded credit card
agreement with Chase Bank USA,
N.A. and a resulting change in
accounting methodology.
(2) Net adjustment related to
presumption that all aircraft in
fleet are owned (i.e., the
impact of eliminating aircraft
rent expense and replacing with
estimated depreciation expense
for those same aircraft).
(3) Average invested capital is an
average of the five most recent
quarter end balances of debt,
net present value of aircraft
leases, and equity adjusted for
hedge accounting.
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
March 31, December 31,
2016 2015
---------- -------------
ASSETS
Current assets:
Cash and cash
equivalents $2,388 $1,583
Short-term investments 1,194 1,468
Accounts and other
receivables 511 474
Inventories of parts and
supplies, at cost 289 311
Prepaid expenses and
other current assets 192 188
--- ---
Total current assets 4,574 4,024
Property and equipment, at cost:
Flight equipment 19,735 19,462
Ground property and
equipment 3,308 3,219
Deposits on flight
equipment purchase
contracts 1,202 1,089
Assets constructed for
others 986 915
--- ---
25,231 24,685
Less allowance for
depreciation and
amortization 9,267 9,084
----- -----
15,964 15,601
Goodwill 970 970
Other assets 733 717
$22,241 $21,312
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,153 $1,188
Accrued liabilities 2,472 2,591
Air traffic liability 3,675 2,990
Current maturities of
long-term debt 953 637
--- ---
Total current
liabilities 8,253 7,406
Long-term debt less
current maturities 2,355 2,541
Deferred income taxes 2,609 2,490
Construction obligation 825 757
Other noncurrent
liabilities 703 760
Stockholders' equity:
Common stock 808 808
Capital in excess of par
value 1,387 1,374
Retained earnings 9,872 9,409
Accumulated other
comprehensive loss (894) (1,051)
Treasury stock, at cost (3,677) (3,182)
Total stockholders'
equity 7,496 7,358
$22,241 $21,312
======= =======
Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months ended
March 31,
---------
2016 2015
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $511 $453
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation and
amortization 290 244
Unrealized/realized
(gain) loss on fuel
derivative instruments 88 11
Deferred income taxes 26 19
Changes in certain assets and
liabilities:
Accounts and other
receivables (21) (130)
Other assets 4 13
Accounts payable and
accrued liabilities 313 177
Air traffic liability 685 717
Cash collateral provided
to derivative
counterparties (231) (17)
Other, net (49) (35)
--- ---
Net cash provided by
operating activities 1,616 1,452
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (438) (573)
Assets constructed for
others (11) (22)
Purchases of short-term
investments (256) (316)
Proceeds from sales of
short-term and other
investments 530 609
Net cash used in
investing activities (175) (302)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee
stock plans 11 13
Proceeds from termination
of interest rate
derivative instruments - 12
Reimbursement for assets
constructed for others 10 2
Payments of long-term
debt and capital lease
obligations (56) (51)
Payments of cash
dividends (96) (81)
Repayment of construction
obligation (2) (2)
Repurchase of common
stock (500) (300)
Other, net (3) -
---
Net cash used in
financing activities (636) (407)
---- ----
NET CHANGE IN CASH AND
CASH EQUIVALENTS 805 743
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,583 1,282
----- -----
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $2,388 $2,025
====== ======
Southwest Airlines Co.
Fuel Derivative Contracts
As of April 18, 2016
Estimated
economic jet
fuel price
per gallon,
including
taxes
----------
Average Brent Crude Oil
price per barrel 2Q 2016 (2) Full Year 2016 (2)
----------------------- ---------- ------------------
$20 $1.20 - $1.25 $1.45 - $1.50
$30 $1.40 - $1.45 $1.60 - $1.65
Current Market (1) $1.75 - $1.80 $1.85 - $1.90
$50 $1.90 - $1.95 $1.95 - $2.00
$60 $2.05 - $2.10 $2.05 - $2.10
Maximum
percent of
estimated
fuel
consumption
covered by
fuel
derivative
contracts at
varying WTI/
Brent Crude
Oil, Heating
Oil, and Gulf
Coast Jet
Fuel-
equivalent
Period price levels
------ -------------
2017 62%
2018 35%
(1) Brent crude oil average market
price as of April 18, 2016, was
approximately $43 per barrel for
second quarter 2016 and $41 per
barrel for full year 2016.
(2) The economic fuel price per gallon
sensitivities provided assume the
relationship between Brent crude
oil and refined products based on
market prices as of April 18,
2016.
Southwest Airlines Co.
737 Delivery Schedule
As of March 31, 2016
The Boeing Company The Boeing Company
737 NG 737 MAX
------ -------
-800 Firm Options Additional -7 -8 Options Total
Orders
-700s Firm Firm
Orders Orders
------
2016 38 - 21 - - - 59 (2)
2017 33 - 14 - 14 - 61
2018 18 18 4 - 13 - 53
2019 - - - 15 10 - 25
2020 - - - 14 22 - 36
2021 - - - 1 33 18 52
2022 - - - - 30 19 49
2023 - - - - 24 23 47
2024 - - - - 24 23 47
2025 - - - - - 36 36
2026 - - - - - 36 36
2027 - - - - - 36 36
89 18 39 30 170 (1) 191 537
=== === === === === === === ===
(1) The Company has
flexibility to substitute
737-7 in lieu of 737-8
firm orders beginning in
2019.
(2) Includes seven 737-800s
and thirteen 737-700s
delivered as of March 31,
2016.
NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES
The Company's unaudited consolidated financial statements are prepared in accordance with GAAP. These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges the Company believes are not indicative of its ongoing operational performance.
As a result, the Company also provides financial information in this release that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information, including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company's economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts--all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis reflects the Company's actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide a better measure of the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.
Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
In addition to its "economic" financial measures, as defined above, the Company has also provided other non-GAAP financial measures, including results that it refers to as "excluding special items," as a result of items that the Company believes are not indicative of its ongoing operations. These include a one-time special revenue adjustment due to the July 2015 amendment of the Company's co-branded credit card agreement with Chase Bank USA, N.A. and a resulting change in accounting methodology, union contract bonuses recorded for certain workgroups, expenses associated with the Company's acquisition and integration of AirTran incurred in 2015, and a gain resulting from a litigation settlement received in January 2015. The Company believes that evaluation of its financial performance can be enhanced by a presentation of results that exclude the impact of these items in order to evaluate the results on a comparative basis with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The Company does not expect to incur any further Acquisition and integration costs related to the AirTran acquisition.
The Company has also provided free cash flow and ROIC, which are non-GAAP financial measures. The Company believes free cash flow is a meaningful measure because it demonstrates the Company's ability to service its debt, pay dividends and make investments to enhance Shareholder value. Although free cash flow is commonly used as a measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow. For the three months ended March 31, 2016, the Company generated $1.2 billion in free cash flow, calculated as operating cash flows of $1.6 billion less capital expenditures of $438 million less assets constructed for others of $11 million plus reimbursements for assets constructed for others of $10 million.
The Company believes ROIC is a meaningful measure because it quantifies how well the Company generates operating income relative to the capital it has invested in its business. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC may differ; therefore, the Company is providing an explanation of its calculation for ROIC in the accompanying reconciliation tables (see Return on Invested Capital).
SW-QFS
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SOURCE Southwest Airlines Co.
