Southwest Airlines’ 1Q net profit dips to $5 million

Southwest Airlines (Dallas) today (April 21) reported first quarter 2011 net income of $5 million, or $.01 per diluted share, compared to net income of $11 million, or $.01 per diluted share, for first quarter 2010. Both periods’ results included special items related to non-cash, mark-to-market, and other items associated with a portion of the Company’s fuel hedge portfolio. In addition, first quarter 2011 results included approximately $9 million in charges (net of profitsharing and taxes) primarily related to consulting fees in association with the Company’s proposed acquisition of AirTran Holdings, Inc.* Excluding special items in both periods, first quarter 2011 net income was $20 million, or $.03 per diluted share, compared to $24 million, or $.03 per diluted share, for first quarter 2010. Operating income was $114 million for first quarter 2011, compared to $54 million for first quarter 2010. Excluding special items in both periods, operating income was $110 million for first quarter 2011, compared to $102 million for first quarter 2010.

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

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

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

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

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

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