Category Archives: Southwest Airlines

Southwest founder, Herb Kelleher, passes away

Statement from Gary Kelly, Chairman and CEO, following the passing of Herb Kelleher, Chairman Emeritus:

“Herb was a lifelong mentor and friend, and one of the greatest joys of my life has been working alongside Herb for over 30 years. His stamp on the airline industry and all those he touched has been profound. His vision for making air travel affordable for all revolutionized the industry, and you can still see that transformation taking place today. But his legacy extends far beyond our industry and far beyond the world of entrepreneurship. He inspired people; he motivated people; he challenged people—and, he kept us laughing all the way. He was an exceptionally gifted man with an enormous heart and love for people—all people. We have been beyond blessed to have him as a part of our lives.”” — Gary Kelly

Southwest Airlines issued this statement:

We are deeply saddened to share that Southwest Airlines Founder and Chairman Emeritus Herbert D. Kelleher passed away today at the age of 87.

Herb was a pioneer, a maverick, and an innovator. His vision revolutionized commercial aviation and democratized the skies. Herb’s passion, zest for life, and insatiable investment in relationships made lasting and immeasurable impressions on all who knew him and will forever be the bedrock and esprit de corps of Southwest Airlines.

The entire Southwest Family extends our deepest sympathies to Herb’s wife, Joan, and his entire family.

By Linda Rutherford, Southwest employee:

It is with heavy hearts that we share with you that our Founder, Inspiration, Chairman Emeritus, and Friend Herb Kelleher has passed away this morning at the age of 87. Herb is survived by his wife, Joan, three of their four children, many cherished grandchildren, and, of course, his pride and joy, the Employees of Southwest Airlines.

Born Herbert David Kelleher on March 12, 1931, and raised in Haddon Heights, New Jersey, Herb received his bachelor’s degree from Wesleyan and his law degree from New York University. He practiced law on the East Coast before relocating to Texas with plans to start his own law firm. In 1967, Herb and client Rollin King incorporated Air Southwest, Inc., with the idea of offering low-fare, intra-Texas airline service. After a name change and many legal battles valiantly fought and won by Herb, Southwest Airlines took to the skies on June 18, 1971—a date that would change each of our lives forever. Anyone in the world who has set foot on an airplane in the past 50 years has been touched by the life of Herb Kelleher. For he, with the first set of Southwest Warriors, made history when they set out to disrupt the airline industry by making flying both fun and affordable.

As we all know, Herb has played a very profound role in the life of President Emeritus Colleen Barrett. They have been a powerful pair since she became his legal secretary in 1967, and together they nurtured and groomed Southwest Airlines into one of the most admired Companies in the world. Colleen said: “He always supported me and always treated me as his complete equal. His generosity and inclusion from the very beginning allowed me opportunities and experiences that have been my guiding lights.”

Southwest CEO Gary Kelly’s life is another one of the many lives that Herb touched, and he had this to say about his lifelong mentor and friend: “One of the greatest joys of my life has been working alongside Herb for more than 30 years. His stamp on the airline industry cannot be overstated. His vision for making air travel affordable for all revolutionized the industry, and you can still see that transformation taking place today. But his legacy extends far beyond our industry and far beyond the world of entrepreneurship. His true impact can only be accurately measured by the hearts and minds of the People who he inspired, motivated, and engaged on a daily basis. And that, I believe, cannot be measured or quantified—but it is to be admired and appreciated by all who have been fortunate enough to experience it. I consider myself blessed to be one of those People.”

Herb served as Southwest Airlines Executive Chairman from March 1978 to May 2008 and as President and CEO from September 1981 through June 2001.  Fortune magazine, which consistently recognizes Southwest among the world¹s top 10 most admired companies, called Kelleher perhaps the Best CEO in America.

Kelleher himself received numerous awards and honors, including the U. S. Chamber Business  Leadership Hall of Fame; CEO of the Year and one of history¹s top three CEOs, Chief Executive magazine; CEO of the Century, Texas Monthly magazine; National Sales and Marketing Hall of Fame; CEO of the Decade-Airline Industry; Wright Brothers Memorial Trophy; Bower Award for Business Leadership, Franklin Institute; Tony Jannus Award; Wings Club Distinguished Achievement Award; San Diego Aerospace Hall of Fame; L. Welch Pogue Award for Lifetime Achievement in Aviation, Aviation Week; Airline Business Award, Airline Business magazine; History Making Texan Award; the Business Halls of Fame of the State of Texas, the University of Texas, Texas A&M, and the City of Dallas; the Herbert D. Kelleher Servant Leader Scholarship, named in Herb¹s honor by the Austin Business Travel Association; induction into the Texas Labor Management Hall of Fame; Transportation Research Forum President¹s Award; induction into the National Aviation Hall of Fame; induction into the Paul E. Garber First Flight Shrine, Wright Brothers National Memorial; recipient of the Department of Homeland Security Distinguished Public Service Medal; an honorary lifetime member of the Transport Workers Union; recipient of full page USA Today “Thank You Herb!” ad from Southwest¹s Pilots union; inducted into the AAF Tenth District Southwest Advertising Hall of Fame; the Joseph T. Nall Safety Award, NTSB Bar Association; the Murphy Award for Lifetime Achievement, University of North Texas; Ronald McDonald House Charities Award of Excellence; inducted into the Advertising Hall of Fame, and, was inducted into the American Advertising Federation Hall of Fame and the Entrepreneurs For North Texas’ Ring of Entrepreneurs.

Herb was a Freedom Fighter. He revolutionized the skies. He blazed a trail of low fares and exemplary Customer Service in an industry ruled by just the opposite. Herb was a Pioneer. A Maverick. An Innovator. He celebrated and exemplified the esprit de corps of the Southwest People with such vigor that the spirit has grown exponentially. Herb knew all along that “The business of business is People”—yesterday, today, and forever. Herb decided long ago that our internal Customers, our Employees, would come first.

 

Herb has been quoted as saying, “It is my practice to try to understand how valuable something is by trying to imagine myself without it.” We now have to imagine ourselves without Herb. Our Founding Father has passed on, but the legacy that he has left to each of us is still very much alive. Southwest will grieve as Families do, but we know he’d want us to laugh through our tears.

 

We miss you already, Herbie.

March 28, 1978 Lamar Muse resigned as President and CEO. Herb Kelleher was appointed Interim President, CEO, and Chairman of the Board.
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Southwest’s N752SW overruns the runway at Hollywood/Burbank

Southwest Airlines flight 278 from Oakland to Hollywood/Burbank overran the runway on landing at BUR in the rain.

The aircraft was stopped by the protective EMAS (Engineered Material Arresting System) bed at the end of the runway.

The airline issued this statement on social media:

Southwest Flight 278 from OAK to BUR landed safely and rolled to a stop at the end of a runway. Customers deplaned the aircraft via air stairs, with no reported injuries among the 112 Customers and five Crewmembers.

Video:

Photo on social media:

LAX celebrates new Terminal 1 guest experience

Mayor Eric Garcetti, Los Angeles World Airports, Southwest Airlines and Unibail-Rodamco-Westfield celebrated the grand opening of the new Terminal 1 at LAX on Friday, Nov. 30. Pictured left to right: URW President Jean-Marie Tritant, actor Danny Trejo, Mayor Eric Garcetti, Southwest CEO Gary Kelly, LAWA CEO Deborah Flint, Board of Airport Commissioners Vice President Val Velasco. (PRNewsfoto/Los Angeles World Airports)

News Highlights:

  • Mayor Eric Garcetti, Los Angeles World Airports, Southwest Airlines Employees and Customers jointly celebrate unveiling of new Terminal 1 at LAX.
  • $516.7 million redevelopment by Southwest introduces larger seating areas in gates, a larger and more efficient centralized Customer screening checkpoint and all-new dining and retail options.
  • Redevelopment created 3,475 construction jobs.
  • Partnership with Unibail-Rodamco-Westfield’s airports group, URW Airports, increases dining and retail options, including local L.A. favorites Urth Caffé, Trejo’s Tacos and Cassell’s Hamburgers.

Mayor Eric Garcetti joined Los Angeles World Airports (LAWA) and Southwest Airlines to unveil the new Los Angeles International Airport Terminal 1. This follows a half-billion-dollar, curb-to-gate redevelopment that showcases a new check-in area featuring all-new self-service ticket kiosks, an efficient nine-lane security checkpoint, new area for baggage claim, and exciting new dining and retail destinations with state-of-the-art design.

Completion of the Terminal 1 redevelopment comes as part of LAWA’s multibillion-dollar Capital Improvement Program, considered the largest public works program in history for the City of Los Angeles. The Terminal 1 renovation is part of an overall LAX modernization program, which includes an Automated People Mover – an elevated train expected to be completed by 2023 – and is expected ultimately to create more than 121,000 construction-related jobs.

Los Angeles is a city of dreamers and doers, and the reimagined Terminal 1 reflects the creativity at the heart of our city,” said Mayor Eric Garcetti. “Working together with Southwest Airlines and our partners, what we have created is more than a terminal that connects passengers to flights — it’s a destination in its own right.”

“Today the City of Los Angeles and Los Angeles World Airports are celebrating a momentous occasion: The completion of a half a billion dollar investment into our airport by Southwest Airlines,” said Councilmember Joe Buscaino. “As investment and partnerships continue to take flight, travelers can get a sneak peek of the future of LAX by visiting Southwest’s Terminal 1 – a new first-class experience for every traveler, visitor and Angeleno.”

“The work happening to modernize LAX is focused on making our airport a more convenient and inviting place to travel through for Angelenos and visitors,” said Councilmember Mike Bonin. “From the improved security screening facilities, new restrooms and concessions that feature local eateries, LAX is rapidly becoming the world-class airport this city deserves. The renovations to Terminal 1 will make this part of LAX more secure and more environmentally-friendly, and I applaud Southwest and LAWA on their progress so far.”

The four-year, $516.7 million project created 3,475 construction jobs and completely refreshed the aging terminal, which was initially constructed in the early 1980s in advance of the 1984 Olympic Games. The project was completed with minimal impact to customer service and flight operations, keeping approximately 10 million customers moving through the facility each year of the redevelopment.

“The new Terminal 1 reflects Los Angeles World Airports’ commitment to creating exceptional facilities and experiences for our guests,” said Deborah Flint, CEO, LAWA. “The T1 modernization has been a phenomenal effort by all partners at LAWA, Southwest, and URW Airports, and the results raise the bar for what guests can expect when they come to LAX.”

“Today’s reveal of Terminal 1 marks a significant milestone in our continued improvement and modernization of LAX,” said Board of Airport Commissioners Vice President Val Velasco. “Not only are we transforming LAX into the airport for the future, but we’re doing so with a local workforce and businesses to ensure that our community is involved in and benefits from all that we do.”

A major goal of the T1 project was to eliminate lines that crowded the approaches to ticketing, security and at shops and restaurants in previously cramped gate areas. Now the terminal runs efficiently with a fleet of new self-service check-in stations, the repositioned security checkpoint and additional retail and dining offerings post-security.

The new 13-gate terminal is a true transformation: curb-to-gate, wall-to-wall. It now boasts an efficient nine-lane security checkpoint; a fully automated checked-baggage inspection and sortation system; refurbished arrival/baggage claim area; updated and expanded restrooms; and replaced Customer boarding bridges.

“Southwest carries more California travelers to, from and within the Golden State every day than any other airline and is scheduled to offer a record 800 departures a day from California next summer,” said Southwest CEO Gary Kelly. “This redeveloped Terminal 1 facility at LAX will host many of those Customers and is the perfect venue for our award-winning People to showcase their world-famous Hospitality.”

Southwest worked with LAX partner URW Airports, the terminal commercial manager, on a new and expanded dining and retail approach that includes celebrated local brands Urth Caffé, Trejo’s Tacos and Cassell’s Hamburgers, among others. With 22 dining and retail destinations comprising 23,543 square feet, the new offerings introduce 13 brands new to LAX and eight that are making their airport debut.

Southwest, construction manager Hensel-Phelps and architects from PGAL worked closely with URW to integrate shopping and dining destinations throughout the terminal, giving airport guests greater options and more visibility to their gate.

As part of the Terminal 1 unveiling ceremony, Mayor Garcetti also opened the first long-term LA Original store, operated by Marshall Retail Group. LA Original will be the first-year occupant of a retail space at the front of the terminal that will rotate regularly to introduce guests to trending brands and new products. LA Original, a pilot program of the Mayor’s Fund for Los Angeles and the Mayor’s Office of Economic Development, provides a platform to showcase diverse makers and promote locally designed, assembled, or manufactured goods through a line of LA-branded products from across Los Angeles. Proceeds support creative entrepreneur programs.

“The Southwest brand is all about customer service and little surprise-and-delight moments, and today you can feel that energy pulsing in the new terminal,” said Dominic Lowe, Executive Vice President and Group Director for URW Airports. “Terminal 1 is true testament to the results we can achieve in airports when we all come together with a shared vision.”

Here’s a closer look at the full dining and retail lineup:

  • Learn to live Beaming at this ultimate organic superfood café, offering plant-based food, unique cleansing programs and a menu of other delicious delights;
  • Get pampered with on-demand massage, nail and facial services at LAX-first Be Relax;
  • Discover unique gifts for men, women and children at Brookstone;
  • California Pizza Kitchen serves Cali-style cuisine from quality ingredients including hearth-baked pizzas, distinctive pastas, and fresh salads;
  • Cassell’s Hamburgers is a local crown jewel of LA’s culinary realm with a reputation for quality ingredients and pitch perfect plates that have made it the darling of food critics across the nation;
  • Made from fresh, simple ingredients, Chick-fil-A serves up chicken with no added fillers or hormones;
  • The Coffee Bean & Tea Leaf was born and brewed in Southern California, delivering the taste and aroma of the world’s best coffees and teas;
  • Deli & Co puts the “delicatessen” back in deli with fresh, quality ingredients that satisfy cravings morning, noon and night;
  • Taste the consistently perfect bagels, specialty sandwiches, gourmet salads and handcrafted drinks at Einstein’s Bagels;
  • I Love L.A., a go-to spot to pick up must-have travel essentials, souvenirs and news and gift items;
  • Explore unique, natural skincare solutions at Kiehl’s Since 1851;
  • LA Original showcases locally designed, assembled, or manufactured goods through a line of LA-branded products from across Los Angeles;
  • From lipsticks and blush to mascara and eye shadow, MAC Cosmetics is like a cosmetic candy store;
  • Designed to help travelers on their way, the New Stand store and kiosk carry a rotating mix of travel essentials, gifts and accessories while its free mobile app serves up entertaining articles, music, deals and a digital wallet.
  • Pei Wei Asian Diner delivers a veritable nod to the new American trifecta: make it delicious, make it fresh and make it fast;
  • Good food, good drinks, and good fun at Reilly’s Irish Pub, a West Hollywoodoriginal boasting the largest selection of whiskey in Los Angeles;
  • Sample world-class craft beers and quality American comfort food in a vibrant environment at Rock & Brews, a partnership with KISS front men Gene Simmons and Paul Stanley;
  • Shop quality surf wear and lifestyle items from the Southern California brand Sol Surf, an airport first anywhere;
  • Indulge in confections and candies at Treat Me Sweet;
  • Danny Trejo brings an uber-hip, on-trend brand shining bright with star quality appeal in Trejo’s Tacos;
  • Urth Caffé offers its organic coffee and fine teas as well as a fresh, healthy and sustainable menu.

Additional improvements at Terminal 1 include renovation of airline support office space; modernized aircraft parking/apron pavement and modernized hydrant fueling system; improvements to the building facade; a new roof; and relocation of the main terminal entrances to ease traffic congestion.

Construction by the same project team is well underway on Terminal 1.5, a connecting structure between Terminals 1 and 2 that will further expand baggage claim areas and offer Southwest Customers connectivity to the new LAX automated people mover.

Video:

Southwest to add new routes from Nashville

Southwest Airlines Boeing 737-79P WL N7832A (msn 30657) ONT (Michael B. Ing). Image: 944275.

Southwest Airlines today announced it extended its bookable flight schedule through August 5, 2019, bringing several new nonstop flights into its route network.

Records Set in Nashville
Southwest continues its investment in Nashville by offering its biggest schedule ever from Music City.

New Nonstop Routes
Effective June 9, 2019, the carrier will add daily nonstop service between:

Nashville and Burbank
Nashville and San Jose, Calif.

Additionally, the carrier is offering seasonal service on Sundays between Nashvilleand Omaha.

More Weekday Flights
On June 10, 2019, the carrier will also increase the number of roundtrip flights between:

Nashville and Boston, 4 flights day (an increase of one weekday flight)
Nashville and Detroit, 3 flights a day (an increase of one weekday flight)
Nashville and Las Vegas, 4 flights a day (an increase of one flight Sundays-Fridays)
Nashville and Minneapolis, 2 flights a day (an increase of one weekday flight)
Nashville and San Diego, 3 flights a day (an increase of one weekday flight)
Nashville and St. Louis, 4 flights a day (an increase of one weekday flight)

The carrier also announced the return of popular seasonal routes from Nashvilleincluding weekend service between:
Nashville and Norfolk, Va. (Previously operated in 2014)
Nashville and Seattle (Previously operated in Sept. 2018)

“These new flights are a result of the demand we’re seeing from Customers as they ask for more options to the places that matter most in their lives,” said Andrew Watterson, Southwest Airlines’ Executive Vice President and Chief Revenue Officer. “As Nashville’s economy thrives, we want to do what we can to be the region’s top choice for air travel, providing that service with a smile and the Heart that can only be found at Southwest Airlines.”

With the new routes and frequency increases listed above, Southwest will offer 124 departures a day on weekdays and 133 departures on Sundays.

Additional Nonstop Flights to Takeoff in June 2019
Effective June 9, 2019, Southwest will add the following daily nonstop options for travelers:

Between San Diego and Omaha
Between Ontario, Calif. and San Francisco (4 flights a day on weekdays, 3 flights a day on weekends)
Between Austin and Raleigh-Durham

New International Routes
Southwest also announced today it will be adding seasonal service on Saturdays effective June 15, 2019, between:

Baltimore/Washington and Grand Cayman*
Houston (Hobby) and Punta Cana, Dominican Republic*
*Routes are subject to government approvals.

Paine Field Update
Southwest also today announced it has entered into an agreement with Alaska Airlines to transfer the carrier’s slot access to an under-construction passenger terminal at Paine Field (PAE). The decision is based on business considerations and terms of the agreement are confidential. The carrier has since notified airport developers and Snohomish County leaders of its decision.

Next year, Southwest will celebrate 25 years of service to the Puget Sound area through its operation at Seattle-Tacoma International Airport, which offers more than 40 flights a day to 14 cities nonstop during peak travel periods.

Top Copyright Photo (all others by Southwest): Southwest Airlines Boeing 737-79P WL N7832A (msn 30657) ONT (Michael B. Ing). Image: 944275.

Southwest aircraft slide show:

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Southwest Airlines begins operating new flights

Southwest Airlines Boeing 737-76N WL N7705A (msn 32744) BWI (Ron Monroe). Image: 944274.

Southwest Airlines has begun to operate several new routes just in time for the holiday season.

More Options for California Travelers
Northern California Expansion

Southwest continues complementing its robust service for California travelers by strengthening its commitment to San Jose, California. By the end of this month, the carrier will offer up to 98 departures a day to more than two dozen destinations across the United States and Mexico.

To reach that milestone, the carrier began service today between:

San Jose, Calif. and Tucson, Ariz. (nonstop itineraries are available Sundays-Fridays)

Starting Monday, Nov. 5, 2018, the carrier will increase the number of weekday flights between:

San Jose, Calif. and Portland, Ore. (eight roundtrips on weekdays, an increase of two flights each weekday)
San Jose, Calif. and Orange County/Santa Ana (11 roundtrips on weekdays, an increase of one flight each weekday)

Burbank’s New Flights Take Off
Today, the carrier also added nonstop service between:

Burbank and Houston (Hobby) (nonstop itineraries are available Sundays-Fridays)
Burbank and Chicago (Midway) (nonstop itineraries are available Sundays-Fridays)

Growing In the Nation’s Capital
Southwest is growing its presence at Washington, D.C.’s Reagan National airport with more service. The carrier began nonstop service today between Oklahoma Cityand Washington, D.C. (Reagan National).

More weekday service begins Monday, Nov. 5, 2018, with one additional roundtrip flight between:

Washington, D.C. (Reagan National) and Nashville (an increase to four weekday roundtrip flights)
Washington, D.C.
(Reagan National) and Dallas (an increase to five weekday roundtrip flights)

Nonstop Between the Big Easy and the Big Apple
Beginning today, Southwest began operating daily flights between New York(LaGuardia) and New Orleans.

On Monday, Nov. 5, 2018, the carrier will add one additional frequency on routes it currently serves between:

New York (LaGuardia) and Dallas Love Field (an increase to five weekday roundtrip flights)
New York (LaGuardia) and Denver (an increase to three weekday roundtrip flights)
New York (LaGuardia) and Kansas City, Mo. (an increase to two weekday roundtrip flights)

With these new additions, Southwest will offer up to 35 flights a day from LaGuardia.

Passport Stamps for the Holidays
Southwest also began weekend service between Chicago (Midway) and Cabo San Lucas/Los Cabos, Mexico.

Additionally, seasonal daily international service returned on routes between:

Austin and Cancun
Denver and Puerto Vallarta
Ft. Lauderdale/Hollywood and Belize
Ft. Lauderdale/Hollywood and Grand Cayman
Ft. Lauderdale/Hollywood and Turks and Caicos
Houston (Hobby) and Liberia, Costa Rica
St. Louis and Cancun

On Saturday, Nov. 10, 2019, the carrier will resume weekly seasonal service on Saturdays between:

Nashville and Cancun
Columbus, Ohio and Cancun
Indianapolis and Cancun

Even More Nonstop Flights Take Off
Today, the carrier began daily nonstop service linking Denver and Lubbock. Additionally, the airline began nonstop flights on Sundays between Houston (Hobby) and Philadelphia and Houston (Hobby) and Sacramento.

Top Copyright Photo (all others by Southwest): Southwest Airlines Boeing 737-76N WL N7705A (msn 32744) BWI (Ron Monroe). Image: 944274.

Southwest aircraft slide show:

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Southwest reports a third quarter profit

Southwest Airlines Boeing 737-8 MAX 8 N8705Q (msn 42558) LAX (Michael B. Ing). Image: 944056.

Southwest Airlines Company today reported its third quarter 2018 results:

 

  • Record third quarter net income of $615 million
  • Net income of $614 million, excluding special items1
  • Record third quarter earnings per diluted share of $1.08
  • Operating income of $798 million, or $796 million, excluding special items
  • Operating margin2 of 14.3 percent, and net margin3 of 11.0 percent
  • Operating cash flow of $1.3 billion, and free cash flow1 of $817 million
  • Returned $591 million to Shareholders through a combination of share repurchases and dividends
  • Return on invested capital (ROIC)1 pre-tax of 23.4 percent for the 12 months ended September 30, 2018, or 18.1 percent on an after-tax basis

 

Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, “I want to congratulate our Employees on an excellent third quarter 2018 performance, resulting in record third quarter earnings per diluted share. The significant increase in our third quarter 2018 earnings per diluted share was driven by record third quarter operating revenues, lower federal income taxes, and a 4.8 percent year-over-year reduction in share count. Despite higher jet fuel prices and other cost pressures, we grew our third quarter 2018 net margin, year-over-year, which is a notable accomplishment.

“I am grateful to our People for their hard work and resilience, as we continue to consistently deliver stellar margins and returns. With these results, we accrued an additional $135 million in profitsharing for the benefit of our Employees and provided $591 million of share buybacks and dividends for our Shareholders.

“As we finish the year, our revenue momentum has continued into fourth quarter 2018, thus far. Unit revenue trends are stable and have recovered nicely from first half 2018. We are particularly pleased with the performance of our new revenue management tools. With our new reservation system in place since last year, we have more capabilities and are well-positioned to drive revenue growth. We expect $80 million to $90 million of year-over-year improvement in fourth quarter 2018 pre-tax results from these enhanced capabilities, which is in line with our annual 2018 pre-tax goal of $200 million.

“On the cost side, our third quarter 2018 unit cost performance was in line with our expectations. Our fuel hedge portfolio mitigated a significant portion of market jet fuel price increases, and we are pleased with the fuel hedge in place for both fourth quarter 2018 and annual 2019. Based on current trends, we continue to expect modest year-over-year inflation in our annual 2018 unit costs, excluding fuel and oil expense and profitsharing expense.

“Based on our second half 2018 revenue trends, we are well-positioned for year-over-year unit revenue growth in 2019, with easier year-over-year comparisons in first half. We also will continue to experience year-over-year unit cost inflation in 2019, excluding fuel and oil expense and profitsharing expense, of at least three percent, as we continue investing in and deploying new operations, technology, and airport infrastructure to support future growth. With the 2017 retirement of our Boeing 737-300 Classic fleet, launch of the 737 MAX, and implementation of our new reservation system, we continue with our efforts to modernize our fleet, optimize our network, and pursue additional revenue opportunities. Given our healthy revenue outlook, and despite expected cost increases, our 2019 goal is to expand margins year-over-year. We are refocusing our efforts to control costs and drive efficiency, and, as ever, we remain steadfast in our efforts to produce industry-leading margins and superior returns in excess of our cost of capital.

“For next year, Hawaii is our expansion focus, and we continue to expect 2019 available seat miles (ASMs, or capacity) to increase no more than five percent, year-over-year.”

Revenue Results and Outlook
The Company’s third quarter 2018 total operating revenues increased 5.1 percent, year-over-year, to a third quarter record $5.6 billion. Third quarter 2018 operating revenue per ASM (RASM, or unit revenues) increased 1.2 percent, year-over-year, driven largely by a passenger revenue yield increase of 2.3 percent, year-over-year, offset slightly by a load factor decline of 0.9 points, year-over-year, to 83.9 percent. Third quarter 2018 RASM also included an approximate one-half point year-over-year positive impact as a result of approximately 2,200 flight cancellations in third quarter 2018, due to thunderstorms and weather-related disruptions (the “weather cancellations”).

Based on current bookings and yield trends, the Company expects fourth quarter 2018 RASM to increase in the one to two percent range, compared with fourth quarter 2017 RASM of 13.88 cents, as recast in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (or the “New Revenue Standard”). The Company adopted the New Revenue Standard effective January 1, 2018, and utilized the full retrospective method of adoption allowed by the standard. As such, results for the three and nine months ended September 30, 2017, have been recast under the new standard in order to be comparable with current period results in the accompanying unaudited Condensed Consolidated Statement of Income. The Company’s third quarter 2018 year-over-year RASM increase included an approximate one point headwind from the change in the Rapid Rewards revenue recognition method as a result of the Company’s adoption of the New Revenue Standard. The Company continues to expect an immaterial impact to its fourth quarter and annual 2018 year-over-year RASM trends as a result of the New Revenue Standard.

Cost Performance and Outlook
Third quarter 2018 total operating expenses increased 7.2 percent, year-over-year, to $4.8 billion. Total operating expenses per ASM (CASM, or unit costs) increased 3.1 percent, as compared with third quarter 2017. Excluding special items in both periods, third quarter 2018 total operating expenses increased 8.1 percent to $4.8 billion, or 4.1 percent on a unit basis, year-over-year.

Effective January 1, 2018, the Company early adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new standard eliminated ineffectiveness for all derivatives designated in a hedge for accounting purposes, as well as changed the Company’s classification of premium expense associated with fuel hedges from Other (gains) and losses, net, to Fuel and oil expense within the unaudited Condensed Consolidated Statement of Income. As such, the classification of premium expense for the three and nine months ended September 30, 2017, has been recast under the new standard to be comparable with current period results.

Third quarter 2018 economic fuel costs1 were $2.25 per gallon and included $.06 per gallon in premium expense and $.10 per gallon in favorable cash settlements from fuel derivative contracts, compared with $2.07 per gallon in third quarter 2017, as recast, which included $.06 per gallon in premium expense and $.31 per gallon in unfavorable cash settlements from fuel derivative contracts. Third quarter 2018 ASMs per gallon, or fuel efficiency, improved 1.1 percent year-over-year, driven primarily by the retirement of the Classic fleet and the addition of more fuel-efficient 737-800 and 737 MAX 8 aircraft.

Based on the Company’s existing fuel derivative contracts and market prices as of October 19, 2018, fourth quarter 2018 economic fuel costs are estimated to be in the range of $2.30 to $2.35 per gallon4, including $.07 per gallon in premium expense and an estimated $.14 per gallon in favorable cash settlements from fuel derivative contracts, compared with $2.16 per gallon in fourth quarter 2017, as recast, which included $.07per gallon in premium expense and $.19 per gallon in unfavorable cash settlements from fuel derivative contracts. As of October 19, 2018, the fair market value of the Company’s fuel derivative contracts settling in fourth quarter 2018 was an asset of approximately $82 million, and the fair market value of the hedge portfolio settling in 2019 and beyond was an asset of approximately $521 million.

Based on the Company’s existing fuel derivative contracts and market prices as of October 19, 2018, annual 2019 economic fuel costs are estimated to be in the range of $2.35 to $2.40 per gallon4, including $.04 per gallon in premium expense and an estimated $.08 per gallon in favorable cash settlements from fuel derivative contracts. 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, third quarter 2018 operating expenses increased 7.0 percent, as compared with third quarter 2017. Third quarter 2018 profitsharing expense was $135 million, as compared with $127 million in third quarter 2017. Excluding fuel and oil expense, profitsharing expense, and special items, third quarter 2018 operating expenses also increased 7.0 percent, or 3.0 percent on a unit basis, year-over-year. This increase was due primarily to shifting of spending from first half 2018 into third quarter 2018, higher maintenance and advertising expenses, and a nearly one-point year-over-year negative impact as a result of the third quarter 2018 weather cancellations.

Based on current cost trends, the Company estimates fourth quarter 2018 CASM, excluding fuel and oil expense and profitsharing expense, to be flat to up one percent, compared with fourth quarter 2017’s 8.82 cents, as recast, which excluded fuel and oil expense, profitsharing expense, and special items. The Company continues to estimate annual 2018 CASM, excluding fuel and oil expense and profitsharing expense, to be flat to up one percent, compared with annual 2017’s 8.47 cents, as recast, which excluded fuel and oil expense, profitsharing expense, and special items.

Third Quarter Results
Third quarter 2018 net income was a third quarter record $615 million, or a record third quarter $1.08 per diluted share, compared with third quarter 2017 net income of $528 million, or $.88 per diluted share. Excluding special items, third quarter 2018 net income was $614 million, or a third quarter record $1.08 per diluted share, compared with third quarter 2017 net income of $554 million, or $.93 per diluted share, and compared with First Call third quarter 2018 consensus estimate of $1.06 per diluted share.

The Company estimates its effective tax rate to be approximately 23 percent for annual 2018. For annual 2019, the Company estimates its effective tax rate to be approximately 23.5 percent.

Liquidity and Capital Deployment
As of September 30, 2018, the Company had approximately $3.8 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1 billion. Net cash provided by operations during third quarter 2018 was $1.3 billion, capital expenditures were $454 million, and free cash flow was $817 million. The Company repaid $98 million in debt and capital lease obligations during third quarter 2018, and expects to repay approximately $87 million in debt and capital lease obligations during fourth quarter 2018.

During third quarter 2018, the Company returned $591 million to its Shareholders through the repurchase of $500 million in common stock and the payment of $91 million in dividends. The Company repurchased 8.2 million shares of common stock pursuant to a $500 million accelerated share repurchase program (ASR) launched during third quarter 2018 and completed earlier this month. The Company’s third quarter ASR completed the remaining $350 million of its previous $2.0 billion share repurchase program that had been authorized by its Board of Directors in May 2017, and initiated the $2.0 billion share repurchase program authorized by its Board of Directors in May 2018. The Company has $1.85 billion remaining under its current authorization.

For the nine months ended September 30, 2018, net cash provided by operations was approximately $3.9 billion. Capital expenditures, including net proceeds from assets constructed for others, were approximately $1.3 billion, and free cash flow was $2.6 billion. This enabled the Company to return approximately $1.8 billion to Shareholders through the repurchase of $1.5 billion in common stock and the payment of $332 million in dividends.

The Company continues to estimate its annual 2018 capital expenditures to be in the $2.0 to $2.1 billion range. For annual 2019, capital expenditures are expected to be similar to 2018 levels.

Fleet and Capacity
The Company ended third quarter 2018 with 742 aircraft in its fleet. This reflects the third quarter delivery of five new 737-800s and seven new 737 MAX 8s. The Company continues to expect to end 2018 with 751 aircraft in its fleet based on the current aircraft delivery schedule. Additional information regarding the Company’s aircraft delivery schedule is included in the accompanying tables:

The Company now expects its annual 2018 year-over-year ASM growth to be approximately four percent, slightly lower than previously expected, due primarily to the third quarter 2018 weather cancellations. The Company now expects fourth quarter 2018 year-over-year ASM growth to be in the 6.0 to 6.5 percent range.

1See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items, free cash flow, and ROIC. In addition, information regarding special items, ROIC, and economic results is included in the accompanying reconciliation tables.
2Operating margin is calculated as operating income divided by operating revenues.
3Net margin is calculated as net income divided by operating revenues.
4Based on the Company’s existing fuel derivative contracts and market prices as of October 19, 2018, fourth quarter 2018 fuel costs per gallon on a GAAP and economic basis are both estimated to be in the $2.30 to $2.35 range, and annual 2019 fuel costs per gallon on a GAAP and economic basis are both estimated to be in the $2.35 to $2.40 range. See Note Regarding Use of Non-GAAP Financial Measures.

Top Copyright Photo (all others by Southwest): Southwest Airlines Boeing 737-8 MAX 8 N8705Q (msn 42558) LAX (Michael B. Ing). Image: 944056.

Southwest aircraft slide show:

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Southwest Airlines takes delivery of the last Boeing 737 Next Generation

Southwest Airlines on October 1, 2018 took delivery of its last Boeing 737 Next Generation aircraft (737-800 N8583Z, msn 64799). The airline announced the milestone on social media:

On October 1, 2018, we welcome our last delivery of @BoeingAirplanes 737 Next Generation aircraft to @SouthwestAir. We’re proud of our 21-year history with the aircraft, which will continue to serve us well for many years. Now, we look forward to our future with the 737 MAX 7 and 8 aircraft!

Photo: Southwest Airlines.