01—Abstract
Summary
Summary of the 10-K filed February 5, 2003. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported 2002 net income of $241.0 milliona ($.30 per share, diluted), down from $511.1 million ($.63 per share, diluted) in 2001, a decrease of $270.1 million or 52.9 percent.
Operating income fell to $417.3 millionb from $631.1 million, a decrease of 33.9 percent. Management described 2002 as one of the most difficult years in commercial aviation history, but noted the company was the only major carrier to remain profitable for the 30th consecutive year. Operating revenues were $5.52 billion, down $33.4 million or .6 percent, as passenger revenues fell amid a 65.9 percent load factor versus 68.1 percent in 2001, on capacity growth of 5.5 percent.
Results were supported by $48 millionc of Air Stabilization Act grant gains in 2002, versus $235 million in 2001; excluding special items, adjusted net income was $198.1 million ($.24 per share, diluted). Cost control was a key theme. Operating expenses per available seat mile fell 1.7 percent to 7.41 cents, driven by lower profitsharing, fuel and commission expense, although insurance costs per ASM rose more than 175 percent.
Fuel averaged 68.01 cents per gallon, with hedges covering approximately 83 percent of expected 2003 fuel consumption. Management expects 2003 operating expenses per ASM to rise on higher fuel and salary costs, while forecasting ASM growth of about four percent. The balance sheet remained solid, with cash and cash equivalents of $1.82 billiond at year-end, total assets of $8.95 billion, and stockholders' equity of $4.42 billion.
Long-term debt rose to $1.55 billion from $1.33 billion after a $385 million 6.5% notes offering in March 2002. Operating cash flow was $520.2 million, down from $1.48 billion in 2001, and the company had aircraft purchase commitments of about $3.2 billion. The company has an unfunded aircraft delivery schedule of 17 Boeing 737-700s in 2003.
02—Key points
Key Highlights
- Net income of $241.0 million ($.30 per diluted share) in 2002, down 52.9 percent from $511.1 million in 2001, marking the 30th consecutive profitable year.
- Operating income declined to $417.3 million from $631.1 million, a 33.9 percent decrease.
- Passenger load factor fell to 65.9 percent from 68.1 percent as capacity (ASMs) grew 5.5 percent against a 2.0 percent RPM increase.
- Government Air Stabilization Act grants contributed $48 million in 2002 versus $235 million in 2001; excluding special items, adjusted diluted EPS was $.24 versus $.51.
- Operating expenses per ASM decreased 1.7 percent to 7.41 cents, though aviation insurance costs per ASM rose more than 175 percent.
- Year-end cash of $1.82 billion, with a $575 million bank revolving credit facility and about $3.2 billion in aircraft purchase commitments.
- Hedges cover approximately 83 percent of anticipated 2003 jet fuel requirements; first quarter 2003 fuel cost is forecast at $.70 to $.75 per gallon.
03—Questions
Frequently Asked Questions
Why did Southwest's earnings decline in 2002?
Net income fell to $241.0 million from $511.1 million. The filing attributes this to weak demand after the September 11, 2001 attacks, heavy fare discounting that reduced passenger yields, lower load factors from capacity growth, higher insurance and security costs, and smaller government grant gains ($48 million in 2002 versus $235 million in 2001).
How strong is Southwest's balance sheet?
At December 31, 2002, the company had cash and cash equivalents of $1.82 billion, total assets of $8.95 billion, and stockholders' equity of $4.42 billion. Long-term debt was $1.55 billion, up from $1.33 billion, and the company met or exceeded all minimum covenant and credit rating standards in its debt agreements.
What is Southwest's outlook for 2003?
The company expects available seat mile capacity to grow about four percent with 11 net aircraft additions. It expects operating expenses per ASM to increase due to higher fuel costs and salaries, wages, and benefits, while expecting insurance costs per ASM to decline. First quarter 2003 unit revenues should exceed the first quarter 2002 level of $.0761 if current trends continue.
What is Southwest's exposure to fuel prices?
Jet fuel averaged $.6801 per gallon in 2002, and fuel represented 14.9 percent of operating expenses. The company hedged about 83 percent of 2003 anticipated fuel requirements. A ten percent change in fuel-related commodity prices would change the fair value of its derivatives by approximately $135 million.
What risks did the company identify regarding insurance and security?
Aviation insurance costs per ASM rose more than 175 percent in 2002. The federal government provides third-party war-risk coverage through August 31, 2003, which may be extended to December 31, 2003, but the company cannot predict whether that coverage will be extended or whether comparable commercial coverage will be available at reasonable premiums.
04—Continue