What drove the increase in revenue and costs in 2004?

Operating revenues increased $593 million, or 10.0 percent, primarily from a $539 million increase in passenger revenues, which reflected an 11.4 percent increase in revenue passenger miles on a 7.1 percent rise in available seat miles. Operating expenses rose $522 million, or 9.6 percent, with fuel and oil expense per ASM up 12.1 percent due to higher jet fuel prices, partly offset by hedging gains and the elimination of travel agent commissions.

How is Southwest managing fuel price risk?

The company uses a mix of purchased call options, collar structures, and fixed-price swaps. As of December 31, 2004, it had hedged 85 percent of anticipated 2005 fuel consumption at approximately $26 per barrel crude oil equivalent, 65 percent for 2006 at about $32 per barrel, and over 45 percent for 2007 at about $31 per barrel. The fair value of its fuel hedge derivatives was a net asset of $796 million at year-end 2004.

What is the company's financial position and capital activity?

At December 31, 2004, Southwest had $1.3 billion in cash and cash equivalents, total assets of $11.34 billion, long-term debt of $1.70 billion, and stockholders' equity of $5.52 billion. During 2004 it issued $520 million in long-term debt, including $350 million of 5.25% senior unsecured notes due 2014, and repurchased $246 million of common stock under a $300 million authorization. It also had a $575 million bank revolving credit facility with no borrowings outstanding.

What are the company's expectations for 2005?

Southwest expects ASM capacity to grow approximately 10 percent in 2005 with a planned net addition of 29 aircraft and 34 scheduled Boeing 737-700 deliveries. It expects operating expenses per ASM excluding fuel to decline from first quarter 2004 levels and expects its 2005 effective tax rate to be about 38 percent. It also expects an increase in interest expense excluding new debt offerings, and expects the ATA codeshare to produce additional annual revenues of $25 million to $50 million.

LUV 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 4, 2005. Cited figures are marked; the original filing is the authoritative source.

Southwest Airlines Co. reported net income of $313 million^a ($.38 per share, diluted) for 2004, its 32nd consecutive year of profit, compared with $442 million ($.54 per share, diluted) in 2003.

The 2003 result included a $271 million^b government grant under the Emergency Wartime Supplemental Appropriations Act; excluding that grant, 2004 net income rose $15 million, or 5.0 percent, versus 2003's $298 million. Operating revenues increased $593 million, or 10.0 percent, to $6.53 billion, driven by an 11.4 percent increase in revenue passenger miles and a 2.7 point rise in load factor to 69.5 percent, while passenger revenue yield per RPM fell 1.8 percent amid heavy fare discounting. Operating expenses rose $522 million, or 9.6 percent, with fuel and oil expense per ASM up 12.1 percent as the average jet fuel cost per gallon rose to 82.8 cents from 72.3 cents, partly offset by $455 million in hedging gains.

The company ended 2004 with $1.3 billion^c in cash and cash equivalents, total assets of $11.34 billion, and stockholders' equity of $5.52 billion. Operating cash flow was $1.2 billion, and the company repurchased about $246 million of common stock during the year. Southwest expects ASM capacity to grow about 10 percent in 2005 with a net addition of 29 aircraft, and it expects unit costs excluding fuel to be lower than in 2004.

Fuel hedges cover approximately 85 percent of anticipated 2005 fuel consumption at a crude oil equivalent price of about $26^d per barrel. The filing also describes the company's first codeshare arrangement with ATA Airlines at Chicago Midway, following a $40 million purchase of certain ATA assets and $40 million in debtor-in-possession financing provided to ATA.

02—Key points

Key Highlights

Net income of $313 million ($.38 per diluted share) in 2004, versus $442 million ($.54 per diluted share) in 2003, which included a $271 million government grant
Excluding the 2003 government grant, 2004 net income increased $15 million, or 5.0 percent, to the $313 million reported for 2004 from $298 million in 2003
Operating revenues rose $593 million, or 10.0 percent, to $6.53 billion, with load factor up 2.7 points to 69.5 percent
Passenger revenue yield per RPM declined 1.8 percent to $.1176 amid industry fare discounting, and management expects pressure on yields to continue
Fuel and oil expense per ASM rose 12.1 percent as jet fuel cost per gallon increased to 82.8 cents from 72.3 cents, net of $455 million in hedging gains
Fuel hedges cover about 85 percent of expected 2005 fuel consumption at approximately $26 per barrel crude oil equivalent; a one-cent change in jet fuel price affects fuel expense by about $13 million per year
Capacity expected to grow about 10 percent in 2005 with a net addition of 29 aircraft, and 2005 unit costs excluding fuel are expected to be lower than 2004

03—Questions

Frequently Asked Questions

How did Southwest's 2004 profitability compare with 2003?
Net income was $313 million ($.38 per diluted share) in 2004, down $129 million, or 29.2 percent, from $442 million ($.54 per diluted share) in 2003. The 2003 figure included a $271 million grant under the Emergency Wartime Supplemental Appropriations Act. Excluding that grant, 2004 net income increased $15 million, or 5.0 percent, from $298 million. Operating income for 2004 was $554 million, an increase of $71 million, or 14.7 percent.
What drove the increase in revenue and costs in 2004?
Operating revenues increased $593 million, or 10.0 percent, primarily from a $539 million increase in passenger revenues, which reflected an 11.4 percent increase in revenue passenger miles on a 7.1 percent rise in available seat miles. Operating expenses rose $522 million, or 9.6 percent, with fuel and oil expense per ASM up 12.1 percent due to higher jet fuel prices, partly offset by hedging gains and the elimination of travel agent commissions.
How is Southwest managing fuel price risk?
The company uses a mix of purchased call options, collar structures, and fixed-price swaps. As of December 31, 2004, it had hedged 85 percent of anticipated 2005 fuel consumption at approximately $26 per barrel crude oil equivalent, 65 percent for 2006 at about $32 per barrel, and over 45 percent for 2007 at about $31 per barrel. The fair value of its fuel hedge derivatives was a net asset of $796 million at year-end 2004.
What is the company's financial position and capital activity?
At December 31, 2004, Southwest had $1.3 billion in cash and cash equivalents, total assets of $11.34 billion, long-term debt of $1.70 billion, and stockholders' equity of $5.52 billion. During 2004 it issued $520 million in long-term debt, including $350 million of 5.25% senior unsecured notes due 2014, and repurchased $246 million of common stock under a $300 million authorization. It also had a $575 million bank revolving credit facility with no borrowings outstanding.
What are the company's expectations for 2005?
Southwest expects ASM capacity to grow approximately 10 percent in 2005 with a planned net addition of 29 aircraft and 34 scheduled Boeing 737-700 deliveries. It expects operating expenses per ASM excluding fuel to decline from first quarter 2004 levels and expects its 2005 effective tax rate to be about 38 percent. It also expects an increase in interest expense excluding new debt offerings, and expects the ATA codeshare to produce additional annual revenues of $25 million to $50 million.

04—Continue

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