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Southwest Airlines Annual Report, Year Ended Dec 31, 2005

Filing Date
Filed February 1, 2006
Period End
December 31, 2005
Security
LUV
In the record · 2016–202610-K1210-Q338-K204

LUV filed 12 annual reports (10-K), 33 quarterly reports (10-Q) and 204 current reports (8-K) between 2016 and 2026.

  1. Leadership change8-K · Jan ’17Jan ’17
  2. FY2018 annual report10-K · Feb ’19Feb ’19
  3. Leadership change8-K · Nov ’21Nov ’21
  4. Material agreement8-K · Nov ’25Nov ’25

01—Abstract

Summary

Summary of the 10-K filed February 1, 2006. Cited figures are marked; the original filing is the authoritative source.

Southwest Airlines Co. ("Southwest") reported 2005 net income of $548 milliona ($.67 per diluted share), up 75.1% from $313 million in 2004, on operating revenues of $7.58 billion and operating income of $820 million, up 48.0%.

Operating revenues rose 16.1%, driven by a 10.8% increase in available seat miles, a record 70.7% load factor, and a 2.8% rise in passenger revenue yield per RPM. Fuel and oil expense rose to $1.34 billionb, or 19.8% of operating expenses, despite a hedging gain of $892 million that offset much of the jet fuel price increase; the average jet fuel cost per gallon rose to $1.03 from $.83. The company ended 2005 with cash and cash equivalents of $2.28 billion, total assets of $14.22 billion, and stockholders' equity of $6.68 billion.

Net cash provided by operating activities was $2.23 billionc. Fuel hedge contracts had a fair value of $1.7 billion at year-end, and the company held $950 million in cash collateral deposits under bilateral collateral provisions. Management said it has hedged over 70% of anticipated 2006 fuel consumption at about $36 per barrel, but that the 2006 hedge position is weaker than in 2005, and it expects a significant increase in fuel costs in the first quarter of 2006.

Looking ahead, Southwest plans about 8% ASM capacity growth in 2006 with 33 new 737-700 deliveries, and its board authorized a new $300 milliond share repurchase program in January 2006. The filing also discloses a change in accounting for heavy maintenance on 737-300 and 737-500 aircraft effective January 1, 2006, and the adoption of SFAS 123R, which management expects to add about $65 million to 2006 salaries, wages, and benefits expense. A December 8, 2005 accident involving Flight 1248 at Chicago Midway Airport is disclosed, with management not expecting a material adverse effect given insurance coverage.

02—Key points

Key Highlights

  1. Net income of $548 million ($.67 per diluted share) for 2005, up 75.1% from $313 million in 2004
  2. Operating revenues of $7.58 billion, up 16.1%; operating income of $820 million, up 48.0%
  3. Record 70.7% load factor for 2005, with passenger revenue yield per RPM up 2.8%
  4. Fuel hedging reduced fuel and oil expense by $892 million in 2005, while average jet fuel cost rose to $1.03 per gallon from $.83
  5. Cash and short-term investments of $2.5 billion at December 31, 2005; net cash from operations of $2.23 billion
  6. Hedges cover over 70% of anticipated 2006 fuel needs at about $36 per barrel; the 2006 hedge position is weaker than in 2005
  7. New $300 million share repurchase program authorized in January 2006; 2006 capacity expected to grow about 8% with 33 new 737-700 aircraft

03—Questions

Frequently Asked Questions

  1. How did Southwest's fuel hedging affect 2005 results?

    The filing states that the fuel hedging program reduced fuel and oil expense by $892 million in 2005. Hedging also produced an unrealized net gain of $110 million, recorded in other (gains) losses, net, under SFAS 133. The company noted that its 2006 hedge position is not as strong as in 2005, and it expects significantly higher fuel costs in the first quarter of 2006.

  2. What drove the increase in 2005 operating income?

    The filing attributes the $266 million increase in operating income, or 48.0%, primarily to higher revenues from fleet growth, improved load factors, and higher fares, which more than offset a significant increase in jet fuel costs. Available seat miles grew 10.8%, and total operating expenses rose 13.2%.

  3. What are the main expected cost pressures for 2006?

    Southwest expects a $20 million increase in first-quarter salaries, wages, and benefits from adopting SFAS 123R, and about $65 million for the full year. It also expects higher fuel costs, a $24 million retroactive TSA security fee assessment received in January 2006, and an increase in interest expense from higher expected floating rates.

  4. What are the company's capacity and financing plans for 2006?

    Available seat miles are expected to grow about 8% in 2006 with 33 new 737-700 aircraft. The board authorized up to $300 million in new share repurchases in January 2006. The company has a $600 million revolving credit line, no borrowings outstanding at year-end, and $1.3 billion in shelf registrations for debt that it may issue in 2006.

04—Continue

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