01—Abstract
Summary
Summary of the 10-K filed February 4, 2008. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported 2007 net income of $645 milliona ($.84 per diluted share), up from $499 million ($.61 per diluted share) in 2006.
The filing states that this increase was entirely driven by gains and losses recorded under SFAS 133 on fuel derivatives expiring in future periods. Operating income, which excludes these items, declined 15.3 percent to $791 millionb, primarily because fuel costs rose faster than revenues. Operating revenues rose to $9.86 billion from $9.09 billion, while operating expenses increased to $9.07 billion.
Jet fuel averaged $1.70c per gallon in 2007 versus $1.53 in 2006, even after a $686 million reduction to fuel and oil expense from hedging. Management said it expects net cash expenditures for jet fuel in 2008 could increase by more than $500 million compared with 2007. Fuel derivatives in place for 2008 cover over 70 percent of expected consumption at about $51 per barrel of crude oil equivalent.
Southwest plans to grow its fleet by a net seven aircraft to 527 737s by year-end 2008, with net ASM capacity growth of four to five percent. Fitch cut the company's senior unsecured debt rating to "A-" in January 2008. The Board authorized a new $500 milliond share repurchase program in January 2008, following $1.0 billion of repurchases in 2007.
The balance sheet at December 31, 2007 showed total assets of $16.77 billion, stockholders' equity of $6.94 billion, and cash plus short-term investments of $2.78 billion. Fuel derivative contracts had a net fair value of $2.4 billion, of which about $1.1 billion is expected to settle in 2008. The company also held $2.0 billion in cash collateral deposits from fuel hedge counterparties, which are included in accrued liabilities.
02—Key points
Key Highlights
- Net income rose to $645 million ($.84 diluted EPS) from $499 million, but the filing attributes the increase entirely to SFAS 133 fuel derivative gains and losses, not operations.
- Operating income fell 15.3 percent to $791 million as jet fuel cost per gallon rose to $1.70 from $1.53 despite a $686 million hedging benefit to fuel and oil expense.
- Operating revenues increased 8.5 percent to $9.86 billion, driven mainly by passenger revenue growth from a 7.5 percent increase in available seat miles.
- Management expects 2008 net jet fuel cash expenditures to rise by more than $500 million versus 2007, with over 70 percent of expected 2008 consumption hedged at about $51 per barrel.
- Fleet grew to 520 Boeing 737s at year-end 2007; the company plans a net addition of seven aircraft in 2008, with ASM capacity growth of four to five percent.
- Capital returns continued: $1.0 billion of common stock repurchased in 2007 and a new $500 million program authorized in January 2008.
- Fitch lowered the senior unsecured debt rating to "A-" in January 2008; Standard & Poor's and Fitch had rated it "A" and Moody's "Baa1" at year-end 2007.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 4, 2008Financial Statements
| Revenue | $9.86B |
| Operating Expenses | $9.07B |
| Operating Income | $791.00M |
| Interest Expense | -$119.00M |
| Net Income | $645.00M |
| EPS (Basic) | $0.85 |
| EPS (Diluted) | $0.84 |
| Shares Outstanding (Basic) | 757 |
| Shares Outstanding (Diluted) | 768 |
05—Questions
Frequently Asked Questions
Why did net income increase in 2007 if operating income declined?
The filing states that the $146 million increase in net income was entirely driven by SFAS 133 gains and losses on fuel derivatives expiring in future periods. These net gains totaled $360 million in 2007 versus net losses of $101 million in 2006, and are recorded below operating income in Other (gains) losses.
How much did fuel costs affect Southwest's 2007 results?
Jet fuel and oil represented 28.0 percent of operating expenses in 2007, up from 26.2 percent in 2006. Average jet fuel cost rose to $1.70 per gallon from $1.53, and fuel and oil expense was $2.54 billion. Hedging reduced fuel and oil expense by $686 million in 2007.
What is the company's outlook for 2008 fuel costs and capacity?
Management expects net cash jet fuel expenditures in 2008 could rise by more than $500 million versus 2007. It expects first-quarter 2008 jet fuel cost of about $2.00 per gallon, excluding certain hedge effects. The company plans a net addition of seven aircraft in 2008 and expects ASM growth of four to five percent for the year.
What balance sheet and liquidity resources did Southwest report at year-end 2007?
Total assets were $16.77 billion and stockholders' equity was $6.94 billion. Cash and cash equivalents were $2.21 billion and short-term investments were $566 million. The company also had a $600 million revolving credit facility, undrawn at year-end, and held $2.0 billion in fuel hedge counterparty cash collateral deposits.
What labor risks does the filing disclose?
Approximately 82 percent of employees were represented by labor unions at December 31, 2007. The Pilots' agreement became amendable in September 2006 and negotiations were ongoing. The Flight Attendants' agreement becomes amendable in June 2008, and the Ramp, Operations, Provisioning, and Freight Agents' agreement in July 2008.
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