01—Abstract
Summary
Summary of the 10-K filed February 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported a net income of $178 milliona ($.24 per share, diluted) for 2008, its 36th consecutive year of reported profit, down from $645 million ($.84 per share, diluted) in 2007.
Operating income fell to $449 millionb from $791 million, a 43.2 percent decrease, as fuel and oil expense rose $1.0 billion, or 38.0 percent, to $3.7 billion. Operating revenues increased 11.8 percent to $11.02 billion, driven by an 11.8 percent increase in average fares. Management notes that much of the net income decline reflected SFAS 133 fuel hedge accounting adjustments, which were a $19 million net loss in 2008 versus a $360 million net gain in 2007, and that operating income is the better indicator of performance.
Fuel hedging was the dominant issue for the year. Cash settlements from fuel derivatives were $1.3 billionc in 2008, but the company reduced its net hedge for 2009 through 2013 to approximately ten percent of anticipated consumption after fuel prices collapsed in the fourth quarter. The net fuel derivative liability was $992 million at year-end, and the company states it expects to pay above-market fuel prices in those years.
Operating cash flow was negative $1.5 billiond in 2008, largely because of a $2.2 billion net outflow from counterparty cash deposits, compared with $2.8 billion provided in 2007. Liquidity included $1.8 billion in cash and short-term investments at year-end, and the company borrowed $600 million under a term loan, $400 million under its revolver, and $400 million of 10.5% secured notes during the year. Looking to 2009, the company plans to reduce its fleet by a net two aircraft, expects first-quarter available seat miles to be four to five percent lower than in first quarter 2008, and plans to begin Minneapolis-St. Paul service in March 2009.
Standard & Poor's and Fitch downgraded the company's rating from "A-" to "BBB+", and Moody's affirmed "Baa1". The company did not repurchase shares after February 2008 and states that it does not believe repurchases are prudent under current conditions.
02—Key points
Key Highlights
- Net income of $178 million ($.24 per diluted share) in 2008, down from $645 million ($.84 per diluted share) in 2007; operating income of $449 million, a 43.2 percent decrease.
- Fuel and oil expense rose $1.0 billion, or 38.0 percent, to $3.71 billion, with the average jet fuel cost per gallon increasing from $1.80 to $2.44 despite hedging gains.
- Fuel hedges produced $1.3 billion in cash settlement gains in 2008, but the net fuel derivative liability was $992 million at December 31, 2008, after the company reduced its hedge to about ten percent of anticipated consumption for 2009 through 2013.
- Operating revenues rose 11.8 percent to $11.02 billion, driven by an 11.8 percent increase in average fares, while revenue passenger miles increased only 1.6 percent.
- Operating cash flow was negative $1.5 billion in 2008, versus $2.8 billion provided in 2007, primarily due to a $2.2 billion net outflow in counterparty cash deposits.
- Cash and short-term investments totaled $1.8 billion at year-end; the company raised $600 million in a term loan, $400 million under its revolver, and $400 million of 10.5% secured notes.
- Standard & Poor's and Fitch downgraded the credit rating from "A-" to "BBB+"; Moody's reaffirmed "Baa1"; no share repurchases were made after February 2008.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $11.02B$9.86B | +11.8% |
| Operating Expenses | $10.57B$9.07B | +16.6% |
| Operating Income | $449.00M$791.00M | −43.2% |
| Interest Expense | $130.00M-$119.00M | +209.2% |
| Net Income | $178.00M$645.00M | −72.4% |
| EPS (Basic) | $0.24$0.85 | −71.8% |
| EPS (Diluted) | $0.24$0.84 | −71.4% |
| Shares Outstanding (Basic) | 735757 | −2.9% |
| Shares Outstanding (Diluted) | 739768 | −3.8% |
05—Questions
Frequently Asked Questions
Why did net income fall so sharply in 2008 if the company still reported a profit?
Net income fell to $178 million from $645 million mainly because of SFAS 133 fuel derivative accounting. Those adjustments were a $19 million net loss in 2008 versus a $360 million net gain in 2007. Operating income also declined 43.2 percent, to $449 million, as fuel expense rose sharply, and management says operating income better reflects performance.
How did the company's fuel hedging program affect 2008 results?
The company recorded fuel hedge gains of $1.1 billion in fuel and oil expense and received $1.3 billion in cash settlements in 2008. Even so, the average fuel cost per gallon rose to $2.44 from $1.80. In the fourth quarter, the company reduced its 2009 through 2013 hedge to about ten percent of anticipated consumption and now expects to pay higher-than-market fuel prices for those years.
What are the main liquidity concerns disclosed in the filing?
Operating cash flow was negative $1.5 billion in 2008, largely due to a $2.2 billion net outflow of counterparty cash collateral deposits. Year-end cash and short-term investments were $1.8 billion, with $200 million remaining under the $600 million revolver. The company also pledged 20 Boeing 737-700 aircraft as collateral in lieu of cash for a range of potential hedge obligations, and a credit downgrade would likely raise borrowing costs.
What is the outlook for 2009 capacity and fleet?
The company expects first-quarter 2009 available seat miles to be four to five percent lower than first quarter 2008, and about a four percent decline for full-year 2009. It plans to reduce its fleet by a net two aircraft, to 535 737s by the end of 2009, and to begin Minneapolis-St. Paul service in March 2009. It also expects to take possession of 13 new 737-700 aircraft in 2009.
Are there significant legal or regulatory risks disclosed?
The FAA sought to fine the company approximately $10 million over an airworthiness directive matter, and the company is negotiating a settlement. Two putative class actions and a shareholder derivative action were filed, which the company believes are without merit. The company also noted a pending ruling on a $50 million Aviation Security Infrastructure Fee challenge, expected in 2009.
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