01—Abstract
Summary
Summary of the 10-K filed January 29, 2010. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported 2009 net income of $99 milliona ($.13 per diluted share), down from $178 million ($.24 per share) in 2008.
Operating income fell to $262 millionb from $449 million, and operating revenues declined to $10.35 billion from $11.02 billion. Management attributed the results largely to fuel hedging accounting: the Company recognized a net total of $408 million in losses from fuel hedges in 2009, versus $1.0 billion in net gains in 2008. Jet fuel and oil expense fell to $3.04 billion from $3.71 billion, and the Company cut capacity by 5.1 percent in available seat miles while load factor rose to a record 76.0 percent.
The Company responded to the downturn with capacity reductions, fare sales, the "Bags Fly Free" campaign, new ancillary fees, and the Freedom '09 early retirement program, which had a one-time $66 millionc charge. Management expects a year-over-year increase in unit revenues for first quarter 2010 and anticipates approximately flat ASMs for full-year 2010, with ten new 737-700 deliveries planned. Cash flow from operations was $985 million in 2009, compared with a $1.5 billion outflow in 2008, and cash and short-term investments totaled $2.6 billion at year-end.
Investors should note several risks disclosed in the filing: Standard & Poor's and Fitch downgraded the Company's credit rating from BBB+ to BBB, and Moody's lowered its rating from Baa1 to Baa3. The Company also carries $477 milliond in net fuel derivative liabilities, with $580 million in deferred losses in accumulated other comprehensive income. Approximately 82 percent of employees are unionized, and the Company depends on Boeing as its sole aircraft supplier.
02—Key points
Key Highlights
- Net income of $99 million ($.13 per diluted share) in 2009, down 44.4 percent from $178 million ($.24 per share) in 2008; the Company reported its 37th consecutive year of profit.
- Operating income of $262 million, down 41.6 percent from $449 million; operating revenues of $10.35 billion, down 6.1 percent from $11.02 billion.
- Fuel hedging produced a net total of $408 million in losses in 2009 (versus $1.0 billion in net gains in 2008), with fuel and oil expense falling to $3.04 billion from $3.71 billion.
- Record 76.0 percent load factor in 2009, up from 71.2 percent, on 5.1 percent lower available seat miles; operating revenue yield per ASM declined only 1.0 percent.
- Cash flow from operating activities of $985 million in 2009, compared with a $1.5 billion outflow in 2008; cash and short-term investments totaled $2.6 billion at December 31, 2009.
- Credit ratings were downgraded by S&P and Fitch from BBB+ to BBB and by Moody's from Baa1 to Baa3; net fuel derivative liability of $477 million at year-end.
- Management expects a year-over-year increase in unit revenues for first quarter 2010 and anticipates approximately flat ASMs for 2010, with ten new 737-700 deliveries planned.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed January 29, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $10.35B$11.02B | −6.1% |
| Operating Expenses | $10.09B$10.57B | −4.6% |
| Operating Income | $262.00M$449.00M | −41.6% |
| Interest Expense | $186.00M$130.00M | +43.1% |
| Net Income | $99.00M$178.00M | −44.4% |
| EPS (Basic) | $0.13$0.24 | −45.8% |
| EPS (Diluted) | $0.13$0.24 | −45.8% |
| Shares Outstanding (Basic) | 741.00M735 | +100816226.5% |
| Shares Outstanding (Diluted) | 741.00M739 | +100270536.0% |
05—Questions
Frequently Asked Questions
Why did net income fall in 2009 even though operating revenues were only modestly lower?
Net income is heavily affected by fuel hedge accounting. Management said the decline in Passenger revenues almost exactly offset the decline in Fuel and oil expense, so the drop in operating income of $187 million was mostly due to higher Salaries, wages, and benefits, including the $66 million Freedom '09 charge. Other (gains) losses, net swung to a $54 million gain in 2009 from a $92 million loss in 2008 and interest expense rose $56 million, largely from new debt issuances.
How did Southwest manage to grow load factor while cutting capacity?
The Company reduced available seat miles by 5.1 percent and used fare sales, the "Bags Fly Free" advertising campaign, and schedule optimization to stimulate demand. Load factor rose 4.8 points to 76.0 percent, a Company record, and the Company reported Company-record load factors in every month from July through December 2009.
What is the outlook for 2010 according to management?
Management remains cautious about domestic demand and says unit revenue trends have improved mainly through capacity reductions and revenue initiatives, not a significant increase in full-fare demand. It expects a year-over-year increase in unit revenues for first quarter 2010, expects first quarter 2010 unit costs excluding fuel to exceed the fourth quarter 2009 level, and anticipates approximately flat ASMs for 2010. The Company expects a 2010 effective tax rate of approximately 40 percent.
What are the main balance sheet and financing risks?
The Company's credit ratings were downgraded in 2009, which the filing says will likely result in a slight increase in borrowing costs and could trigger credit rating provisions in credit card processing and hedging agreements. Net fuel derivative liabilities were $477 million at year-end, with $330 million in cash collateral posted to counterparties, and $580 million in net deferred losses were held in accumulated other comprehensive income. Long-term obligations were $3.3 billion, and the Company had a $600 million unsecured revolving credit facility with no amounts outstanding.
What is the status of the Company's dividend and share repurchases?
The Company paid a quarterly dividend of $0.0045 per share throughout 2009 and currently intends to continue quarterly dividends. It has not repurchased any shares since February 15, 2008, and does not believe it is prudent to repurchase shares at the current time given unstable financial markets and volatile fuel prices.
06—Continue