01—Abstract
Summary
Summary of the 10-K filed February 8, 2011. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported 2010 net income of $459 milliona ($.61 per diluted share), its 38th consecutive profitable year, compared with $99 million ($.13 per diluted share) in 2009.
Operating revenues rose 16.9 percent to $12.1 billionb, outpacing a 10.2 percent increase in operating expenses, which lifted operating income to $988 million from $262 million. Results were driven by higher fares and passenger yield, a record 79.3 percent load factor, and revenue initiatives such as the Bags Fly Free campaign and new ancillary fees. Fuel and oil expense rose to $3.62 billion, with the jet fuel cost per gallon up 18.4 percent, and the company recognized net fuel hedging losses of $426 million across fuel and other expense lines.
The pending acquisition of AirTran Holdings, Inc. is the most significant strategic development. Under the September 26, 2010 merger agreement, each AirTran share would convert into 0.321 Southwest shares plus $3.75c in cash, with an adjustment mechanism providing at least $7.25 and up to $7.75 in value per AirTran share. The company expects closing in the second quarter of 2011, subject to AirTran stockholder approval and regulatory clearances, and anticipates approximately $500 million in one-time acquisition and integration costs and net annual synergies of more than $400 million by 2013.
The company also plans to launch a new Rapid Rewards frequent flyer program on March 1, 2011, and to begin introducing Boeing 737-800 aircraft in 2012. The balance sheet at December 31, 2010 showed total assets of $15.46 billiond, long-term debt of $2.88 billion, and stockholders' equity of $6.24 billion, with cash and short-term investments of $3.5 billion. Net cash provided by operating activities was $1.56 billion.
Management guided to 2011 ASM growth of roughly five to six percent and an effective tax rate of 38 to 39 percent, and noted that fuel prices remain the primary threat to profitability. Several shareholder lawsuits challenging the AirTran merger were pending, and the parties to two of them entered a memorandum of understanding to settle on January 26, 2011.
02—Key points
Key Highlights
- Net income of $459 million ($.61 per diluted share) in 2010, up from $99 million ($.13 per diluted share) in 2009; the 38th consecutive profitable year.
- Operating revenues increased 16.9 percent to $12.1 billion, outpacing a 10.2 percent increase in operating expenses; operating income rose to $988 million from $262 million.
- Proposed AirTran acquisition: 0.321 Southwest shares plus $3.75 cash per AirTran share, with at least $7.25 and up to $7.75 in value; closing expected in second quarter 2011, with about $500 million in one-time costs and more than $400 million in net annual synergies by 2013.
- Fuel remained the largest pressure: fuel and oil expense was $3.62 billion in 2010, with the average jet fuel cost per gallon at $2.51, and net fuel hedging losses of $426 million recognized across expense lines.
- Record 2010 load factor of 79.3 percent, supported by revenue management, higher fares, and the Bags Fly Free and No Change Fees campaigns; January 2011 passenger unit revenues were estimated up eight to nine percent year over year.
- New Rapid Rewards frequent flyer program scheduled to launch March 1, 2011, shifting from segment-based credits to points earned per dollar spent.
- Balance sheet at year-end 2010: total assets $15.46 billion, long-term debt $2.88 billion, stockholders' equity $6.24 billion, and cash plus short-term investments of $3.5 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 8, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $12.10B$10.35B | +16.9% |
| Operating Expenses | $11.12B$10.09B | +10.2% |
| Operating Income | $988.00M$262.00M | +277.1% |
| Interest Expense | $167.00M$186.00M | −10.2% |
| Net Income | $459.00M$99.00M | +363.6% |
| EPS (Basic) | $0.62$0.13 | +376.9% |
| EPS (Diluted) | $0.61$0.13 | +369.2% |
| Shares Outstanding (Basic) | 746.00M741.00M | +0.7% |
| Shares Outstanding (Diluted) | 747.00M741.00M | +0.8% |
05—Questions
Frequently Asked Questions
How did Southwest's profitability change in 2010?
Net income rose to $459 million ($.61 per diluted share) from $99 million ($.13 per diluted share) in 2009. Operating income increased to $988 million from $262 million because operating revenues grew 16.9 percent, faster than the 10.2 percent rise in operating expenses. The 2009 results included a $66 million early retirement charge.
What are the key terms of the proposed AirTran acquisition?
Each AirTran common share would convert into 0.321 shares of Southwest common stock and $3.75 in cash, subject to an adjustment based on Southwest's share price before closing, which provides at least $7.25 and up to $7.75 in value per AirTran share. The merger requires AirTran stockholder approval and regulatory clearances, and the company expects closing in the second quarter of 2011.
What costs and benefits does the company expect from the AirTran merger?
The company estimates one-time acquisition and integration costs of approximately $500 million and believes the transaction has the potential to yield net annual synergies of more than $400 million by 2013. It expects the deal to be accretive to fully diluted earnings per share in the first year after closing. The company also expects to fund up to $670 million of cash consideration from cash on hand.
How exposed is Southwest to fuel prices, and how does it manage that exposure?
Jet fuel and oil represented about 33 percent of 2010 operating expenses, making fuel the second-largest expense. The company hedges with fuel derivatives, covering about 64 percent of estimated full-year 2011 fuel consumption at prices up to $90 per barrel of crude oil, excluding the AirTran impact. The filing notes that hedge accounting results can create volatility in reported earnings, and that fuel hedging losses of $426 million were recognized in 2010.
What are the main risks flagged in the filing?
The filing highlights volatile fuel prices, sensitivity to economic conditions, a labor-intensive business with about 82 percent of employees unionized, dependence on Boeing as the sole aircraft supplier and on a single engine supplier, and the need for government-provided war-risk insurance, which is scheduled to expire September 30, 2011. It also describes risks specific to the AirTran merger, including regulatory conditions, integration challenges, assumed indebtedness, and pending shareholder lawsuits.
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