01—Abstract
Summary
Summary of the 10-K filed February 9, 2012. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported net income of $178 milliona ($.23 per diluted share) for 2011, its 39th consecutive profitable year, compared with $459 million ($.61 per diluted share) in 2010.
Operating income fell to $693 millionb from $988 million, as operating expenses rose 34.6 percent while operating revenues rose 29.4 percent. The decline was attributed primarily to higher fuel costs: the average jet fuel cost per gallon rose to $3.19, and fuel and oil expense reached $5.644 billion, 37.7 percent of operating expenses. Fuel hedging losses of $259 million were recognized in 2011 across Fuel and oil expense and Other (gains) losses, net.
Non-GAAP net income was $330 millionc ($.43 per diluted share). The results include AirTran Holdings, Inc., acquired May 2, 2011 for 0.321 Southwest shares and $3.75 cash per AirTran share, with total transaction value of approximately $3.2 billion. AirTran contributed $2.0 billion of operating revenues and a net loss of $23 million for the post-acquisition period.
The company recorded $134 milliond of acquisition and integration costs in 2011 and expects approximately $500 million in total integration costs through 2014, against estimated annual net synergies of more than $400 million in 2013. Management said it does not intend to grow fleet size in 2012 and plans to take delivery of 33 Boeing 737-800 aircraft that year. At year-end, Southwest held $3.1 billion of unrestricted cash and short-term investments, an undrawn $800 million revolving credit facility, and stockholders' equity of $6.877 billion.
Net cash provided by operating activities was $1.4 billion in 2011. The company ordered 150 Boeing 737 MAX aircraft, expanded its Next-Generation 737 orders to 200, and reported total Boeing firm orders of 350 for 2012 through 2024. Management said January 2012 passenger unit revenues rose approximately seven percent year over year.
02—Key points
Key Highlights
- Net income of $178 million ($.23 per diluted share) in 2011, down from $459 million ($.61) in 2010, the 39th consecutive profitable year
- Operating revenues of $15.658 billion, up 29.4 percent, largely from the AirTran acquisition, while operating expenses rose 34.6 percent to $14.965 billion
- Fuel and oil expense of $5.644 billion, or 37.7 percent of operating expenses; average fuel cost per gallon rose to $3.19 and net fuel hedge losses were $64 million in Fuel and oil expense
- AirTran acquisition closed May 2, 2011 with total transaction value of approximately $3.2 billion; expected net synergies above $400 million in 2013 against roughly $500 million of integration costs through 2014
- Record 80.9 percent load factor in 2011; January 2012 passenger unit revenues up approximately seven percent year over year
- Fleet of 698 aircraft at year-end 2011 with 150 Boeing 737 MAX firm orders and Next-Generation 737 firm orders totaling 350 for 2012 through 2024
- Liquidity of $3.1 billion in unrestricted cash and short-term investments plus an undrawn $800 million revolving credit facility at December 31, 2011
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 9, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $15.66B$12.10B | +29.4% |
| Operating Expenses | $14.96B$11.12B | +34.6% |
| Operating Income | $693.00M$988.00M | −29.9% |
| Interest Expense | $194.00M$167.00M | +16.2% |
| Net Income | $178.00M$459.00M | −61.2% |
| EPS (Basic) | $0.23$0.62 | −62.9% |
| EPS (Diluted) | $0.23$0.61 | −62.3% |
| Shares Outstanding (Basic) | 774.00M746.00M | +3.8% |
| Shares Outstanding (Diluted) | 775.00M747.00M | +3.7% |
05—Questions
Frequently Asked Questions
Why did Southwest's profit fall in 2011 despite higher revenue?
Operating expenses grew faster than revenue. Operating expenses rose 34.6 percent, driven mainly by fuel and oil expense of $5.644 billion, which increased 33.5 percent excluding AirTran. Operating income fell to $693 million from $988 million, and net income fell to $178 million from $459 million. The company also recorded $134 million of AirTran acquisition and integration costs and a $17 million asset impairment related to its Classic fleet.
How is Southwest managing fuel price risk?
Southwest uses fuel derivative contracts, primarily purchased call options, collars, call spreads and swaps, based largely on West Texas Intermediate crude. At January 13, 2012, it had hedged about 50 percent of estimated second-half 2012 consumption at WTI prices of $100 to $125 per barrel. The filing notes that the WTI-jet fuel spread has widened beyond historic norms, which has made more hedges ineffective. A one-cent change in jet fuel price would affect 2012 Fuel and oil expense by about $19 million before hedges.
What is the AirTran integration expected to deliver?
Management believes the acquisition has the potential to yield net annual synergies of more than $400 million in 2013, excluding acquisition and integration costs. Integration costs are estimated at about $500 million through 2014. Management said the transaction was modestly accretive to 2011 earnings excluding special items, is expected to be accretive in 2012, and is expected to be strongly accretive thereafter. Integration milestones include obtaining a single FAA operating certificate and converting AirTran aircraft to Southwest livery beginning in 2012.
What are the main risks flagged in the filing?
Key risks include high and volatile fuel prices, sensitivity to economic conditions, labor costs (about 82 percent of employees are unionized and a majority of Southwest labor agreements are amendable or in negotiation in 2012), dependence on Boeing as sole aircraft supplier, technology and system integration risk, and the risk that AirTran's integration and synergies take longer than expected. The filing also discloses pending antitrust litigation involving AirTran and Delta over first-bag fees, and notes goodwill of $970 million that could be impaired in future periods.
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