Southwest Airlines Reports Record Fourth Quarter And Annual Profit; 43rd Consecutive Year Of Profitability

DALLAS, Jan. 21, 2016 /PRNewswire/ -- Southwest Airlines Co. (NYSE:LUV) (the "Company") today reported its fourth quarter and annual 2015 results:

• Record fourth quarter net income, excluding special items¹, of $591 million, or $.90 per diluted share, compared with fourth quarter 2014 net income, excluding special items, of $404 million, or $.59 per diluted share. This was in line with the First Call consensus estimate of $.90 per diluted share.
• Record fourth quarter GAAP² net income of $536 million, or $.82 per diluted share, compared with fourth quarter 2014 GAAP net income of $190 million, or $.28 per diluted share.
• Record fourth quarter operating income, excluding special items, of $992 million, resulting in an operating margin³ of 19.9 percent. Record fourth quarter GAAP operating income of $1.0 billion.
• Record annual net income, excluding special items, of $2.4 billion, or $3.52 per diluted share, compared with 2014 net income, excluding special items, of $1.4 billion, or $2.01 per diluted share.
• Record annual GAAP net income of $2.2 billion, or $3.27 per diluted share, compared with 2014 GAAP net income of $1.1 billion, or $1.64 per diluted share.
• Record annual operating income of $4.0 billion, excluding special items, resulting in an operating margin of 20.1 percent. Record annual GAAP operating income of $4.1 billion.
• Record annual profitsharing of $620 million, up 74.6 percent from a year ago.
• Strong annual free cash flow¹ of $1.1 billion; returned $1.4 billion to Shareholders in 2015 through a combination of $180 million in dividends and $1.2 billion in share repurchases.
• Record return on invested capital, before taxes and excluding special items (ROIC)¹, of 32.7 percent for 2015, as compared with 21.2 percent for 2014.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "We are extremely pleased to report a record annual net income, excluding special items, of $2.4 billion, or $3.52 per diluted share. We beat 2014's previous record profit per share by 75.1 percent and produced an all-time high ROIC of 32.7 percent. Record revenues, low fuel prices, and continued cost controls resulted in record operating income of $4.0 billion, and a strong operating margin of 20.1 percent, both excluding special items. We generated strong free cash flow of $1.1 billion in 2015, allowing us to return $1.4 billion to Shareholders. Based on our current outlook, we expect strong free cash flow to continue in 2016 and intend to repurchase an additional $500 million of Southwest common stock under an accelerated share repurchase program, which will be launched soon. I am very thankful to our great Southwest People, and I commend them on these exceptional results, which earned them a record $620 million in profitsharing, up 74.6 percent from 2014's previous record profitsharing contribution of $355 million.

"Net income, excluding special items, was $591 million in fourth quarter 2015, compared with $404 million in fourth quarter 2014, resulting in a 52.5 percent increase in our diluted earnings per share. Total operating revenues grew 7.5 percent to a record $5.0 billion. Considering the 8.3 percent increase in available seat miles, 3.6 percent longer average stage length, higher average seats per trip (gauge), and the high number of markets under development, our fourth quarter 2015 unit revenue performance was solid, especially in a softer yield environment. Strong demand for our low and friendly fares resulted in a record fourth quarter load factor of 84.1 percent, up 2.1 points from fourth quarter 2014. As we begin 2016, we've seen a continuation of strong demand and softer yields. Based on these revenue and booking trends, we currently expect our first quarter 2016 operating unit revenues to be in line with our year-ago performance.

"On the cost side, we continue to benefit from significantly lower jet fuel prices and our fleet modernization. Excluding special items, fourth quarter unit costs declined 6.9 percent year-over-year. Our fourth quarter 2015 economic fuel costs per gallon were $2.03, a decline of 22.5 percent from fourth quarter 2014, resulting in a reduction of $189 million in economic fuel costs, year-over-year. As expected, our annual 2015 economic fuel costs were $1.3 billion lower than 2014. With energy prices near 12-year lows, and assuming current market prices, we are expecting another significant year-over-year decline in economic fuel costs in 2016. Based on our existing fuel derivative contracts and market prices as of January 15, 2016, we currently estimate our first quarter 2016 economic fuel costs will be approximately $1.70 per gallon, compared with $2.00 per gallon in first quarter 2015. Excluding fuel, profitsharing, and special items, our fourth quarter 2015 unit costs declined 1.1 percent, year-over-year.  Based on current cost trends excluding fuel, special items, and profitsharing, we expect modest 2016 unit cost inflation.

"Our network is performing well, and we are pleased with the investments we have made over the past couple of years, particularly at Dallas Love Field. In fourth quarter 2015, we were thrilled to launch international service from Houston in conjunction with the opening of Houston Hobby's international terminal, and demand, thus far, has been encouraging. We ended the year with a 7.2 percent year-over-year increase in available seat miles (capacity), as expected, and we continue to plan for 2016 year-over-year capacity growth in the five to six percent range. We have increased our future aircraft delivery schedule to support our recent decision to accelerate the retirement of our Classic fleet to no later than mid-2018. This decision is expected to reduce operating costs over the acceleration period and improve the Customer experience with better ontime performance and WiFi-equipped 737 aircraft, with a manageable increase in our capital spending.

"As we close out our 43^rd consecutive year of profitability, we begin 2016 with much enthusiasm and excitement. Once again, we will strive to grow our route network, unit revenues, margins, and earnings. Our goal is to continue to strengthen our financial position and deliver value to our Employees, Customers, and Shareholders. Based on our current trends and outlook for first quarter 2016, excluding special items, we expect another quarter of strong margins."

Notable 2015 accomplishments include:

• Achieved 43^rd consecutive year of profitability, with record profits
• Achieved record 32.7 percent ROIC
• Earned a record $620 million in profitsharing, a 74.6 percent increase from 2014
• Returned $1.4 billion to Shareholders through repurchases of $1.2 billion of common stock (approximately 30 million shares) and payment of $180 million in dividends
• Strengthened our investment grade rating with an upgrade to Baa1 with Moody's Investor Service and an upgrade to BBB+ with Fitch Ratings
• Amended and executed our co-branded credit card agreement with Chase Bank USA, N.A. ("Chase") resulting in a second half 2015 GAAP operating revenue benefit of approximately $430 million⁴
• Revised our future delivery schedule at year-end to reinforce the modernization of our fleet
• Provided more competition, travel options, and low fares for the Dallas market with our nonstop expansion from Dallas Love Field to 180 daily departures to 50 nonstop destinations
• Launched service to four international destinations including San Jose and Liberia, Costa Rica; Puerto Vallarta, Mexico; and Belize City, Belize
• Opened the new five-gate international concourse at Houston's William P. Hobby Airport and relaunched international flights for the first time since 1969 at that airport
• Announced plans to launch international service from Los Angeles International Airport (LAX) to Liberia, Costa Rica, in April 2016, making LAX our eleventh⁵ international gateway airport in the 48 contiguous states
• Ratified collective bargaining agreements with our Meteorologists, Flight Simulator Technicians, and Dispatchers, following an agreement reached with our Customer Service Agents and Customer Representatives in December 2014
• Received numerous awards and recognitions, including being named to FORTUNE's 2015 list of World's Most Admired Companies for the 21^st consecutive year; being named Airline of the Year by Air Transport World, Domestic Carrier of the Year by the Airforwarders Association, Domestic Airline of the Year by Express Delivery and Logistics Association for the 15^th year in a row, Best Low Cost Carrier in North America from Premier Traveler, and one of CR's 100 Best Corporate Citizens 2015; recognized for Best Redemption Ability, Best Airline Customer Service, and Best Loyalty Credit Card by InsideFlyer for our Rapid Rewards program; and recognized as a 2015 Most Valuable Employer for military by CivilianJobs.com, in addition to the top airline employer and one of the top 20 best employers overall according to Forbes' inaugural list of America's Best Employers for 2015, and as the top airline and the 6^th best overall on the Fortune 500 Top 100 Employment Brands

Fourth Quarter Financial Results and Outlook

The Company's fourth quarter 2015 total operating revenues increased 7.5 percent, year-over-year, to $5.0 billion, largely driven by fourth quarter 2015 passenger revenues of $4.6 billion. Operating unit revenues (RASM) decreased 0.7 percent, on an 8.3 percent increase in available seat miles, as compared with fourth quarter 2014. Based on current trends, the Company expects its first quarter 2016 RASM to be in line with its first quarter 2015 RASM.

Fourth quarter 2015 total operating revenues included approximately $125 million, recorded as a result of the amended co-branded credit card agreement with Chase during third quarter 2015 and the required change in accounting methodology. This $125 million net benefit reflects an approximate $175 million increase to other revenues offset by an approximate $50 million reduction to passenger revenues. An estimated first quarter 2016 total operating revenue benefit from the amended Chase agreement of approximately $110 million is included in the Company's first quarter 2016 RASM outlook.

Total operating expenses in fourth quarter 2015 decreased 1.4 percent to $4.0 billion, as compared with fourth quarter 2014. During fourth quarter 2015, the Company expensed $139 million (before profitsharing expense and taxes) related to union contract bonuses, which is a special item. Excluding special items in both periods, total operating expenses were $4.0 billion in fourth quarter 2015, compared with $3.9 billion in fourth quarter 2014.

Fourth quarter 2015 economic fuel costs were $2.03 per gallon, including $.52 per gallon in unfavorable cash settlements from fuel derivative contracts, compared with $2.62 per gallon in fourth quarter 2014, including $.03 per gallon in unfavorable cash settlements from fuel derivative contracts. Based on the Company's fuel derivative contracts and market prices as of January 15, 2016, first quarter 2016 economic fuel costs are expected to be approximately $1.70 per gallon, compared with first quarter 2015 economic fuel costs of $2.00 per gallon. As of January 15, 2016, the fair market value of the Company's fuel derivative contracts for 2016 was a net liability of $1.0 billion, and a net liability of $787 million for the hedge portfolio in 2017 and 2018, combined. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.

Excluding fuel and oil expense and special items in both periods, fourth quarter 2015 operating costs increased 8.1 percent from fourth quarter 2014, partially due to the fourth quarter 2015 profitsharing expense of $136 million, compared with $100 million in fourth quarter 2014. Excluding fuel and oil expense, special items, and profitsharing, fourth quarter 2015 operating costs increased 7.0 percent from fourth quarter 2014, and declined 1.1 percent on a unit basis. Based on current trends and excluding fuel and oil expense, special items, and profitsharing expense, the Company expects its first quarter 2016 and annual 2016 unit costs to increase approximately two percent, and approximately one percent, respectively, as compared with the same periods last year driven primarily by the incremental depreciation associated with the accelerated retirement of the Company's Boeing 737-300 and 737-500 fleet. This cost outlook includes the impact of current collective bargaining agreements.

Operating income in fourth quarter 2015 was a fourth quarter record $1.0 billion, compared with $621 million in fourth quarter 2014. Excluding special items, operating income increased 46.1 percent year-over-year to a fourth quarter record $992 million, resulting in a 19.9 percent operating margin.

Other expenses in fourth quarter 2015 were $179 million, compared with $319 million in fourth quarter 2014. This $140 million decrease primarily resulted from $164 million in other losses recognized in fourth quarter 2015, compared with $293 million in other losses recognized in fourth quarter 2014. In both periods, these losses included ineffectiveness and unrealized mark-to-market losses associated with a portion of the Company's fuel hedging portfolio, which are special items. Excluding these special items, fourth quarter 2015 had $44 million in other losses, compared with $11 million in fourth quarter 2014, primarily attributable to the premium costs associated with the Company's fuel derivative contracts. First quarter 2016 premium costs related to fuel derivative contracts are currently estimated to be approximately $35 million, compared with $26 million in first quarter 2015. Net interest expense in fourth quarter 2015 was $15 million, compared with $26 million in fourth quarter 2014.

Annual Financial Results

For 2015, total operating revenues increased 6.5 percent to $19.8 billion, which includes a $172 million special revenue adjustment recorded in third quarter 2015 from a required change in accounting methodology as a result of the amended co-branded credit card agreement with Chase. This special item was excluded from the Company's 2015 reported RASM. In addition, the combined impact of the amended agreement and the required change in accounting methodology benefited 2015 total operating revenues by approximately $255 million, the impact of which was included in the Company's 2015 RASM.

Total operating expenses for 2015 were $15.7 billion, including special charges (before profitsharing and taxes) of $39 million associated with the acquisition and integration of AirTran and $334 million associated with union contract bonuses. Operating income for 2015 was a record $4.1 billion, and $4.0 billion, excluding special items, compared with $2.2 billion and $2.4 billion, respectively, in 2014.

Annual net income for 2015 was $2.2 billion, or $3.27 per diluted share, compared with $1.1 billion, or $1.64 per diluted share, for the same period last year. Excluding special items, annual 2015 net income was $2.4 billion, or $3.52 per diluted share, compared with $1.4 billion, or $2.01 per diluted share, for the same period last year.

Balance Sheet and Cash Flows

As of December 31, 2015, the Company had approximately $3.1 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1 billion. This does not include $835 million in hedge collateral posted to counterparties at year-end. For 2015, net cash provided by operations was a record $3.24 billion, capital expenditures were $2.04 billion, and assets constructed for others, net of reimbursements, were $78 million, resulting in free cash flow of approximately $1.1 billion. The Company currently estimates its 2016 capital expenditures will be approximately $2.0 billion. The Company repaid $213 million in debt and capital lease obligations during 2015, and is currently scheduled to repay approximately $600 million in debt and capital lease obligations during 2016. During fourth quarter 2015, the Company issued $500 million of 2.65 percent senior unsecured notes due 2020.

In 2015, the Company returned $1.4 billion to its Shareholders through $180 million in dividends, and the repurchase of $1.2 billion in common stock, or approximately 30 million shares. This compares to $1.1 billion returned to Shareholders in 2014. During fourth quarter 2015, the Company received the remaining 3.2 million shares pursuant to the third quarter 2015 $500 million accelerated share repurchase (ASR) program, bringing the total shares repurchased under that ASR program to 12.9 million shares. The Company intends to repurchase an additional $500 million of Southwest common stock under an ASR program expected to be launched soon. Subsequent to the launch of the planned $500 million ASR program, the Company will have $200 million remaining under its existing $1.5 billion share repurchase program, which was authorized in May 2015.

Fleet

The Company ended 2015 with 704 aircraft in its fleet. This reflects the delivery of 19 new Boeing 737-800s and 24 pre-owned Boeing 737-700s, as well as the retirement of four Boeing 737 Classic aircraft during the year. At the end of December 2015, the Company revised its future firm delivery schedule to reflect 33 additional -800s, and the conversion of its remaining 25 -700 firm orders to -800s. In addition, two pre-owned -700s were added to its delivery schedule. The incremental seat gauge and aircraft will be used to replace the capacity associated with the Company's year-end decision to further accelerate the retirement of its Classic fleet to no later than mid-2018, as compared to the previous plan of 2021. The Company continues to plan for modest year-over-year fleet growth through 2018 of no more than two percent, on average. The revised delivery schedule is currently estimated to increase the Company's firm aircraft capital commitments by $400 million beyond 2015. Replacing the Boeing 737-300s and Boeing 737-500s with more efficient and cost-effective aircraft is expected to provide significant cost savings. Additional information regarding the Company's aircraft delivery schedule is included in the accompanying tables.

Conference Call

Southwest will discuss its fourth quarter and annual 2015 results on a conference call at 12:30 p.m. Eastern Time today. A live broadcast of the conference call also will be available at http://investors.southwest.com.  

¹See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items, ROIC, free cash flow, and "economic" results. In addition, information regarding special items and ROIC is included in the accompanying reconciliation tables.
²Generally Accepted Accounting Principles in the United States.
³Operating margin, excluding special items, is calculated as operating income, excluding special items, divided by operating revenues, excluding special items. See Note Regarding Use of Non-GAAP Financial Measures.
⁴Additional information regarding the amended agreement with Chase and the required change in accounting methodology is included in the Financial Results section of this release.
⁵Excludes gateway airports only serving San Juan, Puerto Rico.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Specific forward-looking statements include, without limitation, statements related to (i) the Company's financial outlook, projected results of operations, and other factors expected to impact them; (ii) the Company's expected share repurchases; (iii) the Company's plans and expectations related to managing risk associated with volatile jet fuel prices; (iv) the Company's capacity and fleet plans and expectations; (v) the Company's financial and operational goals and strategies; (vi) the Company's network plans, including its plans with respect to international operations; and (vii) the Company's expectations with respect to liquidity (including its plans for the repayment of debt and its capital lease obligations) and capital expenditures. These forward-looking statements are based on the Company's current intent, expectations, and projections and are not guarantees of future performance.  These statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) changes in demand for the Company's services and other changes in consumer behavior; (ii) the impact of economic conditions, fuel prices, actions of competitors (including without limitation pricing, scheduling, and capacity decisions and consolidation and alliance activities), and other factors beyond the Company's control, on the Company's business decisions, plans, and strategies; (iii) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions;  (iv) the Company's dependence on third parties, in particular with respect to its fleet plans; (v) the impact of governmental regulations and other governmental actions related to the Company's operations; (vi) the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; and (vii) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.