Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "Despite a modest loss, excluding special items, our first quarter results were notable, with outstanding revenue production and, except for jet fuel, better-than-expected operating costs. Record first quarter revenue results were produced with strong revenue management and network optimization, along with benefits from the AirTran acquisition and All-New Rapid Rewards. First quarter 2012 passenger revenues, on a unit basis, increased five percent compared to first quarter last year, representing a 15 percent improvement over two years, and over 30 percent improvement since first quarter 2009 (as compared to combined results, as defined below). Traffic and booking trends, thus far in April, are solid.
"The decline in operating income was driven by a $478 million increase in our first quarter economic fuel costs, compared to first quarter last year. Energy price increases continue to pressure costs, which only serve to reinforce our commitment to eliminate waste and maximize efficiency throughout our Company."
Financial Results and Outlook
AirTran Airways, Inc. became a wholly-owned subsidiary of the Company on May 2, 2011. Results discussed in this release and provided in the accompanying unaudited Condensed Consolidated Financial Statements and Comparative Consolidated Operating Statistics include the results of operations and cash flows for AirTran beginning May 2, 2011, including the impact of purchase accounting. Periods presented prior to the acquisition date do not include AirTran's results. However, the Company believes the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability. Financial information presented on a "combined basis" is the sum of the historical financial results of the Company and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting beginning May 2, 2011. Supplemental financial information presented on a "combined basis" and the accompanying reconciliations are included in this release.
The Company's total operating revenues in first quarter 2012 increased 28.6 percent to $4.0 billion, compared to $3.1 billion in first quarter 2011, and increased 5.9 percent year-over-year compared to $3.8 billion, on a combined basis. Operating unit revenues increased 4.6 percent from first quarter 2011, on a combined basis.
Total first quarter 2012 operating expenses were $4.0 billion, compared to $3.0 billion in first quarter 2011, and compared to $3.7 billion in first quarter last year on a combined basis. Excluding special items in both periods, first quarter 2012 unit costs increased 6.7 percent from first quarter 2011 combined unit costs, largely due to a 16.6 percent year-over-year increase in economic fuel costs per gallon. First quarter 2012 economic fuel costs of $3.44 per gallon included $0.12 per gallon in unfavorable cash settlements for fuel derivative contracts; however, fuel derivative contract premium costs decreased $25 million year-over-year, as described below in the discussion of other income. Based on market prices as of April 16th, the Company expects second quarter 2012 economic fuel costs, including fuel taxes, to be in the $3.40 to $3.45 per gallon range, with minimal impact from cash settlements for fuel derivative contracts. Second quarter 2012 premium costs, recorded in other gains/losses, are currently estimated to be approximately $12 million, compared to premium costs of $26 million in second quarter 2011.
As of March 31, 2012, the fair market value of the Company's hedge portfolio was a net asset of $184 million, compared to a $44 million net liability at December 31, 2011. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.
Excluding fuel and special items in both periods, first quarter 2012 unit costs increased two percent from first quarter 2011's combined 7.83 cents. Based on current cost trends, the Company expects another year-over-year increase in its second quarter 2012 unit costs, compared to second quarter 2011's combined unit costs, excluding fuel and special items in both periods.
Operating income for first quarter 2012 was $22 million, compared to $114 million in first quarter 2011. Excluding special items in all periods, operating income was $10 million for first quarter 2012, compared to $110 million in first quarter 2011, and compared to $86 million in first quarter last year, on a combined basis.
Other income for first quarter 2012 was $137 million compared to $96 million of other expenses in first quarter 2011. This $233 million swing primarily resulted from $170 million in other gains recognized in first quarter 2012, compared to $59 million in other losses recognized in first quarter 2011. In both periods, these gains and losses primarily resulted from unrealized gains/losses associated with a portion of the Company's fuel hedging portfolio. Excluding these special items, other losses were primarily attributable to the premium costs associated with the Company's fuel derivative contracts. First quarter 2012 premium costs were $6 million, compared to $31 million in first quarter 2011.
The Company's return on invested capital (before taxes and excluding special items) was approximately six percent for the twelve months ended March 31, 2012. Additional information regarding pre-tax return on invested capital is included in the accompanying reconciliation tables.
AirTran Acquisition
Kelly continued, "First quarter marked another key milestone in the integration of AirTran with the approval by the Federal Aviation Administration (FAA) of our Single Operating Certificate (SOC). While we continue the process of welcoming AirTran Employees to the Southwest Family, we have now begun converting AirTran 737 aircraft to the Southwest paint and interior configuration. We will begin transitioning AirTran airport facilities to Southwest later this year, beginning with Seattle and Des Moines.
"In February, we were thrilled to introduce Southwest's legendary low fares and outstanding Customer Service to Atlanta, Georgia. We initiated service to Southwest's 73rd city with 15 daily flights to five nonstop destinations. By August 2012, we will grow Southwest's Atlanta service to 26 flights and eleven nonstop destinations, with AirTran offering over 165 daily flights and 47 nonstop destinations. Customer response to Southwest's entrance in the market, in less than three months' time, has been exceptional. We also introduced Atlanta Customers to Southwest's award winning Cargo service, with the opening of a brand new Cargo facility in Atlanta.
"As we continue to optimize and align the two airlines, both airlines benefit. AirTran's strong revenue performance continues to improve. While there are no plans to connect the two separate brands and networks until next year, we are actively optimizing AirTran's stand alone network. By repurposing less profitable flying, we have created the opportunity to improve network returns. AirTran launched new service from Denver to Cancun this week, and will begin service from San Antonio to Mexico City and Cancun next month; Austin to Cancun next month; and Orange County to Mexico City and Cabo San Lucas in June 2012. AirTran also recently received route authority to commence service between Chicago Midway and Cancun, beginning June 2012, pending Mexican government approval.
"The Flight Attendants and Flight Instructors from both airlines reached agreements regarding seniority integration during first quarter 2012, joining the Pilots from both airlines that reached their seniority integration agreement in December 2011. I commend these Employees for successfully reaching a key step in the integration process. We continue to work and make progress on seniority integration agreements with our remaining unions.
"We have a tremendous amount of work ahead of us to complete the integration in 2014, but we are very pleased with our progress. In 2011, we produced $80 million in net pre-tax synergies, and we produced approximately $40 million in net pre-tax synergies in first quarter 2012, alone. We expect to realize total net pre-tax annual synergies of $400 million in 2013 (excluding acquisition and integration expenses)."
The Company incurred $13 million in expenses (before taxes) associated with the acquisition and integration of AirTran during first quarter 2012, representing a cumulative total of $155 million in acquisition and integration costs. The Company expects total acquisition and integration costs will be approximately $500 million.
Aircraft Fleet
"We celebrated the momentous arrival of our first Boeing 737-800 in March, which entered revenue service last week," stated Kelly. "The -800 is an integral component of our fleet modernization plan, bringing 38 more seats than a Boeing 737-700, lower unit costs, and enhanced scheduling flexibility to consider exciting new opportunities. We expect to take delivery of 33 -800s this year.
"We also began to retrofit our 737-700 fleet with an updated cabin interior. Evolve: The New Southwest Experience enhances Customer comfort, personal space, and the overall travel experience. It also allows for six additional seats. We currently anticipate that all 372 -700s in the Southwest Airlines fleet will receive the Evolve makeover by first half 2013."
Liquidity
Net cash provided by operations for first quarter 2012 was $1.2 billion, and capital expenditures were $127 million. As a result, the Company generated $1.1 billion in free cash flow* in first quarter 2012.
On August 5, 2011, the Company's Board of Directors authorized a share repurchase program to acquire up to $500 million of the Company's common stock following such authorization. As of March 31, 2012, the Company had purchased approximately 33 million shares of common stock under such authorization for approximately $275 million. The Company repaid $431 million in debt during first quarter 2012, and is scheduled to repay approximately $130 million in debt for the remainder of 2012. As of April 18th, the Company had approximately $3.9 billion in cash and short-term investments. In addition, the Company had a fully available unsecured revolving credit line of $800 million.
(Southwest Airlines - Press Release)
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