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Southwest Airlines Reports First Quarter Results

April 19, 2012

DALLAS, April 19, 2012 /PRNewswire/ — Southwest Airlines Co. (NYSE: LUV) (the “Company”) today reported its first quarter 2012 results. First quarter 2012 net income was $98 million, or $.13 per diluted share, which included $116 million (net) of favorable special items. This compared to net income of $5 million, or $.01 per diluted share, in first quarter 2011, which included unfavorable special items totaling $15 million (net). Excluding special items, first quarter 2012 net loss was $18 million, or $.02 loss per diluted share, compared to net income of $20 million, or $.03 per diluted share, in first quarter 2011. This compared favorably to Thomson’s First Call mean estimate of $.05 loss per diluted share. Operating income for first quarter 2012 was $22 million, compared to $114 million in first quarter 2011. Excluding special items, operating income was $10 million for first quarter 2012, compared to $110 million for the same period last year. Additional information regarding special items is included in this release and in the accompanying reconciliation tables.

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 16(th), 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 73(rd) 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.

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 18(th), 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.

Awards and Recognitions

  • Named tenth most admired Company in the world in FORTUNE magazine’s 2012 survey of corporate reputations
  • Recognized by the Temkin Group for the Best Airline Customer Experience, and AirTran followed in second place
  • Ranked first in Brandindex’s 2011 US Buzz Rankings for Airlines for positive brand presence
  • Awarded Value Airline Brand of the Year by the Harris Poll based on familiarity, quality, and purchase consideration
  • Received the top ranking by Forbes for The Brands American Women and Men Desire Most
  • Ranked 16(th) of over 200 companies in the 2012 Temkin Loyalty Rankings measuring customers’ willingness to recommend, reluctance to switching, and likeliness to repurchase
  • Southwest and AirTran were jointly honored by Project Open Hand Atlanta with the New Company on the Block – Corporate Citizenship Award
  • Recognized by Chief Executive Magazine as one of the 40 Best Companies for Leaders based on outstanding Company culture and internal professional development

Southwest will discuss its first quarter 2012 results on a conference call at 12:30 p.m. Eastern Time today. A live broadcast of the conference call will also be available at http://southwest.investorroom.com.

*See Note Regarding use of Non-GAAP financial measures.

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 and projected results of operations; (ii) the Company’s plans and expectations with respect to its acquisition of AirTran, including without limitation anticipated integration timeframes and anticipated costs and benefits results associated with the acquisition; (iii) the Company’s fleet modernization plans and the Company’s related financial and operational expectations; and (iv) the Company’s growth plans and expectations, including network and capacity plans and expectations. 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 the price of aircraft fuel, the impact of hedge accounting, and any changes to the Company’s fuel hedging strategies and positions; (ii) the Company’s ability to successfully integrate AirTran and realize the expected synergies and other benefits from the acquisition; (iii) the impact of the economy on demand for the Company’s services and the impact of fuel prices, economic conditions, and actions of competitors on the Company’s business decisions, plans, and strategies; (iv) 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; (v) the Company’s ability to timely and effectively prioritize its strategic initiatives and related expenditures; (vi) the Company’s dependence on third parties with respect to certain of its initiatives; (vii) the impact of governmental and other regulation related to the Company’s operations; (viii) the Company’s ability to maintain positive relations with employees and employee representatives and to timely and effectively address collective bargaining agreements; and (ix) 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, 2011.

     SOUTHWEST AIRLINES CO.
     CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
     (in millions, except per share amounts)
     (unaudited)
                                                       Three months ended
                                                           March 31,
                                                           ---------
                                                                                                                         Percent
                                                                     2012         2011 (1)         Change
                                                                     ----         -------          ------

      OPERATING
      REVENUES:
              Passenger                                            $3,744                  $2,949            (2)   27.0
              Freight                                                  37                      31                  19.4
              Other                                                   210                     123            (2)   70.7
                                                                      ---                     ---
                              Total operating revenues                     3,991                          3,103                  28.6

      OPERATING
      EXPENSES:
               Salaries,
               wages, and
               benefits                                             1,141                     954                  19.6
              Fuel and oil                                          1,510                   1,038                  45.5
               Maintenance
               materials
               and repairs                                            272                     199                  36.7
               Aircraft
               rentals                                                 88                      46                  91.3
               Landing fees
               and other
               rentals                                                254                     201                  26.4
               Depreciation
               and
               amortization                                           201                     155                  29.7
               Acquisition
               and
               integration                                             13                      17                 (23.5)
               Other
               operating
               expenses                                               490                     379                  29.3
                                                                      ---                     ---
                              Total operating expenses                     3,969                          2,989                  27.0
                                                                           -----                          -----

     OPERATING INCOME                                                 22                     114                 (80.7)

      OTHER EXPENSES
      (INCOME):
               Interest
               expense                                                 40                      43                  (7.0)
               Capitalized
               interest                                                (5)                     (3)                 66.7
               Interest
               income                                                  (2)                     (3)                (33.3)
               Other (gains)
               losses, net                                           (170)                     59                  n.a.
                                                                     ----                     ---
                               Total other (income)
                               expenses                                     (137)                            96                  n.a.
                                                                            ----                            ---

      INCOME BEFORE
      INCOME TAXES                                                   159                      18                  n.a.
      PROVISION FOR
      INCOME TAXES                                                    61                      13                  n.a.
                                                                     ---                     ---

     NET INCOME                                                      $98                      $5                  n.a.
                                                                     ===                     ===

      NET INCOME PER
      SHARE:
              Basic                                                 $0.13                   $0.01
              Diluted                                               $0.13                   $0.01

     WEIGHTED AVERAGE SHARES OUTSTANDING:
              Basic                                                   771                     748
              Diluted                                                 772                     749

             (1) Excludes financial
             results for AirTran. See
             Supplemental Combined
             Statement I for selected
             financial information on
             a combined basis,
             including AirTran, for
             periods prior to the May
             2, 2011 acquisition date.

             (2) The Company made a
             fourth quarter 2011
             reclassification to
             change the allocation of
             Operating revenues
             between Passenger
             revenues and Other
             revenues from its sale of
             frequent flyer points
             associated with its co-
             branded Chase(R) Visa
             credit card. The Company
             has thus reclassified $10
             million in Operating
             revenues for the period
             from January 2011 through
             March 2011 from Other
             revenues to Passenger
             revenues to conform to
             the current presentation.
    SOUTHWEST AIRLINES CO.
    RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS
    (SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
    (in millions, except per share amounts)
    (unaudited)
                                          Three months ended
                                               March 31,
                                               ---------
                                                                              Percent
                                          2012               2011 (1)          Change
                                          ----                -------         ------

     Fuel
     and
     oil
     expense,
     unhedged                                    $1,479               $1,044
    Add (Deduct):
     Fuel hedge
     (gains)
     losses
     included in
     Fuel and oil
     expense                                         31                   (6)
                                                    ---                  ---
     Fuel
     and
     oil
     expense,
     as
     reported                                    $1,510               $1,038
    Add: Net
     impact from
     fuel
     contracts (2)                                   25                   19
                                                    ---                  ---
     Fuel
     and
     oil
     expense,
     economic                                    $1,535               $1,057           45.2
                                                 ------               ------

     Total
     operating
     expenses,
     as
     reported                                    $3,969               $2,989
    Add: Net
     impact from
     fuel
     contracts (2)                                   25                   19
                                                    ---                  ---
     Total
     operating
     expenses,
     economic                                    $3,994               $3,008
    Deduct:
     Acquisition
     and
     integration
     costs, net
     (3)                                            (13)                 (15)
                                                    ---                  ---
     Total
     operating
     expenses,
     non-
     GAAP                                        $3,981               $2,993           33.0
                                                 ------               ------

     Operating
     income,
     as
     reported                                       $22                 $114
    Deduct: Net
     impact from
     fuel
     contracts (2)                                  (25)                 (19)
                                                    ---                  ---
     Operating
     income,
     economic                                       $(3)                 $95
    Add:
     Acquisition
     and
     integration
     costs, net
     (3)                                             13                   15
                                                    ---                  ---
     Operating
     income,
     non-
     GAAP                                           $10                 $110          (90.9)
                                                    ---                 ----

     Other
     (gains)
     losses,
     net,
     as
     reported                                     $(170)                 $59
    Add (Deduct):
     Net impact
     from fuel
     contracts (2)                                  176                  (29)
                                                    ---                  ---
     Other
     losses,
     net,
     non-
     GAAP                                            $6                  $30          (80.0)
                                                    ---                  ---

     Income
     before
     income
     taxes,
     as
     reported                                      $159                  $18
    Add (Deduct):
     Net impact
     from fuel
     contracts (2)                                 (201)                  10
                                                   ----                  ---
                                                   $(42)                 $28
    Add:
     Acquisition
     and
     integration
     costs, net
     (3)                                             13                   15
                                                    ---                  ---
     Income
     (loss)
     before
     income
     taxes,
     non-
     GAAP                                          $(29)                 $43           n.a.
                                                   ----                  ---

    Net
     income,
     as
     reported                                       $98                   $5
    Add (Deduct):
     Net impact
     from fuel
     contracts (2)                                 (201)                  10
    Add (Deduct):
     Income tax
     impact of
     fuel
     contracts                                       77                   (4)
                                                    ---                  ---
                                                   $(26)                 $11
    Add:
     Acquisition
     and
     integration
     costs, net
     (4)                                              8                    9
                                                    ---                  ---
    Net
     income
     (loss),
     non-
     GAAP                                          $(18)                 $20           n.a.
                                                   ----                  ---

    Net
     income
     per
     share,
     diluted,
     as
     reported                                     $0.13                $0.01
    Deduct: Net
     impact from
     fuel
     contracts                           (0.16)                     -
                                         -----                    ---
                                                 $(0.03)               $0.01
    Add: Impact of
     special
     items, net
     (4)                                           0.01                 0.02
                                                   ----                 ----
    Net
     income
     (loss)
     per
     share,
     diluted,
     non-
     GAAP                                        $(0.02)               $0.03           n.a.
                                                 ------                -----

    (1) Excludes financial results for AirTran. See
     Supplemental Combined Statement II for a
     reconciliation of selected combined amounts to non-
     GAAP items, including AirTran, for periods prior to
     the May 2, 2011 acquisition date.
    (2) See Reconciliation of Impact from Fuel Contracts.
    (3) Amounts net of profitsharing impact on charges
     incurred through March 31, 2011. The Company amended
     its profitsharing plan during second quarter 2011 to
     defer the profitsharing impact of integration costs
     incurred from April 1, 2011 through December 31,
     2013. The profitsharing impact will be realized in
     2014 and beyond.
    (4) Amounts net of tax and profitsharing impact (see
     footnote (3) above).

    SOUTHWEST AIRLINES CO.
    RECONCILIATION OF IMPACT FROM FUEL CONTRACTS
    (SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
    (in millions)
    (unaudited)

                                                              Three months ended
                                                                  March 31,
                                                                  ---------
                                                               2012              2011 (1)
                                                               ----              -------

    Fuel and Oil Expense
    --------------------
    Reclassification between Fuel and Oil
     and Other (gains)
    losses, net, associated
     with current period
     settled contracts                                        $(2)                  $2
    Contracts settling in the current
     period, but for which
    losses have been recognized in a
     prior period (2)                                          27                   17
                                                              ---                  ---
    Impact from fuel contracts to Fuel
     and oil expense                                           25                   19
                                                              ---                  ---

    Operating Income
    ----------------
    Reclassification between Fuel and Oil
     and Other (gains)
    losses, net, associated
     with current period
     settled contracts                                         $2                  $(2)
    Contracts settling in the current
     period, but for which
    losses have been recognized in a
     prior period (2)                                         (27)                 (17)
                                                              ---                  ---
    Impact from fuel contracts to
     Operating Income                                         (25)                 (19)
                                                              ---                  ---

    Other (gains) losses, net
    -------------------------
    Mark-to-market impact from fuel
     contracts
    settling in future periods                               $205                   $3
    Ineffectiveness from fuel hedges
     settling in future periods                               (31)                 (30)
    Reclassification between Fuel and oil
     and Other (gains)
    losses, net, associated with current
     period settled contracts                                   2                   (2)
                                                              ---                  ---
    Impact from fuel contracts to Other
     (gains) losses, net                                      176                  (29)
                                                              ---                  ---

    Net Income
    ----------
    Mark-to-market impact from fuel
     contracts
    settling in future periods                              $(205)                 $(3)
    Ineffectiveness from fuel hedges
     settling in future periods                                31                   30
    Other net impact of fuel contracts
     settling in the
    current or a prior period (excluding
     reclassifications)                                       (27)                 (17)
                                                              ---                  ---
    Impact from fuel contracts to Net
     Income (3)                                              (201)                  10
                                                             ----                  ---

    (1) Excludes financial results for
     AirTran.
    (2) As a result of prior hedge
     ineffectiveness and/or contracts
     marked-to-market through the income
     statement.
    (3) Excludes income tax impact of
     unrealized items.

    SOUTHWEST AIRLINES CO.
    COMPARATIVE CONSOLIDATED OPERATING STATISTICS
    (unaudited)

                                                     Three Months Ended
                                                          March 31,
                                                          ---------
                                                      2012                    2011 (1)  Change
                                                      ----                     -------  ------
    Revenue passengers
     carried                                                      25,560,822           21,115,115          21.1%
    Enplaned passengers                                           31,154,453           25,599,118          21.7%
    Revenue passenger miles
     (RPMs) (000s)                                                23,684,869           19,195,885          23.4%
    Available seat miles
     (ASMs) (000s)                                                30,632,893           24,505,674          25.0%
    Load factor                                                         77.3%                78.3%     (1.0)pts
    Average length of
     passenger haul (miles)                                              927                  909           2.0%
    Average aircraft stage
     length (miles)                                                      685                  656           4.4%
    Trips flown                                                      333,896              273,823          21.9%
    Average passenger fare                                           $146.44              $139.65  (2)      4.9%
    Passenger revenue yield
     per RPM (cents)                                                   15.80                15.36  (2)      2.9%
    RASM (cents)                                                       13.03                12.66           2.9%
    PRASM (cents)                                                      12.22                12.03  (2)      1.6%
    CASM (cents)                                                       12.96                12.20           6.2%
    CASM, excluding fuel
     (cents)                                                            8.03                 7.97           0.8%
    CASM, excluding special
     items (cents)                                                     12.99                12.21           6.4%
    CASM, excluding fuel and
     special items (cents)                                              7.99                 7.91           1.0%
    Fuel costs per gallon,
     including fuel tax
     (unhedged)                                                        $3.32                $2.93          13.3%
    Fuel costs per gallon,
     including fuel tax                                                $3.39                $2.91          16.5%
    Fuel costs per gallon,
     including fuel tax
     (economic)                                                        $3.44                $2.96          16.2%
    Fuel consumed, in gallons
     (millions)                                                          443                  356          24.4%
    Active fulltime
     equivalent Employees                                             46,227               35,452          30.4%
    Aircraft in service at
     period-end                                                          694                  550          26.2%

    RASM (unit revenue) - Operating revenue yield per ASM
    PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
    CASM (unit costs) - Operating expenses per ASM

    (1) Excludes operating statistics for AirTran. See Supplemental
     Combined Statement IV for consolidated operating statistics on a
     combined basis, including AirTran, for periods prior to the May 2,
     2011 acquisition date.

    (2) The Company made a fourth quarter 2011 reclassification to change
     the allocation of Operating revenues between Passenger revenues and
     Other revenues from its sale of frequent flyer points associated with
     its co-branded Chase(R) Visa credit card. The Company has thus
     reclassified $10 million in Operating revenues for the period from
     January 2011 through March 2011 from Other revenues to Passenger
     revenues to conform to the current presentation. This
     reclassification affects certain prior year operating statistics.

    SOUTHWEST AIRLINES
     CO.
    RETURN ON INVESTED
     CAPITAL (1)
    (in millions)
    (unaudited)

                             12 Months               12 Months
                               Ended                   Ended
                          March 31, 2012          March 31, 2011
                          --------------          --------------
    Operating Income, as
     reported                               $600                  $1,047
    Add (Deduct): Net
     impact from fuel
     contracts                                (5)                    105
    Add: Acquisition and
     integration costs,
     net (2)                                 130                      21
    Add: Asset
     Impairment, net (3)                      14                       -
                                             ---                     ---
    Operating Income,
     non-GAAP                               $739                  $1,173
    Net adjustment for
     aircraft leases (4)                     139                      81
    Adjustment for fuel
     hedge accounting                        (82)                   (134)
                                             ---                    ----
    Adjusted Operating
     Income, non-GAAP                       $796                  $1,120

    Average Invested
     Capital (5)                         $12,779                 $10,599
    Equity adjustment for
     fuel hedge
     accounting                              166                     305
                                             ---                     ---
    Adjusted Average
     Invested Capital                    $12,945                 $10,904

    ROIC, pre-tax                              6%                     10%

    (1) Calculation includes the impact of
     the AirTran acquisition as of May 2,
     2011.
    (2) Net of profitsharing impact on
     charges incurred through March 31,
     2011.  The Company amended its
     profitsharing plan during second
     quarter 2011 to defer the profitsharing
     impact of integration costs incurred
     from April 1, 2011 through December 31,
     2013.  The profitsharing impact will be
     realized in 2014 and beyond.
    (3) Net of profitsharing impact.
    (4) Net adjustment related to
     presumption that all aircraft in fleet
     are owned.
    (5) Average invested capital represents
     a five quarter average of debt, net
     present value of aircraft leases, and
     equity.
    SOUTHWEST AIRLINES CO.
    CONDENSED CONSOLIDATED BALANCE SHEET
    (in millions)
    (unaudited)

                                                                 March 31,                          December 31,
                                                                       2012                                 2011
                                                                       ----                                 ----
    ASSETS
    Current assets:
                      Cash and cash
                      equivalents                                                           $1,558                                             $829
                      Short-term
                      investments                                                            2,226                                            2,315
                      Accounts and
                      other
                      receivables                                                              367                                              299
                      Inventories of
                      parts and
                      supplies, at
                      cost                                                                     432                                              401
                      Deferred income
                      taxes                                                                    219                                              263
                      Prepaid expenses
                      and other
                      current assets                                                           318                                              238

                     Total current assets                                                    5,120                                            4,345

    Property and equipment, at cost:
                     Flight equipment                                                       15,600                                           15,542
                      Ground property
                      and equipment                                                          2,507                                            2,423
                      Deposits on
                      flight
                      equipment
                      purchase
                      contracts                                                                444                                              456

                                                                                            18,551                                           18,421
                      Less allowance
                      for
                      depreciation
                      and
                      amortization                                                           6,456                                            6,294

                                                                                            12,095                                           12,127
    Goodwill                                                                                   970                                              970
    Other assets                                                                               641                                              626
                                                                                               ---                                              ---
                                                                                           $18,826                                          $18,068
                                                                                           =======                                          =======

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
                     Accounts payable                                                       $1,208                                           $1,057
                      Accrued
                      liabilities                                                            1,024                                              996
                      Air traffic
                      liability                                                              2,556                                            1,836
                      Current
                      maturities of
                      long-term debt                                                           259                                              644

                     Total current liabilities                                               5,047                                            4,533

    Long-term debt less current maturities                                                   3,048                                            3,107
    Deferred income taxes                                                                    2,638                                            2,566
    Deferred gains from sale and leaseback of
     aircraft                                                                                   72                                               75
    Other noncurrent liabilities                                                               924                                              910
    Stockholders' equity:
                     Common stock                                                              808                                              808
                      Capital in
                      excess of par
                      value                                                                  1,225                                            1,222
                      Retained
                      earnings                                                               5,486                                            5,395
                      Accumulated
                      other
                      comprehensive
                      loss                                                                     (57)                                            (224)
                      Treasury stock,
                      at cost                                                                 (365)                                            (324)

                     Total stockholders' equity                                              7,097                                            6,877
                                                                                             -----                                            -----
                                                                                           $18,826                                          $18,068
                                                                                           =======                                          =======

     SOUTHWEST AIRLINES CO.
      CONDENSED CONSOLIDATED STATEMENT OF
      CASH FLOWS
     (in millions)
     (unaudited)

                                                                        Three months ended
                                                                            March 31,
                                                                            ---------
                                                                                      2012       2011 (1)
                                                                                      ----       -------

      CASH FLOWS FROM
      OPERATING
      ACTIVITIES:
              Net income                                                              $98                        $5
               Adjustments to
               reconcile net
               income to
                        cash provided
                        by operating
                        activities:
                        Depreciation
                        and
                        amortization                                                   201                       155
        Unrealized
                        (gain) loss on
                        fuel
                        derivative
                        instruments                                                   (201)                       10
                        Deferred income
                        taxes                                                           14                        28
                        Amortization of
                        deferred gains
                        on sale and
                                         leaseback of aircraft                               (3)                       (3)
                        Changes in
                        certain assets
                        and
                        liabilities:
                                         Accounts and other receivables                     (68)                      (87)
                                         Other current assets                               (51)                      (92)
                                          Accounts payable and accrued
                                          liabilities                                       225                       238
                                         Air traffic liability                              720                       512
                        Cash collateral
                        received from
                        derivative
                        counterparties                                                 147                        29
                       Other, net                                                      143                       170
                                                                                       ---                       ---
               Net cash provided
               by operating
               activities                                                           1,225                       965

      CASH FLOWS FROM
      INVESTING
      ACTIVITIES:
                        Purchases of
                        property and
                        equipment, net                                                (127)                      (57)
                        Purchases of
                        short-term
                        investments                                                   (621)                   (1,484)
                        Proceeds from
                        sales of
                        short-term
                        investments                                                    736                     1,310
               Net cash used in
               investing
               activities                                                             (12)                     (231)

      CASH FLOWS FROM
      FINANCING
      ACTIVITIES:
                        Proceeds from
                        Employee stock
                        plans                                                            5                         4
                        Proceeds from
                        termination of
                        interest rate
                        derivatives                                                      -                        76
        Payments of
                        long-term
                        debt and
                        capital lease
                        obligations                                                   (431)                      (30)
                        Payments of
                        cash dividends                                                  (7)                       (7)
                        Repurchase of
                        common stock                                                   (50)                        -
                       Other, net                                                       (1)                        1
                                                                                       ---                       ---
               Net cash provided
               by (used in)
               financing
               activities                                                            (484)                       44
                                                                                     ----                       ---

      NET CHANGE IN CASH
      AND CASH EQUIVALENTS                                              729                               778

      CASH AND CASH
      EQUIVALENTS AT
               BEGINNING OF
               PERIOD                                                                 829                     1,261
                                                                                      ---                     -----

      CASH AND CASH
      EQUIVALENTS
              AT END OF PERIOD                                                     $1,558                    $2,039
                                                                                   ======                    ======

      (1) Excludes
      financial results
      for AirTran.
     SOUTHWEST AIRLINES CO.
     FUEL DERIVATIVE CONTRACTS
     AS OF APRIL 16, 2012

                                                 Percent of estimated
                                                   fuel consumption
                                                    covered by fuel
                                                      derivative
                                                       contracts
                                                   ----------------
                         Average WTI Crude Oil
                            price per barrel           2Q 2012         Second Half 2012
                            ----------------           -------         ----------------

                                      $80 to $90                               approx. 10%
                                     $90 to $100                               approx. 25%
                                    $100 to $115                   (1)         approx. 50%
                                    $115 to $130                               approx. 25%
                               Above $130                                    less than 10%

                                                 Estimated difference
                                                    in economic jet
                                                    fuel price per
                                                        gallon,
                                                     above/(below)
                                                    unhedged market
                                                  prices, including
                                                         taxes
                                                 ------------------
                         Average WTI Crude Oil
                            price per barrel           2Q 2012         Second Half 2012
                            ----------------           -------         ----------------

                                             $75                $0.05                $0.06
                                             $90                $0.05                $0.06
                                        $104 (2)                $0.03               ($0.02)
                                            $115                $0.03               ($0.12)
                                            $130                $0.00               ($0.23)

                                                 Percent of estimated
                                                   fuel consumption
                                                    covered by fuel
                                                      derivative
                                                     contracts at
                                 Period           varying WTI crude-
                                                   equivalent price
                                                         levels
                                          ------   ------------------

                                            2013             over 40%
                                            2014             over 15%
                                            2015             over 10%
                For second
                                     quarter
                                     2012, the
                                     Company's
                                     current
                                     estimated
                                     fuel
                                     consumption
                                     covered by
                                     fuel
                                     derivative
                                     contracts is
                                (1)  minimal.

                Based on the
                                     second
                                     quarter 2012
                                     average WTI
                                     forward
                                     curve and
                                     market
                                     prices as of
                                     April 16,
                                     2012, and
                                     current
                                     estimated
                                     fuel
                                     consumption
                                     covered by
                                     fuel
                                     derivative
                                     contracts,
                                     second
                                     quarter 2012
                                     economic
                                     fuel price
                                     per gallon,
                                     including
                                     taxes, is
                                     estimated to
                                     be in the
                                     $3.40 to
                                     $3.45 per
                                     gallon
                                     range, or
                                     approximately
                                     $.03 above
                                     market
                                (2)  prices.
    SOUTHWEST AIRLINES CO.
    737 FUTURE DELIVERY SCHEDULE
    AS OF APRIL 18, 2012

                                        The Boeing Company                 The Boeing Company
                                         737 NG                                                 737 MAX
                                         ------                                                 -------
                                           -700                       -800                    Options                            Firm           Options     Total
                                  Firm                          Firm                                        Additional          Orders
                                 Orders                        Orders                                         -800s
                                 ------                        ------                                         -----

    2012                                      -                         25               (2)              -              5               -                -        30
    2013                                      -                         41                                -              -               -                -        41
    2014                                     35                          4                               15              -               -                -        54
    2015                                     36                          -                               12              -               -                -        48
    2016                                     31                          -                               12              -               -                -        43
    2017                                     15                          -                               25              -               4                -        44
    2018                                     10                          -                               28              -              15                -        53
    2019                                      -                          -                                -              -              33                -        33
    2020                                      -                          -                                -              -              34                -        34
    2021                                      -                          -                                -              -              34               18        52
    2022                                      -                          -                                -              -              30               19        49
    2023                                      -                          -                                -              -               -               23        23
    2024                                      -                          -                                -              -               -               23        23
    Through
     2027                                     -                          -                                -              -               -               67        67
                                            ---                        ---                              ---            ---             ---              ---       ---
                                            127            (1)          70                               92              5  (3)        150  (4)         150       594
                                            ===           ===          ===                              ===            === ===         === ===          ===       ===
    (1) The Company has flexibility to substitute 737-800s in lieu of 737-700
     firm orders.
    (2) The Company has taken delivery of three 737-800 aircraft through
     April 18, 2012.
    (3) New delivery leased aircraft.
    (4) The Company has flexibility to accept MAX 7 or MAX 8 deliveries.

    SUPPLEMENTAL COMBINED STATEMENT I
    SOUTHWEST AIRLINES CO.
    SELECTED COMBINED FINANCIAL INFORMATION (1)
    (in millions)
    (unaudited)

                                                 Three months ended
                                                     March 31,
                                                     ---------
                                                                                                                                                     Percent
                                                               2012                          2011                     Change
                                                               ----                          ----                     ------

    OPERATING REVENUES:
                     Passenger                                                    $3,744                                    $3,524                              6.2
                     Freight                                                          37                                        31                             19.4
                     Other                                                           210                                       215                             (2.3)

                     Total operating revenues                                      3,991                                     3,770                              5.9

    OPERATING EXPENSES:
                      Salaries,
                      wages, and
                      benefits                                                     1,141                                     1,098                              3.9
                     Fuel and oil                                                  1,510                                     1,294                             16.7
                      Maintenance
                      materials
                      and repairs                                                    272                                       263                              3.4
                      Aircraft
                      rentals                                                         88                                       107                            (17.8)
                      Landing fees
                      and other
                      rentals                                                        254                                       242                              5.0
                      Depreciation
                      and
                      amortization                                                   201                                       170                             18.2
                      Acquisition
                      and
                      integration                                                     13                                        22                            (40.9)
                      Other
                      operating
                      expenses                                                       490                                       489                              0.2

                     Total operating expenses                                      3,969                                     3,685                              7.7
                                                                                   -----                                     -----

    OPERATING INCOME                                                                 $22                                       $85                            (74.1)

    (1) Selected financial information for the three months
     ended March 31, 2012 is presented on a consolidated basis.
     Selected financial information for the three months ended
     March 31, 2011 is presented on a combined basis, including
     financial results for AirTran, prior to the May 2, 2011
     acquisition date. These combined results exclude the impact
     of purchase accounting. AirTran's historical financial
     information included in the combined presentation has been
     conformed to Southwest's financial statement classification
     where appropriate.  See Note Regarding Use of Non-GAAP
     Financial Measures.
    SUPPLEMENTAL COMBINED STATEMENT II
    SOUTHWEST AIRLINES CO.
    RECONCILIATION OF SELECTED COMBINED AMOUNTS FROM SUPPLEMENTAL COMBINED STATEMENT I TO NON-GAAP ITEMS (1)
    (SEE NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES)
    (in millions)
    (unaudited)

                                                  Three months ended
                                                       March 31,
                                                       ---------
                                                                                               Percent
                                                           2012                          2011                Change
                                                           ----                          ----                ------

    Fuel and oil expense,
     combined unhedged                                   $1,479                        $1,309
    Add (Deduct): Fuel hedge (gains)
     losses included in Fuel and oil
     expense                                                 31                           (15)
                                                            ---                           ---
    Fuel and oil expense,
     as presented on
     Supplemental Combined
     Statement I                                         $1,510                        $1,294
    Add: Net impact from fuel
     contracts                                               25                            19
                                                            ---                           ---
    Fuel and oil expense,
     combined economic                                   $1,535                        $1,313                        16.9
                                                         ------                        ------

    Total operating
     expenses, as presented
     on Supplemental
     Combined Statement I                                $3,969                        $3,685
    Add: Net impact from fuel
     contracts                                               25                            19
                                                            ---                           ---
    Total operating
     expenses, combined
     economic                                            $3,994                        $3,704
    Deduct: Acquisition and
     integration costs, net (2)                             (13)                          (20)
                                                            ---                           ---
    Total operating
     expenses, combined
     non-GAAP                                            $3,981                        $3,684                         8.1
                                                         ------                        ------

    Operating income, as
     presented on
     Supplemental Combined
     Statement I                                            $22                           $85
    Deduct: Net impact from fuel
     contracts                                              (25)                          (19)
                                                            ---                           ---
    Operating income
     (loss), combined
     economic                                               $(3)                          $66
    Add: Acquisition and integration
     costs, net (2)                                          13                            20
                                                            ---                           ---
    Operating income,
     combined non-GAAP                                      $10                           $86                       (88.4)
                                                            ---                           ---
    (1) Selected financial information for the three
     months ended March 31, 2012, is presented on a
     consolidated basis. Selected financial information
     for the three months ended March 31, 2011 is
     presented on a combined basis, including financial
     results for AirTran, prior to the May 2, 2011
     acquisition date. These combined results exclude the
     impact of purchase accounting. AirTran's historical
     financial information included in the combined
     presentation has been conformed to Southwest's
     financial statement classification where

    (2) Amounts net of profitsharing impact on charges
     incurred through March 31, 2011.  The Company
     amended its profitsharing plan during second quarter
     2011 to defer the profitsharing impact of
     integration costs incurred from April 1, 2011
     through December 31, 2013. The profitsharing impact
     will be realized in 2014 and beyond.

    SUPPLEMENTAL COMBINED STATEMENT III
    SOUTHWEST AIRLINES CO.
    SELECTED CONSOLIDATING COMBINED 2011 FINANCIAL INFORMATION (1)
    (in millions)
    (unaudited)

                                                                      Three months ended March 31, 2011
                                                                      ---------------------------------
                                                                              (as reported)
                                                                              ------------
                                                                                Southwest                                                          AirTran
                                                                              Airlines Co.                                                     (as conformed)                                          Combined
                                                                              ------------                                                      -------------                                          --------
    OPERATING REVENUES:
                     Passenger                                                              $2,949            (2)                                                $575                                               $3,524
                     Freight                                                                    31                                                                  -                                                   31
                     Other                                                                     123            (2)                                                  92                                                  215

                     Total operating revenues                                                3,103                                                                667                                                3,770

    OPERATING EXPENSES:
                      Salaries,
                      wages, and
                      benefits                                                                 954                                                                144                                                1,098
                     Fuel and oil                                                            1,038                                                                256                                                1,294
                      Maintenance
                      materials
                      and repairs                                                              199                                                                 64                                                  263
                      Aircraft
                      rentals                                                                   46                                                                 61                                                  107
                      Landing fees
                      and other
                      rentals                                                                  201                                                                 41                                                  242
                      Depreciation
                      and
                      amortization                                                             155                                                                 15                                                  170
                      Acquisition
                      and
                      integration                                                               17                                                                  5                                                   22
                      Other
                      operating
                      expenses                                                                 379                                                                110                                                  489

                     Total operating expenses                                                2,989                                                                696                                                3,685
                                                                                             -----                                                                ---                                                -----

    OPERATING INCOME/(LOSS)                                                                   $114                                                               $(29)                                                 $85

    (1) Selected financial information in this schedule is presented on a
     combined basis, including AirTran, for periods prior to the May 2, 2011
     acquisition date.  Results presented for Southwest and AirTran, on a
     standalone basis, represent previously reported results.  AirTran's
     historical financial information has been conformed to Southwest's
     financial statement classification where appropriate. See Note Regarding
     Use of Non-GAAP Financial Measures.

    (2) The Company made a fourth quarter 2011 reclassification to change the
     allocation of Operating revenues between Passenger revenues and Other
     revenues from its sale of frequent flyer points associated with its co-
     branded Chase(R) Visa credit card. The Company has thus reclassified $10
     million in Operating revenues for the period from January 2011 through
     March 2011 from Other revenues to Passenger revenues to conform to the
     current presentation.

    SUPPLEMENTAL COMBINED STATEMENT IV
    SOUTHWEST AIRLINES CO.
    COMBINED OPERATING STATISTICS (1)
    (unaudited)

                                                                              Three months ended
                                                                                   March 31,
                                                                                   ---------

                                                                        2012                           2011      Change
                                                                        ----                           ----      ------
    Revenue passengers
     carried                                                      25,560,822                     25,581,395         (0.1)%
    Enplaned passengers                                           31,154,453                     31,194,252         (0.1)%
    Revenue passenger miles
     (RPMs) (000s)                                                23,684,869                     23,715,429         (0.1)%
    Available seat miles
     (ASMs) (000s)                                                30,632,893                     30,263,545           1.2%
    Load factor                                                         77.3%                          78.4%     (1.1)pts
    Average length of
     passenger haul (miles)                                              927                            927             -
    Average aircraft stage
     length (miles)                                                      685                            676           1.3%
    Trips flown                                                      333,896                        333,567           0.1%
    Average passenger fare                                           $146.44                        $137.73  (2)      6.3%
    Passenger revenue yield
     per RPM (cents)                                                   15.80                          14.86  (2)      6.3%
    RASM (cents)                                                       13.03                          12.46           4.6%
    PRASM (cents)                                                      12.22                          11.64  (2)      5.0%
    CASM (cents)                                                       12.96                          12.17           6.5%
    CASM, excluding fuel
     (cents)                                                            8.03                           7.89           1.8%
    CASM, excluding special
     items (cents)                                                     12.99                          12.17           6.7%
    CASM, excluding fuel and
     special items (cents)                                              7.99                           7.83           2.0%
    Fuel costs per gallon,
     including fuel tax
     (unhedged)                                                        $3.32                          $2.94          12.9%
    Fuel costs per gallon,
     including fuel tax                                                $3.39                          $2.90          16.9%
    Fuel costs per gallon,
     including fuel tax
     (economic)                                                        $3.44                          $2.95          16.6%
    Fuel consumed, in gallons
     (millions)                                                          443                            445         (0.5)%
    Aircraft in service at
     period-end                                                          694                            690           0.6%

    PRASM (Passenger unit revenue) - Passenger revenue yield per ASM
    RASM (unit revenue) - Operating revenue yield per ASM
    CASM (unit costs) - Operating expenses per ASM

    (1) Selected operating statistics for the three months ended March
     31, 2012 are presented on a consolidated basis.  Selected operating
     statistics for the three months ended March 31, 2011 are presented
     on a combined basis, including operations for AirTran, prior to the
     May 2, 2011 acquisition date.  These combined results exclude the
     impact of purchase accounting.  AirTran's historical operating
     statistics included in the combined presentation have been conformed
     to Southwest's presentation where appropriate.

    (2) The Company made a fourth quarter 2011 reclassification to change
     the allocation of Operating revenues between Passenger revenues and
     Other revenues from its sale of frequent flyer points associated
     with its co-branded Chase(R) Visa credit card. The Company has thus
     reclassified $10 million in Operating revenues for the period from
     January 2011 through March 2011 from Other revenues to Passenger
     revenues to conform to the current presentation.

    SUPPLEMENTAL COMBINED STATEMENT V
    SOUTHWEST AIRLINES CO.
    SELECTED CONSOLIDATING COMBINED FINANCIAL INFORMATION (1)
    (unaudited)

                                                          Three months ended March 31, 2010
                                                          ---------------------------------
                                                                     (as reported)
                                                                     ------------
                                                                       Southwest                                          AirTran
                                                                     Airlines Co.                                     (as conformed)                                        Combined
                                                                     ------------                                      -------------                                        --------

                           Passenger
                           Revenues
                           (in
                           millions)                                               $2,495                                               $515                                             $3,010
                           Available
                           Seat Miles
                           (ASMs)
                           (000s)                                                                                                                                                    28,292,159
                           PRASM
                           (cents)                                                                                                                                                        10.64

                                                        Three months ended March 31, 2009
                                                        ---------------------------------
                                                                     (as reported)
                                                                     ------------
                                                                       Southwest                                          AirTran
                                                                     Airlines Co.                                     (as conformed)                                        Combined
                                                                     ------------                                      -------------                                        --------

                           Passenger
                           Revenues
                           (in
                           millions)                                               $2,252                                               $463                                             $2,715
                           Available
                           Seat Miles
                           (ASMs)
                           (000s)                                                                                                                                                    29,510,520
                           PRASM
                           (cents)                                                                                                                                                         9.20
    (1) Selected financial information in this schedule is presented
     on a combined basis, including AirTran, for periods prior to the
     May 2, 2011 acquisition date.  Results presented for Southwest
     and AirTran, on a standalone basis, represent previously reported
     results.  AirTran's historical financial information has been
     conformed to Southwest's financial statement classification where
     appropriate.  See Note Regarding Use of Non-GAAP Financial
     Measures.

NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges the Company believes are not indicative of its ongoing operational performance.

As a result, the Company also provides financial information in this release that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information, including results that it refers to as “economic,” which the Company’s management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company’s economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts–all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. These economic results provide a better measure of the impact of the Company’s fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company’s management, as well as investors, to consistently assess the Company’s operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company’s fuel hedging program, (ii) the requirements and accounting associated with accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as subsequent quarterly filings.

In addition to its “economic” financial measures, as defined above, the Company has also provided other non-GAAP financial measures as a result of items that the Company believes are not indicative of its ongoing operations. These include expenses associated with the Company’s acquisition and integration of AirTran. The Company believes that evaluation of its financial performance can be enhanced by a presentation of results that exclude the impact of these items in order to evaluate the results on a comparative basis with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. As a result of the Company’s acquisition of AirTran, which closed on May 2, 2011, the Company has incurred and expects to continue to incur substantial charges associated with integration of the two companies. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the charges as special items in its future presentation of non-GAAP results.

The Company has also provided other supplemental non-GAAP financial information on a “combined basis.” This supplemental non-GAAP financial information on a “combined basis” includes specified combined financial results of the Company and AirTran for periods prior to May 2, 2011, as if the acquisition had occurred prior to the beginning of the applicable reporting period, but excludes any impact of purchase accounting prior to May 2, 2011. AirTran’s historical financial information included in the combined presentation has been conformed to the Company’s financial statement classification where appropriate. The Company believes that evaluation of its financial performance can be enhanced by a presentation of combined results in order to evaluate its prior, current or future period results on a more meaningful, consistent year-over-year basis.

The Company has also provided free cash flow, which is a non-GAAP financial measure. The Company believes free cash flow is a meaningful measure because it demonstrates the Company’s ability to service its debt, pay dividends and make investments to enhance shareholder value. Although free cash flow is commonly used as a measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow. For the three months ended March 31, 2012, the Company generated over $1.1 billion in free cash flow, calculated as operating cash flows of approximately $1.2 billion less capital expenditures of $127 million.

SOURCE Southwest Airlines


Source: PR Newswire