Southwest Airlines reported first quarter 2006 net income of $61 million, or $.07 per diluted share, compared to $59 million for first quarter 2005, or $.07 per diluted share.
The Company’s first quarter 2006 and 2005 net income includes unrealized gains/losses associated with Statement of Financial Accounting Standard (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.

Excluding these unrealized SFAS 133 gains/losses (see Supplemental Schedule II), net income for first quarter 2006 increased 49 percent to $64 million, or $.08 per diluted share, compared to $43 million, or $.05 per diluted share for first quarter 2005, as adjusted. These results exceeded First Call’s mean estimate of $.07 per diluted share for first quarter 2006.

Prior year results have been adjusted to retroactively apply the adoption of SFAS 123R, “Share-Based Payment”, which requires all stock-based compensation to be expensed and accounted for using a fair value based method. The adoption of SFAS 123R resulted in stock-based compensation expense of $22 million (before income taxes and profitsharing), or $.01 per diluted share, and $20 million (before income taxes), or $.02 per diluted share, in first quarters 2006 and 2005, respectively.

Results for 2005 also have been adjusted for the Company’s election to change its method of accounting for airframe maintenance of Boeing 737-300 and -500 aircraft from the deferral method to the direct expense method. As required by SFAS 154, “Accounting Changes and Error Corrections”, the Company has adjusted prior periods to show financial statements as if the direct expense method had been used in all prior years. This adjustment resulted in additional pretax maintenance expense of $5 million for first quarter 2005, which did not result in a material impact to diluted earnings per share.

The Company has provided a reconciliation (see Supplemental Schedule I) of previously reported results for 2005 to results adjusted for the Company’s two accounting changes, which were both effective January 1, 2006.

Gary C. Kelly, CEO, stated: “We are pleased with the continued and consistent improvement in our earnings performance. Excluding SFAS 133 items, our first quarter 2006 earnings of $64 million were up 49 percent over last year’s adjusted earnings of $43 million. Despite soaring energy costs, this represented another quarter of strong earnings growth and a stellar performance by the People of Southwest Airlines.

“Even though Easter was in April this year (versus March last year), our revenues increased 21.4 percent, or 11.3 percent per available seat mile. Demand for our low fares and high quality Customer Service was strong, resulting in a record first quarter load factor of 69.2 percent, up 3.8 points from first quarter 2005. Thus far, strong load factor and revenue trends have continued in April, and Customer bookings for the remainder of second quarter 2006 are strong.

“We continued to maintain Low Fare Leadership in America, increasing yields simply to offset ever-higher jet fuel prices. Passenger revenue yields per mile increased 5.4 percent in first quarter 2006 versus the year ago period.

“As expected, our unit costs increased 10.4 percent in first quarter 2006 due to higher jet fuel costs. Despite a $133 million benefit from our fuel hedging position, our first quarter 2006 jet fuel costs per gallon increased 62.8 percent to $1.46 per gallon. For second quarter 2006, we are over 75 percent hedged with prices capped at $36 per barrel. Based on this hedging position and current market conditions, we expect our second quarter 2006 fuel cost per gallon to be in the $1.45 to $1.50 range. We are over 70 percent hedged for the remainder of 2006 at $36 per barrel; over 60 percent in 2007 at $39 per barrel; over 35 percent in 2008 at $38 per barrel; and about 30 percent in 2009 at $39 per barrel.

“Excluding fuel, our unit cost performance was in line with our expectations at 6.43 cents and down slightly from the adjusted year ago performance. Once again, the People of Southwest Airlines delivered more, making an efficient airline even more efficient. Although we expect second quarter 2006 unit costs, excluding fuel, to increase from first quarter 2006’s 6.43 cents, we are pleased with our cost control efforts. And, thanks to our Employees, we are optimistic we can achieve our full-year 2006 goal of flat year-over-year unit costs, excluding fuel, at 6.48 cents.

“We recently announced our request for two gates at Washington Dulles International Airport and intention to start service this fall. As our 63rd airport, Dulles represents an exciting opportunity to complement our existing service to the Washington D.C. metro area from Baltimore/Washington International Thurgood Marshall Airport, our fourth largest operation. We are very pleased with the strong Customer response to our new Denver service, which we commenced on January 3, 2006 and currently offer 20 daily nonstop departures to five cities. We also continue to grow our existing route system, with upcoming service additions to Nashville, Las Vegas, New Orleans, and Philadelphia.

“Chicago Midway also continues to provide expansion opportunities. In fourth quarter 2005, ATA Airlines, Inc. entered into an agreement in which an investor would provide financing to enable ATA to emerge from bankruptcy. As part of this transaction, in December 2005, we acquired the leasehold rights to four additional gates at Chicago Midway Airport in exchange for a $20 million reduction in our debtor-in-possession (DIP) loan to ATA. Upon ATA’s emergence from bankruptcy on February 28, 2006, ATA repaid Southwest in cash the remaining $20 million balance of the DIP loan. In addition, we were relieved of our commitment to purchase $30 million of ATA convertible preferred stock. As part of this agreement, we expanded our codeshare with ATA and will be enhancing our Rapid Rewards program to provide new award destinations via ATA.

“We are confident about our future growth opportunities as evidenced by our agreement with Boeing today to exercise 79 options for delivery of Boeing 737-700 aircraft in 2007 through 2012, bringing our current firm orders to 140. We also have 116 options, with delivery positions in 2008 through 2012, and 54 purchase rights for delivery through December 31, 2014.”

For the tenth year in a row, Fortune magazine recognized Southwest Airlines in its annual survey of corporate reputations. Among all industries in 2006, Fortune listed Southwest Airlines as number three among America’s Top Ten Most Admired Corporations. The Company was also recently recognized for the seventh consecutive year by Business Ethics magazine as one of the 100 Best Corporate Citizens that excel at serving a variety of stakeholders. Institutional Investor magazine named Southwest Airlines as America’s Most Shareholder-Friendly Airline in its survey of investors and analysts. Finally, Southwest Airlines Cargo was recently named “Airline of the Year” by the Express Delivery & Logistics Association, for the second year in a row, marking the sixth consecutive year that the Company has been honored for its excellence in air cargo delivery service.

Southwest will discuss its first quarter 2006 results on a conference call at 11:30 a.m. Eastern Time today. A live broadcast of the conference call will be available at http://www.southwest.com/jp/luvhome.shtml?src=IR_feb_030206 .

Operating Results (compared to adjusted 2005 results)

Total operating revenues for first quarter 2006 increased 21.4 percent to $2.02 billion, compared to $1.66 billion for first quarter 2005. Operating income increased 21.0 percent to $98 million from $81 million in first quarter 2005. Excluding the impact of SFAS 133 items, operating income increased 38.6 percent to $115 million from $83 million in first quarter 2005. Revenue passenger miles (RPMs) increased 15.4 percent in first quarter 2006, as compared to a 9.1 percent increase in available seat miles (ASMs), resulting in a 3.8 point increase in load factor to 69.2 percent. The passenger revenue yield per RPM increased 5.4 percent to 12.68 cents from 12.03 cents in first quarter 2005. Operating revenue yield per ASM (RASM) increased 11.3 percent to 9.15 cents from 8.22 cents in first quarter 2005.

Total first quarter 2006 operating expenses were $1.92 billion, compared to $1.58 billion in first quarter 2005. Operating expenses per ASM (CASM) for first quarter 2006 increased 11.3 percent to 8.70 cents, compared to 7.82 cents in first quarter 2005. Excluding SFAS 133 items, CASM for first quarter 2006 increased 10.4 percent to 8.62 cents, compared to 7.81 cents for first quarter 2005. CASM, excluding fuel, for first quarter 2006 was down slightly from last year’s 6.44 cents.

Net cash provided by operations for first quarter 2006 was $751 million, which included a $205 million increase in fuel hedge-related collateral deposits. Capital expenditures were $262 million for first quarter 2006. In January 2006, the Company’s Board of Directors authorized purchases of up to $300 million of the Company’s common stock. As of yesterday, the Company had repurchased 15.4 million shares of common stock for a total of $261 million. The Company ended first quarter 2006 with $2.9 billion in cash and short-term investments. In addition, the Company had a fully available unsecured revolving credit line of $600 million.

First quarter 2006 “other expenses” of $2 million consisted of $4 million in net interest expense offset by $2 million in “other gains” resulting primarily from SFAS 133 items. Excluding these SFAS 133 items, “other losses” were $11 million for first quarter 2006, consisting primarily of costs associated with the Company’s fuel hedging program.
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