Southwest Airlines Reports First Quarter Earnings; Exceeds First Call Consensus Estimate

Southwest Airlines’ net income, before the cumulative effect of a change in accounting principle, for first quarter 2000 was $95.6 million, compared to $95.8 million in first quarter 1999. Diluted net income per share before the accounting change was $.18 in both first quarter 2000 and 1999 and exceeded First Call’s consensus estimate of $.16 diluted net income per share for first quarter 2000. After consideration of the accounting change, net income was $73.5 million and diluted net income per share was $.14 for first quarter 2000.

The cumulative effect of the change in accounting principle was recorded as of January 1, 2000 in accordance with Staff Accounting Bulletin 101 (SAB 101) on revenue recognition, issued in December 1999 by the Securities and Exchange Commission. As a result of adopting SAB 101, Southwest has changed the way it accounts for the sale of flight segment credits to companies participating in its Rapid Rewards frequent flyer program. Prior to the issuance of SAB 101, the Company recorded revenue in “Other revenue” when flight segment credits were sold. Beginning January 1, 2000, the Company changed its accounting for sales of flight segment credits to recognize “passenger revenue” when the free travel awards are earned and flown. Due to this change, the Company recorded a cumulative adjustment of $22.1 million (net of income taxes of approximately $14.0 million). The impact of this accounting change on first quarter 2000 revenue and net income before the cumulative effect of the change in accounting principle was not material. The Company has also reclassified, for comparison purposes, the revenue reported in prior periods related to the sale of flight segment credits from “Other revenue” to “Passenger revenue.”

Total operating revenues for first quarter 2000 increased 15.5 percent to $1.24 billion, compared to $1.08 billion for first quarter 1999. Revenue passenger miles (RPMs) increased 17.5 percent in first quarter 2000, compared to a 14.2 percent increase in available seat miles (ASMs), resulting in a load factor of 66.8 percent versus the first quarter 1999 load factor of 64.9 percent. The passenger revenue yield per RPM decreased 1.2 percent to $.1269 from $.1285 in first quarter 1999, after considering the 1999 revenue reclassification resulting from the change in accounting principle. Operating revenue yield per ASM, however, increased 1.2 percent to $.0878 from $.0868 in first quarter 1999.

Operating expenses per ASM for first quarter 2000 increased 4.8 percent to $.0768, compared to $.0733 for first quarter 1999, due to a 108.5 percent increase in average jet fuel prices. Excluding fuel and oil expense, operating expenses per ASM for first quarter 2000 were $.0629, a decrease of 5.3 percent. On a unit basis, every cost category, other than fuel and depreciation expense, was down versus year ago levels, in part due to our Company-wide cost reduction efforts.

“Other income” was $565,000 in first quarter 2000 versus first quarter 1999 “Other expenses” of $10.5 million, primarily due to a $13.8 million swing in “Other gains”. Interest expense increased $3.8 million due to higher long-term debt levels versus a year ago. “Other gains” for first quarter 2000 of $4.1 million primarily resulted from the favorable conclusion of a lawsuit. “Other losses” for first quarter 1999 of $9.6 million primarily consisted of a write-down associated with the consolidation of certain software development projects.


Herbert D. Kelleher, Chairman, President, and Chief Executive Officer, stated: “We are extremely satisfied with our strong first quarter 2000 earnings (before the cumulative effect of a change accounting principle) of $95.6 million, which were essentially flat with first quarter 1999’s earnings of $95.8 million. Despite significantly higher jet fuel prices, which were more than double year ago levels, and the adverse impact on passenger traffic in early January from Y2K apprehensions, our first quarter 2000 earnings per share (before consideration of the change in accounting principle) equaled our record first quarter 1999 performance of $.18 diluted net income per share and exceeded the First Call consensus estimate of $.16 diluted net income per share.

“With the exception of early January, we enjoyed favorable load factor comparisons and positive unit revenue trends throughout first quarter 2000. Our modest fare increases have been productive, and we experienced strong demand for our low fares and high value service throughout our system, including our 1999 additions of Islip, New York; Raleigh-Durham, North Carolina; and Hartford, Connecticut. Traffic and unit revenue trends remain strong and, based on results thus far, we expect favorable load factor and unit revenue comparisons again in April 2000. Bookings for May and June are strong at this point.

“We are particularly pleased with the success of our Internet site. More than 25 percent of our first quarter 2000 passenger revenues came through, and we are well on our way to exceed $1 billion in e-commerce revenues for 2000. Passenger revenues booked through our Internet site exceeded $300 million, up more than 100 percent from first quarter 1999.

“Our overall unit costs were up 4.8 percent, driven entirely by higher jet fuel prices. As a result of the rapid escalation of jet fuel prices to near record levels, our jet fuel cost per gallon of $.82 was more than double last year’s exceptionally low jet fuel price of $.39 per gallon. To provide protection against significant fuel price increases, we have hedged the majority of our anticipated requirements for the remainder of the year. For second quarter 2000, we have hedged 39 percent of our requirements with fixed price crude oil swaps at an average price of $26.90 per barrel and capped 46 percent of our requirements with crude oil options at an average of $26.50 per barrel. For second half 2000, we have hedged 70 percent of our anticipated fuel requirements with fixed price crude oil swaps at an average price of $23.60 per barrel for third quarter 2000 and $22.50 per barrel for fourth quarter 2000. In addition we have capped 30 percent of our second half 2000 anticipated requirements with crude oil options at an average price of $24.50 per barrel for third quarter 2000 and $23.25 per barrel for fourth quarter 2000.

“We are extremely pleased with our better than expected first quarter 2000 unit cost performance, excluding fuel. Our unit costs ex-fuel were down an impressive 5.3 percent. I am forever grateful to the People of Southwest Airlines for their extraordinary efforts during first quarter 2000 to offset the dramatic effects of significantly higher jet fuel costs. Excluding fuel, we anticipate lower unit costs in second quarter 2000 versus second quarter 1999.

“We have experienced some second quarter delays of our scheduled Boeing 737-700 aircraft deliveries as a result of the recent Boeing strike. Thus far, the delays have not significantly impacted our flight schedule. During first quarter 2000, we obtained two additional Boeing 737-700s from the used aircraft market and still expect to increase our ASM capacity almost 14 percent in second quarter 2000 and by at least 12 percent for the year 2000.

“We are looking forward to inaugurating service from Albany International Airport on May 7, 2000 with 10 daily nonstop flights to three cities: Baltimore/Washington, Las Vegas, and Orlando. With the addition of Albany, New York, Southwest will serve 56 cities in 29 states.

“We ended first quarter 2000 with $542.6 million in cash on hand, not including our available and unused bank credit facility of $475.0 million.

“I am extremely proud of our Employees’ truly remarkable accomplishments during first quarter 2000. In addition to producing outstanding unit operating revenue and unit operating cost results for our Employees and Shareholders, Southwest Airlines was recognized again by Fortune magazine as one of the most admired companies in America; the most admired airline in America; and one of the best places to work in America. Our Employees continue to provide superb Customer service, as evidenced by our recent top ranking in the national Airline Quality Rating study, conducted annually by the

W. Frank Barton School of Business at Wichita State University and the University of Nebraska at Omaha. Southwest Airlines has ranked first in this survey in four of the last five years. I commend and thank each of our magnificent Employees for the continuation of their unified focus, pride, devotion, and unbeatable Southwest Spirit, which has made these outstanding accomplishments possible. Our Employees are indeed the very best!” This release, as well as past releases, can be accessed on the Southwest Airlines Internet site at: