DALLAS, July 21 /PRNewswire-FirstCall/—Southwest Airlines` (NYSE: LUV) net income for second quarter 2003 was $246 million, compared to second quarter 2002 net income of $102 million. Diluted net income per share was $.30 for second quarter 2003, compared to $.13 for second quarter 2002. The Company`s second quarter net income for both 2003 and 2002 included special items, described below. Excluding special items, second quarter 2003 net income increased 22.6 percent to $103 million, or $.13 per diluted share, compared to second quarter 2002 net income of $84 million, or $.10 per diluted share. These results compare favorably to First Call`s consensus estimate of $.12 per diluted share for second quarter 2003.
Pursuant to the April 2003 Emergency Wartime Supplemental Appropriations Act, the Company received a $271 million cash payment from the U.S. government (government grant), which was recognized as “Other gains” in its unaudited Condensed Consolidated Statement of Income for second quarter 2003. This special item resulted in an increase of approximately $41 million to Employee profitsharing expense.

Second quarter 2002 results included an additional $36 million in passenger revenue from a reduction in estimated future refunds and exchanges included in “Air traffic liability.”

The Company believes it is helpful to management and investors to evaluate ongoing operational performance and trends by excluding these special items for comparative purposes. A reconciliation of key financial measures excluding these special items is included in this release, pursuant to Regulation G issued by the Securities and Exchange Commission.

Total operating revenues for second quarter 2003 increased 2.9 percent to $1.52 billion, compared to $1.47 billion for second quarter 2002. Excluding the special item in 2002, operating revenues increased 5.4 percent from $1.44 billion in second quarter 2002. Revenue passenger miles (RPMs) increased 4.6 percent in second quarter 2003, compared to a 4.2 percent increase in available seat miles (ASMs), resulting in a load factor of 70.1 percent versus the second quarter 2002 load factor of 69.9 percent.

The passenger revenue yield per RPM decreased 1.8 percent, to 11.67 cents, from 11.88 cents in second quarter 2002. Excluding the special item in 2002, the passenger revenue yield per RPM increased 0.8 percent, to 11.67 cents, from 11.58 cents in second quarter 2002. Operating revenue per ASM (RASM) decreased 1.3 percent, to 8.47 cents, from 8.58 cents in second quarter 2002. Excluding the special item in 2002, RASM increased 1.2 percent, to 8.47 cents, from 8.37 cents in second quarter 2002.

Total second quarter 2003 operating expenses were $1.38 billion, an increase of 7.1 percent, compared to $1.28 billion for the same year ago period. Excluding special items, operating expenses were $1.33 billion in second quarter 2003, an increase of 4.4 percent. Operating expenses per ASM (CASM) for second quarter 2003 increased 2.7 percent, to 7.68 cents, from
7.48 cents in second quarter 2002, due to higher profitsharing expense on the government grant. Excluding special items, CASM increased slightly to 7.46 cents in second quarter 2003, compared to 7.44 cents in second quarter 2002. For second quarter 2003, the Company benefited from $36 million of hedging gains recorded in “Fuel and oil,” resulting in jet fuel costs per gallon of 67.4 cents, which was flat with second quarter 2002.

Operating income for second quarter 2003 was $140 million, a decrease of 25.9 percent, compared to $189 million for second quarter 2002. Excluding special items in both years, operating income increased 13.8 percent to $181 million for second quarter 2003, compared to $159 million for the same period in 2002.

“Other income” was $257 million for second quarter 2003 versus “other expenses” of $20 million for second quarter 2002. The $277 million swing in “other income” resulted primarily from the government grant in second quarter 2003 and a $5 million decline in net interest expense. Interest expense declined 14.8 percent to $23 million primarily due to lower interest rates. Interest income for second quarter 2003 declined 22.2 percent, also due to lower interest rates. Capitalized interest increased 60 percent to $8 million in second quarter 2003 as a result of higher Boeing aircraft progress payments.

James F. Parker, Vice Chairman and Chief Executive Officer, stated: “Considering the challenges we faced in second quarter with the Iraq war and the difficult airline industry pricing environment, we are proud of our better than expected earnings performance. Excluding the $271 million government grant, our second quarter 2003 net income of $103 million slightly exceeded last year`s second quarter earnings of $102 million, even though second quarter 2002 included $36 million (pretax) related to a reduction in air traffic liability.

“Although bookings softened early in the quarter as a result of the war in Iraq, traffic and revenues finally began to improve in mid-June. Thus far, traffic and load factors for this month and bookings for the remainder of July and August are strong due to high demand for vacation travel. Thus far in third quarter 2003, unit revenues are exceeding year ago levels. The outlook for the economy remains uncertain, however, and we remain concerned about travel demand post-Labor Day.
“We continue to benefit from our successful fuel hedging program. We were 100 percent hedged in second quarter 2003, which resulted in a reduction in `Fuel and oil` expense of $36 million. We are 87 percent hedged in both third quarter 2003 and fourth quarter 2003 under $24 per barrel. We remain 80 percent hedged for 2004, with caps approximating $23 per barrel.

“Excluding fuel and special items, unit costs were 6.37 cents, slightly above last year`s second quarter cost performance of 6.34 cents. We expect third quarter 2003 unit costs, excluding fuel, to exceed last year`s third quarter unit costs of 6.23 cents.

“Based on our current revenue and cost outlook and barring any unforeseen event, we expect third quarter 2003 earnings to exceed third quarter 2002 earnings of $75 million, which included a federal grant of $48 million (pretax) received pursuant to the 2001 Air Transportation Safety and System Stabilization Act.

“Although the last 22-month period has been the most difficult ever for the airline industry, our superb Employees remain focused more than ever on their mission to spread the Freedom to Fly to Americans. As a consequence of their dedication and improved revenue trends, we recently exercised our remaining 2004 options for the delivery of nine 737-700s next year. In addition, we exercised six 2005 options for accelerated delivery in 2004 and accelerated the firm delivery of two 2005 aircraft to 2004. These changes to our Boeing 737-700 delivery schedule bring our current 2004 firm orders to 42 aircraft, which, after subtracting planned 737-200 retirements, results in a planned annual capacity increase in the 6 to 7 percent range in 2004.”

Net cash provided by operations was $905 million and capital expenditures were $518 million for the six months ended June 30, 2003. We ended second quarter 2003 with $2.2 billion cash on hand plus our available unsecured revolving credit line of $575 million. Total operating revenues for the six months ended June 30, 2003 increased 5.0 percent to $2.87 billion while total operating expenses increased 7.5 percent to $2.68 billion, resulting in operating income in first half 2003 of $186 million versus $238 million in first half 2002. Excluding special items, first half 2003 operating revenues increased 6.4 percent to $2.87 billion while operating expenses increased 6.2 percent to $2.64 billion, resulting in a 9.1 percent increase in first half 2003 operating income to $227 million. Net income for the six-month period was $270 million ($.33 per diluted share) versus $123 million ($.15 per diluted share) for first half 2002. Excluding special items, net income increased 21.0 percent to $127 million ($.16 per diluted share) compared to $105 million ($.13 per diluted share).

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