UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
FORM 8-K
__________________________________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):   January 23, 2014

__________________________________________
 
 
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
__________________________________________
Texas
1-7259
74-1563240
(State or other jurisdiction
(Commission
(I.R.S. Employer
of incorporation)
File Number)
Identification No.)

P. O. Box 36611, Dallas, Texas
75235-1611
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:   (214) 792-4000

Not Applicable
Former name or former address, if changed since last report
______________________________________________


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:

[  ]           Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[  ]           Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[  ]           Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[  ]           Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))






Item 2.02                      Results of Operations and Financial Condition.

On January 23, 2014 the Registrant issued a press release announcing its financial results for the fourth quarter and full year 2013.  The press release is furnished herewith as Exhibit 99.1 and is incorporated by reference into this Item 2.02.

The information furnished in this Item 2.02 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits:

99.1 Registrant’s Fourth Quarter and Full Year 2013 Earnings Release.








SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
SOUTHWEST AIRLINES CO.
 
 
 
January 23, 2014
By
/s/   Tammy Romo
 
 
 
 
 
Tammy Romo
 
 
Senior Vice President Finance & Chief Financial Officer
 
 
(On behalf of the Registrant and in
 
 
her capacity as Principal Financial
 
 
and Accounting Officer)





Exhibit Index


Exhibit No.
Description
 
 
99.1
Registrant's Fourth Quarter and Full Year 2013 Earnings Release.


12.31.2013 - Earnings Release


CONTACT: Investor Relations (214) 792-4415


SOUTHWEST AIRLINES REPORTS RECORD FOURTH QUARTER AND FULL YEAR PROFIT;
41ST CONSECUTIVE YEAR OF PROFITABILITY

DALLAS, TEXAS - January 23, 2014 - Southwest Airlines Co. (NYSE:LUV) (the “Company”) today reported its fourth quarter and full year 2013 results:

Record fourth quarter net income, excluding special items*, of $236 million, or $.33 per diluted share, compared to fourth quarter 2012 net income, excluding special items, of $65 million, or $.09 per diluted share. This exceeded the First Call consensus estimate of $.29 per diluted share.
Record fourth quarter net income of $212 million, or $.30 per diluted share, which included $24 million (net) of unfavorable special items, compared to net income of $78 million, or $.11 per diluted share, in fourth quarter 2012, which included $13 million (net) of favorable special items.
Record full year net income, excluding special items, of $805 million, or $1.12 per diluted share, compared to full year 2012 net income, excluding special items, of $417 million, or $.56 per diluted share.
Record full year net income of $754 million, or $1.05 per diluted share, which included $51 million (net) of unfavorable special items, compared to net income of $421 million, or $.56 per diluted share, in full year 2012, which included $4 million (net) of favorable special items.
Return on invested capital* (before taxes and excluding special items) for full year 2013 of 13.1 percent, as compared to 7.2 percent for full year 2012.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "We are happy to report full year 2013 net income of $805 million, and fourth quarter 2013 net income of $236 million, both excluding special items. We are extremely proud of these record results and the tremendous progress made on our strategic initiatives, which produced substantial returns and contributed significantly to our superb 2013 financial performance. Our full year 2013 total operating revenues were a record $17.7 billion, and our cost performance was excellent. We generated strong free cash flow* of $1.0 billion





in 2013, allowing us to return $611 million to our Shareholders, through share repurchases and dividend payments, and reduce debt and capital lease obligations by $313 million. Our pre-tax return on invested capital, excluding special items (ROIC), for full year 2013 was 13.1 percent, nearly double the prior year's performance. I want to thank the outstanding People of Southwest and AirTran. They deserve all the credit for producing these strong results, which earned them a $228 million contribution to the Profitsharing Plan for the year 2013, up 88.4 percent, or $107 million, compared to the prior year.
"We ended 2013 strong, with an exceptional fourth quarter performance. Total operating revenues were a fourth quarter record $4.4 billion, increasing 6.1 percent compared to fourth quarter last year. On a unit basis (per available seat mile), our fourth quarter 2013 revenues increased 3.8 percent year-over-year, which is remarkable considering the increase in stage length and seat density. While traffic was impacted at the beginning of the quarter by the federal government shutdown, we saw a healthy rebound in traffic and revenue trends, resulting in a five percent year-over-year increase in passenger unit revenues for the combined November/December period. Strong travel demand and favorable year-over-year unit revenues have continued in January, thus far. And, bookings for the remainder of the first quarter are strong. Based on these trends, we currently expect year-over-year growth in first quarter 2014 unit revenues.
"We also had an outstanding fourth quarter 2013 cost performance, with unit costs, excluding special items, down 2.8 percent year-over-year. We benefited from stable fuel prices, our ongoing fleet modernization efforts, and rigorous cost control efforts across the Company. We closed the year with fourth quarter 2013 economic fuel costs of $3.05 per gallon, a decline of approximately eight percent from fourth quarter 2012. Based on current market prices and our existing fuel derivative contracts, as of January 17th, we expect first quarter 2014 economic fuel costs to be in the $3.05 to $3.10 per gallon range, which would be a significant drop year-over-year. Excluding fuel, profitsharing, and special items, our fourth quarter 2013 unit costs declined 0.4 percent year-over-year.  We expect a year-over-year increase in our first quarter 2014 unit costs, excluding fuel, profitsharing, and special items.
"We are on track with our AirTran integration, achieving approximately $400 million in annual net pre-tax synergies in 2013, as planned. Since 2011, we have converted 17 of the 52 AirTran Boeing 737-700s to Southwest, and we have replaced the flying for 13 AirTran Boeing 717-200s transitioned to Delta in 2013, with Southwest 737 service. Nine more 717s were removed from active service at year end 2013, and the remaining 66 717s are scheduled to be removed from the AirTran network by the end of this year, and transitioned to Delta through 2015. The remaining 35 AirTran Boeing 737-700s are scheduled to be converted to Southwest this year. During fourth quarter, we converted Memphis, Pensacola, San Juan, and Buffalo to Southwest, and launched Southwest service to Richmond. At year end 2013, all remaining domestic AirTran markets had Southwest service. We are pleased with the rapid improvement of our developing markets as we convert AirTran routes into Southwest and optimize our combined networks. With our international reservation system scheduled for implementation later this month, we remain on track to convert AirTran’s seven international markets, along with its remaining domestic





markets, by the end of this year. As planned, this will allow us to complete the AirTran integration and retire the brand by the end of 2014.
"We plan to launch international service on Southwest Airlines this year, which will be a huge milestone for us. Construction of a five-gate international facility at Houston's William P. Hobby Airport, expected to open in late 2015, has begun, and can accommodate Southwest service to destinations in the Caribbean, Mexico, Central America, and the northern cities of South America. We also have future plans to bring Southwest near-international service to Fort Lauderdale-Hollywood International Airport (FLL). Under a recently executed agreement with Broward County, Florida, which owns and operates FLL, we will oversee and manage the design and construction of the airport's Terminal 1 Modernization Project.  In addition to significant improvements to the existing Terminal 1, the project includes the design and construction of a new five-gate Concourse A with an international processing facility. 
“During 2014, we expect to take delivery of 33 new Boeing 737-800s and 12 pre-owned -700s, which will allow us to keep our 2014 capacity relatively flat, year-over-year, as we continue to transition the AirTran 717 fleet to Delta, and retire Classic Boeing 737 aircraft. We continue to optimize the combined Southwest and AirTran route networks, and announced new travel options in 2014 to some of our Customers’ favorite domestic destinations, like San Diego and Portland, Oregon. We also look forward to expanding service to Dallas Love Field, with the October 2014 repeal of the Wright Amendment.
“We are excited about bringing more flights to New York's LaGuardia Airport with our recent acquisition of 12 takeoff and landing slots, pursuant to American Airlines' required divestiture for its merger with US Airways. In addition, we gained permanent control of 10 takeoff and landing slots at LaGuardia that Southwest currently operates under lease from American. In an effort to bring more low fares to Washington’s Reagan National Airport, we also have bid on slots that American is required to divest.
"We enter 2014 financially strong and excited about the opportunities unfolding. We are proud of our many 2013 accomplishments, most notably our strong financial performance that we believe positions us well to achieve our targeted 15 percent ROIC in 2014. As ever, we remain focused on providing job security for our Employees; providing friendly, reliable and low-fare service to our Customers; and enhancing Shareholder value.”
    
Notable 2013 accomplishments for Southwest Airlines include:
Achieved 41st consecutive year of profitability, with record profits
Achieved 13.1 percent return on invested capital (before taxes and excluding special items)
Contributed $228 million to the Profitsharing Plan, an increase of $107 million
Returned $611 million to Shareholders through repurchases of $540 million of common stock (38 million shares) and distribution of $71 million in dividends
Reduced long-term debt and capital lease obligations by $313 million
Deferred $1 billion in aircraft capital spending to beyond 2018





Received numerous awards and recognitions, most notably being recognized as the Best Domestic Airline for Customer Service by Executive Travel Magazine's Leading Edge Awards, named Brand of the Year in the Value Airline Category by the Harris Poll, and recognized with the top ranking by InsideFlyer Magazine for Best Customer Service and Best Loyalty Credit Card
For the 17th consecutive year, Southwest Airlines Cargo received the 2013 Quest for Quality Award, awarded by Logistics Management Magazine
Launched the first Southwest destination outside the 48 contiguous states with service to San Juan, Puerto Rico
Completed the connection between the Southwest and AirTran networks
Expanded Southwest Cargo to the AirTran network
Ended the year with Southwest service in all domestic AirTran airports
Launched AirTran service to Hartford and Oklahoma City
Completed the 143-seat Evolve retrofit of 372 Southwest 737-700s and 78 737-300s
Converted 6 of the 52 AirTran 737-700s to the Southwest livery with Evolve configuration, bringing cumulative conversions to 17
Transitioned 13 of the 88 AirTran 717-200s to Delta Air Lines
Reached a cumulative 65 percent of the AirTran workforce converted to Southwest, with the remaining flight crews and dispatchers scheduled to transition in 2014
Completed equipping all -700 and -800 aircraft with satellite-based WiFi  (including completed AirTran conversions) and became the first and only carrier to offer gate-to-gate connectivity
Partnered with DISH to offer “TV Flies Free” in second half 2013; DISH sponsorship was recently extended through 2014
Launched movies on demand, a new WiFi portal, and Messaging feature for iOS users   
Remained on track to implement Southwest's International Reservation system in January 2014
Broke ground on the five-gate, international facility at Houston's William P. Hobby Airport, planned to open in late 2015
Acquired 12 slots (for six roundtrip flights) at New York's LaGuardia Airport and permanently secured 10 slots (five roundtrip flights) that are currently being operated by Southwest
Joined the Transportation Security Administration's (TSA) expedited screening program known as TSA Pre Check™

Financial Results
The Company's fourth quarter 2013 total operating revenues increased 6.1 percent to $4.4 billion, while operating unit revenues increased 3.8 percent, on a 2.2 percent increase in available seat miles and a 3.0 percent increase in average seats per trip, all as compared to fourth quarter 2012. Based on current revenue and booking trends, the Company expects year-over-year growth in its first quarter 2014 unit revenues.





Total operating expenses in fourth quarter 2013 decreased 1.0 percent to $4.0 billion, as compared to fourth quarter 2012. The Company incurred costs (before taxes) associated with the acquisition and integration of AirTran, which are special items, of $19 million during fourth quarter 2013, compared to $14 million in fourth quarter 2012. Excluding special items in both periods, total operating expenses of $4.0 billion in fourth quarter 2013 were comparable to fourth quarter 2012.
Fourth quarter 2013 economic fuel costs were $3.05 per gallon, including $.03 per gallon in favorable cash settlements from fuel derivative contracts, compared to $3.32 per gallon in fourth quarter 2012, including $.09 per gallon in unfavorable cash settlements from fuel derivative contracts. Based on the Company's fuel derivative contracts and market prices as of January 17th, first quarter 2014 economic fuel costs are expected to be in the $3.05 to $3.10 per gallon range, which is significantly below first quarter 2013's economic fuel costs of $3.29 per gallon. As of January 17th, the fair market value of the Company's hedge portfolio through 2017 was a net asset of approximately $108 million. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.
Excluding economic fuel expense, profitsharing, and special items in both periods, fourth quarter 2013 operating costs increased 1.8 percent from fourth quarter 2012, and decreased 0.4 percent on a unit basis. Based on current cost trends, the Company expects first quarter 2014 unit costs, excluding fuel, profitsharing, and special items, to increase from first quarter 2013's 8.21 cents, with full year 2014 unit costs, excluding fuel, profitsharing, and special items, expected to increase year-over-year in the two to three percent range.
Fourth quarter 2013 operating income was a fourth quarter record $386 million, compared to $91 million in fourth quarter 2012. Excluding special items, fourth quarter 2013 operating income was also a fourth quarter record $418 million, compared to $136 million in the same period last year.
Other expenses in fourth quarter 2013 were $52 million, compared to other income of $34 million in fourth quarter 2012. This $86 million swing primarily resulted from $27 million in other losses recognized in fourth quarter 2013, compared to other gains of $62 million recognized in fourth quarter 2012. In both periods, these gains/losses included unrealized mark-to-market gains/losses associated with a portion of the Company's fuel hedging portfolio, which are special items. Excluding these special items, fourth quarter 2013 had $21 million in other expenses, compared to $3 million in fourth quarter 2012, primarily attributable to the premium costs associated with the Company's fuel derivative contracts. First quarter 2014 premium costs related to fuel derivative contracts are currently estimated to be in the $10 million to $20 million range, compared to $5 million in first quarter 2013. Net interest expense in fourth quarter 2013 was $25 million, compared to $28 million in fourth quarter 2012.
For 2013, total operating revenues increased 3.6 percent to $17.7 billion, while total operating expenses of $16.4 billion were comparable to 2012. Operating income for 2013 was a record $1.3 billion, compared to $623 million for 2012. For 2013, special charges (before taxes) associated with the acquisition and integration of AirTran were $86 million. Cumulative costs associated with the acquisition and integration of AirTran, as of December 31, 2013, totaled approximately $410 million (before





profitsharing and taxes). The Company expects total acquisition and integration costs to be no more than $550 million (before profitsharing and taxes). Excluding special items in both periods, operating income was a record $1.4 billion for 2013, compared to $838 million for 2012.
As of January 22nd, the Company had approximately $3.1 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1 billion. Net cash provided by operations during fourth quarter 2013 was $302 million, and capital expenditures were $451 million. For 2013, net cash provided by operations was $2.49 billion, and capital expenditures were $1.45 billion, resulting in free cash flow of approximately $1.04 billion. The Company currently estimates its 2014 capital expenditures to be in the $1.5 billion to $1.6 billion range. The Company repurchased $540 million in common stock, or 38 million shares, during 2013. Since August 2011, the Company has repurchased $1.2 billion, or 111 million shares, of common stock under its $1.5 billion share repurchase authorization. This reduced the Company's outstanding common stock by approximately 14 percent. The Company repaid $313 million in debt and capital lease obligations during 2013, and is currently scheduled to repay approximately $550 million in debt and capital lease obligations during 2014.


Conference Call
Southwest will discuss its fourth quarter and full year 2013 results on a conference call at 11:30 a.m. Eastern Time today. A live broadcast of the conference call also will be available at
http://southwest.investorroom.com.

*Additional information regarding special items is included in the accompanying reconciliation tables. 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 targets and projected results of operations; (ii) the integration of AirTran and the Company's related financial and operational plans and expectations, including the anticipated timing of full integration and the expected benefits and costs associated with the integration; (iii) the Company's fleet plans, including its fleet modernization and capacity plans and expectations; (iv) the Company’s network plans, expectations, and opportunities; (v) the Company’s plans and expectations with respect to international operations; (vi) the Company's plans and expectations related to managing risk associated with changing jet fuel prices; and (vii) the Company's plans and expectations with respect to capital expenditures and liquidity (including its plans for the repayment of debt and capital lease obligations). 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) demand for the Company's services and the impact of economic conditions, fuel prices, and actions of competitors (including without limitation pricing, scheduling, and capacity decisions and consolidation and alliance activities) on the Company's business decisions, plans, and strategies; (ii) the Company's ability to effectively integrate AirTran and realize the expected synergies and other benefits from the acquisition; (iii) 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; (iv) the Company's ability to timely and effectively prioritize its strategic initiatives and related expenditures; (v) the Company's dependence on third parties with respect to certain of its initiatives, in particular with respect to its fleet plans; (vi) changes in fuel prices, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions; (vii) the impact of governmental action and regulation on the Company's operations; and (viii) 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, 2012.





Southwest Airlines Co.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)

 
Three months ended
 
 
 
Year ended
 
 
 
December 31,
 
 
 
December 31,
 
 
 
2013
 
2012
 
Percent change
 
2013
 
2012
 
Percent change
OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
 
 
Passenger
$
4,197

 
$
3,939

 
6.5
 
$
16,721

 
$
16,093

 
3.9
Freight
41

 
42

 
(2.4)
 
164

 
160

 
2.5
Other
190

 
192

 
(1.0)
 
814

 
835

 
(2.5)
     Total operating revenues
4,428

 
4,173

 
6.1
 
17,699

 
17,088

 
3.6
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages, and benefits
1,284

 
1,197

 
7.3
 
5,035

 
4,749

 
6.0
Fuel and oil
1,367

 
1,505

 
(9.2)
 
5,763

 
6,120

 
(5.8)
Maintenance materials and repairs
238

 
270

 
(11.9)
 
1,080

 
1,132

 
(4.6)
Aircraft rentals
84

 
85

 
(1.2)
 
361

 
355

 
1.7
Landing fees and other rentals
255

 
252

 
1.2
 
1,103

 
1,043

 
5.8
Depreciation and amortization
223

 
224

 
(0.4)
 
867

 
844

 
2.7
Acquisition and integration
19

 
14

 
35.7
 
86

 
183

 
(53.0)
Other operating expenses
572

 
535

 
6.9
 
2,126

 
2,039

 
4.3
     Total operating expenses
4,042

 
4,082

 
(1.0)
 
16,421

 
16,465

 
(0.3)
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
386

 
91

 
n.a.
 
1,278

 
623

 
105.1
 
 
 
 
 
 
 
 
 
 
 
 
OTHER EXPENSES (INCOME):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
33

 
35

 
(5.7)
 
131

 
147

 
(10.9)
Capitalized interest
(7
)
 
(5
)
 
40.0
 
(24
)
 
(21
)
 
14.3
Interest income
(1
)
 
(2
)
 
(50.0)
 
(6
)
 
(7
)
 
(14.3)
Other (gains) losses, net
27

 
(62
)
 
(143.5)
 
(32
)
 
(181
)
 
(82.3)
     Total other expenses (income)
52

 
(34
)
 
n.a.
 
69

 
(62
)
 
n.a.
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
334

 
125

 
167.2
 
1,209

 
685

 
76.5
PROVISION FOR INCOME TAXES
122

 
47

 
159.6
 
455

 
264

 
72.3
NET INCOME
$
212

 
$
78

 
171.8
 
$
754

 
$
421

 
79.1
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME PER SHARE:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.11

 
 
 
$
1.06

 
$
0.56

 
 
Diluted
$
0.30

 
$
0.11

 
 
 
$
1.05

 
$
0.56

 
 
 
 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
Basic
699

 
735

 
 
 
710

 
750

 
 
Diluted
707

 
736

 
 
 
718

 
757

 
 







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
 
 
 
Year ended
 
 
 
December 31,
 
 
 
December 31,
 
 
 
2013
 
2012
 
Percent Change
 
2013
 
2012
 
Percent Change
Fuel and oil expense, unhedged
$
1,364

 
$
1,436

 
 
 
$
5,645

 
$
5,963

 
 
Add: Fuel hedge losses included in Fuel and oil expense
3

 
69

 
 
 
118

 
157

 
 
Fuel and oil expense, as reported
$
1,367

 
$
1,505

 
 
 
$
5,763

 
$
6,120

 
 
Deduct: Net impact from fuel contracts (1)
(13
)
 
(31
)
 
 
 
(84
)
 
(32
)
 
 
Fuel and oil expense, economic
$
1,354

 
$
1,474

 
(8.1)%
 
$
5,679

 
$
6,088

 
(6.7)%
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses, as reported
$
4,042

 
$
4,082

 
 
 
$
16,421

 
$
16,465

 
 
Deduct: Net impact from fuel contracts
(13
)
 
(31
)
 
 
 
(84
)
 
(32
)
 
 
Total operating expenses, economic
$
4,029

 
$
4,051

 
 
 
$
16,337

 
$
16,433

 
 
Deduct: Charge for Acquisition and integration costs, net
(19
)
 
(14
)
 

 
(86
)
 
(183
)
 

Total operating expenses, non-GAAP
$
4,010

 
$
4,037

 
 
 
$
16,251

 
$
16,250

 
 
Deduct: ProfitSharing
(66
)
 
(19
)
 

 
(228
)
 
(121
)
 

Operating expense, non-GAAP excluding Profitsharing
$
3,944

 
$
4,018

 
(1.8)%
 
$
16,023

 
$
16,129

 
(0.7)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income, as reported
$
386

 
$
91

 
 
 
$
1,278

 
$
623

 
 
Add: Net impact from fuel contracts (1)
13

 
31

 
 
 
84

 
32

 
 
Operating income, economic
$
399

 
$
122

 
 
 
$
1,362

 
$
655

 
 
Add: Charge for Acquisition and integration costs, net
19

 
14

 
 
 
86

 
183

 
 
Operating income, non-GAAP
$
418

 
$
136

 
n.a.
 
$
1,448

 
$
838

 
72.8%
 
 
 
 
 
 
 
 
 
 
 
 
Other (gains) losses, net, as reported
$
27

 
$
(62
)
 

 
$
(32
)
 
$
(181
)
 

Add (Deduct): Net impact from fuel contracts (1)
(6
)
 
65

 
 
 
89

 
221

 
 
Other losses, net, non-GAAP
$
21

 
$
3

 
n.a.
 
$
57

 
$
40

 
42.5%
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes, as reported
$
334

 
$
125

 
 
 
$
1,209

 
$
685

 
 
Add (Deduct): Net impact from fuel contracts (1)
19

 
(34
)
 
 
 
(5
)
 
(189
)
 
 
 
$
353

 
$
91

 

 
$
1,204

 
$
496

 

Add: Charge for Acquisition and integration costs, net
19

 
14

 
 
 
86

 
183

 
 
Income before income taxes, non-GAAP
$
372

 
$
105

 
n.a.
 
$
1,290

 
$
679

 
90.0%
 
 
 
 
 
 
 
 
 
 
 
 
Net income, as reported
$
212

 
$
78

 
 
 
$
754

 
$
421

 
 
Add (Deduct): Net impact from fuel contracts (1)
19

 
(34
)
 
 
 
(5
)
 
(189
)
 
 
Add (Deduct): Income tax impact of fuel contracts
(7
)
 
12

 

 
2

 
73

 

 
$
224

 
$
56

 
 
 
$
751

 
$
305

 
 
Add: Charge for Acquisition and integration costs, net (2)
12

 
9

 
 
 
54

 
112

 
 
Net income, non-GAAP
$
236

 
$
65

 
n.a.
 
$
805

 
$
417

 
93.0%
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share, diluted, as reported
$
0.30

 
$
0.11

 
 
 
$
1.05

 
$
0.56

 
 
Add (Deduct): Net impact from fuel contracts (2)
0.02

 
(0.03
)
 
 
 

 
(0.15
)
 
 
 
$
0.32

 
$
0.08

 
 
 
$
1.05

 
$
0.41

 
 
Add: Impact of special items, net (2)
0.01

 
0.01

 
 
 
0.07

 
0.15

 
 
Net income per share, diluted, non-GAAP
$
0.33

 
$
0.09

 
n.a.
 
$
1.12

 
$
0.56

 
100.0%
(1) See Reconciliation of Impact from Fuel Contracts.
(2) Amounts net of tax.





Southwest Airlines Co.
Reconciliation of Impact from Fuel Contracts
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions)
(unaudited)


 
Three months ended
 
Year ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013
 
2012
Fuel and oil expense
 
 
 
 
 
 
 
Reclassification between Fuel and oil and Other (gains) losses, net,
  associated with current period settled contracts
$
13

 
$
(35
)
 
$
3

 
$
(42
)
Contracts settling in the current period, but for which gains and/or
  (losses) have been recognized in a prior period (1)
(26
)
 
4

 
(87
)
 
10

Impact from fuel contracts to Fuel and oil expense
$
(13
)
 
$
(31
)
 
$
(84
)
 
$
(32
)
 
 
 
 
 
 
 
 
Operating Income
 
 
 
 
 
 
 
Reclassification between Fuel and oil and Other (gains) losses, net,
  associated with current period settled contracts
$
(13
)
 
$
35

 
$
(3
)
 
$
42

Contracts settling in the current period, but for which gains and/or
  (losses) have been recognized in a prior period (1)
26

 
(4
)
 
87

 
(10
)
Impact from fuel contracts to Operating Income
$
13

 
$
31

 
$
84

 
$
32

 
 
 
 
 
 
 
 
Other (gains) losses, net
 
 
 
 
 
 
 
Mark-to-market impact from fuel contracts settling in future periods
$
(9
)
 
$
28

 
$
103

 
$
221

Ineffectiveness from fuel hedges settling in future periods
16

 
2

 
(11
)
 
(42
)
Reclassification between Fuel and oil and Other (gains) losses, net,
  associated with current period settled contracts
(13
)
 
35

 
(3
)
 
42

Impact from fuel contracts to Other (gains) losses, net
$
(6
)
 
$
65

 
$
89

 
$
221

 
 
 
 
 
 
 
 
Net Income
 
 
 
 
 
 
 
Mark-to-market impact from fuel contracts settling in future periods
$
9

 
$
(28
)
 
$
(103
)
 
$
(221
)
Ineffectiveness from fuel hedges settling in future periods
(16
)
 
(2
)
 
11

 
42

Other net impact of fuel contracts settling in the current or a prior
  period (excluding reclassifications)
26

 
(4
)
 
87

 
(10
)
Impact from fuel contracts to Net Income (2)
$
19

 
$
(34
)
 
$
(5
)
 
$
(189
)



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















Southwest Airlines Co.
Comparative Consolidated Operating Statistics
(unaudited)

 
Three months ended
 
 
 
Year ended
 
 
 
December 31,
 
 
 
December 31,
 
 
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Revenue passengers carried
26,895,809

 
26,607,560

 
1.1%
 
108,075,976

 
109,346,509

 
(1.2)%
Enplaned passengers
33,118,822

 
32,699,829

 
1.3%
 
133,155,030

 
133,978,100

 
(0.6)%
Revenue passenger miles (RPMs) (000s)
25,652,363

 
24,821,008

 
3.3%
 
104,348,216

 
102,874,979

 
1.4%
Available seat miles (ASMs) (000s)
31,886,318

 
31,193,395

 
2.2%
 
130,344,072

 
128,137,110

 
1.7%
Load factor
80.4
%
 
79.6
%
 
0.8 pts.

 
80.1
%
 
80.3
%
 
(0.2) pts.

Average length of passenger haul (miles)
954

 
933

 
2.3%
 
966

 
941

 
2.7%
Average aircraft stage length (miles)
704

 
688

 
2.3%
 
703

 
693

 
1.4%
Trips flown
317,688

 
327,590

 
(3.0)%
 
1,312,785

 
1,361,558

 
(3.6)%
Average passenger fare
$
156.05

 
$
148.02

 
5.4%
 
$
154.72

 
$
147.17

 
5.1%
Passenger revenue yield per RPM (cents)
16.36

 
15.87

 
3.1%
 
16.02

 
15.64

 
2.4%
RASM (cents)
13.89

 
13.38

 
3.8%
 
13.58

 
13.34

 
1.8%
PRASM (cents)
13.16

 
12.63

 
4.2%
 
12.83

 
12.56

 
2.1%
CASM (cents)
12.68

 
13.08

 
(3.1)%
 
12.60

 
12.85

 
(1.9)%
CASM, excluding fuel (cents)
8.39

 
8.25

 
1.7%
 
8.18

 
8.07

 
1.4%
CASM, excluding special items (cents)
12.58

 
12.94

 
(2.8)%
 
12.47

 
12.68

 
(1.7)%
CASM, excluding fuel and special items (cents)
8.33

 
8.21

 
1.5%
 
8.11

 
7.93

 
2.3%
CASM, excluding fuel, special items, and
  profitsharing (cents)
8.12

 
8.15

 
(0.4)%
 
7.94

 
7.84

 
1.3%
Fuel costs per gallon, including fuel tax
  (unhedged)
$
3.08

 
$
3.23

 
(4.6)%
 
$
3.10

 
$
3.21

 
(3.4)%
Fuel costs per gallon, including fuel tax
$
3.08

 
$
3.38

 
(8.9)%
 
$
3.16

 
$
3.30

 
(4.2)%
Fuel costs per gallon, including fuel tax
  (economic)
$
3.05

 
$
3.32

 
(8.1)%
 
$
3.12

 
$
3.28

 
(4.9)%
Fuel consumed, in gallons (millions)
442

 
444

 
(0.5)%
 
1,818

 
1,847

 
(1.6)%
Active fulltime equivalent Employees
44,831

 
45,861

 
(2.2)%
 
44,831

 
45,861

 
(2.2)%
Aircraft in service at period-end
680

 
694

 
(2.0)%
 
680

 
694

 
(2.0)%


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









Southwest Airlines Co.
Return on Invested Capital (ROIC)
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions)
(unaudited)

 
 
 
 
 
Twelve Months Ended
 
Twelve Months Ended
 
December 31, 2013
 
December 31, 2012
Operating Income, as reported
1,278

 
623

Add: Net impact from fuel contracts
84

 
32

Add: Acquisition and integration costs
86

 
183

Operating Income, non-GAAP
1,448

 
838

Net adjustment for aircraft leases (1)
143

 
117

Adjustment for fuel hedge accounting
(60
)
 
(36
)
Adjusted Operating Income, non-GAAP
1,531

 
919

 
 
 
 
Average invested capital (2)
11,664

 
12,575

Equity adjustment for hedge accounting
50

 
145

Adjusted average invested capital
11,714

 
12,720

 
 
 
 
ROIC, pre-tax
13.1
%
 
7.2
%


(1) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).
(2) 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)

 
December 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
     Cash and cash equivalents
$
1,355

 
$
1,113

     Short-term investments
1,797

 
1,857

     Accounts and other receivables
419

 
332

     Inventories of parts and supplies, at cost
467

 
469

     Deferred income taxes
168

 
246

     Prepaid expenses and other current assets
250

 
210

          Total current assets
4,456

 
4,227

Property and equipment, at cost:
 
 
 
     Flight equipment
16,937

 
16,367

     Ground property and equipment
2,760

 
2,714

     Deposits on flight equipment purchase contracts
764

 
416

     Assets constructed for others
359

 

 
20,820

 
19,497

     Less allowance for depreciation and amortization
7,431

 
6,731

 
13,389

 
12,766

Goodwill
970

 
970

Other assets
530

 
633

 
$
19,345

 
$
18,596

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
     Accounts payable
$
1,247

 
$
1,107

     Accrued liabilities
1,229

 
1,102

     Air traffic liability
2,571

 
2,170

     Current maturities of long-term debt
629

 
271

          Total current liabilities
5,676

 
4,650

 
 
 
 
Long-term debt less current maturities
2,191

 
2,883

Deferred income taxes
2,934

 
2,884

Construction obligation
437

 
331

Other noncurrent liabilities
771

 
856

Stockholders' equity:
 
 
 
     Common stock
808

 
808

     Capital in excess of par value
1,231

 
1,210

     Retained earnings
6,431

 
5,768

     Accumulated other comprehensive income (loss)
(3
)
 
(119
)
     Treasury stock, at cost
(1,131
)
 
(675
)
          Total stockholders' equity
7,336

 
6,992

 
$
19,345

 
$
18,596









Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
 
Three months ended December 31,
 
Year ended
December 31,
 
2013
 
2012
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
     Net income
$
212

 
$
78

 
$
754

 
$
421

     Adjustments to reconcile net income to cash provided
       by operating activities:
 
 
 
 
 
 
 
     Depreciation and amortization
223

 
224

 
867

 
844

     Unrealized (gain) loss on fuel derivative instruments
19

 
(34
)
 
(5
)
 
(189
)
     Deferred income taxes
(2
)
 
131

 
50

 
251

     Changes in certain assets and liabilities:
 
 
 
 
 
 
 
          Accounts and other receivables
57

 
74

 
(17
)
 
(33
)
          Other current assets
36

 
60

 
(46
)
 
(104
)
          Accounts payable and accrued liabilities
158

 
72

 
343

 
186

          Air traffic liability
(411
)
 
(354
)
 
400

 
334

          Cash collateral received from derivative
          counterparties
1

 
15

 
57

 
233

          Other, net
9

 
(34
)
 
87

 
121

     Net cash provided by operating activities
302

 
232

 
2,490

 
2,064

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
     Payments for purchase of property and equipment, net
(451
)
 
(399
)
 
(1,447
)
 
(1,348
)
     Purchases of short-term investments
(614
)
 
(563
)
 
(3,135
)
 
(2,481
)
     Proceeds from sales of short-term and other investments
812

 
773

 
3,198

 
2,996

     Net cash used in investing activities
(253
)
 
(189
)
 
(1,384
)
 
(833
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
     Proceeds from Employee stock plans
66

 
5

 
97

 
27

     Proceeds from termination of interest rate derivative instrument

 
38

 

 
38

     Payments of long-term debt and capital lease obligations
(46
)
 
(61
)
 
(313
)
 
(578
)
     Payments of cash dividends

 

 
(71
)
 
(22
)
     Repayment of construction obligation
(3
)
 

 
(5
)
 

     Repurchase of common stock
(40
)
 
(75
)
 
(540
)
 
(400
)
     Other, net
(4
)
 
(5
)
 
(32
)
 
(12
)
     Net cash used in financing activities
(27
)
 
(98
)
 
(864
)
 
(947
)
 
 
 
 
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
22


(55
)
 
242

 
284

 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,333

 
1,168

 
1,113

 
829

 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
1,355

 
$
1,113

 
$
1,355

 
$
1,113

 
 
 
 
 
 
 
 






Southwest Airlines Co.
Fuel Derivative Contracts
As of January 17, 2014

 
Estimated economic jet fuel price per gallon,
including taxes
Average Brent Crude Oil price per barrel
1Q 2014 (2)
Full Year 2014 (2)
$85
$2.60 - $2.65
$2.45 - $2.50
$95
$2.80 - $2.85
$2.70 - $2.75
Current Market (1)
$3.05 - $3.10
$2.95 - $3.00
$115
$3.15 - $3.20
$3.20 - $3.25
$125
$3.30 - $3.35
$3.40 - $3.45
 
 
Period
Average percent of estimated fuel consumption covered by fuel derivative contracts at varying WTI/Brent crude oil-equivalent price levels
2014
Approx. 20%
2015
Approx. 40%
2016
Approx. 35%
2017
Approx. 50%

(1) Brent crude oil average market prices as of January 17, 2014, were approximately $106 and $104 per barrel for first quarter 2014 and full year 2014, respectively.

(2) The Company currently has approximately 10 percent of its first quarter 2014 estimated fuel consumption covered by fuel derivative contracts at varying crude oil-equivalent prices; and approximately 30 percent at Gulf Coast jet fuel-equivalent prices. For full year 2014, the Company currently has approximately 15 percent of its full year 2014 estimated fuel consumption covered by fuel derivative contracts at varying crude oil-equivalent prices; and approximately 5 percent at Gulf Coast jet fuel-equivalent prices.  The economic fuel price per gallon sensitivities provided above assume the relationship between Brent crude oil and refined products based on market prices as of January 17, 2014.








Southwest Airlines Co.
737 Delivery Schedule
As of January 22, 2014


 
The Boeing Company
 
The Boeing Company
 
 
 
737 NG
 
737 MAX
 
 
 
-700 Firm Orders
 
-800 Firm Orders
Options
Additional
 -700s
-7
Firm
Orders
-8
Firm
Orders
 
Options
Total
 
2014

 
33


12



 

45

 
2015

 
19


5



 

24

 
2016
31

 

12




 

43

 
2017
15

 

12



14

 

41

 
2018
10

 

12



13

 

35

 
2019

 



15

10

 

25

 
2020

 



14

22

 

36

 
2021

 



1

33

 
18

52

 
2022

 




30

 
19

49

 
2023

 




24

 
23

47

 
2024

 




24

 
23

47

 
2025

 





 
36

36

 
2026

 





 
36

36

 
2027

 





 
36

36

 
 
56

(1)
52

36

17

30

170

(2)
191

552

 

(1) The Company has flexibility to substitute 737-800s in lieu of 737-700 firm orders.
(2) The Company has flexibility to substitute MAX 7 in lieu of  MAX 8 firm orders beginning in 2019.






NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES
The Company's unaudited consolidated financial statements are prepared in accordance with 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. The Company believes 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 of 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, 2012.
In addition to its “economic” financial measures, as defined above, the Company has also provided other non-GAAP financial measures, including results that it refers to as “excluding special items,” 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 free cash flow and ROIC, which are non-GAAP financial measures. 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 year ended December 31, 2013, the Company generated $1.04 billion in free cash flow, calculated as operating cash flows of $2.49 billion less capital expenditures of $1.45 billion. The Company believes ROIC is a meaningful measure because it quantifies how well the Company generates operating income relative to the capital it has invested in its business.  Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC may differ; therefore, the Company is providing an explanation of its calculation for ROIC (before taxes and excluding special items) in the accompanying reconciliation tables to the press release (See Return on Invested Capital).