Southwest Airlines releases 2Q09 earnings

Southwest Airlines has reported its second quarter 2009 results.

Net income for second quarter 2009 (2Q09) was $54 million compared to $321 million for 2Q08. Excluding special items, the 2Q09 net income was $59 million, down from 2Q08's figure of $121 million.

The total operating revenues for 2Q09 were $2.6 billion, with cash flow from operations of $135 million. The company raised $540 million through financing activities and repaid $400 million borrowed in 2008 on its $600 million revolving credit facility

Commenting on the results, Southwest Airlines' chairman of the Board, president and CEO Gary Kelly stated, "In second quarter 2009, we reported a profit. In, without a doubt, one of the worst revenue environments for the airlines ever, this is an enormous achievement by the employees of Southwest Airlines. I am exceptionally proud of them, their warrior spirits, and their terrific operational and customer service results.

"We continue to stay focused on weathering this economic storm and managing alarming jet fuel price volatility. Thanks to the superb efforts of our people, we have a tremendous body of work completed, underway, and planned to sustain our financial health by enhancing the customer experience and generating substantial new revenue opportunities. In that regard, we recently implemented several programmes and processes and have more planned for the fall, including the launch of a new and improved southwest.com, and several related products and initiatives.

"While our second quarter unit revenue trends outperformed the industry, our total operating revenues were down almost 9% from a year ago and 6% on a unit basis. Demand for business travel remains weak, and we continue to stimulate traffic with more discounted and promotional fares. Unless demand rebounds significantly, we expect third quarter 2009 unit revenues to decline year-over-year more than the second quarter decline of 6% due to more difficult comparisons.

"Our 2Q09 unit costs, excluding special items, declined 4.6% from 2Q08. Even with approximately $60 million in unfavourable cash settlements from derivative contracts in the 2Q09, our economic fuel costs decreased 22.8% to $1.79 per gallon, including taxes. Although market prices have continued to trend higher since the beginning of the year, we continue to benefit from the decline in energy prices from last year's unprecedented levels. Consequently, based on our third quarter derivative position and current market energy prices, we anticipate our third quarter 2009 economic jet fuel costs, including taxes, to decline significantly year-over-year to the $2.15 per gallon range."

As of 20 July, the company had derivative contracts in place for more than 30% of its estimated third quarter 2009 fuel consumption and over 45% of its estimated fourth quarter 2009 fuel consumption capped at a weighted average crude-equivalent price in the low $70 per barrel range; approximately 50% in 2010 capped at a weighted average crude-equivalent price in the mid $70 per barrel range; and modest positions in 2011 through to 2013. The total market value (as of 20 July) of the company's net fuel derivative contracts for the remainder of 2009 through 2013 reflects a net liability of approximately $805 million.

Kelly continued, "Excluding fuel, 2Q09 unit costs increased by 5.8% from a year ago, which was better than we anticipated. In addition to other cost containment measures, our hiring freeze remains in place as well as a pay freeze for our officers and senior management.

"In an effort to better align our staffing with our current capacity needs, we launched a voluntary early-out programme during the second quarter and approximately 1,400 employees have elected to participate. Employee departure dates will fall between 31 July 2009 and 15 April 2010, based on the operational needs of particular work locations and departments. We currently anticipate incurring approximately $70 million ($40 million and $30 million during 2009 and 2010, respectively) in additional costs for the early-out programme. We expect annual savings in subsequent years from the programme should eventually exceed the cost of the programme.

"We were very pleased that our flight attendants, customer support and services, and airport customer service employees voted to ratify their contracts during the second quarter, demonstrating their commitment to sustain the financial strength of the company. Excluding any charge from the voluntary early-out programme, and based on current cost trends and lower available seat miles, we expect our third quarter 2009 unit costs, excluding fuel and special items, to increase from second quarter 2009's 6.91 cents.

"We continue our diligent cost control efforts and remain committed to maintaining our competitive cost advantage to sustain our strong low-fare brand. However, we are not immune to the effects of the debilitating economic environment.  Based on weak travel demand and fuel price volatility, we cannot predict a profitable third quarter 2009.  We will continue to take the vital steps we believe are necessary to strategically and financially position ourselves to be able to return to prosperity once travel demand rebounds.

"While we plan to reduce our 2009 available seat miles in the 5%-6% range versus last year, our continued focus on maximising the efficiency and profitability of each published flight schedule has positioned us to take advantage of strategic growth opportunities even in this challenging economic environment. We were thrilled to introduce the Southwest brand to the New York market with our inaugural service from LaGuardia on 28 June and look forward to our service to Boston Logan International, followed by Milwaukee."