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Southwest Airlines Reports Record Third Quarter Profit

The following excerpt is from the company's SEC filing.

DALLAS, TEXAS - October 22, 2015 - Southwest Airlines Co. (NYSE:LUV) (the “Company”) today reported its

third quarter 2015

results:

Record third quarter net income, excluding special items

, of $

623 million

, or $

per diluted share. This represented a $

241 million

increase from

third quarter 2014

and exceeded the Thomson Reuters First Call mean estimate of $.92 per diluted share.

Record third quarter GAAP

net income of $

584 million

per diluted share, compared with third quarter 2014 GAAP net income of

$329 million

Record quarterly GAAP operating income of

$1.2 billion

. Excluding special items, record third quarter operating income of

$1.0 billion

, resulting in an operating margin

percent.

Returned $

549 million

to Shareholders through dividends and share repurchases during

, and $

1.4 billion

during the first nine months of 2015.

Return on invested capital, before taxes and excluding special items (ROIC)

, for the 12 months ended

September 30, 2015

percent, compared with

percent for the 12 months ended

September 30, 2014

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, "We are very pleased to report outstanding third quarter 2015 results marked by a

percent year-over-year increase in net income, excluding special items. Our record third quarter operating income, excluding special items, of

produced a strong

percent operating margin, which is a 680 basis point improvement from the year-ago period. The significant margin expansion was driven largely by lower fuel prices. Our results also benefited from a continued focus on cost control and solid overall revenue performance, including a significant contribution from our Rapid Rewards program. Customer demand for our low fares was evident with an all-time quarterly record load factor of

percent for third quarter 2015. That's what low fares without 'gotcha's', which we call Trans

, will do for you. My thanks to our superb Employees for producing our tenth consecutive quarter of record profits and my congratulations to them on their record $

484 million

profitsharing accrual, thus far this year.

"We are pleased with our third quarter 2015 unit revenue (RASM) performance, considering the longer average stage length, higher average seats per trip (gauge), and softer yield environment. Third quarter 2015 operating revenues grew

percent to a record $

5.3 billion

on a year-over-year increase in available seat miles of

percent. Our third quarter 2015 operating revenues reflected a benefit of approximately $300 million from our July 2015 amended agreement with Chase Bank USA, N.A. (Chase), including a required change in accounting treatment. This benefit includes a one-time non-cash increase to operating revenues of $172 million, which was recorded as a special revenue adjustment. Total operating revenues, excluding this special item

, increased

percent to $

5.1 billion

, and decreased slightly on a unit basis, both as compared with third quarter 2014. Based on favorable booking and revenue trends thus far in October, and including the ongoing benefit to operating revenues from our amended Chase agreement (estimated to be approximately $130 million for fourth quarter 2015), we are currently expecting an increase to fourth quarter 2015 unit revenue of approximately one percent, year-over-year.

“Our favorable third quarter 2015 cost trends and outlook for fourth quarter 2015 costs reflect significantly lower jet fuel prices and ongoing fleet modernization benefits. Our third quarter 2015 economic fuel costs

declined nearly $300 million, year-over-year. Based on our existing fuel derivative contracts and market prices as of

October 19, 2015

, we currently expect full year 2015 economic fuel costs to decline approximately $1.3 billion, year-over-year.

"We are very pleased with the strength of our network, especially considering our uncharacteristically high percentage of markets under development. Our new Dallas markets, in particular, continue to perform exceptionally well, including the eight new markets launched in August 2015. We reached an exciting milestone in our international expansion last week with the opening of a new five-gate concourse, along with a Federal Inspection Station for Customs and Border Protection, at Houston's William P. Hobby Airport. We began service between Houston Hobby and San Jose, Costa Rica; Cancun, Mexico City, Puerto Vallarta, and San Jose del Cabo/Los Cabos, Mexico; and our inaugural service to our 96

city, Belize City, Belize. In addition, we are offering seasonal Saturday service to San Juan, Puerto Rico, and Oranjestad, Aruba. Next month, we will begin service from Houston to Montego Bay, Jamaica, and our inaugural service to Liberia, Costa Rica, subject to foreign government approval. That will bring us to ten nonstop destinations across Latin America and the Caribbean for Southwest Customers out of Houston Hobby.

"In addition to producing strong margins and record earnings, our investment grade balance sheet, liquidity, and cash flow remain strong. Our cash and short-term investments were $

3.1 billion

at the end of third quarter 2015. Thus far this year, we have generated free cash flow

1.6 billion

. We have returned $

to Shareholders through the payment of $

180 million

in dividends and the repurchase of $

in common stock so far this year, reflecting our ongoing commitment to enhance long-term value for our Shareholders."

Financial Results

The Company's

total operating revenues were a record $

percent increase compared with

, largely driven by third quarter 2015 passenger revenues of

$4.7 billion

. In addition, as described in more detail below, the Company recorded a special revenue adjustment during

related to its amended agreement with Chase. Other revenues for

102.1 percent

year-over-year, largely due to the amended agreement with Chase and the resulting change in accounting methodology.

The Company executed an amended co-branded credit card agreement with Chase during third quarter 2015, through which the Company sells loyalty points and other items to Chase. For accounting purposes, the amended agreement materially modified the previously existing agreement between Chase and the Company and is subject to Accounting Standards Update 2009-13, "Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force" (ASU 2009-13). Under the transition provisions of ASU 2009-13, the existing deferred revenue liability at the date of the amended agreement was reduced to reflect the estimated selling price of the undelivered element (air transportation) of the contract. As a result, the Company recorded a one-time non-cash adjustment of $

that increased revenue, which was classified as a special item and excluded from the Company's

reported RASM. In addition, the combined impact of the amended agreement and the effect of the resulting change in accounting methodology benefited third quarter 2015 total operating revenues by approximately $130 million, the impact of which was included in third quarter 2015 RASM. This $130 million benefit reflects a $170 million increase to other revenues offset by a $40 million reduction to passenger revenues. An estimated fourth quarter total operating revenue benefit of approximately $130 million is included in the Company's current outlook for a fourth quarter 2015 RASM increase of approximately one percent, year-over-year.

Total operating expenses in

4.1 billion

. During

, the Company expensed $

140 million

(before profitsharing expense and taxes) related to the proposed ratification bonuses included in the tentative collective-bargaining agreement recently reached with the Company's Pilots, which is a special item. Excluding special items in both periods, total operating expenses in

economic fuel costs were $

per gallon, including $.50 per gallon in unfavorable cash settlements from fuel derivative contracts, compared with $

, including $.05 per gallon in favorable cash settlements from fuel derivative contracts. Based on the Company's existing fuel derivative contracts and market prices as of

, fourth quarter 2015 economic fuel costs are estimated to be in the $2.05 to $2.10 per gallon range, as compared with fourth quarter 2014's $2.62 per gallon. As of

, the fair market value of the Company's fuel derivative contracts was a net liability of approximately $1.2 billion for the fuel hedge portfolio through 2018, including a $116 million net liability related to the remainder of 2015. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.

Excluding fuel and oil expense and special items in both periods,

operating costs

percent from

, partially due to the

profitsharing expense of

$177 million

$100 million

. Excluding fuel and oil expense, special items, and profitsharing expense,

percent on a unit basis. Based on current trends and excluding fuel and oil expense, special items, and profitsharing expense, the Company currently expects fourth quarter 2015 unit costs to be comparable to fourth quarter 2014. This fourth quarter cost outlook includes the estimated impact of the tentative collective-bargaining agreement recently reached with the Company's Pilots.

Operating income in

was a record $

614 million

. Excluding special items, operating income was a third quarter record $

649 million

Other expenses in

292 million

89 million

$203 million

increase primarily resulted from $

272 million

in other losses recognized in

66 million

. In both periods, these losses included ineffectiveness and unrealized mark-to-market amounts associated with a portion of the Company's fuel hedge portfolio, which are special items. Excluding these special items,

had $

33 million

in other losses, compared with $

, primarily attributable to the premium costs associated with the Company's fuel derivative contracts.

Fourth quarter 2015

premium costs related to fuel derivative contracts are currently estimated to be in the $40 million to $45 million range, compared with $13 million in

. Net interest expense in

$20 million

$23 million

net income was $

per diluted share, which included $39 million (net) of unfavorable special items, compared with

per diluted share, which included $53 million (net) of unfavorable special items. Excluding special items,

net income, excluding special items, of $

382 million

For the

nine months ended September 30, 2015

, total operating revenues increased

14.8 billion

, while total operating expenses decreased

11.8 billion

, resulting in operating income of $

for the same period last...


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