Southwest Airlines reports drop in 2Q earnings

Southwest Airlines has reported second quarter 2011 (2Q11) net income of $161 million, compared with net income of $112 million for 2Q10, although when excluding special items in both periods, 2Q11 net income was $121 million compared with $216 million in 2Q10

Operating income was $207 million for 2Q11, compared with $363 million for 2Q10. The 2011 results include those of AirTran since the 2 May 2011 acquisition date. Prior periods do not include AirTran’s results.

Both periods’ results included special items related to non-cash, mark-to-market, and other items associated with a portion of the company’s fuel hedge portfolio. In addition, second quarter 2011 results included approximately $40 million (net of taxes) in charges primarily related to financial advisory fees and severance payments in association with the company’s acquisition and integration of AirTran.

“With energy prices surging, and Brent crude oil near $120 a barrel, significant revenue growth was critical to achieve 2Q11 operating income of $276 million and net income of $121 million (both excluding special items),” explained Gary Kelly, chairman of the board, president, and chief executive officer. “Record load factors and record passenger yields resulted in a record $3.9 billion in passenger revenues. Still, with our economic fuel costs rising 72%, our year-over-year revenue growth could not keep pace. However, total operating revenues of $4.1 billion, another record, is a notable accomplishment.

AirTran became a wholly-owned subsidiary of the company on 2 May 2011. Second quarter 2011 results include the results of operations and cash flows for AirTran from 2 May until 30 June 2011, including the impact of purchase accounting. Periods presented prior to the acquisition date do not include AirTran’s results. However, Southwest believes the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability. Financial information on a "combined basis" is the sum of the historical financial results of Southwest and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting only as of 2 May 2011.

The Company’s total operating revenues for 2Q11 increased 30.6% to $4.1 billion, compared to $3.2 billion for 2Q10. Operating unit revenues increased by 5.7% compared with 2Q10. On a combined basis, operating unit revenues increased 7.4% from 2Q10. Based on bookings and revenue trends thus far, the company expects 3Q11 unit revenues to improve from third quarter 2010’s combined unit revenue performance of 12.13 cents.
Total 2Q11 operating expenses were $3.9 billion, compared to $2.8 billion in 2Q10. Excluding special items, 2Q11 unit costs increased by 13.5% from 2Q10, mostly due to a 38.4% year-over-year increase in economic fuel costs per gallon.

Excluding fuel and special items in both periods, 2Q11 unit costs increased 1.4% from those of 2Q10. On a combined basis, nonfuel unit costs, excluding special items, increased 3.1% from the second quarter last year.

Operating income for 2Q11 was $207 million, compared to $363 million in 2Q10. Excluding special items in both periods, operating income was $276 million for 2Q11, compared to $414 million for 2Q10. On a combined basis, second quarter 2011 operating income, excluding special items, was $295 million, compared to $488 million in second quarter 2010.

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