Southwest reports record 3Q profit

Southwest Airlines has published its third quarter 2015 (3Q15) financial results including record third quarter net income, excluding special items, of $623 million which was $241 million higher than in the third quarter of 2014.

The airline achieved a record third quarter GAAP net income of $584 million, compared with third quarter 2014 GAAP net income of $329 million. It also had a 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 of 20.3%.

The return on invested capital before taxes and excluding special items (ROIC) for the 12 months ended 30 September 2015, of 31.1%, compared with 19.0% for the 12 months ended 30 September 2014.

Gary Kelly, chairman of the board, president, and chief executive officer, commented, "We are very pleased to report outstanding third quarter 2015 results marked by a 63.1% year-over-year increase in net income, excluding special items. Our record third quarter operating income, excluding special items, of $1.0 billion produced a strong 20.3% 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 programme,” Kelly continued. “Customer demand for our low fares was evident with an all-time quarterly record load factor of 85.4% for third quarter 2015. That's what low fares without 'gotcha's', which we call Transfarency, will do for you.

"We are pleased with our third quarter 2015 unit revenue (RASM) performance, considering the longer average stage length, higher average seats per trip, and softer yield environment. Third quarter 2015 operating revenues grew 10.8% to a record $5.3 billion on a year-over-year increase in available seat miles of 7.6%. 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 7.2% to $5.1 billion, and decreased slightly on a unit basis, both as compared with third quarter 2014,” Kelly remarked. “Based on favourable 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 favourable 3Q15 cost trends and outlook for 4Q15 costs reflect significantly lower jet fuel prices and ongoing fleet modernisation benefits. Our 3Q15 economic fuel costs declined nearly $300 million, year-over-year. Based on our existing fuel derivative contracts and market prices as of 19 October 2015, we currently expect full year 2015 economic fuel costs to decline approximately $1.3 billion, year-over-year,” said Kelly.

As of 30 September 2015, the company had approximately $3.1 billion in cash and short-term investments, and a fully available unsecured revolving credit line of $1 billion.

During 3Q15, the company received three pre-owned Boeing 737-700s to end the quarter with 692 aircraft. The company continues to manage to approximately 700 aircraft at year-end 2015 and continues to expect to grow its fleet approximately two percent, year-over-year, in 2016.

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