Southwest ups annual profit in 42nd consecutive profitable year

Southwest Airlines has revealed its fourth quarter and annual 2014 results including a record annual net income, excluding special items, of $1.4 billion, a significant increase over the 2013 net income, excluding special items, of $805 million.

With the inclusion of $261 million (net) of unfavourable special items, the airline still reported a record annual net income of $1.1 billion, compared with 2013’s figure of $754 million, which included $51 million (net) of unfavourable special items.

The fourth quarter (4Q14) net income excluding special items of $404 million was also a record, and jumped from the 4Q13 net income excluding special items of $236 million. When $214 million (net) of unfavourable special items were included, the 4Q14 net income was $190 million, compared with net income of $212 million, in 4Q13, which included $24 million (net) of unfavorable special items.

Southwest’s return on invested capital before taxes and excluding special items (ROIC) was 21.2% for 2014, up 8.1 percentage points from 13.1% in 2013.

Gary Kelly, chairman of the Board, president, and chief executive officer (pictured), commented, "We are extremely proud to report record annual 2014 net income, excluding special items. Our 2014 total operating revenues were strong, increasing 5.1% to a record $18.6 billion. Our 2014 operating cost performance was also solid, with costs declining, year-over-year.

“This remarkable achievement would not have been possible without the hard work, perseverance, and determination of our Southwest People, and I commend them for these exceptional results, which earned them a record $355 million in profitsharing for 2014, up 56% from the previous record in 2013,” Kelly noted. “Our strategic plan has come together successfully, and we have realised significant contributions from the AirTran integration, fleet modernisation efforts, and the continued growth of our Rapid Rewards programme.

"Our balance sheet and liquidity remain strong, with cash and short-term investments of $3.0 billion at the end of 2014,” he continued. “We generated strong free cash flow of $1.1 billion in 2014, allowing us to repurchase $955 million of Southwest common stock, pay $139 million to shareholders in dividends, and reduce debt and capital lease obligations by $261 million, net, during the year.

"We concluded 2014 with record fourth quarter profits, excluding special items, of $404 million. Total operating revenues were a fourth quarter record $4.6 billion. On a year-over-year basis, our fourth quarter 2014 revenue per available seat mile increased 2.0%, which is outstanding considering the 2.4% increase in available seat miles (ASMs); the 2.6% increase in stage length; the 2.4% increase in seats per trip (gauge); and the large percentage of our capacity under development.

“Customer demand remained strong, resulting in a record fourth quarter 2014 load factor of 82.0%, up 1.6 points from 4Q13. We are pleased with our passenger unit revenue and booking trends thus far in January, considering the continuing impact of increasing ASMs, stage length, and gauge, and the large percentage of our capacity under development. Based on these trends, we currently expect our first quarter 2015 passenger revenues to grow in line with the expected six percent increase in first quarter 2015 ASMs, both on a year-over-year basis,” Kelly declared.

"Our fourth quarter 2014 unit costs, excluding special items, were down 3.8% year-over-year, primarily as a result of significantly lower fuel prices. Our first quarter 2015 cost outlook is also favourable. With the collapse in fuel prices since September 2014, fuel prices have declined nearly 50%,” he noted. “Based on our existing fuel derivative contracts and market prices as of 16 January 2015, we estimate our first quarter 2015 economic fuel costs to be approximately $1.90 per gallon, which would result in approximately half a billion dollars in year-over-year fuel cost savings for the first quarter alone. Excluding fuel and oil expense, special items, and profitsharing, we currently expect first quarter and full year 2015's unit costs to decline in the one to two percent range, compared with the same year-ago periods, driven largely by our capacity growth and ongoing fleet modernisation initiatives.”

Kelly highlighted that on 28 December 2014, the AirTran brand was retired. “Overall, the AirTran acquisition resulted in net pre-tax synergies (excluding acquisition and integration expenses) of approximately $500 million in 2014, exceeding our $400 million target,” he reported.

Kelly then summarised the past year. "Without question, 2014 was a monumental year for Southwest Airlines with many notable achievements. My gratitude goes out to our outstanding employees for their tremendous efforts and the successful execution of our strategic initiatives, which allowed us to achieve our financial goals and expand our service internationally,” he remarked. “As we enter 2015, we are well positioned financially and excited about our growth opportunities ahead. We remain steadfast in our unwavering commitment to preserve our financial strength, provide job security for our employees, protect our low-fare brand, and deliver adequate returns to our shareholders. We live up to that commitment by offering friendly, reliable, and low-cost air travel, and by expanding our network in a sensible manner."

During 2014, Southwest’s fleet decreased by 16 to 665 aircraft at the end of 2014. This reflected the delivery of 33 new Boeing 737-800s and 22 pre-owned Boeing 737-700s, as well as the retirement of five Boeing 737 Classic aircraft. The figure also reflects the remaining 66 AirTran 717-200s being removed from service during 2014.

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