Special items bring Southwest 3Q net loss despite record operating revenues

Southwest Airlines has reported its third quarter 2011 results, including a net loss of $140 million (which included $262 million (net) of unfavourable special items), compared with a net income of $205 million for the third quarter of 2010 (which has favourable special items totalling $10 million (net)).

The company’s 3Q11 operating income was $225 million, compared with $355 million for 3Q10. Excluding special items, 3Q11 net income was $122 million, compared with net income of $195 million in 3Q10.

As required by generally accepted accounting principles (GAAP) and accounting pronouncements pertaining to derivative instruments and hedging, the company’s third quarter 2011 results include $227 million (net) in unrealised, non-cash markdowns relating to a portion of the company’s fuel hedges for future periods.

Gary Kelly, Southwest’s chairman, president and CEO, commented, "Excluding special items, third quarter 2011 operating income was $285 million, and third quarter 2011 net income was $122 million. Total third quarter operating revenues were very strong and reached an all-time quarterly record of $4.3 billion. Passenger revenues were driven by strong load factors, revenue yields, and unit revenues, which were all third quarter records. Third quarter passenger unit revenues increased approximately 6%, compared with third quarter last year (on a combined basis as defined below). Despite the cautious economic outlook, our booking trends remain strong. Importantly, business travel has remained stable since spring. Based on October traffic and booking trends, thus far, we expect solid passenger unit revenue year-over-year growth in the fourth quarter. Also, third quarter 2011 Other revenues grew approximately 18%, compared with the third quarter last year (on a combined basis as defined below), largely due to the All-New Rapid Rewards programme and continued growth in our EarlyBird Check-In revenues. While it is disappointing to report a decline in earnings excluding special items, I was pleased with our strong third quarter revenue performance.

"In accordance with fuel hedge accounting rules, our third quarter GAAP net results included $227 million of unrealised, non-cash markdowns relating to future periods’ fuel hedges. These special items resulted in a GAAP net loss for the quarter; however, since September 30th, market prices have rebounded, and our future fuel hedge portfolio has gained back over $300 million in fair value. Our economic fuel costs per gallon, which excludes this GAAP markdown, increased approximately 34% compared to third quarter last year. This surge in fuel costs caused our quarterly profits to decline despite record revenue results."

AirTran became a wholly-owned subsidiary of Southwest on 2 May 2011. The results discussed here include the results of operations and cash flows for AirTran from that date through to 30 September 2011, including the impact of purchase accounting. Periods presented prior to the acquisition date do not include AirTran’s results.

The company believes, however, that the analysis of specified financial results on a "combined basis" provides more meaningful year-over-year comparability. Financial information presented on a "combined basis" is the sum of the historical financial results of the company and AirTran for periods prior to the acquisition date, but includes the impact of purchase accounting only as of 2 May 2011. Supplemental financial information presented on a "combined basis" and the accompanying reconciliations have been included here.

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