Southwest Airlines Co. Q1 2004 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2004. Southwest Airlines Co. operates as a low-cost carrier and reported its 52nd consecutive quarterly profit despite a challenging revenue environment and record high energy prices. The company continues to expand its fleet, adding a net of 16 aircraft in the first quarter, with a total fleet size of 393 aircraft as of period-end.
Key Financial Metrics
| Metric (in millions) | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Operating Revenues | $1,484 | $1,351 |
| Operating Income | $46 | $46 |
| Net Income | $26 | $24 |
| Diluted EPS | $0.03 | $0.03 |
| Operating Cash Flow | $417 | $267 |
| Cash and Equivalents (End of Period) | $1,824 | $1,889 |
| Total Debt (Current + Long-term) | $1,577 | N/A |
| Operating Margin | 3.1% | 3.4% |
Note: Total Debt calculated as Current maturities of long-term debt ($307M) plus Long-term debt less current maturities ($1,270M).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 9.8% ($133 million) driven by a 9.3% increase in passenger revenues. This was supported by an 8.2% increase in Revenue Passenger Miles (RPMs) and a 5.6% increase in capacity (Available Seat Miles).
- Cost Increases: Operating expenses rose 10.2% to $1,438 million. Unit costs (per ASM) increased 4.3% primarily due to higher labor costs, airport fees, and fuel prices, partially offset by the elimination of travel agency commissions.
- One-Time Costs: The quarter included approximately $18 million in expenses related to the consolidation of nine reservations centers into six, including severance and relocation costs.
- Fuel Hedging: While fuel costs per gallon rose 6.4% to 79.6 cents, the company recognized $63 million in hedging gains. The fair value of fuel hedge contracts increased significantly to a net asset of $382 million.
- Share Repurchases: The company repurchased 8.5 million shares for approximately $125 million, utilizing proceeds from employee stock options.
Guidance, Outlook, and Risks
- Earnings Outlook: Management expects second quarter 2004 earnings to exceed second quarter 2003 earnings, excluding the impact of a $271 million government grant received in the prior year.
- Cost Outlook: Second quarter unit costs are expected to be in line with Q1 (7.82 cents per ASM). However, management anticipates unit costs will recede in the second half of 2004 due to cost-saving measures, including the elimination of travel agency commissions and the installation of Blended Winglets on 737-700 aircraft.
- Capacity: Capacity is expected to accelerate throughout 2004 with a net fleet expansion of 29 aircraft for the full year.
- Risks and Contingencies:
- Labor Negotiations: Flight Attendant contract negotiations remain ongoing with no agreement reached as of April 16, 2004.
- Fuel Prices: The company has hedged over 80% of its 2004 and 2005 fuel requirements, capping prices under $24 per barrel for the remainder of 2004.
- Legal/Tax: The company is subject to IRS examinations and various legal proceedings, though management does not expect a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of the 52nd consecutive profit given the 4.3% increase in unit costs.
- Confirm the status of Flight Attendant contract negotiations and potential impact on future labor costs.
- Monitor the effectiveness of fuel hedges as crude oil prices fluctuate, noting the $382 million unrealized gain position.
- Assess the impact of the $18 million one-time reservation center consolidation cost on future operational efficiency.
- Review the $3.0 billion in firm aircraft purchase commitments and the company's liquidity position ($1.8 billion cash) to fund these obligations.