Southwest Airlines Reports Record Fourth Quarter and Annual Profit; 43rd Consecutive Year of Profitability

Dino D'Amore
By Dino D'Amore January 26, 2016 20:54

Southwest Airlines Reports Record Fourth Quarter and Annual Profit; 43rd Consecutive Year of Profitability

Southwest Airlines has reported record fourth quarter net income, and record annual operating income of $4.0 billion, excluding special items, resulting in an operating margin of 20.1 percent.

Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated, “We are extremely pleased to report a record annual net income, excluding special items, of $2.4 billion, or $3.52 per diluted share. We beat 2014’s previous record profit per share by 75.1 percent and produced an all-time high ROIC of 32.7 percent. Record revenues, low fuel prices, and continued cost controls resulted in record operating income of $4.0 billion, and a strong operating margin of 20.1 percent, both excluding special items. We generated strong free cash flow of $1.1 billion in 2015, allowing us to return $1.4 billion to Shareholders. Based on our current outlook, we expect strong free cash flow to continue in 2016 and intend to repurchase an additional $500 million of Southwest common stock under an accelerated share repurchase program, which will be launched soon. I am very thankful to our great Southwest People, and I commend them on these exceptional results, which earned them a record $620 million in profitsharing, up 74.6 percent from 2014’s previous record profitsharing contribution of $355 million.

“Net income, excluding special items, was $591 million in fourth quarter 2015, compared with $404 million in fourth quarter 2014, resulting in a 52.5 percent increase in our diluted earnings per share. Total operating revenues grew 7.5 percent to a record $5.0 billion. Considering the 8.3 percent increase in available seat miles, 3.6 percent longer average stage length, higher average seats per trip (gauge), and the high number of markets under development, our fourth quarter 2015 unit revenue performance was solid, especially in a softer yield environment. Strong demand for our low and friendly fares resulted in a record fourth quarter load factor of 84.1 percent, up 2.1 points from fourth quarter 2014. As we begin 2016, we’ve seen a continuation of strong demand and softer yields. Based on these revenue and booking trends, we currently expect our first quarter 2016 operating unit revenues to be in line with our year-ago performance.
“On the cost side, we continue to benefit from significantly lower jet fuel prices and our fleet modernization. Excluding special items, fourth quarter unit costs declined 6.9 percent year-over-year. Our fourth quarter 2015 economic fuel costs per gallon were $2.03, a decline of 22.5 percent from fourth quarter 2014, resulting in a reduction of $189 million in economic fuel costs, year-over-year. As expected, our annual 2015 economic fuel costs were $1.3 billion lower than 2014. With energy prices near 12-year lows, and assuming current market prices, we are expecting another significant year-over-year decline in economic fuel costs in 2016. Based on our existing fuel derivative contracts and market prices as of January 15, 2016, we currently estimate our first quarter 2016 economic fuel costs will be approximately $1.70 per gallon, compared with $2.00 per gallon in first quarter 2015. Excluding fuel, profitsharing, and special items, our fourth quarter 2015 unit costs declined 1.1 percent, year-over-year.  Based on current cost trends excluding fuel, special items, and profitsharing, we expect modest 2016 unit cost inflation.

“Our network is performing well, and we are pleased with the investments we have made over the past couple of years, particularly at Dallas Love Field. In fourth quarter 2015, we were thrilled to launch international service from Houston in conjunction with the opening of Houston Hobby’s international terminal, and demand, thus far, has been encouraging. We ended the year with a 7.2 percent year-over-year increase in available seat miles (capacity), as expected, and we continue to plan for 2016 year-over-year capacity growth in the five to six percent range. We have increased our future aircraft delivery schedule to support our recent decision to accelerate the retirement of our Classic fleet to no later than mid-2018. This decision is expected to reduce operating costs over the acceleration period and improve the Customer experience with better ontime performance and WiFi-equipped 737 aircraft, with a manageable increase in our capital spending.

“As we close out our 43rd consecutive year of profitability, we begin 2016 with much enthusiasm and excitement. Once again, we will strive to grow our route network, unit revenues, margins, and earnings. Our goal is to continue to strengthen our financial position and deliver value to our Employees, Customers, and Shareholders. Based on our current trends and outlook for first quarter 2016, excluding special items, we expect another quarter of strong margins.”

Dino D'Amore
By Dino D'Amore January 26, 2016 20:54