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Articles 

Southwest Airlines Co. Reports Operating Results (10-Q)

July 27, 2012 | About:

Southwest Airlines Co. (NYSE:LUV) filed Quarterly Report for the period ended 2012-06-30.

Southwest Airlines Co. has a market cap of $6.81 billion; its shares were traded at around $8.68 with a P/E ratio of 15.3 and P/S ratio of 0.4. The dividend yield of Southwest Airlines Co. stocks is 0.4%. Southwest Airlines Co. had an annual average earning growth of 5.2% over the past 10 years. GuruFocus rated Southwest Airlines Co. the business predictability rank of 2-star.

Highlight of Business Operations:

Other revenues for second quarter 2012 increased by $28 million, or 13.5 percent, compared to second quarter 2011, the majority of which was due to the inclusion of AirTran results for the full three months in second quarter 2012, while second quarter 2011 results only include AirTran Other revenues following the acquisition date. Excluding the results of AirTran in both periods, Other revenues for second quarter 2012 increased 7.4 percent on a dollar basis compared to second quarter 2011. This increase primarily was due to higher revenues associated with commissions earned from programs the Company sponsors with certain business partners, such as Southwest s co-branded Chase Visa credit card. Based on current trends, the Company expects Other revenues for third quarter 2012 to decrease as compared to third quarter 2011 s $241 million, due to a higher portion of expected revenues from business partners being classified as Passenger Revenue.

Salaries, wages, and benefits expense for second quarter 2012 increased by $97 million, or 8.6 percent, compared to second quarter 2011, of which approximately $41 million was due to the inclusion of AirTran results for the full three months in second quarter 2012, while second quarter 2011 results only include AirTran Salaries, wages, and benefits expense following the acquisition date. Excluding the results of AirTran in both periods, Salaries, wages, and benefits expense increased by 5.5 percent on a dollar basis for second quarter 2012 compared to second quarter 2011. The majority of this increase was due to the increase in profitsharing expense to $73 million in second quarter 2012, compared to $33 million in second quarter 2011. The Company s profitsharing expense is based on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program, as well as acquisition and integration costs. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further information on fuel hedging. Salaries, wages, and benefits expense per ASM for second quarter 2012 increased 2.8 percent compared to second quarter 2011. On a per-ASM basis, the majority of this increase was due to the increase in profitsharing expense. Based on current cost trends and anticipated capacity, the Company expects Salaries, wages, and benefits expense per ASM in third quarter 2012, excluding profitsharing, to be comparable to second quarter 2012 s Salaries, wages, and benefits expense per ASM, excluding profitsharing.

Operating revenues for the six months ended June 30, 2012, increased by $1.4 billion, or 18.9 percent, compared to the first six months of 2011. The majority of the increase was due to the fact that the first six months of 2012 results include six full months of AirTran Operating revenues, while the first six months of 2011 results only include AirTran Operating revenues following the May 2, 2011 acquisition date. Excluding the results of AirTran in both periods, Operating revenues for the six months ended June 30, 2012 increased by 7.1 percent on a dollar basis compared to the first six months of 2011, primarily due to a 7.0 percent increase in Southwest s passenger revenues. The majority of the increase in passenger revenues was attributable to higher passenger yields, as the Company implemented fare increases in an attempt to buffer a portion of the impact of high fuel costs. The remainder of the increase primarily was due to the 1.7 percent increase in Southwest s capacity, versus the first six months of 2011. In the first six months of 2012, Southwest s passenger revenue yields increased 5.4 percent, and average passenger fare increased 4.7 percent, compared to the first six months of 2011. In addition to the fare increases the Company has been able to implement and other revenue management techniques, the year-over-year increase in passenger revenues benefitted from continued optimization of the Company s flight schedule to better match demand in certain markets and, at certain times, targeted marketing campaigns in which the Company differentiates its product and services from competitors. This increase in passenger revenues was partially offset by a slight decrease in the Company s load factor, partially due to the impact of higher airfares on Customer demand.

Other revenues for the first six months of 2012 increased by $116 million, or 35.0 percent, compared to the first six months of 2011, of which approximately $97 million was due to the inclusion of the full six months of AirTran results in 2012, while the first six months of 2011 results only include AirTran Other revenues following the acquisition date. Excluding the results of AirTran in both periods, Other revenues for the first six months of 2012 increased by 7.4 percent on a dollar basis compared to the first six months of 2011. This increase was due to increased revenues from initiatives, such as the Company s EarlyBird product, for which Customers can pay $10 to automatically receive an assigned boarding position before general checkin begins, and service charges for unaccompanied minors and pets. Southwest s EarlyBird product and service charges for unaccompanied minors, pets, and excess bags contributed $108 million to Other revenues in the six months ended June 30, 2012. The year-over-year increase in revenues from these initiatives and other ancillary revenue sources was partially offset by a year-over-year increase in the portion of the commissions earned from programs the Company sponsors with certain business partners that were classified as Passenger revenues as opposed to Other revenues. The classification of such amounts is influenced by average fares, among other factors. Other revenues for the first six months of 2012 included approximately $76 million in baggage fees collected from AirTran Customers, versus approximately $31 million in baggage fees for the six months ended June 30, 2011.

Salaries, wages, and benefits expense for the six months ended June 30, 2012, increased by $285 million, or 13.7 percent, compared to the six months ended June 30, 2011. Approximately $183 million of this increase was due to the inclusion of the full six months of AirTran results in 2012, while the first six months of 2011 results only include AirTran Salaries, wages, and benefits expense following the acquisition date. Excluding the results of AirTran in both periods, Salaries, wages, and benefits expense increased by 5.1 percent on a dollar basis for the first six months of 2012 compared to the first six months of 2011. Approximately 59 percent of this year-over-year increase was a result of higher salaries expense, primarily associated with the increase in Southwest s capacity. In addition, approximately 34 percent of the increase was due to an increase in profitsharing expense resulting from higher income available for profitsharing. The Company s profitsharing expense is based on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program as well as acquisition and integration costs. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further information on fuel hedging. On a per-ASM basis, consolidated Salaries, wages, and benefits expense for the first six months of 2012 decreased 0.3 percent compared to the first six months of 2011. On a per-ASM basis, the majority of this decrease was due to AirTran unit costs for Salaries, wages, and benefits being lower than Southwest s. This decrease was partially offset by a significant increase in profitsharing expense.

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About the author:

10qk
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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