This summary is based on the second quarter fiscal 2008 earnings call conducted by Southwest Airlines Co. (LUV) on 24 July, 2008.
Management:
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Chairman, President and Chief Executive Officer: Gary Kelly
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Senior Vice President Finance and Chief Financial Officer: Laura Wright
Key Investors Issues
- Net income was 15.5% firmer closing at $321 million or 44 cents.
- Revenue rose 11% to $2.9 billion.
- The firm engaged two new Rapid Reward partners, Avis Rent-A-Car and Thrifty Car Rental.
Half Year Highlights:
- Net income was down 4% to $355 million or 48 cents a share, versus $371 million or 47 cents in 2007.
- Revenues increased by 12.9% to close at $5.4 billion compared with $4.8 billion last year.
- The firm reduced its fleet by 14 aircrafts.
Second Quarter Highlights
Despite a tough economy and more difficult year-over-year comparisons caused by Easter falling in March, Southwest Airlines posted an 11.1% increase in revenue to close at $2.9 billion up from $2.6 billion last year.
- Although the firm has continued to face pressure from energy prices, it has continued to see more opportunities to increase revenue.
- Customers in Denver have responded exceptionally well, the firm plans to grow daily departures destined to 32 markets to 115.
- Revenue passengers carried increased by 2.4%, while Revenue passenger miles increased by 4.2% reflecting the success from the elimination of unproductive flying.
- Other income was $324 million, a $205 million increase from last year, mainly caused by higher unrealized gains from Hedging Activities, associated with the accounting standard SFAS 133.
Operating income was $205 million, down from $328 million last year, affected by more than 47% in fuel increases.
- Excluding special items operating income was $242 million compared with $328 million last year second quarter.
- Fuel has had serious effect on airline operations worldwide. Economic fuel costs increased 35.2% to $2.19 per gallon, up from $1.62 second quarter last year.
- Fuel was by far the most significant driver of unit costs, which increase by 10.5% excluding special items to close at 9.98 cents.
Despite a very heavy calendar of engine overhauls and airport cost pressure, the firm’s unit costs excluding fuel only increased by 1.8% to close at 6.72 cents up from 6.60 cents last year.
- Fuel and oil expense closed at $857 million, 47.3% higher, up from $607 million second quarter last year.
- Highest increases in expenditure were experienced from fuel & oil and maintenance materials and repairs, which increased 24% to close at $191 million, up from $154 million last year.
Maintenance unit costs closed the quarter firmer at 73 cents, 17.7% higher than last year, chiefly driven by engine repair costs, which account for half of the maintenance costs.
- General Electric which maintained the firm’s classic engines on a power-by-the-hour contract, has been extended a contract to now include the dash 700 engines which were previously on event driven, time and material contract.
- The contract with General Electric will provide the firm with a long-term, cost effective, comprehensive leverage support and services, which will enable the firm to more accurately predict the engine and maintenance costs.
Oil prices forced Southwest Airlines competitors to consider fleet reductions of 15%
- The firm still remains cautions in terms of fleet reduction, with the forecast fleet mile growth for the third quarter at 2.4%
- Employee productivity increased by over 4% versus a year ago and fuel consumption per available seat mile decreased by almost 2%.
Profit share expense for the quarter was $36.8 million down by 33.2% from $55.1 million last year
- The firm’ s freight revenue increased by 12.1% to close at $37 million, up from $33 million last year, mainly due to increases in rates.
- The firm expects a similar freight revenue increase in the third quarter.
- Net income increased by 15.5% to close the quarter at $321 million or 44 cents per diluted share, up from $278 million or 36 cents per diluted share last year, despite the negative effects of increases in fuel and maintenance costs.
The firm acquired 9 dash 700s from Boeing this quarter.
