'World's Largest Profitable Airline' Does it Again

It was expected, and some of the news is even better than expected -- for the first half of 2003 (versus the same period in 2002), RPMs were up 4.7%, overall revenue was up 5%, with 2.9% of that in the past three months.

On the other hand, some expenses -- notably salaries, wages, and benefits -- had grown a lot (14.5%). The fleet, too, is 13 aircraft bigger than it was a year earlier.

Partially slowing the payroll upsurge was a small drop in headcount; since Southwest simply doesn't lay people off, that drop can be attributed to retirements and other structural unemployment factors. Fuel and oil (up 12%) and other maintenance costs (up 6.1%) cost $55 million more than the same period last year, and it looks at first glance that a reduction in agency commissions (down 13.8%) would go a long way to counter that. The commissions, though, are a much-smaller piece of the expense pie, so that 13.8% drop represents less than $5 million in savings.

Put it all together, though, and Southwest is still the big airline to envy.

Were things better, or worse? That depends, as accountants say, "on how you want it to come out." Most would say, "better."

Operating income for second quarter 2003 was $140 million, a decrease of 25.9 percent, compared to $189 million for second quarter 2002. Excluding special items in both years, operating income increased 13.8 percent to $181 million for second quarter 2003, compared to $159 million for the same period in 2002.

"Other income" was $257 million for second quarter 2003 versus "other expenses" of $20 million for second quarter 2002. The $277 million swing in "other income" resulted primarily from the government grant in second quarter 2003 and a $5 million decline in net interest expense. Interest expense declined 14.8 percent to $23 million primarily due to lower interest rates. Interest income for second quarter 2003 declined 22.2 percent, also due to lower interest rates. Capitalized interest increased 60 percent to $8 million in second quarter 2003 as a result of higher Boeing aircraft progress payments.

James F. Parker, Vice Chairman and Chief Executive Officer, stated: "Considering the challenges we faced in second quarter with the Iraq war and the difficult airline industry pricing environment, we are proud of our better than expected earnings performance. Excluding the $271 million government grant, our second quarter 2003 net income of $103 million slightly exceeded last year's second quarter earnings of $102 million, even though second quarter 2002 included $36 million (pretax) related to a reduction in air traffic liability.

"Although bookings softened early in the quarter as a result of the war in Iraq, traffic and revenues finally began to improve in mid-June. Thus far, traffic and load factors for this month and bookings for the remainder of July and August are strong due to high demand for vacation travel. Thus far in third quarter 2003, unit revenues are exceeding year ago levels. The outlook for the economy remains uncertain, however, and we remain concerned about travel demand post-Labor Day."

Still growing, albeit slowly

He continued, "Although the last 22-month period has been the most difficult ever for the airline industry, our superb Employees remain focused more than ever on their mission to spread the Freedom to Fly to Americans. As a consequence of their dedication and improved revenue trends, we recently exercised our remaining 2004 options for the delivery of nine 737-700s next year. In addition, we exercised six 2005 options for accelerated delivery in 2004 and accelerated the firm delivery of two 2005 aircraft to 2004. These changes to our Boeing 737-700 delivery schedule bring our current 2004 firm orders to 42 aircraft, which, after subtracting planned 737-200 retirements, results in a planned annual capacity increase in the 6 to 7 percent range in 2004."

FMI: www.southwest.com