EX-1 2 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 CONTACT: Investor Relations (214) 792-4415 SOUTHWEST AIRLINES REPORTS SECOND QUARTER EARNINGS DALLAS, TEXAS - July 15, 2004 -- Southwest Airlines' net income for second quarter 2004 was $113 million, compared to second quarter 2003 net income of $246 million. Net income per diluted share was $.14 for second quarter 2004, compared to $.30 for second quarter 2003. The Company's second quarter 2003 net income included the impact of a $271 million government grant (or $143 million net of profitsharing and income tax effects). Excluding the impact of the government grant, second quarter 2003 net income was $103 million, or $.13 per diluted share. The second quarter 2004 results included the following two charges: - an $11 million expense (or $6 million net of profitsharing and income tax effects) for costs associated with Southwest's recent voluntary company-wide early out offer, - a $12 million expense (or $6 million net of profitsharing and income tax effects), for pay, per diem, and benefit increases retroactive to May 2002 associated with the June 2004 tentative contract agreement reached with TWU Local 556, the union representing Southwest's 7,400 Flight Attendants. Government Grant Pursuant to the April 2003 Emergency Wartime Supplemental Appropriations Act, the Company received a $271 million cash payment from the U.S. government (government grant), which was recognized as "Other gains" in its unaudited Condensed Consolidated Statement of Income for second quarter 2003. This item resulted in an increase of approximately $41 million to Employee profitsharing expense. The Company believes it is helpful to management and investors to evaluate ongoing operational performance and trends by excluding the prior year government grant for comparative purposes. A reconciliation of key financial measures excluding the impact of this item is included in this release, pursuant to Regulation G issued by the Securities and Exchange Commission. Operating Results Total operating revenues for second quarter 2004 increased 13.3 percent to $1.72 billion, compared to $1.52 billion for second quarter 2003. Revenue passenger miles (RPMs) increased 14.1 percent in second quarter 2004, compared to a 4.9 percent increase in available seat miles (ASMs), resulting in a load factor of 76.3 percent versus the second quarter 2003 load factor of 70.1 percent. The passenger revenue yield per RPM decreased 1.1 percent year-over-year to 11.54 cents. Operating revenue per ASM (RASM) increased 7.9 percent year-over-year to 9.14 cents. Total second quarter 2004 operating expenses were $1.52 billion, an increase of 10.5 percent, compared to $1.38 billion for second quarter 2003. Excluding the profitsharing impact of the government grant, operating expenses were $1.33 billion in second quarter 2003. Operating expenses per ASM (CASM) for second quarter 2004 increased 5.3 percent, to 8.09 cents, from 7.68 cents in second quarter 2003. Excluding the profitsharing impact of the government grant, CASM for second quarter 2003 was 7.46 cents. In addition to the expenses associated with the Company's early out offer, tentative agreement with its Flight Attendants, and significantly higher jet fuel prices, the CASM increase was driven by higher labor, aircraft maintenance, and advertising costs. Although the Company's hedging program resulted in the recognition of $87 million and $36 million in effective hedging gains in second quarter "Fuel and oil" expense in 2004 and 2003, respectively, average jet fuel cost per gallon increased 21.5 percent to 81.9 cents from 67.4 cents in second quarter 2003. Operating income for second quarter 2004 was $197 million, an increase of 40.7 percent, compared to $140 million for second quarter 2003. Excluding the profitsharing impact of last year's government grant, operating income increased 8.8 percent in second quarter 2004 from $181 million in second quarter 2003. "Other expenses" was $18 million for second quarter 2004 versus "other income" of $257 million for second quarter 2003. The $275 million swing in "other expenses" primarily resulted from the government grant in second quarter 2003. James F. Parker, Vice Chairman and Chief Executive Officer, stated: "Southwest Airlines is grateful to report its 53rd consecutive quarterly profit. Excluding the impact of last year's government grant, our second quarter earnings of $113 million were up 9.7 percent over second quarter 2003 earnings of $103 million. This increase was achieved despite significantly higher jet fuel prices; the Company's July early out offer, which was accepted by over 1,000 Employees; and additional expenses associated with the tentative agreement with our Flight Attendants. This earnings growth was driven by a welcomed improvement in revenues, which increased 13.3 percent versus a year ago, or 7.9 percent per unit (ASM) to 9.14 cents. "Considering the difficult airline industry revenue environment, we are pleased with our second quarter revenue and traffic results. Our 2004 load factor increased 6.2 points to 76.3 percent and was a record performance. Thus far, favorable load factors and unit revenue trends have continued in July. Bookings for the remainder of July and August are also strong due to high demand for vacation travel. Bookings for September are building nicely as a result of recent fare sales. Based on these trends, we expect year-over- year unit revenue growth, again, in third quarter 2004, although at a slower pace than second quarter due to toughening comparisons. We also expect third quarter 2004's unit revenue to be below second quarter 2004 RASM of 9.14 cents, which is consistent with historical seasonal trends. "As anticipated, our unit costs rose in second quarter 2004 and were higher than budgeted due to higher than expected fuel prices, the Company's early out offer, and higher pay, per diem, and benefit increases retroactive to May 2002 associated with our Flight Attendants. Based on current plans and barring any unforeseen events, third and fourth quarter 2004 unit costs will decline from first half 2004 levels. "We continue to mitigate high energy costs with our successful hedging program and fuel efficiency efforts. We are over 80 percent hedged for the remainder of 2004 with prices capped below $24 per barrel. We are also 80 percent hedged for 2005 with prices capped at approximately $25 per barrel and approximately 45 percent hedged for 2006 with prices capped at around $28 per barrel. "Based on our current revenue and cost outlook and barring any unforeseen event, we expect third quarter 2004 earnings to exceed third quarter 2003 earnings of $106 million. "We are excited about our future growth opportunities and recently exercised options to acquire three more 737-700s in 2005, which brings our current 2005 firm aircraft orders to 34. We are thrilled with the Customer response to our Philadelphia service, which thus far, has been our best start-up ever." Net cash provided by operations was $847 million and capital expenditures were $870 million for the six months ended June 30, 2004. We ended second quarter 2004 with $1.8 billion cash on hand. During second quarter 2004, we fully replaced our unsecured revolving credit line of $575 million, which now expires April 2007. The Company also repurchased approximately 686,000 of its common shares during second quarter 2004, bringing the total to 9.2 million shares, or $136 million, pursuant to the Company's previously announced $300 million repurchase program. Total operating revenues for the six months ended June 30, 2004 increased 11.7 percent to $3.2 billion while total operating expenses increased 10.3 percent to $2.96 billion, resulting in operating income in first half 2004 of $243 million versus $186 million in first half 2003. Excluding the profitsharing impact of last year's government grant, first half 2004 operating expenses increased 12.1 percent to $2.96 billion from $2.64 billion in first half 2003, resulting in a 7.0 percent increase in first half 2004 operating income to $243 million from $227 million in first half 2003. Net income for first half 2004 was $139 million ($.17 per diluted share) versus $270 million ($.33 per diluted share) for first half 2003. Excluding the impact of last year's government grant, first half 2004 net income increased 9.4 percent to $139 million from $127 million ($.16 per diluted share) in first half 2003. Southwest Airlines will conduct a conference call to discuss its quarterly earnings today at 2:30 p.m. Eastern Time. A live broadcast of the conference call will be available at southwest.com. This news release contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the plans, intentions, and expectations reflected in or suggested by the forward-looking statements. Additional information concerning the factors which could cause actual results to differ materially from the forward-looking statements is contained in the Company's periodic filings with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended 2003. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this press release.

SOUTHWEST AIRLINES CO. CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited) Three months ended Six months ended June 30, June 30, (in millions except per share amounts) Percent Percent 2004 2003 Change 2004 2003 Change OPERATING REVENUES: Passenger $1,654 $1,465 12.9 $3,082 $2,771 11.2 Freight 28 25 12.0 54 47 14.9 Other 34 25 36.0 64 48 33.3 Total operating revenues 1,716 1,515 13.3 3,200 2,866 11.7 OPERATING EXPENSES: Salaries, wages, and benefits 622 587 6.0 1,212 1,103 9.9 Fuel and oil 246 194 26.8 476 402 18.4 Maintenance materials and repairs 124 104 19.2 238 210 13.3 Agency commissions - 13 (100.0) 2 25 (92.0) Aircraft rentals 44 46 (4.3) 89 91 (2.2) Landing fees and other rentals 99 91 8.8 202 181 11.6 Depreciation 107 95 12.6 209 188 11.2 Other operating expenses 277 245 13.1 529 480 10.2 Total operating expenses 1,519 1,375 10.5 2,957 2,680 10.3 OPERATING INCOME 197 140 40.7 243 186 30.6 OTHER EXPENSES (INCOME): Interest expense 22 23 (4.3) 40 49 (18.4) Capitalized interest (10) (8) 25.0 (20) (15) 33.3 Interest income (5) (7) (28.6) (9) (12) (25.0) Other (gains) losses, net 11 (265) n.a. 12 (272) n.a. Total other expenses (income) 18 (257) n.a. 23 (250) n.a. INCOME BEFORE INCOME TAXES 179 397 (54.9) 220 436 (49.5) PROVISION FOR INCOME TAXES 66 151 (56.3) 81 166 (51.2) NET INCOME $113 $246 (54.1) $139 $270 (48.5) NET INCOME PER SHARE: Basic $ .14 $ .32 (56.3) $ .18 $ .35 (48.6) Diluted $ .14 $ .30 (53.3) $ .17 $ .33 (48.5) WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 784 780 785 779 Diluted 817 820 817 814

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SOUTHWEST AIRLINES CO. RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE) (unaudited) Three months ended Six months ended June 30, June 30, (In millions, except per share amounts) Percent Percent 2004 2003 Change 2004 2003 Change Operating expenses, as reported $1,519 $1,375 $2,957 $2,680 Profitsharing impact of government grant (41) (41) Operating expenses, excluding grant impact $1,519 $1,334 13.9 $2,957 $2,639 12.1 Operating income, as reported $197 $140 $243 $186 Profitsharing impact of government grant 41 41 Operating income, excluding grant impact $197 $181 8.8 $243 $227 7.0 Net income, as reported $113 $246 $139 $270 Government grant, net of income taxes and profitsharing (143) (143) Net income, excluding grant impact $113 $103 9.7 $139 $127 9.4 Net income per share, diluted, as reported $.14 $.30 $.17 $.33 Government grant, net of income taxes and profitsharing (.17) (.17) Net income per share, diluted, excluding grant impact $.14 $.13 7.7 $.17 $.16 6.3

NOTE: The above schedule reconciles the financial measures, excluding the government grant, included in this press release to the most comparable GAAP financial measures. The $271 million government grant was received in second quarter 2003 pursuant to the April 2003 Emergency Wartime Supplemental Appropriations Act. The $271 million government grant was received as a result of the war with Iraq and was recorded in "Other gains." In management's view, comparative analysis of results can be enhanced by excluding the impact of this item. The item is not indicative of the Company's operating performance for that period, nor should it be considered in developing trend analysis for future periods. /more

SOUTHWEST AIRLINES CO. COMPARATIVE CONSOLIDATED OPERATING STATISTICS (unaudited) Three months ended June 30, 2004 2003 Change Revenue passengers carried 18,863,975 17,063,283 10.6 % Enplaned passengers 21,627,986 19,446,533 11.2 % Revenue passenger miles (RPMs) (000s) 14,325,737 12,550,665 14.1 % Available seat miles (ASMs) (000s) 18,773,522 17,893,765 4.9 % Load factor 76.3% 70.1% 6.2 pts. Average length of passenger haul (miles) 759 736 3.1 % Average aircraft stage length (miles) 571 556 2.7 % Trips flown 242,386 237,518 2.0 % Average passenger fare $87.67 $85.87 2.1 % Passenger revenue yield per RPM (cents) 11.54 11.67 (1.1)% Operating revenue yield per ASM (cents) 9.14 8.47 7.9 % Operating expenses per ASM (cents) 8.09 7.68 5.3 % Operating expenses per ASM, excluding government grant (cents) 8.09 7.46^ 8.4 % Operating expenses per ASM, excluding fuel (cents) 6.79 6.60 2.9 % Operating expenses per ASM, excluding fuel and government grant (cents) 6.79 6.37^ 6.6 % Fuel costs per gallon, excluding fuel tax (cents) 81.9 67.4 21.5 % Fuel consumed, in gallons (millions) 298 286 4.2 % Number of Employees at period-end 31,408 32,902 (4.5)% Size of fleet at period-end 405 379 6.9 %

^ Amounts exclude profitsharing impact of $271 million government grant.

Six months ended June 30, 2004 2003 Change Revenue passengers carried 34,859,036 32,140,820 8.5 % Enplaned passengers 39,818,390 36,616,105 8.7 % Revenue passenger miles (RPMs) (000s) 26,118,160 23,446,366 11.4 % Available seat miles (ASMs) (000s) 37,155,115 35,292,897 5.3 % Load factor 70.3% 66.4% 3.9 pts. Average length of passenger haul (miles) 749 729 2.7 % Average aircraft stage length (miles) 570 554 2.9 % Trips flown 480,855 470,605 2.2 % Average passenger fare $88.41 $86.23 2.5 % Passenger revenue yield per RPM (cents) 11.80 11.82 (0.2)% Operating revenue yield per ASM (cents) 8.61 8.12 6.0 % Operating expenses per ASM (cents) 7.96 7.59 4.9 % Operating expenses per ASM, excluding government grant (cents) 7.96 7.48^ 6.4 % Operating expenses per ASM, excluding fuel (cents) 6.68 6.45 3.6 % Operating expenses per ASM, excluding fuel and government grant (cents) 6.68 6.34^ 5.4 % Fuel costs per gallon, excluding fuel tax (cents) 80.8 71.0 13.8 % Fuel consumed, in gallons (millions) 585 563 3.9 % Number of Employees at period-end 31,408 32,902 (4.5)% Size of fleet at period-end 405 379 6.9 %

^ Amounts exclude profitsharing impact of $271 million government grant. /more

SOUTHWEST AIRLINES CO. CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) June 30, December 31, (in millions) 2004 2003 ASSETS Current assets: Cash and cash equivalents $1,768 $1,865 Accounts and other receivables 222 132 Inventories of parts and supplies, at cost 108 93 Fuel hedge contracts 315 164 Prepaid expenses and other current assets 58 59 Total current assets 2,471 2,313 Property and equipment, at cost: Flight equipment 9,242 8,646 Ground property and equipment 1,142 1,117 Deposits on flight equipment purchase contracts 886 787 11,270 10,550 Less allowance for depreciation 3,198 3,107 8,072 7,443 Other assets 270 122 $10,813 $9,878 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $464 $405 Accrued liabilities 870 650 Air traffic liability 658 462 Income taxes payable - - Current maturities of long-term debt 317 206 Total current liabilities 2,309 1,723 Long-term debt less current maturities 1,239 1,332 Deferred income taxes 1,649 1,420 Deferred gains from sale and leaseback of aircraft 160 168 Other deferred liabilities 202 183 Stockholders' equity: Common stock 790 789 Capital in excess of par value 263 258 Retained earnings 3,979 3,883 Accumulated other comprehensive income 287 122 Treasury stock, at cost (65) - Total stockholders' equity 5,254 5,052 $10,813 $9,878

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SOUTHWEST AIRLINES CO. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Three months ended Six months ended June 30, June 30, (in millions) 2004 2003 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $113 $246 $139 $270 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 107 95 209 188 Deferred income taxes 66 136 81 148 Amortization of deferred gains on sale and leaseback of aircraft (4) (4) (8) (8) Amortization of scheduled airframe inspections & repairs 13 12 27 24 Changes in certain assets and liabilities: Accounts and other receivables (4) 31 (50) 47 Other current assets 3 (7) (11) (8) Accounts payable and accrued liabilities 160 59 282 52 Air traffic liability (42) 40 197 163 Income taxes payable - 11 - 11 Other 18 19 (19) 18 Net cash provided by operating activities 430 638 847 905 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (511) (325) (870) (518) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt 29 - 58 - Proceeds from Employee stock plans 27 20 40 32 Payments of long-term debt and capital lease obligations (13) (14) (21) (20) Payments of cash dividends (4) (4) (11) (11) Repurchase of common stock (11) - (136) - Other, net (3) - (4) 1 Net cash provided by (used in) financing activities 25 2 (74) 2 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (56) 315 (97) 389 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,824 1,889 1,865 1,815 CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,768 $2,204 $1,768 $2,204

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Southwest Airlines Co. Boeing 737-700 Delivery Schedule As of July 15, 2004 Prior Schedule Current Schedule Firm Options* Firm Options* 2004 47 - 47** - 2005 31 3 34 - 2006 22 12 22 12 2007 25 29 25 29 2008 6 45 6 45 2009-2012 - 177 - 177 Total 131 266 134 263

*Includes purchase rights **22 aircraft were received during first half 2004, including one leased aircraft ***