Southwest Airlines Co. (NYSE:LUV) (the “Company”) today reported its fourth quarter and annual 2016 results:
- Fourth quarter net income of $522 million, or $.84 per diluted share, compared with fourth quarter 2015 net income of $536 million, or $.82 per diluted share.
- Excluding special items1, fourth quarter net income of $463 million, or $.75 per diluted share, compared with fourth quarter 2015 net income of $591 million, or $.90 per diluted share. This exceeded the First Call fourth quarter 2016 consensus estimate of $.70 per diluted share.
- Record annual net income of $2.24 billion, or $3.55 per diluted share, compared with 2015 net income of $2.18 billion, or $3.27 per diluted share.
- Excluding special items, record annual net income of $2.37 billion, or $3.75 per diluted share, compared with 2015 net income of $2.36 billion, or $3.52 per diluted share.
- Annual operating income of $3.76 billion, resulting in an operating margin2 of 18.4 percent.
- Excluding special items, annual operating income of $3.96 billion, resulting in an operating margin3 of 19.4 percent.
- Record annual operating cash flow of $4.29 billion, and record annual free cash flow1 of $2.25 billion.
- Returned $1.97 billion to Shareholders in 2016, through a combination of $222 million in dividends and $1.75 billion in share repurchases.
- Annual return on invested capital (ROIC)1 of 30.0 percent.
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, “We are delighted to report record annual profits for 2016, our 44thconsecutive year of profitability. Our total operating revenues reached a record $20.4 billion, with sustained demand for our legendary low fares and superior Customer Service. Our profit margins were very strong, and our ROIC was a near-record 30.0 percent. Our record profits and balance sheet discipline generated record free cash flow, allowing us to return significant value to our Shareholders. Operationally, our performance was also very solid. We carried a record number of Customers while improving our ontime performance, baggage delivery rate, and net promoter score. My thanks and congratulations to the superb People of Southwest for these outstanding results, which earned them $586 million in profitsharing during 2016.
“We ended the year with a solid fourth quarter 2016 performance. Total operating revenues grew 2.0 percent, year-over-year, to a fourth quarter record $5.1 billion, exceeding our expectations as of the beginning of the fourth quarter. Travel demand and close-in yields improved post-election. In addition, December business travel was stronger than anticipated leading up to the holiday period. Based on current bookings and revenue trends, we estimate first quarter 2017 operating unit revenues will be flat to down one percent, year-over-year. This represents a continued and sequential improvement from the 2.9 percent operating unit revenue year-over-year decline in fourth quarter 2016, which is an encouraging start to the year.
“As expected, our fourth quarter unit costs increased, year-over-year, due to higher fuel costs, pay increases from amended union contracts, and additional depreciation expense associated with the accelerated retirement of our Boeing 737-300 aircraft. While inflationary cost pressures are expected in 2017 due to the union contract pay increases, we are continuing our efforts to drive offsetting cost efficiencies through fleet modernization and ongoing technology investments in our operations.
“During fourth quarter 2016, we began service to Cuba with daily flights to Varadero, Havana, and Santa Clara. We also launched international flights from Los Angeles International Airport (LAX) to Cancun, Puerto Vallarta, and Los Cabos, Mexico. In commencing this LAX service, we were the first U.S. carrier to launch new service between the United States and Mexico under the recently approved Air Transport Agreement. Earlier this month, we filed an application with the U.S. Department of Transportation to serve Owen Roberts International Airport in Grand Cayman4, and announced plans to launch service to Cincinnati/Northern Kentucky International Airport in June 2017.
“We are excited about our strategic technology investments, especially our new reservation system. In December, we began selling domestic itineraries in the new Amadeus platform. We remain on track to move to a single reservation system on May 9, 2017, with significant incremental profits expected to begin in 2018. The first release deployed in December, providing booking capabilities for travel on and after May 9, was virtually flawless. As this is the largest technology project in our history, I commend our People on their tremendous efforts to deliver these critical new capabilities.
“As we close out a year of record results, we begin 2017 with momentum and enthusiasm. We are on track to open a new international terminal in Fort Lauderdale, along with the launch of new service, this June. We are on track to launch the new Boeing 737-8 in the fall. And, we are encouraged by recent revenue trends, as well as the prospects for continued economic growth and moderate fuel prices. We are excited about our current outlook for another strong year with opportunities to win more Customers and reward our People and our Shareholders.”