Thanks to the tremendous efforts of our hard-working Employees, we celebrated a monumental year for Southwest Airlines in 2011.
To our Stakeholders:
The economic realities of sky-rocketing fuel prices, a sluggish U.S. economy, and international uncertainties continue to challenge the U.S. airline industry. Once again the People of Southwest Airlines prevailed by showing their Warrior Spirit and finding a way to win. We’ve come out a champion for our Shareholders, Employees, Customers, and the Planet, because we are not content just to survive—we aim to thrive. Motivated by our passions and dedication to our triple bottom line of Performance, People, and Planet—we made 2011 a historic year for Southwest Airlines. We celebrated our 40th Anniversary. We welcomed AirTran into the Southwest Family, launched a completely revamped All-New Rapid Rewards® frequent flyer program, and opened three new cities: Newark, N.J.; Greenville-Spartanburg, N.C.; and Charleston, S.C. And, thanks to the extraordinary efforts of our hard-working Employees, we preserved an industry-wide distinction with our 39th consecutive year of profitability. We’re proving that our commitment to our passions continues to propel us forward and lead the industry.
Our 2011 Southwest Airlines One Report™ comprehensively covers our financial, social, and environmental performance. This year’s report is featured in a microsite with enhancements such as the ability to build your own report. Our 2011 One Report adheres to the Global Reporting Initiative (GRI), an internationally recognized standard for triple bottom line reporting, and fully complies with the GRI’s B+ application level. In addition, we’re introducing parallel Carbon Disclosure Project reporting that covers effective management of environmental risks, focusing on greenhouse gas emissions and climate change strategies.
We had a strong revenue Performance in 2011, generating a record $15.7 billion in revenues and achieving a net income of $178 million despite rapidly rising jet fuel prices. Excluding special items,G our 2011 profit was $330 million. Our strategic initiatives, including the acquisition of AirTran, contributed to our 29.4 percent year-over-year growth in revenues. By staying true to our low-fare brand, our Customers rewarded us with their loyalty. We set a record load factor of 80.9 percent, grew our domestic market share to 25 percent,1,2 and maintained our distinct position as the largest domestic airline.1
Our outstanding revenue Performance helped to blunt soaring jet fuel prices, but higher fuel costs, ultimately, drove a year-over-year decline in earnings. With fuel costs accounting for 37.7 percent of our operating expenses in 2011, successfully managing our fuel hedging program and controlling our other costs remain vital. We continue our focus on improving productivity, eliminating waste, and conserving fuel. Despite the decline in earnings, we ended 2011 in a strong financial position with cash and short-term investments of $3.1 billion and a fully available $800 million bank line-of-credit. We generated $1.4 billion of cash flow from operations, had capital expenditures of $968 million, repaid $638 million in debt, and repurchased approximately $225 million, or approximately 27.5 million shares of common stock, under the $500 million stock repurchase authorization program approved by the Board of Directors in 2011. We also preserved our investment grade credit rating.
On May 2, 2011, we closed on the purchase of AirTran. The AirTran acquisition expands our network into key markets like Atlanta, Washington, D.C., and near-international destinations in Mexico and the Caribbean. We obtained our Single Operating Certificate from the Federal Aviation Administration on March 1, 2012, and have made outstanding progress integrating AirTran into Southwest Airlines, although full integration will take several years to complete. Thanks to the efforts of our Southwest Airlines and AirTran Employees, we achieved $80 million in net pre-tax synergies in 2011, and believe we are on target for annual net pre-tax synergies to grow to our goal of over $400 million upon full integration. We firmly believe that both AirTran and Southwest Airlines, together, are stronger and can accomplish more, faster than either could on its own.
While we fly planes, we are and always have been a Company of People, and they remain our greatest asset. Our People continue to cultivate our unique Culture and storied 40-year history. Our Culture is stronger today than at any point in our history, thanks to our People. This year we enthusiastically welcomed AirTran Employees into our Family, growing to more than 45,000 Employees.3 For our 40th Anniversary, we celebrated in true Southwest-style throughout the year. The festivities included promotions, partner sweepstakes and contests, and inflight perks for Customers; commemorative events; and special community service programs such as 40 for 40: 1,600-Ticket Giveaway, Pledge 40 Employee Volunteer program, and Conservation in Action: 40 Projects for 40 Years.
Thanks to our Employees delivering world-class Customer Service every day, Southwest Airlines once again led the domestic airline industry in Customer Satisfaction in 2011. We had the lowest ratio of complaints per Customers boarded of all major U.S. carriers, according to the U.S. Department of Transportation’s Air Travel Consumer Report.4 With our low-fare brand and superior Customer Service, we continually win the hearts of our Customers.
Our passion for serving our Customers is matched by our passion for serving our Communities. Our Customer Service extends to sharing our Servant’s Heart in the communities where we fly. We give back to our communities by volunteering our time and donating tickets, dollars, and LUV to help those in need. In 2011, we donated more than $18.2 million in monetary, in-kind, and ticket donations to our communities, and our Employees volunteered more than 114,000 hours.
We believe it’s our responsibility to protect our Planet now and for future generations, so we operate with a green filter—a mindset of making environmentally responsible decisions. As good environmental stewards, we recycle onboard and in airports. We are working to improve energy efficiency, use renewable energy, and reduce water usage at our Headquarters and other facilities. In the air, we’re conserving jet fuel, reducing our greenhouse gas emissions, and using recycled materials to furnish our cabins. On the tarmac, we’re increasing our use of alternative and highly efficient energy sources to power our ground support equipment. Given years of continued increases in jet fuel prices, operating with a green filter is not only good for the Planet, it’s also good for our bottom line.
In 2011, we shared our passion for education and protecting the environment with our Stakeholders by partnering with the Student Conservation Association for Conservation in Action: 40 Projects for 40 Years, featuring 40 conservation service projects in 25 cities where we fly.
We have championed resource conservation for decades. We were at the forefront of paperless tickets, quick aircraft turnarounds, and the installation of winglets onboard aircraft. Now we are charting a new course for sustainable cabin interiors with our refreshed cabin design, Evolve. Our new interior features recycled, more durable, and lighter weight materials tested on our Green Plane. The improved durability of the redesigned seat cover, coupled with fuel savings from 635 pounds less weight per 737-700 series aircraft, is expected to result in significant ongoing annual cost savings. By reusing the existing seat frames, we avoid creating waste and spending an additional $50 million. Our fleet modernization—with new Boeing 737-800s and the 737 MAX—will further enhance our fuel efficiency and, as a result, reduce our emissions. Even with nearly 30 percent more seating capacity, the -800s offer an estimated emissions reduction of 30 pounds of carbon dioxide equivalent per 1,000 available seat miles. The LEAP-1B engine in the 737 MAX is expected to reduce fuel burn and carbon dioxide emissions by 10 to 11 percent over today’s most fuel-efficient, single-aisle airplane. And, as part of our ongoing commitment to conserve our natural resources, we’re again publishing our 2011 One Report exclusively online.
Looking Forward as One Southwest
As we embark on our next 40 years, we are focused on achieving and sustaining a 15 percent pre-tax return on invested capital, while delivering the highest quality of Customer Service and using resources responsibly. Our strategic initiatives include: integrating AirTran into Southwest Airlines; growing our All-New Rapid Rewards® program; incorporating fuel-efficient Boeing 737-800s into our fleet; executing our fleet modernization plans, including the launch of the Evolve interior; and replacing our reservations system.
Our dedication to our three passions—our Performance, our People, and our Planet—creates a Culture of consistent Performance, enthusiastic Employees, respected Customer Service, active community involvement, and environmentally responsible decisions. Something that we can all be proud of as America’s largest domestic airline and one of the world’s most admired companies.
I am proud of what we have built over the past 40 years. Our People continue to be our champions in the face of tough times. I am immensely proud to work alongside the best Employees in the industry to create the best Company in the world, and they deserve our thanks.
Gary C. Kelly
Chairman of the Board, President, and Chief Executive Officer
March 31, 2012
|1||As measured by the number of originating passengers boarded and based on data available from the U.S. Department of Transportation as of Sept. 30, 2011.|
|2||Includes AirTran beginning May 2, 2011.|
|3||Based on active, full-time equivalent Southwest Airlines and AirTran Employees as of Dec. 31, 2011.|
|4||From the 2011 yearend U.S. Department of Transportation Air Travel Consumer Report issued February 2012. Top ranking is for Southwest Airlines only. AirTran ranked fifth in the same report.|