Southwest Airlines 2014 Annual Report Download - page 2

While operating revenues grew 5.1 percent, total operating costs were virtually flat,
primarily because of declines in jet fuel prices, along with decreases in aircraft maintenance
and aircraft rentals. Even excluding the welcome drop in fuel prices, our cost performance was
solid, especially considering a record $355 million contribution to the ProfitSharing Plan for
2014. The strategic efforts to control unit costs by modernizing and up-gauging the fleet are
producing as planned.
In 2014, our financial position strengthened, and we were able to return significant
value to our Shareholders. We have long led the industry in these two categories, consistent
with our unmatched record of consecutive profitability. At December 31, 2014, our cash and
short-term investments were a strong $3 billion, with a fully-available bank line-of-credit. In
May 2014, our Board of Directors authorized a $1 billion share repurchase program and
increased the quarterly dividend by 50 percent to $.06 per share.
These actions enabled Southwest to return virtually all of our strong free cash flow2of
approximately $1.1 billion to Shareholders through repurchases of $955 million of common
stock (33 million shares) and payment of $139 million in dividends. In 2014, Southwest repaid
$261 million of long-term debt and capital lease obligations, net of the new issuance of long-
term debt. The net effect on our debt-to-total-capital ratio (including aircraft leases) was a
reduction to approximately 35 percent at year end 2014. Southwest has maintained an
investment grade credit rating since 1986, earning upgrades in 2014. We remained the only
investment grade-rated U.S. airline by all three credit rating agencies.
In the course of completing the AirTran integration, along with the implementation of
international capabilities at Southwest, we converted seven AirTran destinations to Southwest
service in 2014: Aruba, Montego Bay, the Bahamas, Cancun, Mexico City, Cabo San Lucas,
and Punta Cana. On March 7, 2015, we successfully launched service to San Jose, Costa Rica.
In 2015, we also plan to add service to Puerto Vallarta in June; and, subject to government
approvals, Belize City in October. We are looking forward to the completion of a new five-
gate international terminal at Houston’s Hobby Airport, scheduled to be completed in the
second half of this year, allowing us to commence nonstop international service from Houston
to four destinations in Mexico, to Belize City, Belize, and to San Jose, Costa Rica, each
beginning October 2015 and subject to required governmental approvals. Our new near-
international flights, along with Southwest’s new service at Love Field, Reagan National, and
LaGuardia, will generate the vast majority of our expected available seat mile growth of
approximately seven percent in 2015, compared with 2014. We project to end 2015 with
approximately 700 aircraft in our fleet, all Boeing 737s. We will also restore the utilization of
our fleet to more historic levels as a function of the completion of the AirTran aircraft
conversion process and our fleet modernization efforts, which is a very cost-effective means
of growing trips and seats.
While the U.S. economy continues to produce modest but steady growth, the big news
has been the collapse in oil and jet fuel prices. It is welcome, but we remain wary of volatility.
2Free cash flow is calculated as operating cash flows of $2.90 billion less capital expenditures of $1.75 billion less assets
constructed for others of $80 million plus reimbursements for assets constructed for others of $27 million.