The leading U.S. budget carrier has released details of its operating performance in the first quarter of the year, recording a net loss of around $1billion. Total debts for the airline are in excess of $10 billion.
First quarter net income of $116 million, or $.19 per diluted share, driven by a $1.2 billionoffset of salaries, wages, and benefits expenses from the extended Payroll Support Program(PSP Extension) proceeds under the Consolidated Appropriations Act, 2021Excluding special items, first quarter net loss of $1.0 billion, or $1.72 loss per diluted shareFirst quarter operating revenues of $2.1 billion, down 51.5 percent year-over-yearEnded first quarter with debts outstanding of $10.8 billion
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "In first quarter, we benefited from temporary cost relief as a result of PSP Extension proceeds, which offset a portion of salaries, wages, and benefits expenses, resulting in first quarter 2021 net income of $116 million, or $.19 per diluted share. We remain grateful for this much-needed federal payroll support on the heels of substantial losses in 2020, and ongoing non-GAAP losses in first quarter 2021. The payroll support from the federal government has allowed Southwest to preserve its 50-year history without involuntary layoffs or furloughs, an achievement unprecedented in the U.S. airline industry. Excluding the benefit of PSP Extension proceeds and other special items, our first quarter 2021 net loss was $1.0 billion, or $1.72 loss per diluted share. While the pandemic is not over, we believe the worst is behind us, in terms of the severity of the negative impact on travel demand. Vaccinations are on the rise, and COVID-19 hospitalizations in the United States are down significantly from their peak in January 2021. As a result, we are experiencing steady weekly improvements in domestic leisure bookings, which began in
mid-February 2021.
"March 2021 operating revenues decreased 9.7 percent, year-over-year, and decreased 53.5 percent compared with March 2019, representing a significant improvement from relatively stagnant revenue levels experienced from September 2020 through February 2021. Our current outlook for operating revenues indicates a sequential improvement from March to April 2021, and again from April to May 2021, based on improving bookings. We believe there is significant pent-up demand for leisure travel and are optimistic about summer 2021. In response, we are in the process of adding flights in June 2021, and we currently expect June available seat miles (ASMs, or capacity) to be only slightly less than June 2019 pre-pandemic levels.
"We had a solid cost performance in first quarter 2021, despite recently rising jet fuel prices. Spending levels in many cost categories remained muted due to the pandemic. We expect capacity-driven year-over-year cost increases in second quarter 2021, most notably as we return parked aircraft to revenue service and recall a portion of our Pilots, Flight Attendants, and Ground Operations Employees from extended time-off to support increased flight levels planned for summer 2021. We currently expect second quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, to increase in the range of 10 to 15 percent, year-over-year, but remain below second quarter 2019 levels3.
"Our liquidity is strong, and we remain the only U.S. airline with an investment-grade credit rating by all three rating agencies. As of March 31, 2021, our total liquidity was $15.3 billion, consisting of cash and short-term investments of $14.3 billion and a fully available revolving credit facility of $1.0 billion. Average core cash burn4 was approximately $9 million per day in March 2021, and approximately $13 million per day in first quarter 2021. Including changes in working capital—most notably, cash flow from future bookings—average core cash flow turned positive in March 2021, and we generated approximately $4 million per day, as revenue and booking trends improved. Our average core cash burn in second quarter 2021 is currently estimated to be in the range of $2 million to $4 million per day. Based on current booking trends and cost outlook, we are hopeful we can achieve breakeven average core cash flow, or better, by June 2021.
"We returned the Boeing 737 MAX (MAX) to revenue service on March 11, 2021. To return the MAX to service, we satisfied applicable Federal Aviation Administration (FAA) requirements by modifying certain operating procedures; implementing enhanced Pilot training requirements; installing FAA-approved flight control software updates; and completing other required maintenance tasks specific to MAX aircraft, as well as completing more than 200 readiness flights. Also in March 2021, as previously disclosed, we completed discussions with The Boeing Company (Boeing) regarding the restructuring of our delivery schedule for MAX aircraft, and added 100 firm orders for MAX 7 aircraft; converted 70 MAX 8 firm orders to MAX 7 firm orders; added 155 MAX options; and extended the order book through 2031. This cost-effective MAX order book allows us to maintain the operational efficiencies of an all-Boeing 737 fleet to support our low-cost, point-to-point route network; accelerate our commitment to fleet modernization with more climate-friendly aircraft; and capitalize on future growth opportunities.
"This year marks our 50th anniversary, and we celebrate what has made Southwest Airlines the most successful airline in the world—our Employees. We applaud our People for their unwavering focus on Hospitality, which has resulted in the U.S. airline industry's top Customer Service ranking for 27 of the past 30 years5. Never has their resilience been more vital, as we work our way through the pandemic recovery while pursuing new airports and Customers.
"It is crucial that we continue managing our business prudently in the near-term, while also positioning ourselves to thrive and prosper, once again. We are increasingly optimistic about our future, and we are in the process of updating our strategic plan with a clear set of initiatives for the next five years. Among these initiatives are the aggressive expansion of our route network, having opened or announced
17 new airports since the pandemic began; the launch of Global Distribution System (GDS) access for corporate travelers; the acceleration of fleet modernization efforts to replace our 737-700 aircraft with the MAX; and the development of tangible steps that are aimed at improving upon our environmental stewardship and supporting our environmental sustainability goal to be carbon neutral by 2050. Being a good steward of the environment is not only good for our Planet, it is good for business, and it is the right thing to do for our Employees, Customers, and Shareholders."
Revenue Results and Outlook
The Company's first quarter 2021 operating revenues decreased 51.5 percent, year-over-year, to $2.1 billion, as a result of negative impacts to passenger demand and bookings due to the pandemic. First quarter 2021 operating revenue per ASM (RASM, or unit revenues) was 8.86 cents, a decrease of 26.0 percent, primarily driven by a passenger revenue yield decrease of 28.4 percent and a load factor decline of 3.4 points, all year-over-year.
The Company began first quarter 2021 experiencing stalled demand and bookings in January, driven by a high level of COVID-19 cases, coupled with typical seasonal weakness. In mid-February 2021, the Company began experiencing a modest improvement in leisure passenger demand and bookings that accelerated in March 2021. Passenger fares improved throughout March as close-in leisure demand held steady. Beach and other nature-inspired destinations continued to outperform other regions in first quarter 2021. Beginning in March 2021, demand improvement was system-wide.
The following table presents selected revenue and load factor results for first quarter 2021:
|
|
January 2021 |
February 2021 |
March 2021 |
1Q 2021 |
|
Operating revenue year-over-year |
Down 65.5% |
Down 65.7% |
Down 9.7% |
Down 51.5% |
|
Previous estimation |
Down ~66% |
Down ~66% |
Down 15% to 20% |
(a) |
|
Operating revenue compared with 2019 |
Down 65.1% |
Down 64.0% |
Down 53.5% |
Down 60.1% |
|
Previous estimation |
Down ~65% |
Down ~64% |
Down 55% to 60% |
(a) |
|
Load factor |
53.4% |
63.9% |
72.7% |
64.3% |
|
Previous estimation |
~53% |
~64% |
65% to 70% |
(a) |
(a) No previous estimation provided.
Thus far, the Company continues to experience improvements in leisure passenger demand and bookings for April and May 2021 travel, with expectations of improving passenger traffic and fares compared with March 2021. The Company continues to experience an increase in bookings farther out on the booking curve, with approximately 35 percent and 20 percent of anticipated bookings currently in place for June and July, respectively. These represent fairly typical future booking patterns; however, business travel continues to significantly lag leisure and is expected to have a significant negative impact on close-in demand and average passenger fares.
Fleet and Capacity
The Company ended first quarter 2021 with 730 aircraft in its fleet, including 61 MAX 8 aircraft. During first quarter 2021, the Company took delivery of 20 MAX 8 aircraft, comprised of 12 owned and 8 leased aircraft. The Company expects delivery of eight more MAX 8 aircraft in 2021. Also during first quarter 2021, the Company returned eight leased 737-700 aircraft to lessors and expects to retire up to nine more 737-700 aircraft in 2021. In response to capacity reductions due to the effects of the pandemic, 59 737-700 aircraft were in temporary storage as of March 31, 2021. In April, the Company also removed 32 of its MAX 8 aircraft from service due to a Boeing production issue related to the electrical power system on a subset of MAX aircraft. Upon learning of the issue, the Company immediately removed these aircraft from service, out of an abundance of caution, and is currently awaiting more guidance from Boeing and the FAA regarding the appropriate corrective actions. The Company is in the process of returning its stored 737-700 aircraft to revenue service to support flight schedules in summer 2021 and beyond.
The Company's order book with Boeing includes a total of 349 MAX firm orders (200 MAX 7 and 149 MAX 8) and 270 MAX options (MAX 7 or MAX 8) for years 2021 through 2031. Additional information regarding the Company's aircraft delivery schedule is included in the accompanying tables.
The Company's first quarter 2021 capacity decreased 34.5 percent, year-over-year, in line with the Company's guidance, due to capacity reductions in light of the decrease in passenger demand and bookings as a result of the pandemic. The following table presents capacity results for first quarter 2021:
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