Southwest Airlines latest results

The U.S. budget carrier Southwest Airlines released its second quarter 2022 financial results this week,  which demonstrated the low-cost airline managed to achieve a strong quarterly net income of $760 million,  record quarterly net income, excluding special items2, of $825 million, record quarterly operating revenues of $6.7 billion, cash provided by operations of $1.9 billion.

Bob Jordan, Chief Executive Officer, stated, "We are very pleased to report all-time record quarterly revenues and net income, excluding special items, representing a significant milestone in our pandemic recovery. Travel demand surged in second quarter, and thus far, strong demand trends continue in third quarter 2022. As anticipated, we experienced inflationary pressures and headwinds from operating at suboptimal productivity levels in second quarter, which we expect will continue in second half 2022; however, our fuel hedge continues to provide significant protection against higher jet fuel prices. Barring significant unforeseen events and based on current trends, we expect to be solidly profitable for the remaining two quarters of this year, and for full year 2022.

"We are making meaningful progress against our 2022 priorities, and I am very proud of our People and their heroic efforts to fight against the pandemic. Since April, we have been delivering a more reliable product for our Customers with cancellations representing less than one percent of scheduled flights in May and June 2022, which is a completion factor of more than 99 percent. We have added flights in second half 2022—especially in short-haul business markets—to better support our operation and the restoration of our route network. We reached another milestone, returning to overall pre-pandemic staffing levels in May 2022. We plan to continue our hiring and training efforts in specific areas—in particular, Pilots—to support further network restoration and future growth with plans to add over 10,000 Employees, net of attrition, this year. However, we plan to begin moderating overall hiring in second half 2022 as our focus shifts to 2023 planning and executing on our goals to better optimize staffing to flight schedules, reduce cost inefficiencies, and return to historic efficiency levels.

"We are experiencing delays in our aircraft deliveries from The Boeing Company (Boeing), and we now estimate 2022 deliveries to be 66 versus the previously expected 114, ending the year with 765 aircraft. Despite those delays, we are confident about our ability to fly our flight schedules as planned, which are currently published through March 8, 2023. We continue to invest in technologies, airports, and facilities to further modernize our operation and allow us to scale for future growth.

"We are also investing in the Southwest Customer Experience, and I am thrilled about today's announcement introducing yet another exciting Customer benefit that sets Southwest even further apart from the competition: Flight credits don't expire4. We are famous for offering industry-leading flexibility for Customers, and it is a key differentiator of our brand. Based on research and feedback, we believe flexibility has become even more important to Customers over the past few years. This further extension of flexibility for our Customers reinforces Southwest as industry-leading and builds on our low-fare brand with no fees to change or cancel plans5; two bags fly free®6; Rapid Rewards® points that don't expire; and transferable flight credits7. With flight credits that don't expire and the addition of our new Wanna Get Away PlusTM fare product—along with recently announced investments to enhance WiFi, install latest-technology onboard power ports, offer larger overhead bins, and enable new self-service capabilities—we are making travel even easier. We believe we have the strongest route network and value proposition for Customers in the domestic U.S., and also believe this policy change will both win new Customers and increase Customer loyalty."

Guidance and Outlook:

The following tables introduce or update selected financial guidance for third quarter 2022 and full year 2022, as applicable:

			3Q 2022 Estimation
Operating revenue compared with 2019 (a)			Up 8% to 12%
ASMs compared with 2019 (b)			~Flat
Economic fuel costs per gallon2,8			$3.25 to $3.35
Fuel hedging premium expense per gallon			$0.02
Fuel hedging cash settlement gains per gallon			$0.46
ASMs per gallon (fuel efficiency)			76 to 78
CASM-X (c) compared with 20199			Up 12% to 15%
Scheduled debt repayments (millions)			~$55
Interest expense (millions)			~$90
Aircraft (d)			741

 

			2022 Estimation			Previous estimation
ASMs compared with 2019 (b)			Down ~4%			No change
Economic fuel costs per gallon2,8			$2.95 to $3.05			$2.75 to $2.85
Fuel hedging premium expense per gallon			$0.04			No change
Fuel hedging cash settlement gains per gallon			$0.51			$0.54
CASM-X (c) compared with 20199			Up 12% to 16%			No change
Scheduled debt repayments (millions)			~$820			~$650
Interest expense (millions)			~$360			No change
Aircraft (d)			765			814
Effective tax rate			24% to 26%			No change
Capital spending (billions) (e)			~$4.0			~$5.0

 

(a) The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.

(b) Available seat miles (ASMs, or capacity). The Company's flight schedule is currently published for sale through March 8, 2023. The Company currently expects fourth quarter 2022 capacity to be down in the range of 1 percent to 2 percent compared with fourth quarter 2019, and first quarter 2023 capacity to be up approximately 10 percent, compared with first quarter 2022.

(c) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing.

(d) Aircraft on property, end of period. The Company ended second quarter 2022 with 730 Boeing 737 aircraft. During third quarter 2022, the Company expects to take delivery of 23 Boeing 737 MAX 8 (-8) aircraft and retire 12 Boeing 737-700 (-700) aircraft to end the quarter with 741 aircraft. During fourth quarter 2022, the Company expects to take delivery of 31 -8 aircraft and retire seven -700 aircraft to end the year with 765 aircraft. The delivery schedule for the Boeing 737 MAX 7 (-7) is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and that the remaining 48 Boeing 737 MAX (MAX) aircraft reflected in its 2022 contractual order book will shift into 2023.

(e) Represents the Company's current expectation which assumes the exercise of its five remaining 2022 MAX aircraft delivery options, and a total of 66 -8 aircraft deliveries in 2022, compared with the Company's previous estimation which assumed the delivery of 114 MAX aircraft in 2022. The Company continues to estimate $900 million in non-aircraft capital spending in 2022.

Revenue Results and Outlook:

• Second quarter 2022 operating revenues were an all-time quarterly record $6.7 billion, increasing 13.9 percent compared with second quarter 2019—in line with the Company's previous guidance
• Second quarter 2022 operating revenues per available seat mile (RASM, or unit revenues) increased 22.0 percent driven primarily by a passenger yield increase of 18.4 percent, coupled with a load factor increase of 0.7 points, all compared with second quarter 2019
• Second quarter 2022 managed business revenues were down 24 percent compared with second quarter 2019—in line with the Company's previous guidance
• Successfully launched new Wanna Get Away Plus™ fare product in May 2022

The Company's revenue performance in second quarter 2022 was a quarterly record primarily due to a surge in leisure demand, especially in June, which resulted in strong passenger bookings, yields, and load factors. In addition, the Company's second quarter 2022 loyalty program revenue represented a quarterly record. June 2022 managed business revenues were down 19 percent, a sequential improvement compared with April and May 2022 managed business revenues, which were down 31 percent and 23 percent, respectively, all compared with their respective 2019 levels. While second quarter 2022 managed business revenues remained below 2019 levels, the Company was encouraged by the sequential improvement during the quarter, as well as managed business average fares that exceeded 2019 levels. June 2022 is estimated to represent a monthly peak for 2022 operating revenues based on first half 2022 results and current expectations for second half 2022.

Currently, the Company continues to experience strong passenger bookings, yields, and load factors. Leisure bookings remain strong and in line with seasonal expectations in third quarter 2022, including post-Labor Day. Based on bookings thus far, the Company's third quarter 2022 managed business revenues are currently estimated to be down in the range of 17 percent to 21 percent, compared with third quarter 2019. Although early in the booking curve, the Company is encouraged by current business bookings post-Labor Day and the expected sequential improvement from second quarter to third quarter 2022, of managed business revenues compared with the same periods in 2019. The Company increased short-haul trips in business markets in its third quarter 2022 published flight schedule, relative to first half 2022, in an effort to support both the reliability of its operational performance and expected business travel demand. Given the Company's estimate that managed business revenues will remain below 2019 levels in third quarter 2022, the increase in short-haul trips in business markets is estimated to be a two point sequential operating revenue growth headwind from second quarter to third quarter 2022, compared with their respective 2019 levels.

In accordance with applicable accounting guidance and the Company's revenue recognition policy, the amount of tickets that will expire unused, referred to as breakage, are estimated and recognized in Passenger revenue once the scheduled flight date has passed, in proportion to Customer behavior. Breakage estimates are based on historical experience over many years, and the Company has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel. As a result of the COVID-19 pandemic, the Company had a significant amount of Customer flight credits that were set to expire on September 7, 2022. The Company's policy change to eliminate expiration dates on qualifying flight credits, in particular those that were set to expire on September 7, 2022, results in a shift in the timing of revenue recognition and an estimated negative impact to third quarter breakage revenue in the range of $250 million to $300 million, or a five point sequential operating revenue growth headwind from second quarter to third quarter 2022, compared with their respective 2019 levels. The Company does not anticipate a material impact from this policy change beyond third quarter 2022, and estimates that breakage as a percentage of revenue will normalize to pre-pandemic levels. The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty and new Customers.

Fuel Costs and Outlook:

• Second quarter 2022 fuel costs were $3.36 per gallon—in line with the Company's previous guidance—and included $0.05 per gallon in premium expense and $0.68 per gallon in favorable cash settlements from fuel derivative contracts
• Second quarter 2022 fuel efficiency improved 2.1 percent compared with second quarter 2019 due to more MAX aircraft, the Company's most fuel-efficient aircraft, as a percentage of the Company's fleet
• As of July 21, 2022, the fair market value of the Company's fuel derivative contracts settling in third quarter 2022 through the end of 2024 was an asset of $1.0 billion

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase in jet fuel in second quarter 2022. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate, Brent crude oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities8 provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of July 21, 2022.

	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums
Average Brent Crude Oil price per barrel	3Q 2022			4Q 2022
$80	$2.85 - $2.95			$2.75 - $2.85
$90	$3.05 - $3.15			$2.95 - $3.05
Current Market (a)	$3.25 - $3.35			$3.00 - $3.10
$110	$3.45 - $3.55			$3.35 - $3.45
$120	$3.70 - $3.80			$3.60 - $3.70
$130	$4.00 - $4.10			$3.85 - $3.95
Fair market value	$235 million			$195 million
Estimated premium costs	$13 million			$13 million

 

(a) Brent crude oil average market prices as of July 21, 2022, were $100 and $94 per barrel for third quarter 2022 and fourth quarter 2022, respectively.

In addition, the Company is providing its maximum percentage of estimated fuel consumption10 covered by fuel derivative contracts in the following table: 

Period			Maximum fuel hedged percentage
2022			63% (a)
2023			39% (b)
2024			17% (b)

 

(a) Based on the Company's available seat mile plans for full year 2022. The Company is currently 59 percent hedged for third quarter 2022 and 62 percent hedged for fourth quarter 2022.

(b) Due to uncertainty regarding available seat mile plans in future years, the Company believes that providing the maximum percentage of fuel consumption covered by derivative contracts in 2023 and 2024 relative to 2019 fuel gallons consumed is a more relevant measure for future coverage.

Non-Fuel Costs and Outlook:

• Second quarter 2022 operating expenses of $5.6 billion increased 12.7 percent compared with second quarter 2019
• Second quarter 2022 operating expenses, excluding fuel and oil expense, special items, and profitsharing, increased 5.6 percent compared with second quarter 2019
• Second quarter 2022 operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing (CASM-X), increased 13.1 percent compared with second quarter 2019—favorable to the Company's previous guidance
• The Company accrued $81 million of profitsharing expense in second quarter 2022 bringing first half 2022 profitsharing expense to $118 million

The Company's second quarter 2022 CASM-X increase was primarily due to continued unit cost headwinds from operating at suboptimal productivity levels, inflation in labor rates and airport costs, and accruals for expected future contractual wage rate increases. However, the Company's second quarter 2022 CASM-X increase was lower than its previous guidance range primarily due to lower benefits costs, as well as the shifting of certain maintenance costs from second quarter to second half 2022.

The Company continues to experience cost inflation in third quarter 2022, in particular with higher rates for labor, benefits, and airports. The Company also expects cost headwinds from operating at suboptimal productivity levels as headcount is expected to increase in third quarter 2022 while capacity levels are expected to remain relatively in line with third quarter 2019. The Company has increased short-haul trips in second half 2022 in an effort to restore its route network and support the reliability of its operational performance, which results in a decrease to average stage length, and adds further unit cost headwinds. As a result of its successful hiring efforts and much improved operational reliability, the Company plans to begin moderating hiring where opportunities exist and intensify its focus on returning to historical efficiency levels.

Fleet and Capital Spending:

For first half 2022, the Company was scheduled to receive 28 -8 aircraft, of which only 12 were received, all during second quarter 2022. The Company ended second quarter 2022 with 730 aircraft, which reflects four owned -700 retirements. In addition, the Company had four -700 aircraft in storage as of June 30, 2022, all of which were subsequently retired from the Company's fleet in July 2022. While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift into 2023 due to Boeing's supply chain challenges and the current status of the -7 certification. Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company is currently estimating it will receive a total of 66 -8 aircraft deliveries and no -7 deliveries in 2022.

Since the Company's previous disclosure on April 28, 2022, the Company exercised seven -8 options for delivery in 2022; exercised two -7 options for delivery in 2023; accelerated and exercised seven 2023 -8 options for delivery in 2022; and shifted seven 2022 MAX firm orders into 2023, which are reflected as -7 firm orders in the Company's updated order book. Additionally in July 2022, the Company converted 48 2023 -7 firm orders to -8 firm orders in 2023.

Based on these modifications and recent discussions with Boeing, the Company is currently assuming 23 and 31 -8 aircraft deliveries in third quarter and fourth quarter 2022, respectively. The Company plans to retire 12 and 7 -700 aircraft in third quarter and fourth quarter 2022, respectively. As a result, the Company expects to end third quarter with 741 aircraft and end 2022 with 765 aircraft, compared with its previous guidance of 814 aircraft. The Company now expects to retire 29 -700 aircraft in 2022, compared with its previous guidance of 28 -700 retirements this year.

The Company's second quarter 2022 capital expenditures were $987 million driven primarily by aircraft-related capital expenditures, as well as technology, facilities, and operational investments. The Company now estimates its 2022 capital spending to be approximately $4.0 billion, which assumes the exercise of its five remaining 2022 options, and a total of 66 -8 aircraft deliveries in 2022, compared with its previous 2022 capital spending guidance of approximately $5.0 billion which assumed the delivery of 114 MAX aircraft in 2022. The Company's 2022 capital spending guidance continues to include approximately $900 million in non-aircraft capital spending.

The following tables provide further information regarding the Company's contractual order book and compare its contractual order book as of July 28, 2022, with its previous order book as of April 28, 2022. Given current supply chain and aircraft delivery delays, the Company will continue working with Boeing on its order book with focus on 2022 and 2023.

New 737 Contractual Order Book as of July 28, 2022:
The Boeing Company
			-7 Firm Orders		-8 Firm Orders		-7 or -8 Options		Total
2022			14		95		5		114(c)
2023			38		48		4		90
2024			30		—		56		86
2025			30		—		56		86
2026			15		15		40		70
2027			15		15		6		36
2028			15		15		—		30
2029			20		30		—		50
2030			15		45		—		60
2031			—		10		—		10
			192(a)		273(b)		167		632

(a) The delivery timing for the -7 is dependent on the FAA issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.

(b) The Company has flexibility to designate firm orders or options as -7s or -8s, upon written advance notification as stated in the contract.

(c) Includes 12 -8 deliveries received through June 30, 2022, 23 expected -8 deliveries in third quarter 2022, and 31 expected -8 deliveries in fourth quarter 2022, for a total of 66 -8 deliveries in 2022. While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift into 2023 due to Boeing's supply chain challenges and the current status of the -7 certification. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and has the ability to convert -7s to -8s as noted in footnote (b).

Previous 737 Contractual Order Book as of April 28, 2022 (a):
The Boeing Company
			-7 Firm Orders	-8 Firm Orders	-7 or -8 Options	Total
2022			21	81	12	114
2023			77	—	13	90
2024			30	—	56	86
2025			30	—	56	86
2026			15	15	40	70
2027			15	15	6	36
2028			15	15	—	30
2029			20	30	—	50
2030			15	45	—	60
2031			—	10	—	10
			238	211	183	632

(a) The 'Previous 737 Contractual Order Book' is for reference and comparative purposes only. It should no longer be relied upon. See 'New 737 Contractual Order Book' for the Company's current aircraft order book.

Liquidity and Capital Deployment:

• The Company ended second quarter 2022 with $16.4 billion in cash and short-term investments and a fully available revolving credit line of $1.0 billion
• The Company had a net cash position11 of $5.9 billion, and adjusted debt12 to invested capital (leverage) of 53 percent as of June 30, 2022
• The Company paid $231 million during second quarter 2022 to retire debt and finance lease obligations, including the extinguishment of $138 million in principal of the Company's convertible notes for a cash payment of $178 million, the extinguishment of $30 million in principal of various unsecured notes for a cash payment of $31 million, as well as $22 million in scheduled debt payments
• The Company's 2022 total debt repayments is expected to be $820 million, compared with its previous guidance of $650 million, due to the unscheduled extinguishments noted above
• The Company recently extended the maturity of its revolving credit facility agreement two years to August 3, 2025

Awards and Recognitions:

• #1 Marketing Carrier in Customer Satisfaction per the U.S. Department of Transportation13
• Named Loyalty Program of the Year for Rapid Rewards Program and recognized for providing the Best Loyalty Credit Card by the 2022 Freddie Awards; Received the 2022 Freddie Awards title of Best Customer Service
• Named a Top 100 Company by BetterInvesting Magazine
• Awarded by Port of Seattle the "2022 Port of Seattle Sustainable Century Aviation Award" for the greatest airline use of ground power systems to reduce emissions, while docked at Seattle airport gates

Environmental, Social, and Governance (ESG):

• Published the Company's annual corporate social responsibility and environmental sustainability report—the Southwest Airlines One Report—a comprehensive, integrated report that includes information on the Company's Citizenship efforts and key topics including People, Performance, and Planet, along with reporting guided by the Global Reporting Initiatives (GRI) Standards, Sustainability Accounting Standards Board (SASB), and United Nations Sustainable Development Goals (UNSDG) frameworks.
• Published the Southwest Airlines Diversity, Equity, & Inclusion Report (DEI), a companion piece to the One Report. This comprehensive report is focused on the Company's current DEI priorities and path forward.
• Announced an investment into SAFFiRE Renewables, LLC (SAFFiRE), a company formed by D3MAX, LLC, as part of a Department of Energy (DOE) backed project to develop and produce scalable sustainable aviation fuel (SAF). Funded with a DOE grant matched by the Company's investment, SAFFiRE is expected to utilize technology developed by the DOE's National Renewable Energy Laboratory to convert corn stover, a widely available waste feedstock in the U.S., into renewable ethanol that then would be upgraded into SAF.
• Launched updated southwest.com/citizenship website pages that celebrate the Company's citizenship story and share details about its ongoing ESG efforts.
• In honor of Global Volunteer and Earth Month, Southwest Employees served over 7,100 volunteer hours during April 2022, sharing their love for the environment and their communities.
• Expanded the Company's Repurpose with Purpose program to include a new partner—the Tropical Agricultural and Higher Education Center (CATIE). CATIE aims to promote a route to achieve Inclusive Green Development, through the construction of human capital, and institutional strengthening for research, development, and external projection.
• Launched a one-of-a-kind Leadership book, "Leading with Heart: Living & Working the Southwest Way" to celebrate more than 50 years of putting People first.

Second Quarter 2022 Supplemental Financial Results

(unaudited)

The Company believes certain 2022 measures compared with 2019 are also relevant due to the significant impacts in 2020 and 2021 from the pandemic. Therefore, the below supplemental information is provided for reference.

 

As reported
	Three months ended June 30,					Six months ended June 30,
(in millions, except per share and unit costs)	2022	2019	Percent Change			2022	2019	Percent Change
Net income	$760	$741	2.6			$482	$1,128	(57.3)
Net income per share, diluted	$1.20	$1.37	(12.4)			$0.77	$2.06	(62.6)
Operating revenues	$6,728	$5,909	13.9			$11,422	$11,059	3.3
Operating expenses	$5,570	$4,941	12.7			$10,415	$9,586	8.6
Operating expenses, excluding Fuel and oil expense	$3,934	$3,805	3.4			$7,775	$7,434	4.6
Operating expenses, excluding Fuel and oil expense and profitsharing	$3,853	$3,635	6.0			$7,657	$7,175	6.7
RASM (cents)	18.03	14.78	22.0			15.93	14.20	12.2
Passenger revenue yield per RPM (cents)	18.81	15.89	18.4			17.38	15.68	10.8
CASM (cents)	14.92	12.36	20.7			14.52	12.31	18.0
CASM, excluding Fuel and oil expense and profitsharing (cents)	10.32	9.09	13.5			10.68	9.21	16.0
Fuel costs per gallon, including fuel tax	$3.36	$2.13	57.7			$2.86	$2.09	36.8
Revenue passengers carried (000s)	33,224	34,924	(4.9)			59,253	66,220	(10.5)
Available seat miles (ASMs)	37,322	39,985	(6.7)			71,706	77,871	(7.9)
Load factor	87.1%	86.4%	0.7 pts.			82.3%	83.8%	(1.5) pts.
Active fulltime equivalent Employees	62,333	59,793	4.2			62,333	59,793	4.2
Adjusted for special items
	Three months ended June 30,					Six months ended June 30,
(in millions, except per share and unit costs)	2022	2019	Percent Change			2022	2019	Percent Change
Net income	$825	$741	11.3			$633	$1,128	(43.9)
Net income per share, diluted	$1.30	$1.37	(5.1)			$1.00	$2.06	(51.5)
Operating revenues	$6,728	$5,909	13.9			$11,422	$11,059	3.3
Operating expenses	$5,555	$4,941	12.4			$10,384	$9,586	8.3
Operating expenses, excluding Fuel and oil expense	$3,919	$3,805	3.0			$7,744	$7,434	4.2
Operating expenses, excluding Fuel and oil expense and profitsharing	$3,838	$3,635	5.6			$7,626	$7,175	6.3
RASM (cents)	18.03	14.78	22.0			15.93	14.20	12.2
Passenger revenue yield per RPM (cents)	18.81	15.89	18.4			17.38	15.68	10.8
CASM (cents)	14.88	12.36	20.4			14.48	12.31	17.6
CASM, excluding Fuel and oil expense and profitsharing (cents)	10.28	9.09	13.1			10.63	9.21	15.4
Fuel costs per gallon, including fuel tax (economic)	$3.36	$2.13	57.7			$2.86	$2.09	36.8
Revenue passengers carried (000s)	33,224	34,924	(4.9)			59,253	66,220	(10.5)
Available seat miles (ASMs)	37,322	39,985	(6.7)			71,706	77,871	(7.9)
Load factor	87.1	86.4	0.7 pts.			82.3	83.8	(1.5) pts.
Active fulltime equivalent Employees	62,333	59,793	4.2			62,333	59,793	4.2