Southwest Airlines Co. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Southwest operates scheduled passenger air service in the U.S. and near-international markets. Results remained heavily affected by COVID-19, although leisure bookings improved during March.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Operating revenue | $2.052 billion | $4.234 billion | Down 51.5% |
| Passenger revenue | $1.712 billion | $3.845 billion | Down 55.5% |
| Operating income (loss), reported | $199 million | $(110) million | Includes substantial government payroll support |
| Net income (loss), reported | $116 million | $(94) million | Diluted EPS $0.19 vs. $(0.18) |
| Net loss, excluding special items | $(1.015) billion | $(77) million | Non-GAAP; reflects removal of payroll support and other special items |
| Operating cash flow | $645 million | $(377) million | Included $1.2 billion of payroll support grants and a $599 million increase in air traffic liability |
| Capital expenditures | $95 million | $224 million | Down year over year |
Reported operating margin was approximately 9.7%; the reported result should be read alongside the $1.2 billion payroll-support grant and other items. Operating expenses, net, were $1.853 billion, including a $1.448 billion net reduction from “Payroll support and voluntary Employee programs.” The filing’s non-GAAP reconciliation reports an operating loss of $1.269 billion excluding special items.
Demand and unit metrics: Revenue passenger miles fell 37.9%, capacity (available seat miles) fell 34.5%, and load factor declined 3.4 percentage points to 64.3%. Average fare fell 22.5% to $120.36; passenger yield fell 28.4%. Reported operating expense per available seat mile fell 34.9%, but expense per available seat mile excluding fuel, profitsharing, and special items increased 23.4%, reflecting weak capacity and fixed costs.
Liquidity, debt, and balance sheet
- At March 31, 2021, cash and cash equivalents were $11.971 billion and short-term investments were $2.377 billion, or approximately $14.3 billion combined.
- Long-term debt, including current maturities, was $10.771 billion; operating lease liabilities totaled $2.014 billion. Long-term debt increased from $10.331 billion at December 31, 2020.
- Current assets were $16.100 billion and current liabilities $8.182 billion. Air traffic liability totaled $7.732 billion, including $1.8 billion of customer travel funds with an extended expiration date of September 7, 2022.
- There were no borrowings under the $1.0 billion revolving credit facility at quarter-end; Southwest reported compliance with its $1.5 billion minimum-liquidity covenant. It repaid $67 million of debt and finance lease obligations during Q1 and expected about $153 million of such payments for the rest of 2021.
- Operating cash flow included government support and customer advance bookings. Management’s non-GAAP average daily core cash burn was $13 million for Q1, or $5 million per day adjusted for working-capital changes.
Material changes and unusual items
- Q1 2021 revenue was down sharply from Q1 2020, when pandemic effects primarily affected March; the pandemic depressed demand and bookings throughout Q1 2021.
- Southwest recognized $1.2 billion of grant support under the Payroll Support Program Extension as a reduction of eligible payroll expense. It also recorded $116 million of Employee Retention Tax Credit benefits and a net $115 million reduction in the Extended ETO liability in the relevant expense line.
- Reported results included a $141 million reversal of previously accrued Extended ETO costs, partly offset by $26 million of additional program expense. The filing also identifies nonmaterial corrections involving prior-period payroll tax credits, investment gains, and adoption accounting.
- Southwest returned the 737 MAX to service on March 11, 2021. In April, after quarter-end, it removed 32 MAX aircraft from service because of a Boeing electrical power-system production issue; it was awaiting corrective guidance and said it had covered affected flights with other aircraft.
- A March Boeing agreement added 100 firm MAX 7 orders, 155 options, converted 70 MAX 8 firm orders to MAX 7 orders, and extended deliveries through 2031. The filing estimates approximately $5.1 billion of firm-order aircraft capital commitments for 2021–2026; it estimates 2021 capital expenditures of about $500 million, primarily for technology, facilities, and operations.
Outlook, risks, and contingencies
- Management reported improving leisure demand and bookings for April and May, while business travel continued to lag. Estimated operating revenue versus 2019 was down 40%–45% for April and 35%–40% for May; estimated load factor was 75%–80% for both months.
- Q2 2021 capacity was expected to rise about 90% year over year and remain approximately 15% below Q2 2019. Management estimated Q2 core cash burn of $2 million–$4 million per day and hoped to reach core cash-flow break-even or better by June. These are forward-looking estimates, not reported results.
- Management expected Q2 operating expenses, excluding fuel, special items, and profitsharing, to increase 10%–15% year over year; estimates included $325 million in savings from voluntary separation and extended leave programs. Fuel-price volatility and recovery uncertainty make expense and cash-flow forecasts uncertain.
- Under the April 2021 PSP3 agreement, Southwest expected approximately $1.9 billion of support, including about $1.3 billion in grants. These post-quarter funds were intended to support eligible payroll costs. Program terms restrict involuntary furloughs and pay reductions and prohibit dividends and share repurchases through September 30, 2022; executive compensation limits also apply. Earlier payroll-support terms restricted buybacks and dividends through March 31, 2022.
- Key risks include the duration and effects of COVID-19, demand and customer behavior, fuel prices and hedge performance, Boeing aircraft production and delivery, and access to capital. Southwest disclosed ongoing consumer claims related to alleged capacity coordination, MAX-related litigation, securities litigation, and a derivative action; management did not expect current proceedings or IRS matters to materially adversely affect financial condition, results, or cash flow. The filing reported no material changes to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- How quickly passenger demand, fares, load factors, and business travel recover, and whether management’s Q2 and June cash-flow outlook is achieved.
- Reported profitability versus the $1.015 billion non-GAAP net loss, including the size, timing, and classification of government support and employee-program adjustments.
- Cash generation excluding grants, working-capital movements, and advance ticket sales; available liquidity and debt service needs as support programs expire.
- The return-to-service timing and operational effects of the 32 MAX aircraft removed after quarter-end, along with Boeing delivery schedules and related capital commitments.
- Customer travel-fund redemption and expiration patterns, fuel-hedge outcomes, and any material developments in disclosed litigation or regulatory matters.