Southwest Airlines Co. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Comparisons are with the corresponding 2012 periods. Amounts are in millions of dollars unless stated otherwise.
Business context and results
Southwest reported stronger revenue and earnings, supported by higher passenger yields, lower fuel costs, and progress integrating AirTran. The company continued fleet modernization and network optimization. Airline results are seasonal and exposed to economic conditions, travel demand, fuel prices, and fuel-hedge accounting volatility.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $4,545 | $4,309 | $13,271 | $12,915 |
| Operating income | $390 | $51 | $893 | $532 |
| Operating margin, approximate | 8.6% | 1.2% | 6.7% | 4.1% |
| Net income | $259 | $16 | $542 | $343 |
| Diluted earnings per share | $0.37 | $0.02 | $0.75 | $0.45 |
| Operating cash flow | $428 | $464 | $2,188 | $1,833 |
Q3 revenue rose 5.5%; passenger revenue increased 6.1%, mainly on higher fares and yields, partly offset by lower load factor. Nine-month revenue rose 2.8%. Q3 operating expenses declined 2.4% despite 1.0% capacity growth; nine-month expenses were approximately flat despite 1.6% capacity growth. Fuel and oil expense fell 5.1% in Q3 and 4.7% year to date. Excluding fuel and special items, non-GAAP cost per available seat mile rose 2.6% in both comparison periods.
Q3 GAAP net income included $59 million of net other gains, principally associated with fuel derivatives, versus $10 million the prior year; acquisition and integration expense was $28 million versus $145 million. Management’s non-GAAP Q3 net income was $241 million versus $97 million, excluding specified fuel-hedge effects and acquisition/integration items. Nine-month non-GAAP net income was $569 million versus $352 million. These company-defined non-GAAP measures are supplemental and are not directly comparable across all companies.
Balance sheet, liquidity and capital allocation
- At September 30, cash and cash equivalents were $1,333 and short-term investments were $1,995, totaling $3,328; combined, these exceeded year-end 2012 levels of $2,970.
- Total debt, including current maturities, was approximately $2,875 ($259 current and $2,616 long-term), compared with $3,154 at December 31, 2012. The company had no borrowings under its $1 billion revolving credit facility and was in compliance with its covenant.
- Nine-month capital expenditures for property and equipment, net, were $995. Financing cash outflows included $267 of debt and lease repayments, $501 of share repurchases, and $71 of dividends.
- The board had authorized up to $1.5 billion of repurchases; approximately $1.1 billion had been completed since the 2011 authorization by September 30. The quarterly dividend declared was $0.04 per share.
Material changes, outlook and risks
- Passenger yield increased 6.8% in Q3; load factor declined 1.3 percentage points to 80.8%. Revenue passengers carried fell 4.6%, while available seat miles increased 1.0%.
- Management estimated AirTran integration synergies of approximately $116 million in Q3 and continued to target approximately $400 million in total annualized net pretax synergies by year-end 2013. Full integration was targeted by the end of 2014. Cumulative acquisition/integration charges were $391 million; the company expected no more than $550 million in total.
- Management expected Q4 and full-year 2013 capacity, measured by ASMs, to increase 2% year over year, primarily due to larger aircraft; 2014 capacity was planned to remain in line with 2013. Management expected Q4 unit costs excluding fuel, special items, and profitsharing to be in line with Q4 2012. No clear full-year earnings-per-share guidance is provided in the filing.
- Management estimated the federal government shutdown reduced October revenue by approximately $20 million, while holiday bookings for November and December were described as strong. Fourth-quarter Freight and Other revenues were expected to decline year over year.
- Fuel hedges covered 78% of Q3 consumption; coverage for the remainder of 2013 was up to 48%, depending on market prices. In Q3, WTI-based derivatives ceased to qualify for hedge accounting prospectively because recent WTI and jet-fuel price correlation weakened. Future fair-value changes on these contracts will flow directly through earnings, increasing volatility. Fuel prices, hedge effectiveness, and potential collateral requirements remain material risks.
- The company was transitioning its 88 AirTran Boeing 717 aircraft to Delta over approximately three years; 16 deliveries were expected by year-end 2013. Two vendor maintenance contracts had potential termination penalties totaling approximately $106 million, but no termination had occurred.
- Construction commitments included the estimated $156 million Houston Hobby international terminal project and the Love Field modernization program. The company guaranteed principal and interest on $456 million of Love Field project bonds; it expected no further bond issuance or related guarantees to be needed.
- An antitrust class-action case involving AirTran and Delta remained pending; summary judgment and class-certification motions were scheduled to be fully briefed by January 15, 2014. Management did not expect ongoing legal matters or IRS examinations to have a material adverse effect. No material changes to the risk factors in the 2012 Form 10-K were reported.
Important facts for investors to verify
- Whether AirTran integration delivers the targeted synergies and stays within the expected total cost limit.
- How WTI hedge accounting changes, fuel-price movements, and hedge settlements affect reported earnings, fuel costs, and cash collateral needs.
- Whether passenger yields, load factors, and unit revenues support the planned capacity levels, particularly after the estimated October shutdown impact.
- Actual unit-cost trends as wages, benefits, airport charges, maintenance, and fleet modernization costs evolve.
- Aircraft purchase commitments, 717 transition costs and timing, and progress and funding obligations for airport construction projects.
- Final settlement of the $150 million accelerated share repurchase and developments in the pending antitrust litigation.