Southwest Airlines Co. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 8, 2021. This annual report covers the full year, with fourth-quarter results also provided. Southwest operates a predominantly U.S. passenger airline and ended the year with 718 Boeing 737 aircraft serving 107 destinations.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Operating revenue | $9.048 billion | $22.428 billion |
| Operating income (loss) | $(3.816) billion | $2.957 billion |
| Net income (loss) | $(3.074) billion | $2.300 billion |
| Diluted EPS | $(5.44) | $4.27 |
| Cash from (used in) operating activities | $(1.127) billion | $3.987 billion |
| Cash and short-term investments at year-end | $13.334 billion | $4.072 billion |
| Total debt, including current maturities | $10.331 billion | $2.665 billion |
Revenue fell 59.7% year over year, while operating expenses declined 33.9%; the cost reductions did not offset the revenue collapse. GAAP operating expenses per available seat mile rose 0.4% to 12.43 cents, while non-GAAP expenses per available seat mile excluding fuel, profitsharing and special items rose 28.1%. The company reported its first annual net loss in 48 years.
Passenger revenue declined 63.1%. Capacity (available seat miles) fell 34.2%, and load factor dropped to 52.4% from 83.5%; passenger yield declined to 14.14 cents per revenue passenger mile from 15.82 cents. Fuel expense decreased 57.5% to $1.849 billion, reflecting fewer gallons consumed and lower fuel prices. Salaries, wages and benefits remained the largest cost category, at 52.9% of operating expenses before considering the separately presented net payroll-support and employee-program line.
Fourth-quarter 2020 revenue was $2.013 billion, operating loss was $1.169 billion, and net loss was $908 million. Average daily core cash burn was approximately $12 million for the quarter; an alternative measure including working-capital changes was approximately $15 million per day.
Year-end current assets were $15.173 billion and current liabilities $7.506 billion. Cash and short-term investments totaled $13.334 billion. Air traffic liability was $7.133 billion, including $2.1 billion of customer travel funds extended to September 2022. The company reported $10.111 billion of long-term debt excluding current maturities, and total debt equal to 29.9% of total assets.
Material changes and unusual items
- COVID-19 sharply reduced travel demand, bookings, capacity and cash generation; Southwest operated about half its pre-pandemic daily departures at year-end.
- The company raised $18.9 billion of capital during 2020, net of transaction fees, through debt, equity and other financing. It issued approximately $2.3 billion of common stock and undertook substantial debt financing. Financing cash flow was $9.658 billion.
- CARES Act payroll support totaled approximately $3.4 billion, including a $2.4 billion grant component; $2.3 billion was recorded as a reduction of expenses and $976 million as a Treasury note, with warrants also issued. A further approximately $1.7 billion of payroll support was agreed in January 2021, including about $1.2 billion in grants.
- Voluntary separation and extended time-off programs generated a $1.4 billion 2020 charge. A $222 million aircraft sale-leaseback gain, a $32 million impairment charge on 20 retired 737-700s, fuel-hedge effects and a $53 million post-retirement curtailment charge also affected reported results.
- Shareholder returns were curtailed: dividends and repurchases are restricted under federal support terms. Southwest paid $0.18 per share in 2020, with the last dividend declared and paid in the first quarter; repurchases are suspended.
Outlook, management commentary and risks
Management said demand remained weak into early 2021 and expected first-quarter capacity to be down approximately 35% year over year. January and February revenue estimates were down roughly 65%–75% versus 2019, with load factors estimated at 50%–55%. First-quarter operating expenses excluding fuel and special items were projected to decline 15%–20% year over year. Management estimated first-quarter core cash burn at about $17 million per day, or $10 million–$15 million including specified working-capital effects. Cash-burn break-even in 2021 was an aspiration dependent on a substantial recovery; management estimated revenue would need to recover to 60%–70% of 2019 levels. These are forward-looking estimates, not assurances.
- 737 MAX: FAA clearance to return the aircraft to service was issued in November 2020; Southwest targeted March 11, 2021 for revenue service, subject to required training, modifications and checks. Delays, further regulatory action or Boeing delivery changes could constrain capacity and fleet plans.
- Liquidity and support restrictions: The company had substantial cash, but ongoing losses and cash burn remained tied to uncertain demand recovery. Treasury support imposes restrictions, including limits on dividends and repurchases through March 31, 2022, and employment and service obligations.
- Other operating and financial risks: Persistent pandemic effects, business-travel weakness, fuel-price volatility and hedge accounting, labor costs and negotiations, concentrated Boeing and supplier dependence, and fixed costs during low capacity could affect results. Credit ratings were downgraded in 2020, though still investment grade at year-end.
- Legal matters: MAX-related customer litigation, securities litigation and a derivative action remained pending. Management did not expect current proceedings, individually or collectively, to materially adversely affect financial condition, results or cash flow.
- Assurance: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included loyalty-point spoilage estimates and valuation of fuel derivatives.
Important facts for investors to verify
- Whether passenger demand, revenue, load factor and business travel recover sufficiently to reduce cash burn; compare actual results with management’s 2021 estimates.
- Cash, debt, liquidity availability and financing terms, including Treasury support obligations and restrictions.
- Customer travel-fund and loyalty liabilities, redemption patterns and related revenue-recognition estimates.
- 737 MAX return-to-service progress, aircraft deliveries, Boeing credits and the revised order book.
- Actual savings and costs from employee programs, labor negotiations, and the company’s capacity and cost-per-seat-mile trends.
- Developments in litigation, fuel hedges and other material contingencies; the filing states that Boeing settlement terms are confidential.