SOUTHWEST AIRLINES CO annual report, FY2021

Southwest Airlines Co. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This annual filing includes full-year results; it does not provide a clear standalone fourth-quarter income statement or earnings-per-share figure in the supplied text. Amounts are U.S. dollars.

Business context and performance

Southwest operates a predominantly domestic, all-Boeing 737 airline. At year-end it served 121 destinations and had 728 aircraft. Passenger demand recovered substantially from the pandemic-depressed 2020 period, particularly for leisure travel, but revenue and capacity remained below 2019 levels. Business travel remained materially weaker, and Delta and Omicron surges contributed to booking softness and operational disruption.

Key financial metrics

Metric	FY2021	FY2020	FY2019
Operating revenue	$15.790 billion	$9.048 billion	$22.428 billion
Operating income (loss), GAAP	$1.721 billion	$(3.816) billion	$2.957 billion
Net income (loss), GAAP	$977 million	$(3.074) billion	$2.300 billion
Diluted EPS, GAAP	$1.61	$(5.44)	$4.27
Operating cash flow	$2.322 billion	$(1.127) billion	$3.987 billion
Capital expenditures	$505 million	$515 million	$1.027 billion

FY2021 operating margin was approximately 10.9% and net margin approximately 6.2%, based on GAAP results. Results included $2.7 billion of Treasury payroll-support grants recorded as a reduction to operating expenses. Excluding special items, Southwest reported an operating loss of $1.281 billion and a net loss of $1.271 billion, or $2.15 per diluted share.
Revenue rose 74.5% from 2020, but remained about 29.6% below 2019. Passenger revenue increased 83.5% year over year. Load factor recovered to 78.5% from 52.4%, versus 83.5% in 2019; available seat miles rose 27.6% from 2020 but were 16.1% below 2019.
Operating expenses were $14.069 billion, down from $19.471 billion in 2019, but the comparison reflects payroll support and other unusual items. Fuel and oil expense was $3.310 billion, or 23.5% of operating expenses; average fuel cost was $1.98 per gallon versus $1.45 in 2020.
Cash and cash equivalents were $12.480 billion and short-term investments $3.024 billion at year-end, totaling $15.5 billion in unrestricted cash and short-term investments. Current assets were $18.036 billion and current liabilities $9.164 billion.
Debt and finance lease obligations totaled $10.756 billion in the debt note, including $2.068 billion of Payroll Support program loans. Debt-to-assets was 29.5%. The $1.0 billion revolving credit facility was undrawn; the company reported compliance with its $1.5 billion minimum-liquidity covenant. Net cash from financing activities was $359 million.

Changes versus comparable periods

Compared with 2020, the return of leisure demand drove higher revenue and a return to GAAP profitability. The company generated $2.322 billion of operating cash flow, including payroll-support grant proceeds and a $591 million increase in air traffic liability.
Compared with 2019, revenue, capacity, passenger traffic, and load factor remained lower. Average passenger fare was $141.92, 8.4% below 2019; passenger revenue yield per RPM was 14.2% below 2019.
GAAP profitability differs materially from the company’s non-GAAP result: the $2.960 billion net benefit from payroll support and voluntary employee programs was a major factor in reported operating income. Payroll support grants ended in the third quarter of 2021; fourth-quarter results included no further grant benefit, and management said the company was profitable in that quarter.
Year-end cash and short-term investments increased to $15.5 billion from $13.3 billion in 2020. Debt and finance lease obligations increased to $10.756 billion from $10.381 billion.

Outlook, management commentary, and risks

2022 outlook, as of the filing: Management expected full-year operating revenue and ASMs to remain below 2019 levels by approximately 4%; CASM-X was projected 12%–16% above 2019. Estimated economic fuel cost was $2.25–$2.35 per gallon. Capital spending was estimated at approximately $5.0 billion, including assumed exercise of all remaining 2022 aircraft options; without further option exercises, the estimate was approximately $3.4 billion.
Management withdrew its expectation of first-quarter 2022 profitability after Omicron-related booking softness, cancellations, weather and staffing constraints. It expected losses in January and February, a return to profitability in March, and profitability in each remaining quarter and for full-year 2022. It estimated January–February revenue was reduced by $330 million and January cancellations had a negative revenue impact of about $50 million.
Staffing remained a significant operating constraint. Southwest planned to hire at least 8,000 employees in 2022, had extended incentive pay for operations employees, and cited elevated labor and airport costs. Approximately 82% of employees were union-represented; many workgroups were in contract negotiations.
Payroll-support terms prohibit share repurchases and common dividends through September 30, 2022, and impose executive compensation restrictions through April 1, 2023. The company had suspended repurchases and dividends; the Board retains discretion over dividends after restrictions expire.
Key risks include renewed pandemic effects and weaker business travel; fuel-price volatility and limits or accounting volatility in hedging; labor availability, labor negotiations and operational reliability; Boeing 737 MAX 7 certification and delivery timing; reliance on Boeing and certain limited suppliers; inflation, airport and regulatory costs; technology and cybersecurity disruption; and climate-related regulation and costs.
Legal matters include passenger class actions concerning the 737 MAX, securities litigation and a derivative action. Management did not expect the outcomes of ongoing proceedings or IRS matters to have a material adverse effect, but some litigation remains pending and outcomes are uncertain.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified critical audit matters involving fuel-derivative valuation and air-traffic-liability breakage estimates, including $1.3 billion of extended customer travel funds with a September 2022 expiration date.

Important facts for investors to verify

Quarterly revenue, net income, cash flow and operating-margin detail—particularly standalone fourth-quarter results—and the reconciliation between GAAP profit and non-GAAP losses.
How much earnings and operating cash flow depended on payroll-support grants, and the repayment schedule and terms for the $2.068 billion of Payroll Support loans.
Whether demand, fares, load factor and business travel recover as assumed, and whether staffing levels resolve schedule disruptions and cancellations.
Fuel-hedge volumes, settlement assumptions, counterparty exposure and Level 3 valuation sensitivity; the filing estimates a $185 million fair-value change for a 10% move in underlying fuel-related commodity prices.
Aircraft delivery and certification timing, 2022 capital-spending commitments, and the company’s capacity to meet debt maturities and other obligations while maintaining liquidity.
Progress and potential exposure in pending litigation, and the assumptions used to estimate customer-credit and loyalty-point breakage revenue.