Southwest Airlines Co. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Southwest operates scheduled passenger air service in the United States and near-international markets. The filing was signed April 26, 2024.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $6.329 billion | $5.706 billion | Up 10.9% |
| Operating loss | $393 million | $284 million | Loss increased |
| Net loss | $231 million | $159 million | Loss increased |
| Diluted loss per share | $0.39 | $0.27 | Loss per share increased |
| Operating cash flow | $(104) million | $706 million | Declined $810 million |
| Capital expenditures | $583 million | $1.046 billion | Down |
Passenger revenue was $5.712 billion, freight revenue $42 million, and other revenue $575 million. Operating margin was approximately negative 6.2%, versus negative 5.0% a year earlier. Total operating expenses rose 12.2% to $6.722 billion, faster than revenue growth. Salaries, wages, and benefits increased 18.6% to $2.940 billion; maintenance materials and repairs increased 50.4% to $361 million. Fuel expense declined 1.0% to $1.531 billion; economic fuel cost was $2.92 per gallon versus $3.19.
At March 31, cash and cash equivalents were $8.367 billion and short-term investments were $2.145 billion, totaling $10.512 billion. Long-term debt, including current maturities, was approximately $8.002 billion; stockholders’ equity was $10.196 billion. The company had $1.0 billion available on its revolving credit facility, with no amount drawn. Current assets were $13.281 billion and current liabilities $12.225 billion. Air traffic liability was $9.394 billion, including advance ticket sales, flight credits, and loyalty obligations.
Operating cash flow included a $1.35 billion payment of pilot contract ratification bonuses and a $105 million profit-sharing payment, partly offset by a $1.115 billion increase in air traffic liability. The company paid $215 million in cash dividends. It reported $10.5 billion of unrestricted cash and short-term investments and approximately $17.2 billion of unencumbered assets.
Changes versus the prior comparable period
- Revenue reached a first-quarter record, supported by an 11.0% increase in capacity, 8.7% more revenue passengers, a 2.9% increase in average fare, and record first-quarter ancillary revenue. Load factor rose 0.7 percentage points to 78.3%.
- Operating expenses grew faster than revenue. Higher labor costs and maintenance were the main pressures; lower fuel prices partly offset them. Operating expenses per available seat mile rose 1.1%, while the company’s non-GAAP CASM-X measure increased 5.0%.
- Q1 2023 comparisons were affected by the December 2022 operational disruption, including a reported approximately $380 million pre-tax impact in Q1 2023. The filing says the disruption also added approximately $55 million of Q1 2023 expenses. It separately identifies a $107 million Department of Transportation settlement charge in Q4 2023.
- Capital expenditures and investing cash outflows were lower year over year, largely due to fewer aircraft deliveries. Cash and cash equivalents declined from $9.288 billion at year-end 2023 to $8.367 billion.
Outlook, commentary, and key risks
- Q2 2024: Management forecasts RASM down 1.5%–3.5% year over year on capacity growth of 8%–9%; it nevertheless expects an all-time quarterly revenue record. Economic fuel cost is estimated at $2.70–$2.80 per gallon. CASM-X is expected to rise 6.5%–7.5%.
- Full-year 2024: Capacity is expected to grow approximately 4%; operating revenue growth is now expected to approach the high single digits, rather than the previously expected double-digit growth. CASM-X is forecast to rise 7%–8%. Capital spending is estimated at approximately $2.5 billion, and the effective tax rate at 24%–25%.
- Boeing delivery delays and the pending FAA certification of the 737-7 led Southwest to re-plan schedules and capacity. The company expects approximately 20 737-8 deliveries and 35 aircraft retirements in 2024, ending the year with about 802 aircraft. It cited Boeing production and certification uncertainty as risks to fleet, capacity, and financial plans.
- Management expects its revenue initiatives, including network changes, to contribute $1.0–$1.5 billion in 2024 year-over-year pre-tax profit, below its initial plan of roughly $1.5 billion. Planned actions include exiting four airports in August, reducing capacity in Atlanta and Chicago, limiting hiring, and offering voluntary time off; Southwest expects approximately 2,000 fewer employees at year-end than at year-end 2023.
- Fuel hedges covered a maximum estimated 58% of 2024 consumption, 47% in 2025, and 26% in 2026. Hedge results depend on fuel markets and contract terms; the filing says approximately $34 million of net unrealized hedge losses were expected to be reclassified into earnings over the following 12 months.
- Legal matters include a USERRA military-leave class action set for trial July 21, 2025, securities and shareholder derivative litigation, and government inquiries related to the 2022 disruption. Southwest says it cannot estimate a possible loss range for the USERRA case; management does not expect current proceedings to have a material adverse effect, but says an adverse outcome could be material.
- Other notable items: pilot, ramp-agent, and flight-attendant labor agreements were ratified; the pilot ratification bonus contributed to the cash outflow. The company announced sustainable aviation fuel investments and customer-experience enhancements. Share repurchases remain suspended.
Important facts for investors to verify
- Whether Boeing delivery schedules and FAA certification allow Southwest to meet revised fleet and capacity plans.
- Whether revenue initiatives and network changes deliver the projected profit contribution amid expected cost inflation and CASM-X increases.
- How operating cash flow and liquidity develop after the pilot bonus payment, and how advance ticket sales and air traffic liability evolve.
- Fuel prices, hedge settlements, and the timing and earnings effects of deferred hedge losses.
- Developments in labor costs, maintenance spending, and the disclosed legal and regulatory matters, including any changes to potential exposure.