Southwest Airlines Co. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 6, 2024. This is an annual filing, not a standalone fourth-quarter report. Southwest operates scheduled passenger air service in the U.S. and near-international markets; it had 817 Boeing 737 aircraft and served 121 destinations at year-end.
Financial and operating performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Operating revenue | $26.091 billion | $23.814 billion | +9.6% |
| Operating income (GAAP) | $224 million | $1.017 billion | -78.0% |
| Operating margin (calculated) | 0.9% | 4.3% | Down 3.4 points |
| Net income (GAAP) | $465 million | $539 million | -13.7% |
| Diluted EPS (GAAP) | $0.76 | $0.87 | -12.6% |
| Operating cash flow | $3.164 billion | $3.790 billion | Down $626 million |
| Capital expenditures | $3.520 billion | $3.924 billion | Down $404 million |
- Revenue and demand: Passenger revenue rose 10.4% to $23.637 billion. Capacity (ASMs) increased 14.7%, passengers carried rose 8.4%, and passenger revenue yield per ASM declined 3.7%; load factor fell 3.4 points to 80.0%. Management cited healthy leisure demand, yield strength, and record ancillary and loyalty revenue.
- Costs and margins: Operating expenses increased 13.5% to $25.867 billion. Salaries, wages, and benefits rose 18.9% to $11.152 billion and represented about 43% of operating expenses; maintenance expense rose 39.4% to $1.188 billion. Fuel expense increased 4.1% to $6.217 billion despite lower average fuel cost per gallon, as consumption rose. Operating expense per ASM declined 1.1%; excluding fuel, profitsharing, and special items, it declined 1.2%.
- Adjusted results: Excluding special items, operating income was $893 million versus $1.120 billion in 2022; net income was $980 million versus $723 million, and diluted EPS was $1.56 versus $1.16. These are company-defined non-GAAP measures and are not substitutes for GAAP results.
- Debt and liquidity: Gross debt and finance leases totaled approximately $8.023 billion at year-end; debt to total assets was 21.9%. Cash and cash equivalents were $9.288 billion and short-term investments $2.186 billion, or $11.5 billion combined. The $1.0 billion revolving credit facility was undrawn, and the company reported compliance with its covenants. Credit ratings remained investment grade at all three major agencies.
- Shareholder returns: Southwest paid $429 million in dividends in 2023, at $0.18 per share quarterly, and suspended share repurchases. The board may change dividends based on relevant factors.
Material changes and unusual items
- The December 2022 Winter Storm Elliott disruption caused more than 16,700 cancellations. The company estimated a pre-tax impact of about $800 million in fourth-quarter 2022 and $380 million in first-quarter 2023. It accrued a $107 million expense in fourth-quarter 2023 for a DOT settlement; a further $33 million penalty was offset by customer compensation already provided.
- FY2023 GAAP results included $180 million of incremental Flight Attendant contract-related expense and $354 million of Pilot contract-related expense. Together with the DOT settlement charge, these items contributed to a $252 million GAAP net loss in fourth-quarter 2023.
- Operating cash flow declined from 2022, while cash and short-term investments remained substantial. Cash dividends resumed after pandemic-era restrictions; the company returned $429 million to shareholders during 2023.
- Southwest added 86 737-8 aircraft and retired 39 737-700 aircraft in 2023. Its Boeing order book was extended through 2031, with 495 firm MAX orders and 199 options; delivery timing and the 737-7 certification remain uncertain.
Outlook, management commentary, and risks
- 2024 outlook: Management expects ASMs to grow about 6% year over year, CASM-X to increase 5.5%–7%, economic fuel cost of $2.55–$2.65 per gallon, capital spending of $3.5–$4.0 billion, and year-end fleet size of approximately 847 aircraft. It expects double-digit operating revenue growth and operating margin expansion, and estimates that initiatives could contribute about $1.5 billion in incremental year-over-year pre-tax profits. These are forward-looking estimates, not guarantees.
- For first-quarter 2024, management forecast RASM growth of 2.5%–4.5% and CASM-X growth of 5%–6%. It expected network optimization to be materially complete with the March schedule and said it expected a return to profitability then. Management attributed much of the projected cost pressure to labor and maintenance.
- Southwest expects to pay approximately $1.35 billion in Pilot contract ratification bonuses in first-quarter 2024. It plans to end 2024 with headcount flat to down year over year, while continuing network adjustments to better match demand.
- Principal risks: Boeing delivery and certification delays and dependence on a single aircraft manufacturer; fuel-price volatility and fuel supply constraints; labor costs and unresolved Flight Attendant and Ramp Agent negotiations; maintenance inflation; severe weather and operational recovery risk; intense competition and lagging business-travel demand; and technology, cybersecurity, regulatory, climate, and airport-capacity risks.
- Contingencies: Securities and shareholder derivative litigation related to the 2022 disruption, a customer contract class action, and a USERRA military-leave class action remained pending. Management did not expect current proceedings, individually or collectively, to materially adversely affect financial condition, results, or cash flow, but noted adverse outcomes could be material. The 2020 securities suit was dismissed with prejudice in 2023.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The auditor identified valuation of fuel derivatives as a critical audit matter because the valuation uses significant unobservable inputs.
Most important facts for investors to verify
- Whether planned 2024 revenue growth, network optimization, and projected $1.5 billion incremental pre-tax contribution translate into sustained margin recovery.
- Actual Boeing deliveries, the timing of 737-7 certification, and the effect of any delivery shortfall on capacity and fleet plans.
- Final labor agreements, the timing and cash impact of the Pilot bonus, and continued labor and maintenance cost trends.
- Whether operational reliability improvements prevent a recurrence of major disruption and whether related DOT settlement commitments create additional costs.
- Fuel prices, hedge coverage and settlement outcomes, and the sensitivity of earnings and cash flows to fuel-market changes.
- Updates on pending litigation, regulatory actions, and significant capital commitments, including the planned LAX concourse project.