Southwest Airlines Co. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited results. Southwest operates scheduled passenger air transportation in the United States and near-international markets. Comparisons are with Q1 2022 unless noted.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $5.706 billion | $4.694 billion |
| Operating loss | $284 million | $151 million |
| Net loss | $159 million; $0.27 per diluted share | $278 million; $0.47 per diluted share |
| Operating margin | -5.0% | -3.2% |
| Operating cash flow | $706 million | $1.071 billion |
| Capital expenditures | $1.046 billion | $510 million |
Revenue increased 21.6%, while operating expenses rose 23.6% to $5.990 billion. Passenger revenue grew 23.5% to $5.105 billion. Fuel and oil expense increased 54.1% to $1.547 billion; salaries, wages, and benefits rose 11.2% to $2.478 billion. Operating expenses per available seat mile increased 11.7%; excluding fuel, profitsharing, and special items, the measure rose 5.9%.
Net loss improved year over year, partly because Q1 2022 included a $72 million loss on debt extinguishment. On a non-GAAP basis, net loss was $163 million versus $191 million, and operating loss was $284 million versus $135 million. The filing cautions that these non-GAAP measures are supplemental and may not be comparable with similarly titled measures at other companies.
At March 31, cash and cash equivalents were $8.359 billion and short-term investments were $3.315 billion, totaling $11.674 billion in unrestricted cash and short-term investments. Current assets were $14.274 billion and current liabilities $11.329 billion. Long-term debt was $7.999 billion, plus $32 million of current maturities. Southwest had no borrowings under its $1.0 billion revolving credit facility. Stockholders’ equity was $10.302 billion.
Operating cash flow included a $947 million increase in air traffic liability, reflecting advance ticket sales, and cash outflows related to customer reimbursements and the 2022 profitsharing contribution. Cash and cash equivalents decreased $1.133 billion during the quarter, including investment purchases and capital spending. The company paid $214 million in cash dividends.
Material changes and operating context
- Revenue growth reflected stronger leisure and business travel demand: passengers carried rose 16.1%, capacity (ASMs) 10.7%, load factor 0.6 percentage points to 77.6%, and average fare 6.3% to $168.88. Yield rose 10.6%.
- Fuel cost per gallon increased 38.7% to $3.19. Southwest reported $58 million of Q1 cash hedge settlements; its economic fuel cost per gallon was $3.19, compared with $2.30 in Q1 2022.
- Southwest attributed a significant portion of its Q1 results to the December 2022 operational disruption following Winter Storm Elliott. More than 16,700 flights were canceled from December 21–31. The company estimated the disruption’s Q1 2023 impact at approximately $380 million pre-tax, including weaker bookings, primarily in January and February. Separately, it reported approximately $55 million of Q1 expenses related to the event. Management said the continuing effects significantly contributed to the quarterly net loss.
- Q1 included no profitsharing expense, which the company said was eliminated as a financial impact of the disruption. The filing also notes the $127 million cash outflow for funding the 2022 profitsharing contribution.
Outlook, risks, and contingencies
For Q2 2023, Southwest guided to RASM down 8%–11% year over year, ASMs up approximately 14%, economic fuel cost of $2.45–$2.55 per gallon, and CASM-X up 5%–8%. Management cited a comparison against unusually high Q2 2022 breakage revenue, inflation, higher labor costs, and planned maintenance as relevant factors. It said leisure demand and yields remained strong heading into summer; corporate revenue trends were expected to remain uneven, with sequential improvement anticipated.
For full-year 2023, guidance included ASMs up 14%–15%, economic fuel cost of $2.60–$2.70 per gallon, CASM-X down 2%–4%, scheduled debt repayments of approximately $85 million, interest expense of approximately $250 million, an effective tax rate of 23%–24%, and capital spending of approximately $3.5 billion. The company expected to end the year with 814 aircraft. These are management estimates, not guarantees.
- Boeing delivery delays and pending FAA certification of the 737 MAX 7 create fleet, capacity, and spending uncertainty. Southwest reduced its expected 2023 MAX 8 deliveries from approximately 90 to 70 and its capital-spending estimate from approximately $4.0 billion to $3.5 billion. It said delays may extend into 2024.
- Southwest described operational-resilience actions, including added monitoring and staffing, software upgrades, winter-readiness investments, and stronger coordination across operating teams. It budgeted more than $1.3 billion for IT investments, upgrades, and maintenance in 2023, but gave no assurance the actions will prevent recurrence.
- Fuel prices, hedge effectiveness, weather, demand, labor matters, technology execution, and third-party performance remain risks. Fuel hedges covered a maximum estimated 50% of 2023 consumption, 51% in 2024, and 10% in 2025; actual coverage and benefits may vary with market prices and fuel use.
- Potential government fines or penalties and customer or shareholder litigation arising from the December disruption could not be estimated. The filing also describes other ongoing legal matters; management did not expect the currently ongoing proceedings, individually or collectively, to materially adversely affect financial condition, results, or cash flow.
- Southwest estimated at least $250 million for seven new Hobby Airport gates, with expected City reimbursements. It had $1.6 billion of Boeing capital commitments for 2023 and substantial future aircraft commitments.
Most important facts for investors to verify
- Whether demand and bookings continue recovering after the disruption-related weakness early in Q1, and whether Q2 RASM meets guidance.
- Progress on operational-resilience measures and any additional costs, regulatory action, or litigation tied to the December cancellations.
- Boeing delivery timing, FAA certification of the MAX 7, and resulting fleet, capacity, and capital-spending changes.
- Fuel-price movements, realized hedge settlements, and whether operating-cost trends align with CASM-X guidance.
- Liquidity and cash generation after elevated capital expenditures, dividends, and customer-related payments.