Southwest Airlines Co. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Southwest operates scheduled passenger airline services in the United States and near-international markets. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $6,220 | $4,679 | $17,642 | $10,739 |
| Operating income | $395 | $733 | $1,402 | $1,526 |
| Net income | $277 | $446 | $759 | $909 |
| Diluted EPS | $0.44 | $0.73 | $1.21 | $1.49 |
| Operating cash flow | $234 | ($575) | $3,211 | $2,075 |
Q3 operating and net margins were approximately 6.4% and 4.5%, respectively. Revenue grew 32.9% year over year, while operating income fell 46.1% and net income fell 37.9%. The 2021 comparison includes substantial Payroll Support credits to expenses: $763 million in Q3 and $2.7 billion for the first nine months. Excluding special items, Southwest reported Q3 operating income of $425 million and net income of $316 million, versus a non-GAAP operating loss of $59 million and net loss of $135 million in Q3 2021. These non-GAAP figures are company-defined and are not substitutes for GAAP results.
Higher fares and demand supported revenue: Q3 passenger yield rose 23.9% year over year and load factor increased 4.7 percentage points to 85.4%. Leisure demand was strong; managed business revenue remained below 2019 levels. Fuel and oil expense increased 76.8% year over year in Q3, primarily due to higher fuel prices. Q3 economic fuel cost was $3.34 per gallon, including $0.43 per gallon of hedge settlement gains. Operating expenses per available seat mile rose 45.7%, reflecting the absence of 2021 Payroll Support, higher fuel costs, and increased labor costs.
At September 30, 2022, cash and cash equivalents were $10.443 billion and short-term investments were $3.230 billion, totaling $13.673 billion in cash and short-term investments. Total debt, including current maturities, was approximately $8.696 billion; operating lease liabilities were approximately $1.416 billion. Current assets were $16.418 billion versus current liabilities of $10.416 billion. Stockholders’ equity was $10.924 billion. Nine-month capital expenditures were $2.568 billion; debt and finance lease repayments were $1.825 billion in the cash flow statement. The company separately reported $2.5 billion of debt and finance lease payments in its liquidity discussion, including scheduled and early repayments.
Cash and cash equivalents declined from $12.480 billion at year-end 2021 to $10.443 billion. Nine-month operating cash flow benefited from a $700 million increase in air traffic liability, a $472 million tax refund, and earnings adjusted for noncash items. Investing cash use was $2.813 billion and financing cash use was $2.435 billion for the nine months.
Material changes and notable items
- Strong travel demand continued through Q3; operating revenue reached a company record of $6.2 billion. Revenue exceeded Q3 2019 by 10.6%, while operating income and net income were below 2019 levels.
- The July 2022 policy change made qualifying existing and future flight credits non-expiring. Southwest estimated a $250–$300 million negative Q3 breakage-revenue impact versus the prior quarter; it expected the impact beyond Q3 to be immaterial. Customer flight credits were approximately $1.9 billion at the change date.
- Southwest repaid debt, including prepaying all $1.3 billion of its 4.75% notes due 2023 and repurchasing convertible notes. It recorded $76 million of debt-extinguishment losses in Q3 and $192 million for the first nine months.
- Adoption of convertible-debt accounting guidance changed diluted EPS methodology and debt presentation. The company reported that adoption reduced net income by $36 million in Q3 and $94 million for the first nine months, mainly from higher extinguishment losses, partly offset by lower noncash interest expense.
- The company’s $1.0 billion revolving credit facility was extended to August 2025 and converted from LIBOR to SOFR; no amount was drawn at quarter-end. Southwest reported compliance with its $1.5 billion minimum-liquidity covenant.
Outlook, risks, and contingencies
For Q4 2022, management estimated operating revenue 13%–17% above Q4 2019, capacity approximately 2% below Q4 2019, economic fuel cost of $3.15–$3.25 per gallon, and CASM-X 14%–18% above Q4 2019. For full-year 2022, it estimated capacity approximately 4.5% below 2019, economic fuel cost of $3.05–$3.15 per gallon, CASM-X 14%–15% above 2019, capital spending of approximately $4.0 billion, and scheduled debt repayments of approximately $2.6 billion. These are estimates, not guarantees; fuel guidance was based on market prices and hedge positions as of October 19, 2022.
Management expected first-half 2023 CASM-X to be flat to up 2% year over year and second-half CASM-X to decline by a low-to-mid-single-digit percentage. Pilot staffing constraints were expected to limit utilization for much of 2023, while labor, benefits, airport, and productivity costs remained pressures. Management also estimated managed business revenue would be 20%–25% below Q4 2019.
Aircraft delivery timing is uncertain because of Boeing supply-chain challenges and pending FAA certification of the 737 MAX 7. Southwest expected 66 MAX 8 deliveries and no MAX 7 deliveries in 2022; delivery delays could extend into 2024. Hurricane Ian reduced Q3 revenue by an estimated $18 million. Other risks include fuel-price volatility and hedge effectiveness, changing travel demand and economic conditions, COVID-19 developments, operational and staffing constraints, regulatory changes, and dependence on Boeing and other third parties.
The filing describes California wage-and-hour proceedings that may be affected by a Supreme Court decision on state meal-and-rest-break rules; the company said it could not estimate a possible loss range. Other disclosed litigation includes claims related to the 737 MAX, securities allegations, and an antitrust matter; management did not expect ongoing proceedings or proposed IRS adjustments to materially affect financial condition, results, or cash flow. Share repurchases and dividends had been restricted through September 30, 2022 under Payroll Support terms; the company stated share repurchases remained suspended until further notice.
Key facts for investors to verify
- Whether demand, fare yield, and business-travel recovery sustain revenue after the strong Q3, and how revenue compares with pre-pandemic levels.
- Actual Q4 and 2023 fuel expense, hedge settlements, and hedge-accounting effects versus management estimates.
- Whether labor costs, staffing constraints, and operational productivity improve enough to deliver projected CASM-X trends.
- Actual Boeing delivery and FAA certification timing, and the resulting effects on capacity, fleet plans, and capital spending.
- Redemption patterns and future breakage estimates following the non-expiring flight-credit policy, including the $8.425 billion air traffic liability balance at quarter-end.
- Debt repayment pace, available liquidity, and any material developments in California employment claims or other litigation.