Southwest Airlines Co. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Southwest operates scheduled passenger airline service in the United States and near-international markets. Unaudited interim financial statements are presented under U.S. GAAP.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $7.037B | $6.728B | $12.743B | $11.422B |
| Operating income | $795M | $1.158B | $511M | $1.007B |
| Net income | $683M | $760M | $524M | $482M |
| Diluted EPS | $1.08 | $1.20 | $0.84 | $0.77 |
| Operating cash flow | $1.416B | $1.906B | $2.123B | $2.977B |
- Q2 operating margin was approximately 11.3%, down from 17.2%; net margin was approximately 9.7%, versus 11.3%. First-half operating margin was approximately 4.0%, versus 8.8%.
- Q2 revenue rose 4.6%, but operating income fell 31.3% and net income fell 10.1%. For the first half, operating income fell 49.3%; net income rose 8.7%, supported partly by higher interest income.
- Passenger revenue was $6.409B in Q2, up 4.7%. Capacity (ASMs) grew 14.1%, while load factor fell 3.7 points to 83.4%, yield fell 4.0%, and revenue per ASM fell 8.3%.
- Q2 operating expenses increased 12.1% to $6.242B. Salaries, wages, and benefits rose 25.5% to $2.786B; fuel expense fell 14.2% to $1.403B. Cost per ASM declined 1.7%, mainly due to lower fuel prices, while cost per ASM excluding fuel, profitsharing, and special items rose 7.5%.
- At June 30, cash and cash equivalents were $9.158B and short-term investments were $3.021B, totaling $12.179B in cash and short-term investments. Current assets were $14.661B and current liabilities $11.728B. Long-term debt, including current maturities, totaled approximately $8.025B; the $1.0B revolving facility was undrawn.
- First-half capital expenditures were $1.971B. The company paid $214M in dividends and reported $253M net cash used in financing activities for the period.
Material changes and management commentary
- Q2 results were pressured by higher labor costs and comparison with Q2 2022, which included approximately $300M of additional flight-credit breakage revenue before the company eliminated expiration dates on qualifying credits.
- For the first half, operating results included an estimated $380M pre-tax impact from the December 2022 disruption, including reduced bookings and recovery-related costs. The filing says the disruption increased first-quarter expenses by approximately $55M; it reports no material Q2 impact.
- Management cited strong leisure demand and yields for July travel, record Q2 loyalty-member additions and engagement, and record co-branded card spend. The network was largely restored but not yet optimized; business revenues remained below pre-pandemic levels.
- Management estimated network optimization and development-market maturation could add roughly $500M in year-over-year pre-tax profit in 2024. This is an expectation, not a guarantee.
Guidance, risks, and contingencies
- Q3 2023: RASM expected down 3%–7% year over year; ASMs up approximately 12%; CASM-X up 3.5%–6.5%; economic fuel cost $2.55–$2.65 per gallon; interest expense approximately $63M.
- Full-year 2023: ASMs expected up 14%–15%; CASM-X down 1%–2%; economic fuel cost $2.70–$2.80 per gallon; capital spending approximately $3.5B; effective tax rate 23%–24%; scheduled debt repayments approximately $83M. The company expected about 70 737-8 deliveries, 26 737-700 retirements, and 814 aircraft at year-end.
- Boeing delivery delays, supply-chain constraints, and FAA certification timing for the 737-7 could affect fleet plans and capacity. Labor inflation and continued maintenance expense growth are cost risks. Fuel prices and fuel-hedge outcomes are volatile; hedge coverage may not provide effective protection at all price levels.
- Southwest described a three-part operational-resiliency plan covering winter operations, operational investments, and cross-team collaboration, but cautioned it cannot assure that a recurrence will be eliminated.
- The December 2022 disruption could lead to government fines or penalties and customer or shareholder litigation; the company could not estimate a possible loss range. Other disclosed matters include USERRA military-leave litigation, securities and derivative suits related to the disruption, and other legal proceedings. Management did not expect currently ongoing proceedings, individually or collectively, to materially adversely affect financial condition, results, or cash flow.
- Fuel derivatives had a reported net fair value asset of $316M; counterparty nonperformance and hedge valuation/accounting changes remain risks. The company reported $60M of cash collateral held from fuel-derivative counterparties.
- Share repurchases were suspended; approximately $899M remained under the authorization. Management reported effective disclosure controls as of June 30, 2023, and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and unit-revenue trends meet guidance as capacity expands and the prior-year breakage comparison rolls off.
- Whether labor, maintenance, and other nonfuel unit costs moderate as projected, and how fuel prices and hedge settlements affect reported and economic results.
- Whether Boeing deliveries and FAA certification support planned fleet growth, capital spending, and capacity targets.
- Actual costs, customer impacts, regulatory outcomes, and litigation exposure arising from the December 2022 disruption.
- Progress toward the projected 2024 network-optimization benefit, including recovery in business travel and execution of schedule changes.