SOUTHWEST AIRLINES CO quarterly report, Q2 FY2022

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Southwest Airlines Co. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Southwest operates scheduled passenger air service in the U.S. and near-international markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance and liquidity

  • Q2 revenue: $6.728 billion, up 67.9% year over year and a quarterly record. Passenger revenue was $6.119 billion; freight revenue was $47 million; other revenue was $562 million.
  • Q2 earnings: Operating income was $1.158 billion, versus $594 million; net income was $760 million, versus $348 million. Diluted EPS was $1.20, versus $0.57. Operating margin was approximately 17.2%, versus 14.8%.
  • First-half results: Revenue was $11.422 billion, up 88.5%; operating income was $1.007 billion, versus $793 million; net income was $482 million, versus $463 million. Diluted EPS was $0.77, versus $0.76. Operating margin was approximately 8.8%, versus 13.1%.
  • Cash flow: First-half cash from operations was $2.977 billion, compared with $2.650 billion. Capital expenditures were $1.497 billion, versus $190 million. Q2 operating cash flow was $1.906 billion and capital expenditures were $987 million.
  • Liquidity: At June 30, cash and cash equivalents were $13.234 billion and short-term investments were $3.197 billion, totaling $16.431 billion. Current assets were $19.396 billion and current liabilities $11.711 billion. Southwest had no borrowings under its $1.0 billion revolving credit facility.
  • Debt: Current and long-term debt totaled $10.539 billion at June 30, compared with $10.727 billion at December 31, 2021. The company repaid $555 million of debt and finance lease obligations during the first half, including $302 million principal of convertible notes repurchased for $409 million.
  • Operating indicators: Q2 load factor was 87.1%, up 4.2 points year over year; average fare increased 35.0%. Capacity (ASMs) was up 11.7% year over year but 6.7% below Q2 2019.

Material changes and drivers

  • Demand, particularly leisure travel, rebounded substantially as COVID-19 cases and travel restrictions eased. Q2 revenue exceeded 2019 levels, primarily on higher yields, although capacity and business travel remained below 2019.
  • Q2 fuel and oil expense rose 103.7% year over year to $1.636 billion; management attributed approximately 90% of the increase to higher jet fuel prices. Economic fuel cost was $3.36 per gallon, including approximately $332 million of hedge gains.
  • Q2 salaries, wages, and benefits increased 21.6% to $2.220 billion. The prior-year comparison included $724 million of Payroll Support credited against expenses; there was no such support in 2022. First-half 2021 included $1.9 billion of support.
  • Q2 non-GAAP net income, excluding company-defined special items, was $825 million, versus a non-GAAP loss of $206 million. First-half non-GAAP net income was $633 million, versus a loss of $1.221 billion. These are supplemental, non-GAAP measures and are not directly comparable across companies.
  • Against Q2 2019, GAAP operating income was up 19.6% and net income up 2.6%, while diluted EPS was down 12.3%. For the first half versus 2019, operating income was down 31.6% and net income down 57.3%.

Outlook, commentary, and risks

  • Q3 2022 guidance: Operating revenue 8%–12% above Q3 2019; ASMs approximately flat versus Q3 2019; economic fuel cost $3.25–$3.35 per gallon; CASM-X 12%–15% above Q3 2019; and approximately 741 aircraft at quarter end.
  • Full-year 2022 guidance: ASMs approximately 4% below 2019; economic fuel cost $2.95–$3.05 per gallon; CASM-X 12%–16% above 2019; approximately $4.0 billion in capital spending; and approximately 765 aircraft at year end. The company estimated a 24%–26% effective tax rate.
  • Southwest reduced its expected 2022 MAX deliveries from 114 to 66, citing Boeing supply-chain delays and uncertainty over 737-7 certification. It expected no 737-7 deliveries in 2022; delivery timing depends on Boeing and FAA actions. Management also cited labor, staffing, productivity, airport-cost and fuel-price pressures.
  • Management expected a one-time Q3 revenue headwind of $250–$300 million from its July 28 decision to make existing and future flight credits non-expiring. Approximately $1.9 billion of flight credits existed on the announcement date. The company expects lower, more stable breakage revenue prospectively.
  • Fuel hedging can reduce, but does not eliminate, exposure to fuel-price volatility; hedge outcomes and accounting treatment may vary. Maximum estimated fuel coverage was 63% for 2022, 39% for 2023, and 17% for 2024. Counterparty nonperformance is also a disclosed risk.
  • Payroll Support restrictions barred share repurchases and dividends through September 30, 2022; Southwest said repurchases were suspended. It had approximately $899 million remaining under its authorization.
  • Legal and labor matters include California wage-and-hour proceedings, a class action involving the Boeing 737 MAX, and securities and other litigation. Southwest said it could not estimate a range of loss for the California claims; management did not expect current legal proceedings, individually or collectively, to have a material adverse effect.

Important facts for investors to verify

  • Whether demand, yields, business-travel recovery, and operational reliability support the revenue and capacity outlook.
  • Actual fuel prices, hedge settlements, hedge accounting effects, and the extent to which fuel costs exceed guidance.
  • Boeing delivery timing, FAA certification of the 737-7, and resulting fleet, capacity, and capital-spending changes.
  • Labor availability, wage and benefit costs, productivity, and the status of collective-bargaining negotiations.
  • The revenue-recognition and customer-retention effects of non-expiring flight credits, including the Q3 breakage headwind.
  • Debt maturities, cash deployment, and any change to shareholder-return restrictions or the revolving credit facility.
  • Developments and potential financial exposure in pending legal proceedings; the filing does not provide a clear loss estimate for certain claims.