Southwest Airlines Co. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited; dollar amounts are U.S. dollars. Southwest operates scheduled passenger service in the U.S. and near-international markets.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $4.694 billion | $2.052 billion |
| Operating income (loss) | $(151) million | $199 million |
| Net income (loss) | $(278) million | $116 million |
| Diluted EPS | $(0.47) | $0.19 |
| Operating margin | (3.2)% | 9.7% |
| Net margin | (5.9)% | 5.7% |
| Operating cash flow | $1.071 billion | $645 million |
- Passenger revenue was $4.135 billion, up 141.5%; total revenue increased 128.8%. Revenue per available seat mile (RASM) rose 54.1% year over year to 13.65 cents.
- Operating expenses were $4.845 billion, up 161.5%. Fuel and oil expense increased to $1.004 billion from $469 million; average economic fuel cost was $2.30 per gallon, including $229 million of hedge gains.
- On a non-GAAP basis excluding special items, Southwest reported an operating loss of $135 million and net loss of $191 million, versus losses of $1.269 billion and $1.015 billion, respectively, in Q1 2021. Management attributed the GAAP year-over-year deterioration largely to $1.2 billion of payroll-support expense credits recognized in Q1 2021, with no such support in Q1 2022.
- Cash and cash equivalents were $13.098 billion and short-term investments $2.642 billion at quarter-end, or $15.740 billion combined. Current assets were $18.822 billion and current liabilities $10.069 billion.
- Long-term debt, including current maturities, totaled $10.724 billion; operating lease liabilities were $1.517 billion. The company had no borrowings under its $1.0 billion revolving credit facility and reported compliance with its $1.5 billion minimum-liquidity covenant.
- Operating cash flow benefited from an $885 million increase in air traffic liability and $385 million of cash collateral received from derivative counterparties. Investing cash flow was $(139) million, including $510 million of capital spending; financing cash flow was $(314) million. Cash increased $618 million during the quarter.
Changes versus comparable periods
- Passenger demand and bookings recovered sharply from Q1 2021, but operating results remained below pre-pandemic profitability. Revenue was 0.4% above Q1 2019, while available seat miles were 9.2% lower; operating expenses per available seat mile were 14.9% higher than Q1 2019.
- Compared with Q1 2021, revenue passengers increased 83.0%, load factor improved 12.7 percentage points to 77.0%, and average fare rose 32.0%. Capacity increased 48.6% but remained below 2019.
- First-quarter revenue was affected by an estimated $430 million of headwinds: approximately $380 million from Omicron-related booking softness and cancellations in January and February, and $50 million from January cancellations associated with staffing challenges and weather.
- Q1 2022 included a $72 million loss on partial extinguishment of convertible and unsecured notes and a $16 million long-lived-asset impairment. The company also reported $144 million of other expense, including these items and fuel-derivative and investment-related mark-to-market effects.
Outlook, commentary and risks
- Q2 2022 guidance: Operating revenue up 8%–12% versus Q2 2019; load factor approximately 85%; capacity down approximately 7% versus 2019; economic fuel cost $3.05–$3.15 per gallon; and CASM-X (unit expense excluding fuel, profitsharing and special items) up 14%–18% versus 2019.
- Full-year 2022 guidance: Capacity down approximately 4% versus 2019; economic fuel cost $2.75–$2.85 per gallon; CASM-X up 12%–16% versus 2019; approximately $650 million of debt repayments; approximately $5.0 billion of capital spending; and 814 aircraft at year-end. Guidance reflects assumptions available at the time, including fuel-market prices as of April 21, 2022.
- Management cited labor-rate and airport-cost inflation, staffing constraints, and suboptimal operating productivity as pressure on unit costs. It planned to hire more than 10,000 employees during 2022 and had added 3,300 net employees in Q1. Published schedules were adjusted for June through August to provide more operational buffer.
- Demand improved in March as COVID-19 cases declined. Managed-business revenue remained 55% below Q1 2019, though March was down 36%; management expected sequential improvement in April through June. The company warned that renewed pandemic effects, fuel-price volatility, weather, economic conditions and changes in travel demand could affect results.
- Fuel hedges provided protection against rising prices, but depend on market prices, contract terms and hedge-accounting treatment. At March 31, the fuel-derivative portfolio had an estimated fair value asset of $1.3 billion; counterparty performance and hedge effectiveness remain risks.
- Aircraft plans depend partly on Boeing and FAA certification of the 737-7. The company exercised aircraft options and disclosed subsequent order-book changes and additional capital commitments. Labor negotiations also remained active; a tentative agreement with one employee group was rejected, while another was awaiting ratification.
- Payroll Support program terms restrict share repurchases and dividends through September 30, 2022, and limit executive compensation until April 1, 2023. Share repurchases were suspended. Management did not expect ongoing legal proceedings or IRS matters to materially affect the company, but disclosed pending customer, securities and other litigation, including claims relating to the 737 MAX.
Important facts for investors to verify
- Whether demand and revenue recovery continued after March, particularly as schedules, staffing and managed-business travel evolved.
- Actual fuel costs and hedge settlements versus guidance, including hedge-accounting volatility, counterparties and collateral.
- Whether unit-cost inflation and operational staffing constraints persisted, and how they affected capacity and reliability.
- Aircraft delivery, 737-7 certification and capital-spending developments, including post-quarter Boeing order changes.
- Debt repayments, liquidity and cash conversion, noting that Q1 operating cash flow benefited from advance ticket sales and derivative collateral.
- Developments in significant litigation, labor agreements, and the restrictions on shareholder returns.