Southwest Airlines Company today reported its first quarter 2020 results:
- First quarter net loss of $94 million and $.18 net loss per diluted share
- Excluding special items1, net loss of $77 million and $.15 net loss per diluted share
- First quarter operating revenues of $4.2 billion, down 17.8 percent year-over-year
- Capital returns of $639 million to Shareholders through share repurchases and dividends during first quarter; dividends and share repurchase programs suspended until further notice
- Return on invested capital (ROIC)1 pre-tax of 18.1 percent for the 12 months ended March 31, 2020, or 14.3 percent on an after-tax basis
- In April 2020, reached an agreement in principle with the U.S. Department of Treasury (the “U.S. Treasury”) for proceeds of approximately $3.3 billion under the Payroll Support Program (“PSP”) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act); consists of $2.3 billion in direct payroll support and $948 million in the form of an unsecured 10-year term loan; the Company is expected to issue warrants that enable the U.S. Treasury to purchase up to an aggregate of approximately 2.6 million shares of the Company’s common stock
- Since the beginning of 2020, bolstered cash on hand by $6.8 billion as of April 24, 2020, including $1.6 billion of PSP proceeds, or 50 percent; remaining $1.6 billion of PSP proceeds expected to be received by July 2020
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, “This is an unprecedented time for our Nation and the airline industry. In late February, we began experiencing a precipitous drop in passenger demand and bookings due to the novel coronavirus COVID-19 pandemic, resulting in a first quarter 2020 net loss. The U.S. economy has been at a standstill, and the current outlook for second quarter 2020 indicates no material improvement in air travel trends. Trip cancellations remain at unprecedented levels, though they have receded from their peak in March. As such, we have significantly reduced our published flight schedules through July 2020. In addition, we have taken swift action to significantly reduce cash burn. We have reduced named executive officer salaries and Board of Director cash retainer fees by 20 percent; suspended all hiring and non-contract salary increases; implemented voluntary time-off programs; canceled or deferred hundreds of capital spending projects; modified vendor and supplier payment terms; and cut all non-essential spending. These combined efforts, along with capacity reductions, are expected to result in more than $2 billion in reduced annual 2020 operating costs as well as more than $1 billion in reduced annual 2020 capital spending, compared with original plans. We will continue evaluating the need for further flight schedule adjustments, while planning to maintain service to all points in our domestic network through at least September 30, 2020.
“We applaud the work of our federal leaders, President Trump, Secretaries Mnuchin and Chao, and the entire United States Congress for recognizing the unprecedented health and economic crisis that our Nation is currently facing due to the pandemic, as well as the importance of airlines to the U.S. economy. The PSP under the CARES Act allows us to protect the jobs of the more than 60,000 Southwest Employees through September 30, 2020.
“We came into this year with significant financial strength and a fortress balance sheet, ending 2019 with cash and short-term investments of $4.1 billion and adjusted debt2 to average invested capital (leverage) of only 24 percent. We have quickly accessed capital to bolster our liquidity as we manage through the effects of the pandemic. Since the beginning of 2020, we have raised approximately $6.8 billion through $5.2 billion in debt financings and $1.6 billion in proceeds received from the PSP, thus far. As of April 24, 2020, we had cash and short-term investments of $9.3 billion, with leverage of 47 percent. We are currently the only U.S. airline with an investment-grade rating by all three rating agencies and remain focused on maintaining a strong balance sheet. Following recent debt transactions, we have unencumbered assets worth nearly $8 billion, including more than $6 billion in aircraft. We expect to receive the remainder of PSP proceeds, approximately $1.6 billion, over the next three months.
“I am extremely grateful to our People for their continued dedication to serve our Customers through an ever-changing environment. Since March 2019, our Employees have been doing a heroic job managing the challenges related to the grounding of the Boeing 737 MAX (MAX) aircraft. Based on The Boeing Company’s recent communication on the MAX return to service date, we currently expect the MAX to be removed through the end of our published flight schedule date of October 30, 2020. In light of the current environment, we are in the process of revising our aircraft order book with Boeing and will continue partnering with Boeing on a sensible delivery schedule.
Copyright Photo: Rainer Besten. MAX 8s in storage.
“Our Employees are taking great care of each other and our Customers. We have implemented enhanced aircraft cleaning procedures, and we are continuing to explore options to further protect the health and safety of our Employees and Customers. Our People have risen to the occasion, once again, approaching current challenges with Teamwork, bravery, and resolve. And, our magnificent, dedicated, and fearless health care professionals also deserve our deepest appreciation; as do essential personnel from first responders to truck drivers, from grocery store workers to frontline communication workers. We are proud of them all, and we remain committed to serving their communities and providing much-needed air travel to transport personnel and supplies.
“We entered this crisis prepared with the U.S. airline industry’s strongest balance sheet and most successful business model. While the impact of the pandemic is unprecedented, we believe demand for air travel will rebound. And, we intend to emerge with ample liquidity and an unwavering focus on our enduring Purpose—to connect People to what is important in their lives through friendly, reliable, and low-cost air travel.”
Revenue Results and Outlook
The Company’s first quarter 2020 total operating revenues decreased 17.8 percent, year-over-year, to $4.2 billion, due primarily to the sharp decline in passenger demand and bookings beginning in late February, combined with an unprecedented level of close-in trip cancellations in March 2020, due to the pandemic. First quarter 2020 operating revenue per available seat mile (RASM, or unit revenues) was 11.98 cents, and decreased 11.8 percent, driven primarily by a load factor decrease of 13.3 points, offset slightly by a passenger revenue yield increase of 4.0 percent, all year-over-year. January and February 2020 unit revenues were in line with original expectations for first quarter year-over-year RASM growth in the range of 3.5 to 5.5 percent. With the sudden and severe drop-off in passenger demand caused by COVID-19 concerns, the load factor for March 2020 was only 46.6 percent, compared with 85.7 percent in March 2019, with a load factor of approximately 20 percent for the second half of March 2020.
The Company has continued to experience weak passenger demand and bookings in April 2020, and operating revenues are currently estimated to decrease, year-over-year, in the range of 90 to 95 percent; available seat miles (ASMs, or capacity) are estimated to decrease approximately 60 percent, year-over-year; and load factor is estimated to be approximately 6 percent. For May 2020, operating revenues are also currently estimated to decrease, year-over-year, in the range of 90 to 95 percent; capacity is estimated to decrease in the range of 60 to 70 percent, year-over-year; and load factor is estimated to be in the range of 5 to 10 percent. The revenue environment remains uncertain, and the Company is unable to reasonably estimate trends beyond May 2020.
Cost Performance and Outlook
First quarter 2020 total operating expenses decreased 6.5 percent, year-over-year, to $4.3 billion. Total operating expenses per available seat mile (CASM, or unit costs) increased 0.2 percent, compared with first quarter 2019.
First quarter 2020 economic fuel costs1 were $1.90 per gallon and included $24 million, or $.05 per gallon, in premium expense and no cash settlements from fuel derivative contracts, compared with $2.05 per gallon in first quarter 2019, which included $28 million, or $.06 per gallon, in premium expense and $.03 per gallon in favorable cash settlements from fuel derivative contracts. The recent market decline in fuel prices reduced the Company’s first quarter 2020 fuel and oil expense by approximately $80 million compared with original projections in January 2020. The ongoing groundings of the Company’s most fuel-efficient MAX aircraft continued to have a negative year-over-year impact on ASMs per gallon (fuel efficiency) in first quarter 2020. However, this negative impact on fuel efficiency was more than offset by flight cancellations and load factor decline in March 2020, due to the pandemic. The Company operated fewer of its oldest, least fuel-efficient 737-700 aircraft due to reduced capacity and, as a result, consumed fewer gallons per ASM in first quarter 2020. These factors, combined, resulted in a slight year-over-year improvement of 0.8 percent in fuel efficiency in first quarter 2020.
Based on the Company’s existing fuel derivative contracts and market prices as of April 22, 2020, second quarter 2020 economic fuel costs are estimated to be in the range of $1.00 to $1.10 per gallon3, including $24 million, or $.12 per gallon, in premium expense and no cash settlements from fuel derivative contracts, compared with $2.13 per gallon in second quarter 2019, which included $28 million, or $.05 per gallon, in premium expense and $.06 per gallon in favorable cash settlements from fuel derivative contracts. As of April 22, 2020, the fair market value of the Company’s fuel derivative contracts for the remainder of 2020 was an asset of approximately $3 million, and the fair market value of the fuel hedge portfolio settling in 2021 and beyond was an asset of approximately $81 million. Additional information regarding the Company’s fuel derivative contracts is included in the accompanying tables.
Excluding fuel and oil expense, first quarter 2020 operating expenses decreased 4.3 percent, compared with first quarter 2019. No profitsharing expense was accrued in first quarter 2020 due to the Company’s net loss, compared with a profitsharing accrual of $88 million in first quarter 2019. Excluding fuel and oil expense and profitsharing expense, first quarter 2020 operating expenses decreased 1.9 percent, and increased 5.1 percent on a unit basis, year-over-year. The majority of the year-over-year unit cost increase in first quarter 2020 was driven by lower capacity as a result of the ongoing MAX groundings. Additionally, the Company experienced year-over-year unit cost pressure in first quarter 2020 driven by capacity reductions in March 2020 due to the pandemic; however, the Company’s proactive measures to reduce spending, combined with the decrease in its variable, flight-driven expenses, substantially offset the incremental unit cost pressure.
The Company expects continued year-over-year unit cost pressure in second quarter 2020, primarily due to its proactive capacity reductions due to the pandemic, as well as the ongoing MAX groundings. The Company is continuing its cost mitigation actions in second quarter 2020.
Other expenses in first quarter 2020 increased by $33 million, year-over-year, primarily due to a $24 million mark-to-market unrealized loss from interest rate swap agreements, which is excluded from the Company’s non-GAAP results as a special item. Excluding special items, other expenses in first quarter 2020 increased by $7 million, year-over-year, due primarily to lower interest income as a result of lower interest rates and a decrease in capitalized interest associated with Boeing’s halt of production of the Company’s undelivered MAX aircraft.
Liquidity and Capital Deployment
As of March 31, 2020, the Company had approximately $5.5 billion in cash and short-term investments, including proceeds of $500 million of unsecured notes due 2030, issued February 10, 2020; $1.0 billion from a 364-day secured term loan, entered into March 12, 2020; and $1.0 billion drawn from the Company’s revolving credit facility on March 16, 2020, which was subsequently secured. On March 30, 2020, the Company renegotiated its $1.0 billion 364-day term loan to add additional funds of approximately $2.3 billion, which were received on April 1, 2020. On April 24, 2020, the Company received another $350 million in funds pursuant to its approximately $417 million accordion provision as part of the 364-day term loan agreement. Since the beginning of 2020, the Company has bolstered cash on hand by $6.8 billion as of April 24, 2020, including $1.6 billion of PSP proceeds, with the remaining $1.6 billion of PSP proceeds expected to be received by July 2020.
Net cash used in operations during first quarter 2020 was $377 million and capital expenditures were $224 million, offset by $300 million of supplier proceeds. The Company has received an additional $128 million of supplier proceeds in April 2020. The majority of capital investment projects originally planned for this year have been canceled or deferred, and thus far, the Company has reduced its annual 2020 capital spending by more than $1 billion compared with original plans. The Company is in the process of working with Boeing to develop delivery and payment schedules for 2020 and 2021. The Company repaid approximately $78 million in debt and finance lease obligations during first quarter 2020, and expects to repay approximately $741 million in debt and finance lease obligations in the remainder of 2020. The Company currently estimates its average daily cash burn4 to be in the range of $30 million to $35 million in second quarter 2020, compared with its original expectations, prior to the pandemic, in the range of $60 million to $65 million. The Company is evaluating additional measures to further improve its cash burn.
During first quarter 2020, the Company returned $639 million to its Shareholders through the repurchase of $451 million of common stock and the payment of $188 million in dividends. In first quarter 2020, the Company launched a new accelerated share repurchase (“ASR”) program by advancing $500 million to a third party financial institution in a privately negotiated transaction (the “first quarter 2020 ASR program”). The Company received 6.4 million shares of common stock pursuant to the first quarter 2020 ASR program, representing 75 percent of the shares originally expected to be repurchased under that ASR program. The third party financial institution exercised its early termination option for the first quarter 2020 ASR program on March 19, 2020, and the Company received $134 million in cash from the third party financial institution as a result of the termination. The Company also received an additional 0.9 million shares of common stock during February 2020 in final settlement of its $550 million fourth quarter 2019 ASR program, launched during fourth quarter 2019 and completed in February 2020. Additionally, the Company repurchased approximately 1.9 million shares during first quarter 2020 through $85 million in open market transactions. The Company has suspended dividends and share repurchase programs until further notice. The Company had $899 million remaining under its May 2019 $2.0 billion share repurchase authorization at the time of the program’s suspension.
In April 2020, the Company reached an agreement in principle with the U.S. Treasury for proceeds of approximately $3.3 billion under the PSP as part of the CARES Act for which the Company expects to provide the U.S. Treasury consideration in the form of a promissory note representing a $948 million unsecured, low-interest, 10-year term loan (the “unsecured loan”) and warrants to purchase up to an aggregate of 2.6 million shares of the Company’s common stock, subject to adjustment by the U.S. Treasury in each case. Approximately $1.6 billion of expected proceeds, or 50 percent, have been received thus far, for which the Company provided consideration of a promissory note representing a $459 million unsecured loan. The unsecured loan may be repaid at any time prior to maturity, at par, and has an interest rate of 1.0 percent through year 5, and a rate consisting of the Secured Overnight Financing Rate plus 2.0 percent, thereafter. The Company also provided consideration of warrants to purchase up to 1.3 million shares of the Company’s common stock to the U.S. Treasury and is expected to issue warrants to purchase approximately 1.3 million additional shares of the Company’s common stock to the U.S. Treasury in conjunction with the balance of the PSP proceeds. The warrants have a 5-year term and an exercise price of $36.47 based on the Company’s closing price on April 9, 2020. The warrants can be settled with the U.S. Treasury on a net basis, either in shares or cash at the Company’s discretion.
Pursuant to a separate secured loan program established under the CARES Act, the Company intends to apply for a secured loan with the U.S.Treasury in the estimated principal amount of approximately $2.8 billion. The Company has not yet determined if it will ultimately participate in the secured loan program and is actively pursuing other options for additional liquidity.
Fleet and Capacity
The Company ended first quarter 2020 with 742 aircraft in its fleet. In response to capacity reductions due to the effects of the pandemic, the Company currently has approximately 350 aircraft in long-term storage or temporary parking. This is in addition to the Company’s 34 MAX aircraft that were grounded as of March 13, 2019, to comply with the Federal Aviation Administration (“FAA”) emergency order issued for all U.S. airlines to ground all MAX aircraft. The Company has not received any MAX aircraft deliveries since February 2019, and Boeing is not currently manufacturing or delivering new MAX aircraft. In light of the current environment, Boeing agreed to an arrangement allowing the Company to take delivery of no more than 48 aircraft through December 31, 2021. The Company is currently planning to take delivery of less than the 27 MAX aircraft previously expected from Boeing in 2020, and is evaluating the need to temporarily remove or retire additional aircraft from its fleet. Additional information regarding the Company’s aircraft delivery schedule can be found in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020.
Upon a rescission of the FAA order to ground the MAX fleet, the Company will work closely with Boeing and the FAA to safely reintroduce the 34 MAX 8 aircraft currently in its fleet and estimates it will take the Company several months to comply with applicable FAA directives, including all necessary Pilot simulator training. Regulatory approval of MAX return to service is subject to Boeing’s ongoing work with the FAA, who will determine the timing of MAX return to service. The Company offers no assurances that current estimations and timelines are correct. Any changes to current estimations could result in additional flight schedule adjustments and reductions beyond October 30, 2020, further delays in MAX aircraft deliveries, and additional financial damages. The Company continues to plan for multiple scenarios for its fleet and capacity plans.
The Company’s first quarter 2020 ASMs decreased 6.7 percent, year-over-year, due primarily to the year-over-year capacity reduction of 17.1 percent in March 2020 related to the pandemic, as well as the MAX groundings. Due to the impact of the pandemic on passenger travel demand, the Company has significantly reduced capacity through July 2020, thus far, and currently estimates second quarter 2020 capacity to decrease at least 60 percent, year-over-year. The Company will continue to evaluate the need for further schedule adjustments.
Based on significant capacity reductions and shelter-in-place restrictions, the Company currently expects the effects of the pandemic to impact its second quarter 2020 financial performance much more significantly than in first quarter 2020. However, due to the uncertain severity and duration of the pandemic, including the impact on the economy, the Company is currently unable to reasonably estimate the future impact on specific operational and financial trends.
Southwest Airlines aircraft photo gallery: