Southwest reports a net loss of $278 million in the first quarter

Southwest Airlines Company today reported its first quarter 2022 financial results:

  • Net loss of $278 million, or $0.47 loss per diluted share
  • Excluding special items1, net loss of $191 million, or $0.32 loss per diluted share
  • Operating revenues of $4.7 billion, down 8.8 percent compared with first quarter 2019
  • Cash provided by operations of $1.1 billion
  • Liquidity2 of $16.7 billion, well in excess of debt outstanding of $10.7 billion

Bob Jordan, Chief Executive Officer, stated, “While the impact from the Omicron variant in January and February disrupted our anticipated profit recovery in first quarter 2022, we returned to strong profitability in March 2022 on surging travel demand. First quarter 2022 operating revenues per available seat mile (RASM, or unit revenues) increased slightly compared with first quarter 2019, representing our first quarterly RASM increase relative to respective 2019 levels since the pandemic began. Our operational performance improved during February and March 2022 following acute staffing challenges experienced in January due to the Omicron variant. We have made great progress against our hiring plans for this year, increasing our headcount by approximately 3,300 in first quarter 2022, alone, net of attrition. We remain intensely focused on our hiring and training efforts as we work diligently to restore our network and position the Company for future growth. While we are experiencing inflationary pressure from higher jet fuel prices, our fuel hedge is providing significant protection against rising oil prices.

“Based on current plans and expected continued strong bookings, we continue to expect to be solidly profitable for the remaining three quarters of this year, and for full year 2022. Barring any unforeseen events and based on current trends, and despite higher fuel prices and managed business revenues and available seat miles (ASMs, or capacity) remaining below pre-pandemic levels, we expect solid second quarter 2022 profits and operating margins, excluding special items3.

“As we focus on the basics, our priorities for 2022 are clear: getting properly staffed and returning to historic operational reliability; restoring our Customer Service advantage; growing our fleet with The Boeing Company’s (Boeing) most-modern, fuel-efficient 737 aircraft; adding flights and restoring our network, especially on shorter-haul business routes; investing in enabling technologies for enhanced efficiencies; and producing consistent quarterly profits. Among our primary goals is to return to
pre-pandemic levels of productivity as we plan to restore the majority of our route network and better optimize our operations by the end of next year. I am grateful to our People for continuing to demonstrate their resilience and superb Teamwork after more than two years of managing through the pandemic. While it has been an incredibly challenging period, we are greatly encouraged by the progress we are making and believe we are well-positioned for future growth and long-term success with our point-to-point network, low cost and low fare business model, industry-leading balance sheet, and the best Employees and Leadership Team in the industry.”

Guidance and Outlook:
The following tables introduce or update selected financial guidance for second quarter 2022 and full year 2022, as applicable:

 

2Q 2022 Estimation

Operating revenue compared with 2019 (a)

Up 8% to 12%

Load factor

~85%

ASMs compared with 2019

Down ~7%

Economic fuel costs per gallon1,4

$3.05 to $3.15

Fuel hedging premium expense per gallon

$0.05

Fuel hedging cash settlement gains per gallon

$0.61

ASMs per gallon (fuel efficiency)

76 to 78

CASM-X (b) compared with 2019 5

Up 14% to 18%

Debt repayments (millions)

~$20

Interest expense (millions)

~$90

 

 

 2022 Estimation

Previous estimation

ASMs compared with 2019 (c)

Down ~4%

No change

Economic fuel costs per gallon1,4

$2.75 to $2.85

$2.25 to $2.35

Fuel hedging premium expense per gallon

$0.04

$0.05

Fuel hedging cash settlement gains per gallon

$0.54

$0.28

CASM-X (b) compared with 2019 5

Up 12% to 16%

No change

Debt repayments (millions)

~$650

~$455

Interest expense (millions)

~$360

No change

Aircraft (d)

814

No change

Effective tax rate (e)

24% to 26%

23% to 25%

Capital spending (billions) (f)

~$5.0

No change

(a) The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.
(b) Operating expenses per available seat mile, excluding fuel and oil expense, profitsharing, and special items.
(c) While the Company’s flight schedule remains published for sale through November 5, 2022, the Company recently adjusted its published flight schedules for June through August 2022 to provide additional buffer to the operation in light of continued available staffing challenges headed into the busy summer travel season. The Company will continue to monitor staffing trends, along with booking and cancellation trends, and adjust capacity, as needed. As such, the Company’s actual flown capacity may differ from currently published flight schedules or current guidance.
(d) Aircraft on property, end of period; net of 22 retirements planned in the remaining three quarters of 2022. Reflects all exercised activity as of April 28, 2022 and the assumption that the Company exercises all 12 remaining 2022 options. The delivery schedule for the Boeing 737-7 (-7) is dependent on the Federal Aviation Administration (“FAA”) issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.
(e) The Company’s estimated effective tax rate increased due to the tax impact related to the extinguishment of $164 million in principal of its convertible notes for a cash payment of $230 million, which occurred in first quarter 2022. The loss on partial extinguishment of convertible notes is largely disallowed as a deduction for tax purposes.
(f) Represents current contractual payments to Boeing for firm aircraft and the assumptions that the Company exercises all
12 remaining 2022 options, in addition to ~$900 million non-aircraft capital spending. Excluding any further option exercises, the Company’s 2022 capital spending would be ~$4.2 billion, also including ~$900 million in non-aircraft capital spending.

Revenue Results and Outlook:

  • First quarter 2022 operating revenues decreased 8.8 percent to $4.7 billion, compared with first quarter 2019—in line with the Company’s previous guidance
  • First quarter 2022 RASM increased 0.4 percent driven primarily by a passenger yield increase of 1.1 percent, partially offset by a load factor decrease of 4.0 points, all compared with first quarter 2019
  • March 2022 operating revenues increased compared with March 2019—which represented the first monthly operating revenues increase relative to respective 2019 levels since the pandemic began—driven primarily by a significant improvement in passenger yields

The Company was encouraged by the sharp rebound in revenue trends in March 2022, despite $430 million of headwinds experienced during first quarter 2022. Approximately $380 million of the operating revenue headwinds related to softness in bookings and increased passenger cancellations in January and February 2022 associated with the Omicron variant, which is higher than the Company’s previous estimate of $330 million. In addition, the Company’s flight cancellations in January 2022 due to available staffing challenges—exacerbated by weather—resulted in a $50 million negative impact to operating revenues, as previously estimated. The Company’s first quarter 2022 revenue performance from its loyalty program was strong and included incremental revenue from its new co-brand credit card agreement, as expected. First quarter 2022 managed business revenues decreased 55 percent, compared with first quarter 2019. March 2022 managed business revenues decreased 36 percent compared with March 2019, outperforming the Company’s previous guidance of down approximately 40 percent, driven by an increase in business passengers and yields and boosted by its participation in Global Distribution System (GDS) platforms. Despite March 2022 managed business passengers and revenues below March 2019 levels, managed business fares exceeded March 2019, representing the first monthly increase relative to respective 2019 levels since the pandemic began.

Thus far in April, the Company continues to experience strong leisure bookings for spring and summer travel and improving managed business revenue trends broadly across the network. The Company currently expects April 2022 managed business revenues to decrease approximately 30 percent, compared with April 2019, and currently expects continued sequential improvement in May and June 2022, compared with their respective 2019 levels. The Company remains optimistic about the return of business travel demand in 2022 based on the renewed momentum experienced in March and April 2022. The Company is looking forward to the expected launch of its new Wanna Get Away PlusTM fare product in second quarter 2022, and, expects to continue with the rollout of its portfolio of revenue initiatives as outlined at the Company’s Investor Day in December 2021.

Fuel Costs and Outlook:

  • First quarter 2022 fuel costs were $2.30 per gallon—in line with the Company’s previous guidance—and included $0.06 per gallon in premium expense and $0.52 per gallon in favorable cash settlements from fuel derivative contracts
  • First quarter 2022 fuel efficiency improved 2.6 percent compared with first quarter 2019 due to more Boeing 737 MAX (MAX), the Company’s most fuel-efficient aircraft, in the fleet
  • As of April 21, 2022, the fair market value of the Company’s fuel derivative contracts settling in second quarter 2022 through the end of 2024 was an asset of approximately $1.4 billion

The Company’s fuel hedge is providing excellent protection against rising energy prices and significantly offset the market price increase in jet fuel in first quarter 2022. The Company’s current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and Brent crude oil; however, the economic fuel price per gallon sensitivities4 provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of April 21, 2022.

 

Estimated economic fuel price per gallon,
including taxes and fuel hedging premiums

Average Brent Crude Oil
price per barrel

2Q 2022

2H 2022

$80

$2.50 – $2.60

$2.40 – $2.50

$90

$2.70 – $2.80

$2.55 – $2.65

Current Market (a)

$3.05 – $3.15

$2.75 – $2.85

$110

$3.10 – $3.20

$2.95 – $3.05

$120

$3.25 – $3.35

$3.15 – $3.25

$130

$3.45 – $3.55

$3.45 – $3.55

     

Fair market value

$295 million

$468 million

Estimated premium costs

$26 million

$26 million

(a) Brent crude oil average market prices as of April 21, 2022, were approximately $107 and $102 per barrel for second quarter 2022 and second half 2022, respectively.

In addition, the Company is providing its maximum percentage of estimated fuel consumption6 covered by fuel derivative contracts in the following table:

Period

Maximum fuel hedged percentage

2022

63% (a)

2023

37% (b)

2024

17% (b)

(a) Based on the Company’s available seat mile plans for full year 2022. The Company is currently 63 percent hedged for second quarter 2022 and 60 percent hedged for second half 2022.
(b) Due to uncertainty regarding available seat mile plans in future years, the Company believes that providing the maximum percentage of fuel consumption covered by derivative contracts in 2023 and 2024 relative to 2019 fuel gallons consumed is a more relevant measure for future coverage.

Non-Fuel Costs and Outlook:

  • First quarter 2022 operating expenses increased 4.3 percent to $4.8 billion, compared with first quarter 2019
  • First quarter 2022 operating expenses, excluding fuel and oil expense, profitsharing, and special items, increased 7.0 percent compared with first quarter 2019
  • First quarter 2022 operating expenses per available seat mile, excluding fuel and oil expense, profitsharing, and special items (CASM-X), increased 17.9 percent compared with first quarter 2019—at the lower end of the Company’s previous guidance range
  • The Company accrued $37 million of profitsharing expense in first quarter 2022, as the Company currently expects to be profitable for full year 2022

The Company’s first quarter 2022 CASM-X increase was primarily due to continued unit cost headwinds from operating at suboptimal productivity levels, inflation in labor rates and airport costs, and $127 million of additional salaries, wages, and benefits expense as a result of incentive pay offered to the Company’s Operations Employees through early February 2022 in an effort to address available staffing challenges related to the Omicron variant. The Company’s first quarter 2022 incentive pay was lower than its previous estimation of $150 million, which, combined with favorable airport settlements and better operational performance in March 2022, drove the Company’s first quarter 2022 CASM-X to the lower end of its previous guidance range.

Based on current cost trends, the Company expects second quarter 2022 CASM-X5 to increase in the range of 14 percent to 18 percent compared with second quarter 2019, due to labor rate inflation across all workgroups; inflation in airport costs; and headwinds from operating at suboptimal productivity levels. The Company continues to experience higher unit cost inflation as it continues to navigate the pandemic recovery and capacity levels remain muted due to available staffing challenges. The Company’s second quarter 2022 published flight schedules include increased short-haul trips in business markets to support the anticipated increase in business travel, relative to its first quarter 2022 flight schedules. Compared with respective 2019 levels, the increase in short-haul trips is expected to drive a sequential 5-point decrease in average stage length from first quarter 2022 to second quarter 2022, adding further pressure to second quarter 2022 CASM-X. Based on current second half 2022 capacity plans, the Company currently expects CASM-X trends to ease sequentially from first half 2022 to second half 2022, but remain elevated above its longer-term expected run rate as the Company scales and better optimizes its network and operations.

Fleet and Capital Spending:
The Company ended first quarter 2022 with 722 Boeing 737 aircraft, compared with the Company’s previous guidance of 725 aircraft, due to three scheduled aircraft deliveries planned in first quarter 2022 shifting to later in 2022. As expected, the Company retired five owned Boeing 737-700 (-700) aircraft, and returned one leased -700 aircraft during first quarter 2022. As of March 31, 2022, four -700 aircraft remained in temporary storage due to first quarter and second quarter 2022 capacity remaining below respective 2019 levels. The Company continues to expect to retire a total of 28 -700 aircraft in 2022.

During first quarter 2022, the Company exercised 15 Boeing 737-8 (-8) options for delivery in 2022 and 12 Boeing -7 options for delivery in 2023. In April 2022, due to the current status of the -7 certification, the Company converted 40 2022 -7 firm orders into 2022 -8 firm orders, moved one 2022 -7 firm order into 2023, and accelerated one 2023 -8 option into 2022. In April 2022, the Company also exercised 16 -8 options for delivery in 2022; exercised 2 -7 options for delivery in 2023; accelerated and exercised 10 2023 -8 options into 2022; and shifted 10 2022 MAX firm orders into 2023, which are reflected as -7 firm orders in the Company’s updated order book.

The Company’s first quarter 2022 capital expenditures were $510 million driven primarily by aircraft-related capital expenditures, as well as technology, facilities, and operational investments. The Company continues to estimate its 2022 capital spending to be approximately $5.0 billion, which assumes the exercise of its 12 remaining 2022 options7 and remains unchanged despite the shift of -7 firm orders to -8 firm orders as the Company contemplated various scenarios in its 2022 plan. The Company’s 2022 capital spending guidance continues to include approximately $900 million in non-aircraft capital spending. The following tables provide further information regarding the Company’s delivery schedule and compare its delivery schedule as of April 28, 2022, with its previous delivery schedule as of December 31, 2021.

New 737 Delivery Schedule as of April 28, 2022:

 

The Boeing Company

 
 

-7 Firm Orders

-8 Firm Orders

-7 or -8 Options

Total

2022

                         21

                         81

                         12

                       114

2023

                         77

                         —

                         13

                         90

2024

                         30

                         —

                         56

                         86

2025

                         30

                         —

                         56

                         86

2026

                         15

                         15

                         40

                         70

2027

                         15

                         15

                          6

                         36

2028

                         15

                         15

                         —

                         30

2029

                         20

                         30

                         —

                         50

2030

                         15

                         45

                         —

                         60

2031

                         —

                         10

                         —

                         10

 

                       238

                       211

                       183

                       632

(a) The delivery schedule for the -7 is dependent on the FAA issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.
(b) The Company has flexibility to designate firm orders or options as -7s or -8s, upon written advance notification as stated in the contract.

 Previous 737 Delivery Schedule as of December 31, 2021 (a):

The Boeing Company

 

-7 Firm Orders

-8 Firm Orders

-7 or -8 Options

Total

2022

                         72

                         —

                         42

                       114

2023

                         52

                         —

                         38

                         90

2024

                         30

                         —

                         56

                         86

2025

                         30

                         —

                         56

                         86

2026

                         15

                         15

                         40

                         70

2027

                         15

                         15

                          6

                         36

2028

                         15

                         15

                         —

                         30

2029

                         20

                         30

                         —

                         50

2030

                         15

                         45

                         —

                         60

2031

                         —

                         10

                         —

                         10

 

                       264

                       130

                       238

                       632

(a) The ‘Previous 737 Delivery Schedule’ is for reference and comparative purposes only. It should no longer be relied upon. See ‘New 737 Delivery Schedule’ for the Company’s current aircraft order book.

 Liquidity and Capital Deployment:

  • The Company ended first quarter 2022 with approximately $15.7 billion in cash and short-term investments and a fully available revolving credit line of $1.0 billion
  • The Company had a net cash position8 of $5.0 billion, and adjusted debt9 to invested capital (leverage) of 56 percent as of March 31, 2022
  • As of March 31, 2022, the Company had unencumbered assets with an estimated value of more than $11.0 billion, including aircraft value estimated in the range of $9.0 billion to $9.5 billion, and approximately $2.0 billion in non-aircraft assets such as spare engines, ground equipment, and real estate
  • The Company paid approximately $323 million during first quarter 2022 to retire debt and finance lease obligations, including the extinguishment of $164 million in principal of the Company’s convertible notes for a cash payment of $230 million, and the extinguishment of $30 million in principal of its 5.125% Notes due 2027 for a cash payment of $34 million, as well as $59 million in scheduled debt payments
  • The Company had current and non-current debt obligations of $10.7 billion as of March 31, 2022
  • The Company’s first quarter 2022 cash provided by operations was $1.1 billion

Awards and Recognitions:

  • Named to FORTUNE’s list of World’s Most Admired Companies; ranked #28
  • Named the #3 U.S. airline in the Wall Street Journal’s annual ranking for 2021
  • #2 Marketing Carrier in Customer Satisfaction per the U.S. Department of Transportation10
  • Named the top domestic airline for customer service by the 2022 Elliot Readers’ Choice Customer Service Awards
  • Named to Glassdoor’s Best Places to Work list for the 13th consecutive year
  • Designated a 2022 Military Friendly Company by Viqtory
  • Named as A Best Place To Work For LGBTQ+ Equality from the Human Rights Campaign Foundation
  • Designated one of the Best Companies for Latinos to Work 2022 by Latino Leaders Magazine
  • Recognized by Comparably as one of the “Best Places to Work 2022: Dallas Metropolitan Area”

Environmental, Social, and Governance (ESG):

  • On Earth Day, April 22, 2022:
    • Published the Company’s annual integrated corporate social responsibility and environmental sustainability report—the Southwest Airlines One Report—a comprehensive, integrated report that includes information on the Company’s Citizenship efforts and key topics including People, Performance, and Planet, along with reporting guided by the Global Reporting Initiatives (GRI) Standards, Sustainability Accounting Standards Board (SASB), and United Nations Sustainable Development Goals (UNSDG) frameworks.
    • Published the Southwest Airlines Diversity, Equity, & Inclusion Report (DEI), a companion piece to the One Report. This comprehensive report is focused on the Company’s current DEI priorities and path forward.
    • Externally highlighted the Company’s 10-year environmental sustainability plan to reduce carbon emissions intensity by at least 20 percent by 2030; maintain carbon neutrality to 2019 levels each year through the end of the decade; and replace 10 percent of total jet fuel consumption with sustainable aviation fuel by 2030—all while continuing to grow the airline.
    • Announced the opportunity for Southwest Customers to earn 20 Rapid Rewards® bonus points on every dollar spent to help Southwest offset its carbon emissions11 from April 22, 2022 through May 22, 202212.
  • Donated more than $4 million in transportation to 76 grant recipients through the carrier’s Medical Transportation Grant Program.
  • Joined the Vision 2045 campaign, a collaboration among multiple organizations and companies to share films and resources that aim to inspire businesses and people to take action toward a more sustainable future. Southwest content showcased how the Company is making sustainability a priority through a series of near-term actions and long-term goals.
  • Launched additional opportunities for Southwest® Business Customers to support and advance sustainability initiatives within their corporate travel portfolios.
  • Announced Texas Southern University (TSU) as a university partner in the airline’s First Officer development and recruitment program: Destination 225°. TSU is the first Historically Black College or University (HBCU) to join Destination 225° and provides a pathway for qualified collegiate aviators to join the Southwest Team as professional Pilots. In addition, announced Advanced Airlines and SkyWest Airlines as Destination 225° program partners.
  • Launched an internal enhancement of our Employee volunteer program, allowing Employees the opportunity to be rewarded for their volunteer service to 501(c)(3) nonprofit organizations and schools.

First Quarter 2022 Supplemental Financial Results
(unaudited)

The Company believes certain 2022 measures compared with 2019 are also relevant due to the significant impacts in 2020 and 2021 from the pandemic. Therefore, the below supplemental information is provided for reference.

As reported    
 

Three months ended March 31,

 
(in millions, except per share and unit costs)

2022

2019

Percent Change

Net income (loss)

$               (278)  

$                387

n.m.

Net income (loss) per share, diluted

$               (0.47)  

$                0.70

n.m.

Operating revenues

$              4,694   

$              5,149

(8.8)

Operating expenses

$              4,845   

$              4,644

4.3

Operating expenses, excluding Fuel and oil expense

$              3,841   

$              3,629

5.8

Operating expenses, excluding Fuel and oil expense and profitsharing

$              3,804   

$              3,541

7.4

RASM (cents)

                13.65   

                13.59

0.4

Passenger revenue yield per RPM (cents)

                15.62   

                15.45

1.1

CASM (cents)

                14.09   

                12.26

14.9

CASM, excluding Fuel and oil expense and profitsharing (cents)

                11.06   

                 9.35

18.3

Fuel costs per gallon, including fuel tax

$                2.30   

$                2.05

12.2

Revenue passengers carried (000s)

              26,029   

              31,296

(16.8)

Available seat miles (ASMs)

              34,384   

              37,885

(9.2)

Load factor

77.0 %

81.0 %

(4.0) pts.

 

Adjusted for special items    
 

Three months ended March 31,

 
(in millions, except per share and unit costs)

2022

2019

Percent Change

Net income (loss)

$               (191)  

$                387

n.m.

Net income (loss) per share, diluted

$               (0.32)  

$                0.70

n.m.

Operating revenues

$              4,694   

$              5,149

(8.8)

Operating expenses

$              4,829   

$              4,644

4.0

Operating expenses, excluding Fuel and oil expense

$              3,825   

$              3,629

5.4

Operating expenses, excluding Fuel and oil expense and profitsharing

$              3,788   

$              3,541

7.0

RASM (cents)

                13.65   

                13.59

0.4

Passenger revenue yield per RPM (cents)

                15.62   

                15.45

1.1

CASM (cents)

                14.04   

                12.26

14.5

CASM, excluding Fuel and oil expense and profitsharing (cents)

                11.02   

                 9.35

17.9

Fuel costs per gallon, including fuel tax (economic)

$                2.30   

$                2.05

12.2

Revenue passengers carried (000s)

              26,029   

              31,296

(16.8)

Available seat miles (ASMs)

              34,384   

              37,885

(9.2)

Load factor

77.0 %

81.0 %

(4.0) pts.

Southwest Airlines aircraft photo gallery: