Southwest Airlines Company reported its third quarter 2023 financial results:
- Net income of $193 million, or $0.31 per diluted share
- Net income, excluding special items1, of $240 million, or $0.38 per diluted share
- Record third quarter operating revenues of $6.5 billion
- Liquidity2 of $12.7 billion, well in excess of debt outstanding of $8.0 billion
Bob Jordan, President and Chief Executive Officer, stated, “Overall, we are pleased with our accomplishments in third quarter 2023. We generated another quarter of profitability and record third quarter operating revenues. Revenue strength was driven by solid leisure demand throughout the quarter and by managed business continuing to perform largely as expected—as we continue to gain initiative-driven market share in the corporate travel space.
“We are proud to be flying our full fleet and completing the restoration of our network. As we move into 2024, we are slowing our ASM growth rate to absorb current capacity, mature development markets, and optimize schedules to current travel patterns. We are in the midst of planning for 2024 and are focused on operational excellence and driving out inefficiencies, increasing productivity, improving reliability, and returning our margins back to historical levels. And, this week, we secured a cost-effective order book with The Boeing Company (“Boeing”) to continue the modernization of our fleet and provide plenty of flexibility to adjust our growth up or down to match the dynamic environment. We are also pleased that we reached a tentative agreement for our fantastic Flight Attendants.
“I am very optimistic about the outlook for Southwest Airlines. We have a legendary Culture, driven by our Warrior Spirit. We have a proven and durable business model which produces efficiency-driven cost advantages. We strive to maintain the best domestic network, with market leadership in large and fast-growing metro areas. We have the most friendly and flexible policies, an unmatched loyalty program, and a committed and engaged Customer base. All this, combined with our financial discipline, has allowed us to maintain an industry-leading fortress balance sheet during the most challenging period in aviation history.
“Without a doubt, our greatest strength is our superb Employees. They do an outstanding job day-in and day-out delivering value and Hospitality for our Customers. I would like to thank them for their relentless dedication and hard work.”
Guidance and Outlook:
The following tables introduce or update selected financial guidance for fourth quarter and full year 2023, as applicable:
|4Q 2023 Estimation|
|RASM (a), year-over-year||Down 9% to 11%|
|ASMs (b), year-over-year||Up ~21%|
|Economic fuel costs per gallon1,3||$2.90 to $3.00|
|Fuel hedging premium expense per gallon||$0.05|
|Fuel hedging cash settlement gains per gallon||$0.19|
|ASMs per gallon (fuel efficiency)||78 to 80|
|CASM-X (c), year-over-year1,4||Down 16% to 19%|
|Scheduled debt repayments (millions)||~$7|
|Interest expense (millions)||~$63|
|ASMs (b), year-over-year||Up 14% to 15%||No change|
|Economic fuel costs per gallon1,3||$2.85 to $2.95||$2.70 to $2.80|
|Fuel hedging premium expense per gallon||$0.06||No change|
|Fuel hedging cash settlement gains per gallon||$0.14||$0.09|
|CASM-X (c), year-over-year1,4,5||Down 1% to 2%||No change|
|Scheduled debt repayments (millions)||~$85||~$83|
|Interest expense (millions)||~$256||~$255|
|Aircraft (d)||814||No change|
|Effective tax rate||~23%||23% to 24%|
|Capital spending (billions)||~$3.5||No change|
|(a) Operating revenue per available seat mile (“RASM” or “unit revenues”).|
|(b) Available seat miles (“ASMs” or “capacity”). The Company’s flight schedule is currently published for sale through August 4, 2024. Adjusting for the December 2022 operational disruption, which lowered capacity in fourth quarter 2022, the Company’s fourth quarter 2023 capacity would have been up roughly 15 percent, year-over-year. The Company now expects first quarter 2024 capacity to increase in the range of approximately 10 percent to 12 percent, year-over-year, of which all is from the carryover effect of capacity growth in 2023, compared with its previous guidance to increase in the range of 14 percent to 16 percent, year-over-year. The Company also expects full year 2024 capacity to increase in the range of 6 percent to 8 percent, year-over-year.|
|(c) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing (“CASM-X”).|
|(d) Aircraft on property, end of period. The Company now plans for approximately 85 Boeing 737-8 (“-8”) aircraft deliveries and 41 Boeing 737-700 (“-700”) aircraft retirements in 2023, and still plans to end the year with 814 aircraft. This is compared with its previous plan for approximately 70 -8 deliveries and 26 -700 retirements. 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 Boeing may continue to experience supply chain challenges, so the Company offers no assurances that current estimations and timelines will be met.|
Revenue Results and Outlook:
- Third quarter 2023 operating revenues were a third quarter record $6.5 billion, a 4.9 percent increase, year-over-year
- Third quarter 2023 RASM decreased 6.8 percent, year-over-year—towards the lower end of the Company’s previous guidance range due to lower-than-expected close-in bookings
The Company’s third quarter 2023 revenue performance was a third quarter record due to strong leisure demand, particularly in July and during the Labor Day holiday, coupled with all-time record quarterly ancillary revenue and record third quarter loyalty program revenue. While the Company experienced lower-than-expected close-in bookings in both August and September, impacted by seasonal trends, overall demand remained stable throughout the quarter. Third quarter 2023 managed business revenues performed largely as expected, as the Company continued to gain business travel market share.
Thus far in fourth quarter 2023, overall demand for travel remains stable, including strong bookings to-date for the holiday travel periods. While leisure demand remains healthy, leisure trends appear to be returning to historically seasonal norms, and business trends continue to be stable. Based on current trends, the Company anticipates record fourth quarter operating revenue driven by record fourth quarter passengers.
The Company expects fourth quarter 2023 RASM to decline in the range of 9 percent to 11 percent, year-over-year. This decline includes an approximate one and one-half point offset from the December 2022 operational disruption. The expected RASM decline is driven by higher-than-seasonally-normal ASM growth in fourth quarter 2023 as the Company closes out the restoration of the network and normalizes the utilization of the fleet. Further, unit revenue pressure is also driven by higher-than-normal investment in development markets and schedules that are not ideally matched to current business travel trends. The Company is addressing these challenges in its 2024 network plan by adjusting capacity and further optimizing the network.
Fuel Costs and Outlook:
- Third quarter 2023 economic fuel costs were $2.78 per gallon1—towards the higher end of the Company’s previous expectations as a result of higher-than-expected crude oil market prices and refinery margins—and included $0.05 per gallon in premium expense and $0.16 per gallon in favorable cash settlements from fuel derivative contracts
- Third quarter 2023 fuel efficiency improved 3.9 percent, year-over-year, primarily due to more -8 aircraft, the Company’s most fuel-efficient aircraft, as a percentage of its fleet
- As of October 18, 2023, the fair market value of the Company’s fuel derivative contracts settling in fourth quarter 2023 through the end of 2026 was an asset of $538 million
The Company’s multi-year fuel hedging program continues to provide protection against spikes in energy prices. The Company’s current fuel derivative contracts contain a combination of instruments based on West Texas Intermediate and Brent crude oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities3 provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of October 18, 2023.
|Estimated economic fuel price per gallon,|
including taxes and fuel hedging premiums
|Average Brent Crude Oil|
price per barrel
|$70||$2.45 – $2.55||$2.75 – $2.85|
|$80||$2.70 – $2.80||$2.80 – $2.90|
|Current Market (a)||$2.90 – $3.00||$2.85 – $2.95|
|$90||$2.95 – $3.05||$2.85 – $2.95|
|$100||$3.15 – $3.25||$2.90 – $3.00|
|$110||$3.40 – $3.50||$2.95 – $3.05|
|Fair market value||$110 million||$306 million|
|Estimated premium costs||$30 million||$121 million|
|(a) Brent crude oil average market prices as of October 18, 2023, were $89 and $84 per barrel for fourth quarter and full year 2023, 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 (a)|
|2026||Less than 10%|
|(a) Based on the Company’s current available seat mile plans. The Company is currently 47 percent hedged for fourth quarter 2023.|
Non-Fuel Costs and Outlook:
- Third quarter 2023 operating expenses increased 10.0 percent, year-over-year, to $6.4 billion
- Third quarter 2023 operating expenses, excluding fuel and oil expense, special items, and profitsharing1, increased 17.3 percent, year-over-year
- Third quarter 2023 CASM-X increased 4.4 percent, year-over-year—in line with previous expectations
- Accrued $38 million of profitsharing expense in third quarter 2023 for the benefit of Employees
The Company’s third quarter 2023 CASM-X came in as expected. The majority of the increase, year-over-year, was attributable to general inflationary cost pressures, in particular higher labor rates for all Employee workgroups, including market wage rate accruals, as well as the timing of planned maintenance expenses.
The Company’s third quarter 2023 results included an approximate $96 million expense driven by an increase in the contract ratification bonus offered to Flight Attendants as part of the tentative agreement reached just this week with the Transport Workers Union 556 (“TWU 556”). The Company began accruing for all of its open labor contracts on April 1, 2022, and this incremental $96 million expense extends the timeframe covered by the ratification bonus to the date the Flight Attendant contract became amendable on November 1, 2018, to compensate for missed wage increases over that time period. Therefore, the $96 million change in estimate relates primarily to prior periods and was treated as a special item in the Company’s third quarter 2023 Non-GAAP financial results.
Third quarter 2023 other expenses decreased $162 million, year-over-year. The decrease was primarily due to an $86 million increase in interest income driven by higher interest rates, coupled with a $23 million decrease in interest expense driven by various debt repurchases and repayments throughout 2022.
The Company expects fourth quarter 2023 CASM-X to decrease in the range of 16 percent to 19 percent, year-over-year, 15-points of which relates to elevated operating expenses and lower capacity levels in fourth quarter 2022 as a result of the December 2022 operational disruption. The guidance range is inclusive of higher labor rates and market wage rate accruals for all Employee workgroups, including wage rate increases associated with the recently announced tentative agreement with TWU 556.
In light of inflationary pressures, particularly labor rates, combined with moderated capacity growth, the Company is now expecting increased headwinds to 2024 year-over-year unit costs. Once the 2024 plan has been finalized, the Company will provide more specific guidance, including an updated estimate for its network optimization efforts and the continued maturation of its development markets, which the Company now expects to exceed $500 million in incremental year-over-year pre-tax profits.
Capacity, Fleet, and Capital Spending:
The Company’s flight schedule is currently published for sale through August 4, 2024. In light of the new Boeing order book and the Company’s continued diligence towards an effective 2024 plan, the Company has lowered its expected growth plans for first quarter and full year 2024 to better match current demand trends. The Company now expects first quarter 2024 capacity to increase in the range of 10 percent to 12 percent, year-over-year, compared with its previous guidance to increase in the range of 14 percent to 16 percent, year-over-year. This will result in a sequential decline in nominal ASMs, relative to fourth quarter 2023. The Company also expects full year 2024 capacity to increase in the range of 6 percent to 8 percent, year-over-year. The Company continues to plan for sequentially lower capacity growth, year-over-year, in each quarter of 2024, and anticipates achieving its target of mid-single-digit year-over-year ASM growth in the second half of 2024.
During third quarter 2023, the Company received 18 -8 aircraft and retired four -700 aircraft, ending third quarter with 817 aircraft. In light of the Company’s new order book with Boeing, the Company now plans for approximately 85 -8 aircraft deliveries from Boeing in 2023, compared with its previous plan for approximately 70 -8 aircraft. Due to the increase in expected deliveries from Boeing, the Company now plans to accelerate additional -700 aircraft retirements in 2023, retiring a total of approximately 41 -700 aircraft in 2023, compared with its previous plan to retire 26 -700 aircraft. As a result of the currently planned aircraft deliveries and retirements, the Company continues to expect to end the year with 814 aircraft.
The Company’s third quarter 2023 capital expenditures were $842 million, driven primarily by aircraft-related capital spending, as well as technology, facilities, and operational investments. The Company continues to estimate its 2023 capital spending to be roughly $3.5 billion, which includes approximately $2.3 billion in aircraft capital spending, assuming approximately 85 -8 aircraft deliveries in 2023, and $1.2 billion in non-aircraft capital spending, including tens of millions in operational investments related to the Company’s winter operations plan. The Company continues to estimate its total annual capital spending to be approximately $4 billion, on average, for the five years 2023 through 2027.
Earlier this week, the Company entered into a Supplemental Agreement with Boeing relating to its contractual order book for -7 and -8 aircraft. The Supplemental Agreement, which extends the order book to 2031, provides flexibility in support of the Company’s growth plans and fleet modernization. The following tables provide further information regarding the Company’s new contractual order book and compare its contractual order book as of October 26, 2023, with its previous order book as of July 27, 2023.
|New 737 Contractual Order Book as of October 26, 2023:|
|The Boeing Company|
|-7 Firm Orders||-8 Firm Orders||-7 or -8 Options||Total|
|(a) The delivery timing 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.|
|(c) Includes 69 -8 deliveries received year-to-date through September 30, 2023. The Company now plans for approximately 85 -8 aircraft deliveries in 2023.|
|Previous 737 Order Book as of July 27, 2023 (a):|
|The Boeing Company|
|-7 Firm Orders||-8 Firm Orders||-7 or -8 Options||Total|
|(a) The ‘Previous 737 Order Book’ is for reference and comparative purposes only. It should no longer be relied upon. See ‘New 737 Contractual Order Book’ for the Company’s current aircraft order book.|
Liquidity and Capital Deployment:
- The Company ended third quarter 2023 with $11.7 billion in cash and short-term investments and a fully available revolving credit line of $1.0 billion
- The Company had a net cash position7 of $3.7 billion, and adjusted debt to invested capital (“leverage”)8 of 45 percent as of September 30, 2023
- The Company has returned $428 million to its Shareholders through the payment of dividends year-to-date as of September 30, 2023
- The Company paid $11 million during third quarter 2023 to retire debt and finance lease obligations, including the retirement of $3 million in principal related to lease buyout transactions and $8 million in scheduled lease payments
Top Copyright Photo: Southwest Airlines Boeing 737-8 MAX 8 N8748Q (msn 61871) LAS (Michael B. Ing). Image: 961795.
Southwest Airlines aircraft photo gallery: