SOUTHWEST AIRLINES REPORTS SECOND QUARTER 2022 RESULTS

DALLAS, July 28, 2022 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its second quarter 2022 financial results:

• Strong quarterly net income of $760 million¹
• Record quarterly net income, excluding special items², of $825 million
• Record quarterly operating revenues of $6.7 billion
• Cash provided by operations of $1.9 billion
• Liquidity³ of $17.4 billion, well in excess of debt outstanding of $10.5 billion

Bob Jordan, Chief Executive Officer, stated, "We are very pleased to report all-time record quarterly revenues and net income, excluding special items, representing a significant milestone in our pandemic recovery. Travel demand surged in second quarter, and thus far, strong demand trends continue in third quarter 2022. As anticipated, we experienced inflationary pressures and headwinds from operating at suboptimal productivity levels in second quarter, which we expect will continue in second half 2022; however, our fuel hedge continues to provide significant protection against higher jet fuel prices. Barring significant unforeseen events and based on current trends, we expect to be solidly profitable for the remaining two quarters of this year, and for full year 2022.

"We are making meaningful progress against our 2022 priorities, and I am very proud of our People and their heroic efforts to fight against the pandemic. Since April, we have been delivering a more reliable product for our Customers with cancellations representing less than one percent of scheduled flights in May and June 2022, which is a completion factor of more than 99 percent. We have added flights in second half 2022—especially in short-haul business markets—to better support our operation and the restoration of our route network. We reached another milestone, returning to overall pre-pandemic staffing levels in May 2022. We plan to continue our hiring and training efforts in specific areas—in particular, Pilots—to support further network restoration and future growth with plans to add over 10,000 Employees, net of attrition, this year. However, we plan to begin moderating overall hiring in second half 2022 as our focus shifts to 2023 planning and executing on our goals to better optimize staffing to flight schedules, reduce cost inefficiencies, and return to historic efficiency levels.

"We are experiencing delays in our aircraft deliveries from The Boeing Company (Boeing), and we now estimate 2022 deliveries to be 66 versus the previously expected 114, ending the year with 765 aircraft. Despite those delays, we are confident about our ability to fly our flight schedules as planned, which are currently published through March 8, 2023. We continue to invest in technologies, airports, and facilities to further modernize our operation and allow us to scale for future growth.

"We are also investing in the Southwest Customer Experience, and I am thrilled about today's announcement introducing yet another exciting Customer benefit that sets Southwest even further apart from the competition: Flight credits don't expire⁴. We are famous for offering industry-leading flexibility for Customers, and it is a key differentiator of our brand. Based on research and feedback, we believe flexibility has become even more important to Customers over the past few years. This further extension of flexibility for our Customers reinforces Southwest as industry-leading and builds on our low-fare brand with no fees to change or cancel plans⁵; two bags fly free®⁶; Rapid Rewards® points that don't expire; and transferable flight credits⁷. With flight credits that don't expire and the addition of our new Wanna Get Away Plus^TM fare product—along with recently announced investments to enhance WiFi, install latest-technology onboard power ports, offer larger overhead bins, and enable new self-service capabilities—we are making travel even easier. We believe we have the strongest route network and value proposition for Customers in the domestic U.S., and also believe this policy change will both win new Customers and increase Customer loyalty."

Guidance and Outlook:

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

Revenue Results and Outlook:

• Second quarter 2022 operating revenues were an all-time quarterly record $6.7 billion, increasing 13.9 percent compared with second quarter 2019—in line with the Company's previous guidance
• Second quarter 2022 operating revenues per available seat mile (RASM, or unit revenues) increased 22.0 percent driven primarily by a passenger yield increase of 18.4 percent, coupled with a load factor increase of 0.7 points, all compared with second quarter 2019
• Second quarter 2022 managed business revenues were down 24 percent compared with second quarter 2019—in line with the Company's previous guidance
• Successfully launched new Wanna Get Away Plus™ fare product in May 2022

The Company's revenue performance in second quarter 2022 was a quarterly record primarily due to a surge in leisure demand, especially in June, which resulted in strong passenger bookings, yields, and load factors. In addition, the Company's second quarter 2022 loyalty program revenue represented a quarterly record. June 2022 managed business revenues were down 19 percent, a sequential improvement compared with April and May 2022 managed business revenues, which were down 31 percent and 23 percent, respectively, all compared with their respective 2019 levels. While second quarter 2022 managed business revenues remained below 2019 levels, the Company was encouraged by the sequential improvement during the quarter, as well as managed business average fares that exceeded 2019 levels. June 2022 is estimated to represent a monthly peak for 2022 operating revenues based on first half 2022 results and current expectations for second half 2022.

Currently, the Company continues to experience strong passenger bookings, yields, and load factors. Leisure bookings remain strong and in line with seasonal expectations in third quarter 2022, including post-Labor Day. Based on bookings thus far, the Company's third quarter 2022 managed business revenues are currently estimated to be down in the range of 17 percent to 21 percent, compared with third quarter 2019. Although early in the booking curve, the Company is encouraged by current business bookings post-Labor Day and the expected sequential improvement from second quarter to third quarter 2022, of managed business revenues compared with the same periods in 2019. The Company increased short-haul trips in business markets in its third quarter 2022 published flight schedule, relative to first half 2022, in an effort to support both the reliability of its operational performance and expected business travel demand. Given the Company's estimate that managed business revenues will remain below 2019 levels in third quarter 2022, the increase in short-haul trips in business markets is estimated to be a two point sequential operating revenue growth headwind from second quarter to third quarter 2022, compared with their respective 2019 levels.

In accordance with applicable accounting guidance and the Company's revenue recognition policy, the amount of tickets that will expire unused, referred to as breakage, are estimated and recognized in Passenger revenue once the scheduled flight date has passed, in proportion to Customer behavior. Breakage estimates are based on historical experience over many years, and the Company has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel. As a result of the COVID-19 pandemic, the Company had a significant amount of Customer flight credits that were set to expire on September 7, 2022. The Company's policy change to eliminate expiration dates on qualifying flight credits, in particular those that were set to expire on September 7, 2022, results in a shift in the timing of revenue recognition and an estimated negative impact to third quarter breakage revenue in the range of $250 million to $300 million, or a five point sequential operating revenue growth headwind from second quarter to third quarter 2022, compared with their respective 2019 levels. The Company does not anticipate a material impact from this policy change beyond third quarter 2022, and estimates that breakage as a percentage of revenue will normalize to pre-pandemic levels. The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty and new Customers.

Fuel Costs and Outlook:

• Second quarter 2022 fuel costs were $3.36 per gallon—in line with the Company's previous guidance—and included $0.05 per gallon in premium expense and $0.68 per gallon in favorable cash settlements from fuel derivative contracts
• Second quarter 2022 fuel efficiency improved 2.1 percent compared with second quarter 2019 due to more MAX aircraft, the Company's most fuel-efficient aircraft, as a percentage of the Company's fleet
• As of July 21, 2022, the fair market value of the Company's fuel derivative contracts settling in third quarter 2022 through the end of 2024 was an asset of $1.0 billion

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase in jet fuel in second quarter 2022. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate, Brent crude oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities⁸ provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of July 21, 2022.

In addition, the Company is providing its maximum percentage of estimated fuel consumption¹⁰ covered by fuel derivative contracts in the following table: 

Non-Fuel Costs and Outlook:

• Second quarter 2022 operating expenses of $5.6 billion increased 12.7 percent compared with second quarter 2019
• Second quarter 2022 operating expenses, excluding fuel and oil expense, special items, and profitsharing, increased 5.6 percent compared with second quarter 2019
• Second quarter 2022 operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing (CASM-X), increased 13.1 percent compared with second quarter 2019—favorable to the Company's previous guidance
• The Company accrued $81 million of profitsharing expense in second quarter 2022 bringing first half 2022 profitsharing expense to $118 million

The Company's second 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 accruals for expected future contractual wage rate increases. However, the Company's second quarter 2022 CASM-X increase was lower than its previous guidance range primarily due to lower benefits costs, as well as the shifting of certain maintenance costs from second quarter to second half 2022.

The Company continues to experience cost inflation in third quarter 2022, in particular with higher rates for labor, benefits, and airports. The Company also expects cost headwinds from operating at suboptimal productivity levels as headcount is expected to increase in third quarter 2022 while capacity levels are expected to remain relatively in line with third quarter 2019. The Company has increased short-haul trips in second half 2022 in an effort to restore its route network and support the reliability of its operational performance, which results in a decrease to average stage length, and adds further unit cost headwinds. As a result of its successful hiring efforts and much improved operational reliability, the Company plans to begin moderating hiring where opportunities exist and intensify its focus on returning to historical efficiency levels.

Fleet and Capital Spending:

For first half 2022, the Company was scheduled to receive 28 -8 aircraft, of which only 12 were received, all during second quarter 2022. The Company ended second quarter 2022 with 730 aircraft, which reflects four owned -700 retirements. In addition, the Company had four -700 aircraft in storage as of June 30, 2022, all of which were subsequently retired from the Company's fleet in July 2022. While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift into 2023 due to Boeing's supply chain challenges and the current status of the -7 certification. Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company is currently estimating it will receive a total of 66 -8 aircraft deliveries and no -7 deliveries in 2022.

Since the Company's previous disclosure on April 28, 2022, the Company exercised seven -8 options for delivery in 2022; exercised two -7 options for delivery in 2023; accelerated and exercised seven 2023 -8 options for delivery in 2022; and shifted seven 2022 MAX firm orders into 2023, which are reflected as -7 firm orders in the Company's updated order book. Additionally in July 2022, the Company converted 48 2023 -7 firm orders to -8 firm orders in 2023.

Based on these modifications and recent discussions with Boeing, the Company is currently assuming 23 and 31 -8 aircraft deliveries in third quarter and fourth quarter 2022, respectively. The Company plans to retire 12 and 7 -700 aircraft in third quarter and fourth quarter 2022, respectively. As a result, the Company expects to end third quarter with 741 aircraft and end 2022 with 765 aircraft, compared with its previous guidance of 814 aircraft. The Company now expects to retire 29 -700 aircraft in 2022, compared with its previous guidance of 28 -700 retirements this year.

The Company's second quarter 2022 capital expenditures were $987 million driven primarily by aircraft-related capital expenditures, as well as technology, facilities, and operational investments. The Company now estimates its 2022 capital spending to be approximately $4.0 billion, which assumes the exercise of its five remaining 2022 options, and a total of 66 -8 aircraft deliveries in 2022, compared with its previous 2022 capital spending guidance of approximately $5.0 billion which assumed the delivery of 114 MAX aircraft in 2022. 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 contractual order book and compare its contractual order book as of July 28, 2022, with its previous order book as of April 28, 2022. Given current supply chain and aircraft delivery delays, the Company will continue working with Boeing on its order book with focus on 2022 and 2023.

Liquidity and Capital Deployment:

• The Company ended second quarter 2022 with $16.4 billion in cash and short-term investments and a fully available revolving credit line of $1.0 billion
• The Company had a net cash position¹¹ of $5.9 billion, and adjusted debt¹² to invested capital (leverage) of 53 percent as of June 30, 2022
• The Company paid $231 million during second quarter 2022 to retire debt and finance lease obligations, including the extinguishment of $138 million in principal of the Company's convertible notes for a cash payment of $178 million, the extinguishment of $30 million in principal of various unsecured notes for a cash payment of $31 million, as well as $22 million in scheduled debt payments
• The Company's 2022 total debt repayments is expected to be $820 million, compared with its previous guidance of $650 million, due to the unscheduled extinguishments noted above
• The Company recently extended the maturity of its revolving credit facility agreement two years to August 3, 2025

Awards and Recognitions:

• #1 Marketing Carrier in Customer Satisfaction per the U.S. Department of Transportation¹³
• Named Loyalty Program of the Year for Rapid Rewards Program and recognized for providing the Best Loyalty Credit Card by the 2022 Freddie Awards; Received the 2022 Freddie Awards title of Best Customer Service
• Named a Top 100 Company by BetterInvesting Magazine
• Awarded by Port of Seattle the "2022 Port of Seattle Sustainable Century Aviation Award" for the greatest airline use of ground power systems to reduce emissions, while docked at Seattle airport gates

Environmental, Social, and Governance (ESG):

• Published the Company's annual 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.
• Announced an investment into SAFFiRE Renewables, LLC (SAFFiRE), a company formed by D3MAX, LLC, as part of a Department of Energy (DOE) backed project to develop and produce scalable sustainable aviation fuel (SAF). Funded with a DOE grant matched by the Company's investment, SAFFiRE is expected to utilize technology developed by the DOE's National Renewable Energy Laboratory to convert corn stover, a widely available waste feedstock in the U.S., into renewable ethanol that then would be upgraded into SAF.
• Launched updated southwest.com/citizenship website pages that celebrate the Company's citizenship story and share details about its ongoing ESG efforts.
• In honor of Global Volunteer and Earth Month, Southwest Employees served over 7,100 volunteer hours during April 2022, sharing their love for the environment and their communities.
• Expanded the Company's Repurpose with Purpose program to include a new partner—the Tropical Agricultural and Higher Education Center (CATIE). CATIE aims to promote a route to achieve Inclusive Green Development, through the construction of human capital, and institutional strengthening for research, development, and external projection.
• Launched a one-of-a-kind Leadership book, "Leading with Heart: Living & Working the Southwest Way" to celebrate more than 50 years of putting People first.

Conference Call:

The Company will discuss its second quarter 2022 results on a conference call at 12:30 p.m. Eastern Time today. To listen to a live broadcast of the conference call, please go to https://www.southwestairlinesinvestorrelations.com. 

Footnotes

Cautionary Statement Regarding Forward-Looking Statements

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specific forward-looking statements include, without limitation, statements related to (i) the Company's financial and operational outlook, expectations, goals, plans, and projected results of operations, including factors and assumptions underlying the Company's expectations and projections; (ii) the Company's network plans and expectations and the associated expected operational benefits, including with respect to adding flights, future growth, and restoring its network, in particular with respect to short-haul business routes and stage length; (iii) the Company's priorities and expectations with respect to investments in the Company's operations and People, including the Company's hiring and training plans and associated goals with respect to operational reliability, efficiency, productivity, optimization, and stability; (iv) the Company's plans and expectations regarding its fleet and fleet delivery schedule, including factors and assumptions underlying the Company's plans and expectations; (v) the Company's plans and expectations with respect to capacity and capacity adjustments, including factors and assumptions underlying the Company's expectations and projections; (vi) the Company's expectations with respect to fuel costs, hedging gains, and fuel efficiency, and the Company's related management of risks associated with changing jet fuel prices, including factors underlying the Company's expectations; (vii) the Company's plans, estimates, and assumptions related to repayment of debt obligations, interest expense, effective tax rate, and capital spending, including factors and assumptions underlying the Company's expectations and projections; (viii) the Company's expectations regarding passenger demand, revenue trends, and bookings, including with respect to managed business revenues; (ix) the Company's expectations with respect to breakage revenues and breakage trends; (x) the Company's expectations with respect to its Flight credits policy change, including the expected impacts from the policy change and the benefits associated with the policy change, in particular the expected increase in Customer loyalty; and (xi) the Company's expectations regarding wage and other cost inflation, including the factors and assumptions underlying the Company's expectations and projections. These forward-looking statements are based on the Company's current estimates, intentions, beliefs, expectations, goals, strategies, and projections for the future and are not guarantees of future performance. Forward-looking statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) the impact of fears or actual outbreaks of other diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), consumer perception, economic conditions, fears of terrorism or war, socio-demographic trends, and other factors beyond the Company's control, on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results; (ii) any negative developments related to the COVID-19 pandemic, including, for example, with respect to the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus; the effectiveness, availability, and usage of COVID-19 vaccines; the impact of government mandates, directives, orders, regulations, and other governmental actions related to COVID-19 on the Company's business plans and its ability to retain key Employees; the extent of the impact of COVID-19 on overall demand for air travel and the Company's related business plans and decisions; and the impact of the COVID-19 pandemic on the Company's access to capital; (iii) the Company's dependence on its workforce, including its ability to employ sufficient numbers of qualified Employees to effectively and efficiently maintain its operations; (iv) the Company's dependence on Boeing with respect to the Company's fleet plans, deliveries, operations, strategies, and goals; (v) the impact of fuel price changes, fuel price volatility, volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company's fuel hedging strategies and positions, on the Company's business plans and results of operations; (vi) the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; (vii) the impact of governmental regulations and other governmental actions on the Company's business plans and operations; (viii) the Company's dependence on Boeing and the Federal Aviation Administration with respect to the certification of the Boeing MAX 7 aircraft; (ix) the Company's dependence on other third parties, in particular with respect to its fuel supply and Global Distribution Systems, and the impact on the Company's operations and results of operations of any third party delays or non-performance; (x) the impact of labor matters on the Company's business decisions, plans, and strategies; and (xi) other factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES

The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements may include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

As a result, the Company also provides financial information in this release that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company's performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss) before income taxes, non-GAAP; Provision (benefit) for income taxes, net, non-GAAP; Net income (loss), non-GAAP; and Net income (loss) per share, diluted, non-GAAP. The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company's actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude any unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

The Company's GAAP results in the applicable periods may include other charges or benefits that are also deemed "special items," that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. For the periods presented, in addition to the items discussed above, special items include:

1. Proceeds related to the Payroll Support programs, which were used to pay a portion of Employee salaries, wages, and benefits;
2. Charges and adjustments to previously accrued amounts related to the Company's extended leave programs;
3. Adjustments for prior period losses reclassified from Accumulated other comprehensive income ("AOCI") associated with forward-starting interest rate swap agreements that were terminated in prior periods related to 12 -8 aircraft leases;
4. Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;
5. Unrealized mark-to-market adjustment associated with certain available for sale securities; and
6. Losses associated with the partial extinguishment of the Company's convertible notes and early prepayment of debt.

Because management believes special items can distort the trends associated with the Company's ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of special items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Company's management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss) before income taxes, non-GAAP; Provision (benefit) for income taxes, net, non-GAAP; Net income (loss), non-GAAP; and Net income (loss) per share, diluted, non-GAAP.

SW-QFS

SOURCE Southwest Airlines Co.