Southwest Reports First Quarter 2021 Results

DALLAS, April 22, 2021 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its first quarter 2021 financial results:

• First quarter net income of $116 million, or $.19 per diluted share, driven by a $1.2 billion offset of salaries, wages, and benefits expenses from the extended Payroll Support Program (PSP Extension) proceeds under the Consolidated Appropriations Act, 2021
• Excluding special items¹, first quarter net loss of $1.0 billion, or $1.72 loss per diluted share
• First quarter operating revenues of $2.1 billion, down 51.5 percent year-over-year
• Ended first quarter with liquidity² of $15.3 billion, well in excess of debt outstanding of $10.8 billion

Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "In first quarter, we benefited from temporary cost relief as a result of PSP Extension proceeds, which offset a portion of salaries, wages, and benefits expenses, resulting in first quarter 2021 net income of $116 million, or $.19 per diluted share. We remain grateful for this much-needed federal payroll support on the heels of substantial losses in 2020, and ongoing non-GAAP losses in first quarter 2021. The payroll support from the federal government has allowed Southwest to preserve its 50-year history without involuntary layoffs or furloughs, an achievement unprecedented in the U.S. airline industry. Excluding the benefit of PSP Extension proceeds and other special items, our first quarter 2021 net loss was $1.0 billion, or $1.72 loss per diluted share. While the pandemic is not over, we believe the worst is behind us, in terms of the severity of the negative impact on travel demand. Vaccinations are on the rise, and COVID-19 hospitalizations in the United States are down significantly from their peak in January 2021. As a result, we are experiencing steady weekly improvements in domestic leisure bookings, which began in mid-February 2021.

"March 2021 operating revenues decreased 9.7 percent, year-over-year, and decreased 53.5 percent compared with March 2019, representing a significant improvement from relatively stagnant revenue levels experienced from September 2020 through February 2021. Our current outlook for operating revenues indicates a sequential improvement from March to April 2021, and again from April to May 2021, based on improving bookings. We believe there is significant pent-up demand for leisure travel and are optimistic about summer 2021. In response, we are in the process of adding flights in June 2021, and we currently expect June available seat miles (ASMs, or capacity) to be only slightly less than June 2019 pre-pandemic levels.

"We had a solid cost performance in first quarter 2021, despite recently rising jet fuel prices. Spending levels in many cost categories remained muted due to the pandemic. We expect capacity-driven year-over-year cost increases in second quarter 2021, most notably as we return parked aircraft to revenue service and recall a portion of our Pilots, Flight Attendants, and Ground Operations Employees from extended time-off to support increased flight levels planned for summer 2021. We currently expect second quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, to increase in the range of 10 to 15 percent, year-over-year, but remain below second quarter 2019 levels³.

"Our liquidity is strong, and we remain the only U.S. airline with an investment-grade credit rating by all three rating agencies. As of March 31, 2021, our total liquidity was $15.3 billion, consisting of cash and short-term investments of $14.3 billion and a fully available revolving credit facility of $1.0 billion. Average core cash burn⁴ was approximately $9 million per day in March 2021, and approximately $13 million per day in first quarter 2021. Including changes in working capital—most notably, cash flow from future bookings—average core cash flow turned positive in March 2021, and we generated approximately $4 million per day, as revenue and booking trends improved. Our average core cash burn in second quarter 2021 is currently estimated to be in the range of $2 million to $4 million per day. Based on current booking trends and cost outlook, we are hopeful we can achieve breakeven average core cash flow, or better, by June 2021.

"We returned the Boeing 737 MAX (MAX) to revenue service on March 11, 2021. To return the MAX to service, we satisfied applicable Federal Aviation Administration (FAA) requirements by modifying certain operating procedures; implementing enhanced Pilot training requirements; installing FAA-approved flight control software updates; and completing other required maintenance tasks specific to MAX aircraft, as well as completing more than 200 readiness flights. Also in March 2021, as previously disclosed, we completed discussions with The Boeing Company (Boeing) regarding the restructuring of our delivery schedule for MAX aircraft, and added 100 firm orders for MAX 7 aircraft; converted 70 MAX 8 firm orders to MAX 7 firm orders; added 155 MAX options; and extended the order book through 2031. This cost-effective MAX order book allows us to maintain the operational efficiencies of an all-Boeing 737 fleet to support our low-cost, point-to-point route network; accelerate our commitment to fleet modernization with more climate-friendly aircraft; and capitalize on future growth opportunities.

"This year marks our 50th anniversary, and we celebrate what has made Southwest Airlines the most successful airline in the world—our Employees. We applaud our People for their unwavering focus on Hospitality, which has resulted in the U.S. airline industry's top Customer Service ranking for 27 of the past 30 years⁵. Never has their resilience been more vital, as we work our way through the pandemic recovery while pursuing new airports and Customers.

"It is crucial that we continue managing our business prudently in the near-term, while also positioning ourselves to thrive and prosper, once again. We are increasingly optimistic about our future, and we are in the process of updating our strategic plan with a clear set of initiatives for the next five years. Among these initiatives are the aggressive expansion of our route network, having opened or announced 17 new airports since the pandemic began; the launch of Global Distribution System (GDS) access for corporate travelers; the acceleration of fleet modernization efforts to replace our 737-700 aircraft with the MAX; and the development of tangible steps that are aimed at improving upon our environmental stewardship and supporting our environmental sustainability goal to be carbon neutral by 2050. Being a good steward of the environment is not only good for our Planet, it is good for business, and it is the right thing to do for our Employees, Customers, and Shareholders."

Revenue Results and Outlook
The Company's first quarter 2021 operating revenues decreased 51.5 percent, year-over-year, to $2.1 billion, as a result of negative impacts to passenger demand and bookings due to the pandemic. First quarter 2021 operating revenue per ASM (RASM, or unit revenues) was 8.86 cents, a decrease of 26.0 percent, primarily driven by a passenger revenue yield decrease of 28.4 percent and a load factor decline of 3.4 points, all year-over-year.

The Company began first quarter 2021 experiencing stalled demand and bookings in January, driven by a high level of COVID-19 cases, coupled with typical seasonal weakness. In mid-February 2021, the Company began experiencing a modest improvement in leisure passenger demand and bookings that accelerated in March 2021. Passenger fares improved throughout March as close-in leisure demand held steady. Beach and other nature-inspired destinations continued to outperform other regions in first quarter 2021. Beginning in March 2021, demand improvement was system-wide.

The following table presents selected revenue and load factor results for first quarter 2021:

Thus far, the Company continues to experience improvements in leisure passenger demand and bookings for April and May 2021 travel, with expectations of improving passenger traffic and fares compared with March 2021. The Company continues to experience an increase in bookings farther out on the booking curve, with approximately 35 percent and 20 percent of anticipated bookings currently in place for June and July, respectively. These represent fairly typical future booking patterns; however, business travel continues to significantly lag leisure and is expected to have a significant negative impact on close-in demand and average passenger fares.

The following monthly table presents selected preliminary estimates of revenue and load factor for April and May 2021:

The Company achieved its goal of accepting corporate travel bookings in 2020 with Amadeus's GDS platform and Travelport's multiple GDS platforms: Apollo, Worldspan, and Galileo. In December 2020, the Company reached a full-participation GDS agreement with Sabre, anticipated to go live by Labor Day 2021. The Company also has an agreement with Airlines Reporting Corporation (ARC) to implement industry-standard processes to handle the settlement of tickets booked through Travelport and Amadeus channels. Once the new Sabre GDS connectivity is implemented, Sabre tickets are also expected to settle via ARC. The Company's enhancement of its GDS channel strategy complements its expansion of direct connect via Airline Tariff Publishing Company's (ATPCO) New Distribution Capability (NDC) Exchange and existing SWABIZ® options, with the goal of distributing its everyday low fares to more corporate travelers through their preferred channel.

Cost Performance and Outlook
First quarter 2021 total operating expenses decreased 57.3 percent, year-over-year, to $1.9 billion. Excluding special items, first quarter 2021 operating expenses decreased 23.5 percent, year-over-year, to $3.3 billion. Total operating expenses per ASM (CASM, or unit costs) decreased 34.9 percent, compared with first quarter 2020. Excluding special items, first quarter 2021 CASM increased 16.7 percent, year-over-year.

The following table presents economic fuel costs per gallon¹, including the impact of fuel hedging premium expense and fuel derivative contracts, for first quarter 2021 and the prior year period:

The Company continued to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity reductions due to the pandemic, which resulted in a year-over-year improvement of 4.7 percent in ASMs per gallon (fuel efficiency) in first quarter 2021. While the Company expects to return more of its 737-700 aircraft to service to support planned capacity increases, second quarter 2021 fuel efficiency is currently estimated to be sequentially in line with first quarter 2021, on a nominal basis, also taking into account the return of its most fuel-efficient aircraft, the MAX, to service in March 2021.

Based on the Company's existing fuel derivative contracts and market prices as of April 15, 2021, the following table presents estimates of economic fuel costs per gallon⁶, including the estimated impact of fuel hedging premium expense and fuel derivative contracts, for second quarter and annual 2021 and prior year periods:

As of April 15, 2021, the fair market value of the Company's fuel derivative contracts for the remainder of 2021 was an asset of approximately $44 million, and the fair market value of the fuel hedge portfolio settling in 2022 and beyond was an asset of approximately $267 million. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.

Excluding fuel and oil expense, first quarter 2021 operating expenses decreased 60.2 percent, compared with first quarter 2020. The Company accrued $24 million of profitsharing expense in first quarter 2021, compared with no profitsharing accrual in first quarter 2020. The Company's first quarter 2021 net income included special items, the largest of which was a net benefit of approximately $1.4 billion. This pre-tax benefit was comprised of approximately $1.2 billion in PSP Extension proceeds; $116 million related to the Employee Retention Tax Credit under the Coronavirus Aid, Relief, and Economic Security Act; and $115 million due to the reversal of a portion of the Company's previous accrual related to the costs for Employees who accepted the Company's offer to participate in its voluntary extended leave program. Due to increasing passenger demand and bookings, the Company plans to increase flight activity in summer 2021—by approximately 25 points of capacity from March to June 2021, compared with respective 2019 levels—which has prompted the early recall of a portion of the Employees who elected this program. The Company now estimates annual 2021 cost savings from voluntary separation and extended leave programs to be in the range of $1.1 billion to $1.2 billion compared with annual 2019, as compared with its previous estimation of approximately $1.2 billion.

Excluding fuel and oil expense, special items, and profitsharing, first quarter 2021 operating expenses decreased 19.1 percent, compared with first quarter 2020, which represented the favorable end of the Company's guidance range. The significant year-over-year decrease primarily was driven by the decline in variable, flight-driven expenses, such as salaries, wages, and benefits; maintenance expense; and landing fees; combined with the Company's continued focus on cost management. As expected, the Company realized approximately $412 million of cost savings in first quarter 2021 from voluntary separation and extended leave programs. On a unit basis, first quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing expense, increased 23.4 percent, year-over-year, primarily driven by the significant reduction in capacity.

Excluding fuel and oil expense, special items, and profitsharing, second quarter 2021 operating expenses are expected to increase in the range of 10 to 15 percent, year-over-year³, which includes an estimated $325 million of salaries, wages, and benefits cost savings from voluntary separation and extended leave programs. Second quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are also expected to increase compared with first quarter 2021, with 60 to 70 percent of the sequential increase attributable to variable, flight-driven expenses as capacity is expected to increase to near-2019 levels by June 2021. These variable, flight-driven cost increases are primarily in salaries, wages, and benefits due to staffing increases; maintenance expense to return aircraft to revenue service, along with higher flight-driven maintenance expenses as flight levels increase; landing fees; and personnel, passenger, and revenue-related costs. In addition, the Company is experiencing cost increases primarily due to airport cost inflation; higher aircraft ownership costs due to MAX deliveries; and certain favorable tax and insurance settlements realized in first quarter 2021 operating expenses that are non-recurring in second quarter 2021. Despite increasing capacity and operating expenses, both sequentially and year-over-year, second quarter 2021 operating expenses are estimated to remain below second quarter 2019 levels.

Other expenses in first quarter 2021 increased by $19 million, year-over-year, primarily due to an increase in interest expense driven by new debt issued during 2020, and lower interest income as a result of lower interest rates.

The Company's first quarter 2021 effective tax rate was 21 percent, and the Company currently estimates its annual 2021 effective tax rate to be approximately 23 percent.

Liquidity and Capital Deployment
As of March 31, 2021, the Company had approximately $14.3 billion in cash and short-term investments, and a fully available revolving secured credit facility of $1.0 billion. The Company currently has unencumbered assets with an estimated value of more than $11 billion, including aircraft value estimated in the range of $9 billion to $10 billion, and approximately $2 billion in non-aircraft assets such as spare engines, ground equipment, and real estate. In addition to the value from aircraft and other physical assets, the Company has significant value from its Rapid Rewards® loyalty program. As of April 21, 2021, the Company's cash and short-term investments remained at approximately $14.3 billion.

Net cash provided by operations during first quarter 2021 was $645 million, primarily driven by PSP Extension proceeds. First quarter 2021 capital expenditures were $95 million. The Company estimates its 2021 capital expenditures to be approximately $500 million, primarily driven by technology, facilities, and operational investments. Based on the Company's recently completed aircraft purchase agreement with Boeing, the Company estimates its total contractual aircraft capital expenditures for all years 2021 through 2026, which are associated with 169 MAX firm orders (135 MAX 7 and 34 MAX 8 aircraft), to be approximately $5.1 billion. The Company currently estimates approximately $700 million of aircraft capital expenditures in 2022, based on firm orders. The Company has not finalized its 2022 fleet or capital investment plans.

During first quarter 2021, the Company reached an agreement with the U.S. Department of Treasury (Treasury) and received approximately $1.7 billion in PSP Extension proceeds under the Consolidated Appropriations Act, 2021. The Company soon expects to receive approximately $259 million as its final distribution pursuant to the PSP Extension, for a total of approximately $2.0 billion of proceeds under this program. In addition, the Company soon expects to reach agreement with Treasury to receive approximately $1.9 billion in payroll support proceeds under the American Rescue Plan Act of 2021 (PSP 3) in return for providing consideration to Treasury in the form of a promissory note and warrants. The Company intends to disclose additional details regarding PSP 3 after the agreement with Treasury is finalized.

As of March 31, 2021, the Company had current and non-current debt obligations that totaled $10.8 billion. The Company repaid approximately $67 million in debt and finance lease obligations during first quarter 2021 and is scheduled to repay approximately $153 million more in debt and finance lease obligations in 2021. Based on current debt outstanding and current market interest rates, the Company expects second quarter 2021 interest expense to be approximately $115 million. As of March 31, 2021, the Company was in a net cash position⁷ of $3.6 billion, and its adjusted debt⁸ to invested capital (leverage) was 57 percent.

Fleet and Capacity
The Company ended first quarter 2021 with 730 aircraft in its fleet, including 61 MAX 8 aircraft. During first quarter 2021, the Company took delivery of 20 MAX 8 aircraft, comprised of 12 owned and 8 leased aircraft. The Company expects delivery of eight more MAX 8 aircraft in 2021. Also during first quarter 2021, the Company returned eight leased 737-700 aircraft to lessors and expects to retire up to nine more 737-700 aircraft in 2021. In response to capacity reductions due to the effects of the pandemic, 59 737-700 aircraft were in temporary storage as of March 31, 2021. In April, the Company also removed 32 of its MAX 8 aircraft from service due to a Boeing production issue related to the electrical power system on a subset of MAX aircraft. Upon learning of the issue, the Company immediately removed these aircraft from service, out of an abundance of caution, and is currently awaiting more guidance from Boeing and the FAA regarding the appropriate corrective actions. The Company is in the process of returning its stored 737-700 aircraft to revenue service to support flight schedules in summer 2021 and beyond.

The Company's order book with Boeing includes a total of 349 MAX firm orders (200 MAX 7 and 149 MAX 8) and 270 MAX options (MAX 7 or MAX 8) for years 2021 through 2031. Additional information regarding the Company's aircraft delivery schedule is included in the accompanying tables.

The Company's first quarter 2021 capacity decreased 34.5 percent, year-over-year, in line with the Company's guidance, due to capacity reductions in light of the decrease in passenger demand and bookings as a result of the pandemic. The following table presents capacity results for first quarter 2021:

The Company estimates its second quarter 2021 capacity to increase approximately 90 percent, year-over-year, and decrease approximately 15 percent as compared with 2019, driven by improving passenger demand and bookings. The following table presents capacity estimates for second quarter 2021:

Passenger demand and booking trends remain primarily leisure-oriented and inconsistent by region. Despite recent improvements in leisure demand, the Company remains cautious in this uncertain environment and continues to plan for multiple fleet and capacity scenarios. The Company will continue to monitor demand and booking trends and adjust capacity, as needed. As such, the Company's actual flown capacity may differ materially from currently published flight schedules or current estimations.

Awards and Recognitions

• Named the #1 U.S. airline in the Wall Street Journal's annual ranking for 2020
• Named to FORTUNE's list of World's Most Admired Companies; ranked #14
• #1 Marketing Carrier in Customer Satisfaction per the U.S. Department of Transportation (DOT)⁵
• Named the top domestic airline for customer service by the 2021 Elliot Readers' Choice Customer Service Awards
• Named Domestic Carrier of the Year by the Airforwarders Association for the 12th consecutive year
• Named to Glassdoor's Best Places to Work list for the 12th consecutive year
• Designated a 2021 Military Friendly Company by Viqtory
• Named one of the 25 Best Companies for Latinos to Work by Latino Leaders Magazine
• Named as A Best Place To Work For LGBTQ Equality from the Human Rights Campaign Foundation

Conference Call
The Company will discuss its first quarter 2021 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
http://www.southwestairlinesinvestorrelations.com.

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 outlook, expectations, and projected results of operations, including factors and assumptions underlying the Company's expectations and projections; (ii) the Company's plans and expectations with respect to capacity and capacity adjustments, including the Company's related beliefs regarding consumer demand; (iii) the Company's expectations regarding capacity-driven cost increases, and the associated return of parked aircraft to revenue service and the Company's recall of Employees from extended time-off; (iv) the Company's expectations with respect to liquidity and average core cash burn and core cash flows, including the Company's underlying cost assumptions; (v) the Company's initiatives, including its environmental sustainability goal; (vi) the Company's expectations regarding passenger traffic and fares; (vii) the Company's expectations and goals related to its enhancement of corporate travel options; (viii) the Company's expectations with respect to fuel efficiency and fuel costs and the Company's related management of risk associated with changing jet fuel prices, including factors underlying the Company's expectations; (ix) the Company's plans, estimates, and assumptions related to capital spending and repayment of debt and finance lease obligations; (x) the Company's expectations related to additional receipt of payroll support pursuant the PSP Extension under the Consolidated Appropriations Act, 2021 and pursuant to the American Rescue Plan of 2021; and (xi) the Company's plans and expectations regarding its fleet and fleet delivery schedule, including factors and assumptions underlying the Company's plans and expectations. 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 extent of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, including through any new variant strains of the underlying virus; the effectiveness and availability of vaccines; the duration and scope of related government orders and restrictions; the duration and scope of the Company's actions to address Customer and Employee health concerns; the extent of the impact of the COVID-19 pandemic on overall demand for air travel and the Company's related business plans and decisions; any negative impact of the COVID-19 pandemic on the Company's ability to retain key Employees; and any negative impact of the COVID-19 pandemic on the Company's access to capital; (ii) the impact of fears or actual outbreaks of other diseases, economic conditions, extreme or severe weather and natural disasters, fears of terrorism or war, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), consumer perception, 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; (iii) the Company's dependence on Boeing with respect to the Company's fleet order book, delivery schedule, and other performance requirements under its agreements with the Company, including with respect to the Company's ability to return all of its MAX aircraft to revenue service; (iv) the Company's and Boeing's dependence on other third-party providers to perform in accordance with expectations in connection with the manufacture and delivery of aircraft; (v) the impact of governmental actions and governmental regulations on the Company's plans, strategies, financial results, and operations; (vi) the Company's dependence on other third parties, in particular with respect to corporate travel enhancements, and the impact on the Company's operations and results of operations of any third party delays or non-performance; (vii) 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; (viii) 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; (ix) Treasury's right pursuant to payroll support laws and documents to amend the documents or require new or additional conditions in ways that may be materially adverse to the Company; (x) the enactment or adoption of future laws, statutes, and regulations and interpretation or enforcement of current and future laws, statutes, and regulations that affect the terms or application of the payroll support documents and that may have a material adverse effect on the Company; (xi) the impact of labor matters on the Company's results of operations, business decisions, plans, and strategies; and (xii) 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, 2020.

SW-QFS

Southwest Airlines Co.
Comparative Consolidated Operating Statistics
(unaudited)

Relevant comparative operating statistics for the three months ended March 31, 2021 and 2020 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company's performance against its results for the prior year period, as well as against the performance of the Company's peers. 

Southwest Airlines Co.
Supplemental Information Compared with 2019
(unaudited)

The Company believes certain comparisons with 2019 are more relevant measures of performance than year-over-year comparisons due to the significant impacts in 2020 due to the pandemic. Therefore, the below supplemental information is provided for reference.

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 loss, non-GAAP; Other (gains) losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income taxes, net, non-GAAP; Net loss, non-GAAP; and Net 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 the 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, 2020.

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 Program Extension, 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 program;
3. Adjustments for prior period losses reclassified from AOCI associated with forward-starting interest rate swap agreements that were terminated in prior periods related to eleven 737 MAX 8 aircraft leases; and
4. Unrealized losses related to nine forward-starting interest rate swap agreements. During first quarter 2020, the interest rate swap agreements, which were related to nine 737 MAX 8 aircraft leases (with deliveries originally scheduled between June 2020 and September 2020), were de-designated as hedges due to the scheduled delivery range no longer being probable, resulting in the mark-to-market changes being recorded to earnings.

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 loss, non-GAAP; Other (gains) losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income taxes, net, non-GAAP; Net loss, non-GAAP; and Net loss per share, diluted, non-GAAP.

The Company has also utilized and provided average cash burn and average daily core cash burn which are non-GAAP financial measures. Cash burn is a supplemental measure that most U.S. airlines began providing in 2020 to measure liquidity in light of the negative financial effects of the pandemic. For the three months ended March 31, 2021, average daily core cash burn was approximately $13 million, calculated as Loss before income taxes, non-GAAP, of $1.3 billion (as provided in the above Non-GAAP reconciliation), adjusted for Depreciation and amortization expense of $312 million; Capital expenditures of $95 million; and adjusted amortizing debt service payments of approximately $67 million; divided by the number of days in the period. The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable break-even or positive results on a cash basis.

Given that the Company's cash burn calculation is derived from Loss before income taxes, non-GAAP, the Company excludes the following items in its calculation of average core cash burn: financing transactions; Payroll Support Program proceeds; extended emergency time off program payments; and other changes in working capital. Cash burn methodology varies by airline, and the Company's first quarter 2021 average daily core cash burn of $13 million may differ materially by utilizing cash burn calculations that adjust for changes in working capital. Utilizing an alternative cash burn approach, which adjusts for changes in working capital, among other items, the Company's first quarter 2021 daily cash burn was also approximately $5 million.

SOURCE Southwest Airlines Co.

Related Links

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