SOUTHWEST AIRLINES REPORTS SECOND QUARTER 2023 RESULTS

Jun 19, 2023

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27 Jul, 2023, 06:45 ET

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DALLAS, July 27, 2023 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its second quarter 2023 financial results:

Bob Jordan, President and Chief Executive Officer, stated, "We are pleased to report a solid quarter amid continued strong demand. We generated all-time record quarterly operating revenues, produced a very strong operational performance, and delivered healthy net income. The resilient demand environment, especially for close-in leisure travel, drove second quarter 2023 operating revenue per available seat mile to the high end of our expectations. Further, we continue to expect $1.0 billion to $1.5 billion of pre-tax profit contribution in full year 2023 from strategic initiatives outlined at our Investor Day last December. Based on current revenue and cost trends, we expect record operating revenue and a profitable outlook again for third quarter 2023 and continue to expect year-over-year margin expansion for full year 2023.

"Our People delivered a very smooth and reliable operation in second quarter 2023, despite disruptive weather. We operated a record number of flights and carried a record number of Customers and bags, all while achieving a completion factor of more than 99 percent—our highest second quarter performance in the past 10 years. This solid operating performance has continued into July, where we have been able to minimize cancellations amid continued weather challenges throughout the network.

"I am very proud of, and grateful for, our amazing People and the great progress they made towards our goals in the first half of the year. To name only a few, we have largely restored our network, developed and are on-track with a robust winter operations plan, implemented a new revenue management system, and added necessary staffing to fully utilize our fleet, ahead of schedule, by the end of third quarter.

"Although our network is largely restored, it is not yet optimized. We are working to align our network, fleet plans, and staffing to better reflect the current business environment. While business revenues continue to recover, they are not back to pre-pandemic levels—therefore, we are revamping our 2024 flight schedules to reflect post-pandemic changes to Customer travel patterns. We estimate these meaningful network optimization efforts and the continued maturation of our development markets will contribute roughly $500 million in incremental year-over-year pre-tax profits in 2024, which we believe will support another year of margin expansion. As ever, we are committed to our goals of achieving industry-leading operational and financial performance, boosting our operational resilience, and widening our Customer Service advantage by enhancing our digital Hospitality."

Guidance and Outlook:

The following tables introduce or update selected financial guidance for third quarter and full year 2023, as applicable:

3Q 2023 Estimation

RASM (a), year-over-year

Down 3% to 7%

ASMs (b), year-over-year

Up ~12%

Economic fuel costs per gallon1,3

$2.55 to $2.65

Fuel hedging premium expense per gallon

$0.05

Fuel hedging cash settlement gains per gallon

$0.08

ASMs per gallon (fuel efficiency)

79 to 80

CASM-X (c), year-over-year1,4

Up 3.5% to 6.5%

Scheduled debt repayments (millions)

~$8

Interest expense (millions)

~$63

2023 Estimation

Previous estimation

ASMs (b), year-over-year

Up 14% to 15%

No change

Economic fuel costs per gallon1,3

$2.70 to $2.80

$2.60 to $2.70

Fuel hedging premium expense per gallon

$0.06

No change

Fuel hedging cash settlement gains per gallon

$0.09

$0.10

CASM-X, year-over-year1,4

Down 1% to 2%

Down 2% to 4%

Scheduled debt repayments (millions)

~$83

~$85

Interest expense (millions)

~$255

~$250

Aircraft (d)

814

No change

Effective tax rate

23% to 24%

No change

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 March 6, 2024. The Company continues to expect fourth quarter 2023 capacity to increase in the range of 20 percent to 22 percent, year-over-year, and currently expects first quarter 2024 capacity to increase in the range of 14 percent to 16 percent, year-over-year, of which nearly 90 percent is from the carryover effect of capacity growth in 2023.

(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 continues to plan for approximately 70 Boeing 737-8 ("-8") aircraft deliveries and 26 Boeing 737-700 ("-700") aircraft retirements in 2023, ending the year with 814 aircraft. The delivery schedule for the Boeing 737-7 ("-7") is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to The Boeing Company ("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 therefore offers no assurances that current estimations and timelines are correct.

Revenue Results and Outlook:

The Company's second quarter 2023 revenue performance was an all-time quarterly record driven primarily by strong leisure demand. Second quarter 2023 managed business revenues also improved sequentially compared with first quarter 2023, which was attributable to growth in corporate accounts and passengers as the Company continued to see gains in business travel market share. The Rapid Rewards® program continues to be a point of strength, with record second quarter new Member additions, a record level of Member engagement, and record second quarter spend on the Company's co-branded Chase® Visa credit card. Second quarter 2023 also saw a record for ancillary revenue.

Second quarter 2023 RASM decreased 8.3 percent, year-over-year, driven largely by a five point headwind from approximately $300 million of additional breakage revenue in second quarter 2022. The higher breakage in second quarter 2022 was driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits5. The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

Thus far, the Company has experienced strong leisure demand and yields for July travel. Based on current booking and revenue trends, the Company anticipates a third quarter 2023 RASM decline of 3 percent to 7 percent, year-over-year, driven by challenging comparisons from the pent-up travel demand surge in 2022, and higher than seasonally-normal growth, as the Company works to close out the restoration of the network and normalizes the utilization of the fleet.

Fuel Costs and Outlook:

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 in 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 July 19, 2023.

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

Average Brent Crude Oilprice per barrel

3Q 2023

4Q 2023

$60

$2.00 - $2.10

$70

$2.30 - $2.40

Current Market (a)

$2.55 - $2.65

$2.50 - $2.60

$90

$2.80 - $2.90

$100

$3.00 - $3.10

$110

$3.25 - $3.35

Fair market value

$47 million

$55 million

Estimated premium costs

$30 million

(a) Brent crude oil average market prices as of July 19, 2023, was $79 per barrel for each of third quarter and fourth quarter 2023.

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)

2023

51 %

2024

54 %

2025

41 %

2026

Less than 10%

(a) Based on the Company's current available seat mile plans. The Company is currently 49 percent hedged for third quarter 2023 and 47 percent hedged for fourth quarter 2023.

Non-Fuel Costs and Outlook:

The majority of the Company's second quarter 2023 CASM-X 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 for the Company's Boeing 737-800 fleet.

The Company expects third quarter 2023 CASM-X to increase in the range of 3.5 percent to 6.5 percent, year-over-year, primarily due to continued inflationary cost pressures, including higher labor rates for all Employee workgroups and increased market wage rate accruals. Overall, nominal cost trends are expected to remain fairly consistent sequentially from second quarter 2023.

The Company currently expects its full year 2023 CASM-X to decrease in the range of 1 percent to 2 percent, year-over-year. The one and a half points of pressure, relative to prior expectations, are driven primarily by an increase in market wage rate accruals for the Company's open collective bargaining agreements as the Company continues to adjust to the dynamic market environment.

Second quarter 2023 other expenses decreased $213 million, year-over-year. The decrease was primarily due to a $116 million increase in interest income driven by higher interest rates, coupled with a $28 million decrease in interest expense driven by various debt repurchases and repayments throughout 2022.

Capacity, Fleet, and Capital Spending:

The Company's flight schedule is currently published for sale through March 6, 2024. Taking into consideration the efforts to revamp its 2024 flight schedules, the Company currently expects first quarter 2024 capacity to increase in the range of 14 percent to 16 percent, year-over-year, of which nearly 90 percent is from the carryover effect of capacity growth in 2023. The Company expects its remaining 2024 year-over-year capacity growth to ease sequentially each quarter relative to first quarter 2024 levels as the Company works toward its long-term goal of mid-single-digit year-over-year capacity growth.

During second quarter 2023, the Company received 21 -8 aircraft and retired 11 -700 aircraft, ending second quarter with 803 aircraft. The Company continues to plan for approximately 70 -8 aircraft deliveries from Boeing and 26 -700 retirements in 2023. The Company's planned deliveries continue to differ from its order book displayed in the table below. 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 second quarter 2023 capital expenditures were $925 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 70 -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 also estimates its total annual capital spending to be approximately $4 billion, on average, for the five years 2023 through 2027.

Since the Company's previous disclosure on April 27, 2023, the Company exercised 19 -7 options for delivery in 2024 and converted 16 2024 -7 firm orders to -8 firm orders. The following tables provide further information regarding the Company's order book and compare its order book as of July 27, 2023 with its previous order book as of April 27, 2023. For purposes of the delivery schedule below, the Company continues to include the remaining 46 of its 2022 contractual undelivered aircraft (14 -7s and 32 -8s) within its 2023 commitments. The Company is working to reflow its order book with Boeing in a way that provides orderly and measured growth in 2024 and beyond.

Current 737 Order Book as of July 27, 2023:

The Boeing Company

-7 Firm Orders

-8 Firm Orders

-7 or -8 Options

Total

2023

105

—

136

(c)

2024

—

2025

—

2026

2027

2028

—

2029

—

2030

—

2031

—

192

(a)

270

(b)

102

564

(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 51 -8 deliveries received year-to-date through June 30, 2023. In addition, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft (14 -7s and 32 -8s) within its 2023 commitments. The Company continues to plan for approximately 70 -8 aircraft deliveries in 2023. The 2023 order book detail is as follows:

The Boeing Company

-7Firm Orders

-8Firm Orders

Total

2022 Contractual Deliveries Remaining

2023 Contractual Deliveries

2023 Total

105

136

Previous 737 Order Book as of April 27, 2023 (a):

The Boeing Company

-7 Firm Orders

-8 Firm Orders

-7 or -8 Options

Total

2023

105

—

136

2024

2025

—

2026

2027

2028

—

2029

—

2030

—

2031

—

189

254

121

564

(a) The 'Previous 737 Order Book' is for reference and comparative purposes only. It should no longer be relied upon. See 'Current 737 Order Book' for the Company's current aircraft order book.

Liquidity and Capital Deployment:

Awards and Recognitions:

Environmental, Social, and Governance ("ESG"):

Conference Call:

The Company will discuss its second quarter 2023 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

1 See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items. In addition, information regarding special items and economic results is included in the accompanying table Reconciliation of Reported Amounts to Non-GAAP Measures (also referred to as "excluding special items").2 Includes $12.2 billion in cash and cash equivalents, short-term investments, and a fully available revolving credit line of $1.0 billion.3 Based on the Company's existing fuel derivative contracts and market prices as of July 19, 2023, third quarter, fourth quarter, and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.55 to $2.65, $2.50 to $2.60, and $2.70 to $2.80, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, or the impact to its financial statements in future periods. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.4 Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.5 Flight credits result from canceling reservations and previously were valid for no longer than one year from the date of original purchase. Flight credits for non-refundable fares are issued as long as the reservation is cancelled more than 10 minutes prior to the scheduled departure. Flight credits or refunds for refundable fares are issued regardless of cancellation time. Flight credits unexpired on, or created on or after July 28, 2022, do not expire. A flight credit with an expiration date on or before July 27, 2022, has expired in accordance with its existing expiration date.6 The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for each respective period. The Company's maximum number of gallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices. The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes used to calculate the Company's maximum fuel hedged percentages, as market prices and the Company's fuel consumption fluctuate.7 Net cash position is calculated as the sum of cash and cash equivalents and short-term investments, less the sum of short-term and long-term debt.8 See Note Regarding Use of Non-GAAP Financial Measures for an explanation of the Company's leverage calculation.9 The Company's carbon emissions intensity reduction goals are compared against a 2019 baseline on a revenue ton kilometer ("RTK") basis, including Scope 1, Scope 2, and Scope 3 Category 3 emissions (upstream emissions of jet fuel), and include the use of sustainable aviation fuel and exclude the use of carbon offsets.

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 with respect to its strategic initiatives outlined at the Company's Investor Day in December 2022 and including factors and assumptions underlying the Company's expectations and projections; (ii) the Company's expectations with respect to the completion of its action plan in response to the December 2022 operational disruption, including with respect to timing of completion and associated expenditures; (iii) the Company's expectations with respect to staffing levels necessary to fully utilize its fleet; (iv) the Company's plans and expectations with respect to its network optimization efforts and the maturation of its development markets; (v) the Company's goals of achieving industry-leading operational and financial performance, boosting operational resilience, and widening its Customer Service advantage; (vi) the Company's capacity and network plans and expectations, including with respect to adjustments and restoring its network, and including factors and assumptions underlying the Company's expectations and projections; (vii) 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; (viii) 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; (ix) the Company's fleet plans and expectations, include with respect to expected fleet deliveries and retirements and including factors and assumptions underlying the Company's plans and expectations; (x) the Company's expectations regarding passenger demand, revenue trends, and bookings, including with respect to managed business revenues; (xi) the Company's labor plans and expectations; and (xii) the Company's plans, expectations, and goals with respect to environmental sustainability. 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 Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; (ii) the impact of fears or actual outbreaks of 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, banking conditions, fears of terrorism or war, sociodemographic 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; (iii) the emergence of additional costs or effects associated with the cancelled flights in December 2022, including litigation, government investigation and actions, and internal actions; (iv) the Company's dependence on its workforce, including its ability to employ sufficient numbers of qualified Employees to effectively and efficiently maintain its operations; (v) the Company's ability to obtain and maintain adequate infrastructure and equipment to support its operations and initiatives; (vi) 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; (vii) the Company's dependence on Boeing and Boeing suppliers with respect to the Company's aircraft deliveries, fleet and capacity plans, operations, strategies, and goals; (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 technology plans, its plans and expectations related to operational resiliency, fuel supply, environmental sustainability; 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 Company's ability to timely and effectively prioritize its initiatives and focus areas and related expenditures; (xi) the impact of labor matters on the Company's business decisions, plans, strategies, and results; (xii) the impact of governmental regulations and other governmental actions on the Company's business plans, results, and operations; and (xiii) 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, 2022.

Southwest Airlines Co.

Condensed Consolidated Statement of Income

(in millions, except per share amounts)

(unaudited)

Three months ended

Six months ended

June 30,

2023

2022

Percent

Change

2023

2022

Percent

Change

OPERATING REVENUES:

Passenger

6,409

6,119

4.7

11,514

10,254

12.3

Freight

—

(2.2)

Other

581

562

3.4

1,142

1,079

5.8

Total operating revenues

7,037

6,728

4.6

12,743

11,422

11.6

OPERATING EXPENSES, NET:

Salaries, wages, and benefits

2,786

2,220

25.5

5,264

4,450

18.3

Fuel and oil

1,403

1,636

(14.2)

2,950

2,640

11.7

Maintenance materials and repairs

271

210

29.0

511

420

21.7

Landing fees and airport rentals

459

388

18.3

867

733

18.3

Depreciation and amortization

367

325

12.9

731

649

12.6

Other operating expenses

956

791

20.9

1,909

1,523

25.3

Total operating expenses, net

6,242

5,570

12.1

12,232

10,415

17.4

OPERATING INCOME

795

1,158

(31.3)

511

1,007

(49.3)

OTHER EXPENSES (INCOME):

Interest expense

(30.1)

130

186

(30.1)

Capitalized interest

(5)

(11)

(54.5)

(11)

(20)

(45.0)

Interest income

(144)

(28)

n.m.

(269)

(31)

n.m.

Loss on extinguishment of debt

—

n.m.

—

116

n.m.

Other (gains) losses, net

(7)

n.m.

(21)

n.m.

Total other expenses (income)

(91)

122

n.m.

(171)

347

n.m.

INCOME BEFORE INCOME TAXES

886

1,036

(14.5)

682

660

3.3

PROVISION FOR INCOME TAXES

203

276

(26.4)

158

178

(11.2)

NET INCOME

683

760

(10.1)

524

482

8.7

NET INCOME PER SHARE:

Basic

1.15

1.29

(10.6)

0.88

0.83

6.6

Diluted

1.08

1.20

(10.1)

0.84

0.77

9.8

WEIGHTED AVERAGE SHARES OUTSTANDING:

Basic

595

593

0.3

595

593

0.3

Diluted

639

635

0.6

639

640

(0.2)

Southwest Airlines Co.

Reconciliation of Reported Amounts to Non-GAAP Financial Measures (excluding special items)

(See Note Regarding Use of Non-GAAP Financial Measures)

(in millions, except per share and per ASM amounts)(unaudited)

Three months ended

Six months ended

June 30,

Percent

June 30,

Percent

2023

2022

Change

2023

2022

Change

Fuel and oil expense, unhedged

1,418

1,942

2,992

3,148

Add: Premium cost of fuel contracts designated as hedges

Deduct: Fuel hedge gains included in Fuel and oil expense, net

(45)

(332)

(103)

(561)

Fuel and oil expense, as reported (economic)

1,403

1,636

(14.2)

2,950

2,640

11.7

Total operating expenses, net, as reported

6,242

5,570

12,232

10,415

Deduct: Impairment of long-lived assets

—

(15)

—

(31)

Deduct: Litigation settlement

(12)

—

(12)

—

Total operating expenses, excluding special items

6,230

5,555

12.2

12,220

10,384

17.7

Deduct: Fuel and oil expense, as reported (economic)

(1,403)

(1,636)

(2,950)

(2,640)

Operating expenses, excluding Fuel and oil expense and special items

4,827

3,919

23.2

9,270

7,744

19.7

Deduct: Profitsharing expense

(121)

(81)

(121)

(118)

Operating expenses, excluding Fuel and oil expense, special items, and profitsharing

4,706

3,838

22.6

9,149

7,626

20.0

Operating income, as reported

795

1,158

511

1,007

Add: Impairment of long-lived assets

—

Add: Litigation settlement

—

Operating income, excluding special items

807

1,173

(31.2)

523

1,038

(49.6)

Other (gains) losses, net, as reported

(7)

(21)

Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods

(6)

(15)

Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities

—

(4)

(7)

Other (gains) losses, net, excluding special items

(13)

n.m.

(23)

n.m.

Income before income taxes, as reported

886

1,036

682

660

Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods

(20)

Add: Impairment of long-lived assets

—

Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities

—

(4)

Add: Loss on extinguishment of debt

—

116

Add: Litigation settlement

—

Income before income taxes, excluding special items

904

1,078

(16.1)

696

829

(16.0)

Provision for income taxes, as reported

203

276

158

178

Add (Deduct): Net income tax impact of fuel and special items (a)

(23)

Provision for income taxes, net, excluding special items

211

253

(16.6)

166

196

(15.3)

Net income, as reported

683

760

524

482

Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods

(20)

Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities

—

(4)

Add (Deduct): Net income tax impact of special items (a)

(8)

(18)

Add: Loss on extinguishment of debt

—

116

Add: Impairment of long-lived assets

—

Add: Litigation settlement

—

Net income, excluding special items

693

825

(16.0)

530

633

(16.3)

Net income per share, diluted, as reported

1.08

1.20

0.84

0.77

Add: Impact of special items

0.01

0.08

0.01

0.24

Add (Deduct): Net impact of net income above from fuel contracts divided by dilutive shares

0.01

(0.03)

0.01

0.02

Add (Deduct): Net income tax impact of special items (a)

(0.01)

0.05

(0.01)

(0.03)

Net income per share, diluted, excluding special items

1.09

1.30

(16.2)

0.85

1.00

(15.0)

Operating expenses per ASM (cents)

14.66

14.92

15.17

14.52

Deduct: Impact of special items

(0.03)

(0.04)

(0.02)

(0.05)

Deduct: Fuel and oil expense divided by ASMs

(3.29)

(4.38)

(3.65)

(3.68)

Deduct: Profitsharing expense divided by ASMs

(0.29)

(0.22)

(0.15)

(0.16)

Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)

11.05

10.28

7.5

11.35

10.63

6.8

(a)

Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

Southwest Airlines Co.

Comparative Consolidated Operating Statistics

(unaudited)

Relevant comparative operating statistics for the three and six months ended June 30, 2023 and 2022 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.

Three months ended

Six months ended

June 30,

Percent

June 30,

Percent

2023

2022

Change

2023

2022

Change

Revenue passengers carried (000s)

35,715

33,224

7.5

65,947

59,253

11.3

Enplaned passengers (000s)

44,787

41,284

8.5

82,452

73,289

12.5

Revenue passenger miles (RPMs) (in millions) (a)

35,505

32,523

9.2

65,052

59,006

10.2

Available seat miles (ASMs) (in millions) (b)

42,579

37,322

14.1

80,641

71,706

12.5

Load factor (c)

83.4 %

87.1 %

(3.7) pts.

80.7 %

82.3 %

(1.6)

Average length of passenger haul (miles)

994

979

1.5

986

996

(1.0)

Average aircraft stage length (miles)

728

727

0.1

722

745

(3.1)

Trips flown

365,089

326,848

11.7

699,210

614,599

13.8

Seats flown (000s) (d)

57,904

50,758

14.1

110,622

95,305

16.1

Seats per trip (e)

158.6

155.3

2.1

158.2

155.1

2.0

Average passenger fare

179.44

184.17

(2.6)

174.60

173.06

0.9

Passenger revenue yield per RPM (cents) (f)

18.05

18.81

(4.0)

17.70

17.38

1.8

RASM (cents) (g)

16.53

18.03

(8.3)

15.80

15.93

(0.8)

PRASM (cents) (h)

15.05

16.39

(8.2)

14.28

14.30

(0.1)

CASM (cents) (i)

14.66

14.92

(1.7)

15.17

14.52

4.5

CASM, excluding Fuel and oil expense (cents)

11.37

10.54

7.9

11.51

10.84

6.2

CASM, excluding special items (cents)

14.63

14.88

(1.7)

15.15

14.48

4.6

CASM, excluding Fuel and oil expense and special items (cents)

11.34

10.50

8.0

11.50

10.80

6.5

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

11.05

10.28

7.5

11.35

10.63

6.8

Fuel costs per gallon, including fuel tax (unhedged)

2.63

3.99

(34.1)

2.93

3.41

(14.1)

Fuel costs per gallon, including fuel tax

2.60

3.36

(22.6)

2.88

2.86

0.7

Fuel costs per gallon, including fuel tax (economic)

2.60

3.36

(22.6)

2.88

2.86

0.7

Fuel consumed, in gallons (millions)

538

486

10.7

1,021

923

10.6

Active fulltime equivalent Employees

71,299

62,289

14.4

71,299

62,289

14.4

Aircraft at end of period (j)

803

730

10.0

803

730

10.0

(a) A revenue passenger mile is one paying passenger flown one mile. Also referred to as "traffic," which is a measure of demand for a given period.

(b) An available seat mile is one seat (empty or full) flown one mile. Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period.

(d) Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period.

(e) Seats per trip is calculated by dividing seats flown by trips flown.

(f) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.

(g) RASM (unit revenue) - Operating revenue yield per ASM, calculated as operating revenue divided by available seat miles. Also referred to as "operating unit revenues," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.

(h) PRASM (Passenger unit revenue) - Passenger revenue yield per ASM, calculated as passenger revenue divided by available seat miles. Also referred to as "passenger unit revenues," this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.

(i) CASM (unit costs) - Operating expenses per ASM, calculated as operating expenses divided by available seat miles. Also referred to as "unit costs" or "cost per available seat mile," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.

(j) Included three and four Boeing 737 Next Generation aircraft in storage as of June 30, 2023 and June 30, 2022, respectively.

Southwest Airlines Co.

Condensed Consolidated Balance Sheet

(in millions)

(unaudited)

June 30, 2023

December 31, 2022

ASSETS

Current assets:

Cash and cash equivalents

9,158

9,492

Short-term investments

3,021

2,800

Accounts and other receivables

1,233

1,040

Inventories of parts and supplies, at cost

714

790

Prepaid expenses and other current assets

535

686

Total current assets

14,661

14,808

Property and equipment, at cost:

Flight equipment

25,229

23,725

Ground property and equipment

7,159

6,855

Deposits on flight equipment purchase contracts

324

376

Assets constructed for others

32,755

30,984

Less allowance for depreciation and amortization

14,159

13,642

18,596

17,342

Goodwill

970

Operating lease right-of-use assets

1,335

1,394

Other assets

957

855

36,519

35,369

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

1,882

2,004

Accrued liabilities

2,468

2,043

Current operating lease liabilities

226

225

Air traffic liability

7,121

6,064

Current maturities of long-term debt

Total current liabilities

11,728

10,378

Long-term debt less current maturities

7,994

8,046

Air traffic liability - noncurrent

1,938

2,186

Deferred income taxes

2,057

1,985

Noncurrent operating lease liabilities

1,077

1,118

Other noncurrent liabilities

936

969

Stockholders' equity:

Common stock

888

Capital in excess of par value

4,103

4,037

Retained earnings

16,571

16,261

Accumulated other comprehensive income

344

Treasury stock, at cost

(10,831)

(10,843)

Total stockholders' equity

10,789

10,687

36,519

35,369

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

(in millions) (unaudited)

Three months ended June 30,

Six months ended June 30,

2023

2022

2023

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

683

760

524

482

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization

367

325

731

649

Impairment of long-lived assets

—

Unrealized mark-to-market adjustment on available for sale securities

—

(4)

Unrealized/realized (gain) loss on fuel derivative instruments

(20)

Deferred income taxes

209

272

157

174

Loss on extinguishment of debt

—

116

Changes in certain assets and liabilities:

Accounts and other receivables

439

(188)

105

Other assets

(1)

109

(45)

Accounts payable and accrued liabilities

364

328

293

506

Air traffic liability

(137)

(92)

809

793

Other liabilities

(44)

(103)

(90)

(209)

Cash collateral received from (provided to) derivative counterparties

(16)

(101)

(46)

284

Other, net

(118)

(178)

Net cash provided by operating activities

1,416

1,906

2,123

2,977

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(925)

(987)

(1,971)

(1,497)

Assets constructed for others

(8)

(3)

(14)

(6)

Purchases of short-term investments

(1,522)

(1,545)

(3,727)

(2,470)

Proceeds from sales of short-term and other investments

1,828

980

3,508

2,280

Net cash used in investing activities

(627)

(1,555)

(2,204)

(1,693)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Employee stock plans

Payments of long-term debt and finance lease obligations

(8)

(53)

(67)

(146)

Payments of cash dividends

—

(214)

—

Payments for repurchases and conversions of convertible debt

—

(178)

—

(409)

Other, net

Net cash provided by (used in) financing activities

(215)

(253)

(530)

NET CHANGE IN CASH AND CASH EQUIVALENTS

799

136

(334)

754

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

8,359

13,098

9,492

12,480

CASH AND CASH EQUIVALENTS AT END OF PERIOD

9,158

13,234

9,158

13,234

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, non-GAAP; Other (gains) losses, net, non-GAAP; Income before income taxes, non-GAAP; Provision for income taxes, net, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). 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, 2022.

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:

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, non-GAAP; Other (gains) losses, net, non-GAAP; Income before income taxes, non-GAAP; Provision for income taxes, net, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

The Company has also provided adjusted debt, invested capital, and adjusted debt to invested capital (leverage), which are non-GAAP measures of financial performance. Management believes these supplemental measures can provide a more accurate view of the Company's leverage and risk, since they consider the Company's debt and debt-like obligation profile and capital. Leverage ratios are widely used by investors, analysts, and rating agencies in the valuation, comparison, rating, and investment recommendations of companies. Although adjusted debt, invested capital, and leverage ratios are commonly-used financial measures, definitions of each differ; therefore, the Company is providing an explanation of its calculations for non-GAAP adjusted debt and adjusted equity in the accompanying reconciliation below in order to allow investors to compare and contrast its calculations to the calculations provided by other companies. Invested capital is adjusted debt plus adjusted equity. Leverage is calculated as adjusted debt divided by invested capital.

June 30, 2023

(in millions)

Current maturities of long-term debt, as reported

$ 31

Long-term debt less current maturities, as reported

7,994

Total debt

8,025

Add: Net present value of aircraft rentals

1,028

Adjusted debt (A)

$ 9,053

Total stockholders' equity, as reported

$ 10,789

Deduct: Accumulated other comprehensive income, as reported

Deduct: Cumulative retained earnings impact of unrealized losses associated with

ineffective fuel hedge derivatives that will settle in future periods

(5)

Adjusted equity (B)

$ 10,736

Invested capital (A+B)

$ 19,789

Leverage: Adjusted debt to invested capital (A/(A+B))

46 %

SW-QFS

SOURCE Southwest Airlines Co.

Southwest Airlines Co.

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