01—Abstract
Summary
Summary of the 10-K filed February 7, 2017. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported that for the 44th consecutive year it was profitable, earning $2.2 billiona in net income for 2016 ($3.55 per diluted share), a record, with operating revenues of $20.43 billion and operating income of $3.76 billion, down from $4.12 billion in 2015.
Passenger revenues rose on a 5.7 percent increase in capacity and a record 84.0 percent load factor, while Other revenues increased 41.9 percent, largely from the amended co-branded credit card agreement with Chase Bank USA, N.A., which also changed revenue accounting. Operating expenses rose 6.1 percent, driven by salaries, wages and benefits (41 percent of operating expenses), accelerated depreciation from the early retirement of the Classic 737 fleet, and technology project costs, partly offset by lower jet fuel prices. Fuel and oil expense was $3.65 billionb, about 22 percent of operating expenses.
The company returned a record $2.0 billionc to shareholders in 2016, including $222 million in dividends and $1.75 billion in accelerated share repurchases. Net cash provided by operating activities was $4.3 billion, and the company ended the year with $3.3 billion in unrestricted cash and short-term investments and a $1.0 billion undrawn revolving credit facility.
Management plans 2017 capacity growth of about 3.5 percent and expects a 2017 capital expenditure of approximately $2.3 billiond. Key risks disclosed include fuel price volatility, labor costs (about 83 percent of employees are unionized, with several groups still in negotiations), dependence on Boeing as sole aircraft supplier, and pending antitrust class action litigation related to capacity and fares.
02—Key points
Key Highlights
- Net income of $2.24 billion, a company record, up 2.9 percent; diluted EPS of $3.55 versus $3.27 in 2015
- Operating income fell to $3.76 billion from $4.12 billion; non-GAAP operating income was $3.96 billion in both years
- Other operating revenues rose 41.9 percent, mainly due to the amended Chase co-branded credit card agreement and the resulting change in accounting methodology
- Returned a record $2.0 billion to shareholders in 2016 through $222 million in dividends and $1.75 billion in accelerated share repurchases
- Passenger revenue rose 1.6 percent on 5.7 percent capacity growth, with a record 84.0 percent load factor, though passenger revenue per ASM fell 3.8 percent
- Early retirement of the Classic 737 fleet by third quarter 2017 is expected to reduce the fleet to 703 aircraft by year-end 2017
- Investment-grade ratings maintained: Baa1 (Moody's), BBB+ (Fitch), and BBB (Standard & Poor's)
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 7, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $20.43B$19.82B | +3.1% |
| Operating Expenses | $16.77B$15.70B | +6.8% |
| Operating Income | $3.52B$4.12B | −14.4% |
| Interest Expense | $122.00M$121.00M | +0.8% |
| Net Income | $2.18B$2.18B | +0.1% |
| EPS (Basic) | $3.48$3.30 | +5.5% |
| EPS (Diluted) | $3.45$3.27 | +5.5% |
| Shares Outstanding (Basic) | 627.00M661.00M | −5.1% |
| Shares Outstanding (Diluted) | 633.00M669.00M | −5.4% |
05—Questions
Frequently Asked Questions
How did Southwest's profitability change in 2016?
Net income rose 2.9 percent to a record $2.24 billion, or $3.55 per diluted share, but operating income declined 8.6 percent to $3.76 billion. The net income increase was driven mainly by higher Other revenues from the Chase credit card agreement and increased Passenger revenues, partly offset by higher salaries, depreciation and other operating expenses.
What is the impact of the Chase co-branded credit card agreement?
The amended agreement with Chase Bank USA, N.A. required a change in accounting methodology beginning July 1, 2015. It increased Other revenues by 41.9 percent in 2016 and reduced Passenger revenues, with the filing stating approximately 90 percent of the Other revenue increase was attributable to the agreement.
What are the main cost pressures facing the company?
Salaries, wages, and benefits were about 41 percent of operating expenses and were the largest cost. Unionized employees, about 83 percent of the workforce, have received contractual pay increases, and several groups remain in negotiations. Accelerated depreciation from the Classic fleet retirement and technology project costs also raised expenses, while fuel costs fell.
How much fuel hedging does the company have in place for 2017?
As of January 20, 2017, the company had derivative contracts covering up to 63 percent of estimated 2017 fuel consumption, 57 percent for 2018 and 15 percent for 2019. The filing states that fuel derivative liabilities at year-end 2016 were a net $326 million, with $301 million in cash collateral posted.
06—Continue