01—Abstract
Summary
Summary of the 10-K filed February 7, 2018. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported that for the 45th consecutive year it was profitable, with 2017 net income of $3.5 billiona ($5.79 per diluted share) and operating income of $3.52 billion, down 6.5 percent from 2016.
Operating revenues rose to $21.17 billionb from $20.43 billion, driven by a 2.9 percent increase in Passenger revenues and a 3.6 percent capacity increase, while Salaries, wages, and benefits rose 7.7 percent and Fuel and oil expense rose 8.0 percent. Net income was boosted by a $1.4 billion reduction in income tax provision from the Tax Cuts and Jobs Act; non-GAAP net income, which excludes special items, was $2.1 billion, down 11.1 percent. The Company reported 2017 operating cash flow of $3.9 billion, capital expenditures of $2.1 billion, and $1.9 billion returned to shareholders through dividends and share repurchases.
The Company completed its Amadeus Altéa reservation system transition in 2017, retired its remaining Boeing 737-300 (Classic) fleet, and began scheduled service with the Boeing 737 MAX 8 in October 2017. It ended 2017 with 706 Boeing 737 aircraft and 56,110 active full-time equivalent employees, approximately 83 percent of whom were represented by labor unions. The Company guided to 2018 available seat mile growth in the low five percent range and a planned 2018 capital expenditure of approximately $1.9 billionc, and it announced plans to begin selling tickets for Hawaii service in 2018, subject to FAA ETOPS approval.
The Company faces significant risks, including fuel price volatility (jet fuel and oil were about 22 percent of 2017 operating expenses), rising labor costs under amended collective-bargaining agreements, and pending antitrust litigation, including a $15 milliond settlement agreed in December 2017 for a class action alleging capacity-restriction collusion. Management expects the 2018 effective tax rate to be in the 23 to 23.5 percent range.
02—Key points
Key Highlights
- Net income of $3.49 billion, up 55.4 percent, or $5.79 per diluted share, driven by a $1.4 billion tax provision reduction from the Tax Cuts and Jobs Act; non-GAAP net income was $2.11 billion, down 11.1 percent.
- Operating income of $3.52 billion, down 6.5 percent year over year, as Salaries, wages, and benefits rose 7.7 percent and Fuel and oil expense rose 8.0 percent.
- Operating revenues of $21.17 billion, with Passenger revenues up 2.9 percent on a 3.6 percent capacity increase; Load factor was 83.9 percent.
- Pre-tax non-GAAP return on invested capital of 25.9 percent, compared with 30.0 percent in 2016.
- Shareholder returns of $1.9 billion in 2017, including $274 million in dividends and $1.6 billion in share repurchases; a new $500 million accelerated share repurchase was launched in January 2018, with $850 million remaining under the May 2017 $2.0 billion authorization.
- Fleet and capacity plans: 706 Boeing 737 aircraft at year-end 2017, with firm commitments expected to result in 750 aircraft by year-end 2018 and 2018 available seat mile growth planned in the low five percent range.
- Credit ratings upgraded in 2017 by Moody's to A3 and by Standard & Poor's to BBB+, and the Company had a $1 billion unsecured revolving credit facility with no amounts outstanding at December 31, 2017.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 7, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $21.17B$20.43B | +3.7% |
| Operating Expenses | $17.74B$16.77B | +5.8% |
| Operating Income | $3.41B$3.52B | −3.3% |
| Interest Expense | $114.00M$122.00M | −6.6% |
| Net Income | $3.36B$2.18B | +53.8% |
| EPS (Basic) | $5.58$3.48 | +60.3% |
| EPS (Diluted) | $5.57$3.45 | +61.4% |
| Shares Outstanding (Basic) | 601.00M627.00M | −4.1% |
| Shares Outstanding (Diluted) | 603.00M633.00M | −4.7% |
05—Questions
Frequently Asked Questions
How profitable was Southwest in 2017, and why did net income rise so sharply while operating income fell?
Net income was $3.49 billion, up 55.4 percent, primarily because of a $1.4 billion reduction in the provision for income taxes from the Tax Cuts and Jobs Act, which re-measured deferred tax liabilities at the 21 percent federal rate. Operating income fell 6.5 percent to $3.52 billion because Salaries, wages, and benefits rose 7.7 percent and Fuel and oil expense rose 8.0 percent. The Company's non-GAAP net income, which excludes special items, fell 11.1 percent to $2.11 billion.
What are the main cost pressures facing Southwest?
Salaries, wages, and benefits were about 41 percent of 2017 operating expenses and the largest cost, while jet fuel and oil were about 22 percent. Wage increases came from amended collective-bargaining agreements, and the Company notes that unionized employees represent approximately 83 percent of its workforce. Several groups, including Mechanics and Material Specialists, were in negotiations at year-end. Fuel prices can be volatile, and the Company hedges a portion of its fuel purchases; it expects to consume approximately 2.1 billion gallons in 2018.
How is Southwest's liquidity and capital allocation positioned?
Net cash provided by operating activities was $3.9 billion in 2017. Capital expenditures were $2.1 billion, and the Company estimates 2018 capital expenditures of approximately $1.9 billion. The Company reported unrestricted cash and short-term investments of $3.3 billion at December 31, 2017, and a $1 billion unsecured revolving credit facility with no amounts outstanding. It also returned $1.9 billion to shareholders in 2017 and launched a $500 million accelerated share repurchase in January 2018.
What legal and regulatory risks does the filing disclose?
The filing discloses pending antitrust litigation involving AirTran's first-bag fee class action, where appeals are scheduled for oral argument on March 7, 2018. It also discloses a Department of Justice Civil Investigative Demand and related state inquiries about capacity, and a class action on capacity and fares for which the Company agreed to pay $15 million, subject to court approval. Management does not expect these matters to have a material adverse effect. Other risks include the expected 2018 Congressional FAA reauthorization and aviation tax deadline of March 31, 2018, and the ETOPS application for Hawaii service.
What growth plans does Southwest outline for 2018?
The Company plans to grow 2018 available seat miles in the low five percent range, with first-half growth in the low three percent range and second-half growth in the low seven percent range. It announced plans to begin selling tickets in 2018 for Hawaii service, subject to FAA ETOPS authorization, and planned service starting in 2018 at several new international gateways. It expects the reservation system transition to produce incremental pre-tax benefits of approximately $200 million in 2018.
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