01—Abstract
Summary
Summary of the 10-K filed February 5, 2019. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported 2018 results with operating revenues of $21.97 billiona, up from $21.15 billion in 2017, and operating income of $3.21 billion, down 5.9 percent year-over-year, as higher market jet fuel prices offset a 3.5 percent increase in Passenger revenues driven by a 3.9 percent increase in capacity.
GAAP net income was $2.47 billionb, down 26.6 percent, largely because 2017 included a $1.3 billion benefit from re-measuring deferred taxes under the Tax Cuts and Jobs Act. Excluding special items, non-GAAP net income rose 15.1 percent to a record $2.44 billion, and non-GAAP diluted EPS was $4.24. Operating cash flow was $4.9 billion.
The company returned $2.3 billionc to shareholders in 2018, including $2.0 billion of accelerated share repurchases and $332 million in dividends. It ended the year with $3.7 billion of unrestricted cash and short-term investments, a $1.0 billion undrawn revolving credit facility, and investment grade ratings of A3 (Moody's), BBB+ (S&P) and BBB+ (Fitch). Management plans 2019 capacity growth of no more than five percent and expects 2019 capital expenditures of approximately $1.9 billion.
Fuel was hedged at 70 percent of estimated 2019 consumption, and the company disclosed pending litigation, including a $15 milliond antitrust settlement and a DOJ capacity investigation. Key risks highlighted in the filing include fuel price volatility, labor cost pressure (about 83 percent of employees are unionized, and several work groups are in negotiations), competition from ultra-low-cost carriers, and reliance on Boeing 737 aircraft. The company also flagged a planned 2019 start of Hawaii service that is subject to FAA ETOPS approval.
02—Key points
Key Highlights
- Operating revenues of $21.97 billion in 2018 versus $21.15 billion in 2017; operating income of $3.21 billion, down 5.9 percent year-over-year
- GAAP net income of $2.47 billion, down 26.6 percent; diluted EPS of $4.29 versus $5.57, reflecting a prior-year $1.3 billion Tax Reform benefit
- Non-GAAP net income (excluding special items) was a record $2.44 billion, up 15.1 percent; non-GAAP diluted EPS was $4.24
- Jet fuel and oil expense rose to $4.62 billion, with average economic fuel cost up 6.8 percent to $2.20 per gallon
- Returned $2.3 billion to shareholders in 2018, including $2.0 billion of accelerated share repurchases and $332 million in dividends
- Liquidity of $3.7 billion in unrestricted cash and short-term investments plus a $1.0 billion undrawn revolving credit facility; investment grade ratings maintained
- Fleet of 750 Boeing 737 aircraft at year-end with firm orders for 219 737 MAX 8 and 30 737 MAX 7 aircraft; 2019 capacity growth planned at no more than five percent
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 5, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $21.96B$21.17B | +3.8% |
| Operating Expenses | $18.76B$17.74B | +5.8% |
| Operating Income | $3.21B$3.41B | −5.9% |
| Interest Expense | $131.00M$114.00M | +14.9% |
| Net Income | $2.46B$3.36B | −26.6% |
| EPS (Basic) | $4.30$5.58 | −22.9% |
| EPS (Diluted) | $4.29$5.57 | −23.0% |
| Shares Outstanding (Basic) | 573.00M601.00M | −4.7% |
| Shares Outstanding (Diluted) | 574.00M603.00M | −4.8% |
05—Questions
Frequently Asked Questions
Why did GAAP net income fall in 2018 while non-GAAP net income rose?
GAAP net income of $2.47 billion fell 26.6 percent because 2017 included a $1.3 billion reduction in the provision for income taxes from re-measuring deferred taxes under the Tax Cuts and Jobs Act. Non-GAAP net income, which excludes this and other special items, rose 15.1 percent to $2.44 billion, according to the filing.
How did fuel costs affect 2018 results?
Fuel and oil expense increased $540 million, or 13.2 percent, to $4.62 billion, driven by higher market jet fuel prices. Hedging gains of $168 million in 2018 partly offset this, compared with $416 million of hedging losses in 2017. The filing expects 2019 economic fuel cost of $2.00 to $2.10 per gallon and has hedged up to 70 percent of 2019 consumption.
What is the company's outlook for 2019?
The company plans to grow 2019 available seat miles by no more than five percent year-over-year, with first quarter growth of 3.5 to 4 percent. It expects 2019 capital expenditures of approximately $1.9 billion, a full-year effective tax rate of about 23.5 percent, and the planned start of Hawaii service subject to FAA ETOPS approval.
How much debt and liquidity does the company have?
Long-term debt less current maturities was $2.77 billion at year-end 2018, with total debt and capital leases of $3.40 billion. The company had $3.7 billion of unrestricted cash and short-term investments and an undrawn $1.0 billion revolving credit facility expiring in August 2022.
What labor and litigation risks does the filing disclose?
About 83 percent of employees are represented by labor unions, and salaries, wages and benefits were about 41 percent of operating expenses. Several groups, including Flight Attendants and Customer Service Agents, were in negotiations. The company is also a defendant in antitrust class actions and a DOJ Civil Investigative Demand on capacity, and a $15 million settlement of consolidated class claims is pending a March 2019 fairness hearing.
06—Continue