01—Abstract
Summary
Summary of the 10-K filed February 4, 2020. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported 2019 Operating revenues of $22.43 billiona, up from $21.97 billion in 2018, and Operating income of $2.96 billion versus $3.21 billion.
Net income was $2.30 billionb, or $4.27 per diluted share, compared with $2.47 billion and $4.29 in 2018. The filing attributes the decline mainly to the FAA grounding of the Boeing 737 MAX, which the Company says reduced 2019 operating income by an estimated $828 million, along with unscheduled maintenance disruptions and a U.S. government shutdown in first quarter 2019. Operating expenses rose $712 million, or 3.8 percent, while capacity fell 1.6 percent, and salaries, wages, and benefits increased 8.4 percent.
Fuel and oil expense fell 5.8 percent to $4.35 billionc, helped by lower jet fuel prices. The Company generated $3.99 billion of operating cash flow and spent $1.03 billion on capital expenditures. It returned $2.4 billion to shareholders through $372 million in dividends and $2.0 billion of share repurchases.
It ended 2019 with $4.1 billiond of unrestricted cash and short-term investments and a $1.0 billion undrawn revolving credit facility. Fitch upgraded the Company to "A-" in February 2019. The Company has entered a confidential settlement with Boeing for a substantial portion of its 2019 MAX grounding damages, to be recorded as a reduction in aircraft cost basis rather than in 2019 earnings.
Compensation for 2020 damages remains under discussion, and no settlement is assumed in the 2020 outlook. The outlook is constrained by the MAX grounding, which the Company has removed from its schedule through June 6, 2020. The Company expects first quarter 2020 ASMs to decline 1.5 to 2.5 percent and first quarter 2020 unit costs excluding fuel and profitsharing to rise 6.0 to 8.0 percent.
It also expects first quarter 2020 RASM to increase 3.5 to 5.5 percent. Labor contracts are a significant risk: Flight Attendants and several other groups are in negotiations, and the Pilots' agreement becomes amendable in September 2020. The Company also faces pending litigation, including antitrust class actions and a RICO complaint filed in July 2019 relating to the MAX.
02—Key points
Key Highlights
- Operating revenues rose to $22.43 billion in 2019 from $21.97 billion in 2018, while operating income fell to $2.96 billion from $3.21 billion.
- Net income was $2.30 billion, or $4.27 per diluted share, versus $2.47 billion and $4.29 per diluted share in 2018.
- The FAA grounding of the 737 MAX reduced estimated 2019 operating income by $828 million; all 34 MAX aircraft in the fleet remain grounded, and the MAX is removed from the schedule through June 6, 2020.
- Operating cash flow was $3.99 billion in 2019, and capital expenditures were $1.03 billion.
- The Company returned $2.4 billion to shareholders in 2019, including $2.0 billion of share repurchases and $372 million of dividends.
- A confidential Boeing settlement covers a substantial portion of 2019 MAX damages and will reduce aircraft cost basis, with no 2019 earnings impact; 2020 compensation remains under discussion.
- Salaries, wages, and benefits rose 8.4 percent, and roughly 83 percent of employees are unionized, with several contracts in negotiation or amendable in 2020.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 4, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $22.43B$21.96B | +2.1% |
| Operating Expenses | $19.47B$18.76B | +3.8% |
| Operating Income | $2.96B$3.21B | −7.8% |
| Interest Expense | $118.00M$131.00M | −9.9% |
| Net Income | $2.30B$2.46B | −6.7% |
| EPS (Basic) | $4.28$4.30 | −0.5% |
| EPS (Diluted) | $4.27$4.29 | −0.5% |
| Shares Outstanding (Basic) | 538.00M573.00M | −6.1% |
| Shares Outstanding (Diluted) | 539.00M574.00M | −6.1% |
05—Questions
Frequently Asked Questions
How did the MAX grounding affect Southwest's 2019 results?
The Company estimates the grounding reduced 2019 operating income by $828 million. Its operating expenses are largely fixed once schedules are published, so lost capacity drove unit cost pressure. Operating expenses per ASM rose 5.5 percent to 12.38 cents, and the Company expects continued unit cost pressure while the MAX remains grounded.
What is the outlook for the first quarter of 2020?
The Company expects first quarter 2020 ASMs to decrease 1.5 to 2.5 percent versus first quarter 2019, and RASM to increase 3.5 to 5.5 percent. Unit costs excluding fuel and profitsharing are expected to rise 6.0 to 8.0 percent. The Company is unable to provide annual 2020 ASM guidance because of uncertainty about the MAX return to service.
How strong is the balance sheet and liquidity position?
At December 31, 2019, unrestricted cash and short-term investments totaled $4.1 billion, and the Company had a $1.0 billion revolving credit facility expiring in August 2022 with no amounts outstanding. Total assets were $25.90 billion and stockholders' equity was $9.83 billion. Fitch upgraded the Company's rating to "A-" in February 2019, and Moody's and S&P ratings were unchanged at "A3" and "BBB+".
What labor and legal risks does the Company face?
About 83 percent of employees are represented by unions. Flight Attendants (16,000) and Customer Service Agents (7,200) are in negotiations, and the Pilots' contract (about 9,300) becomes amendable September 1, 2020. The Company faces a DOJ Civil Investigative Demand about capacity, a RICO class action filed July 2019 alleging concealment of MAX defects, and an antitrust class action in which it previously agreed to pay $15 million. Management does not expect these matters to have a material adverse effect.
How is fuel exposure managed?
Fuel and oil expense was $4.35 billion in 2019, or 22.3 percent of operating expenses, and the average cost per gallon was $2.09. The Company hedged up to 59 percent of estimated 2020 fuel consumption. A one-cent change in jet fuel prices would affect 2020 Fuel and oil expense by approximately $22 million before hedges.
06—Continue