Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its fourth quarter and annual 2019 results:
- Fourth quarter net income and earnings per diluted share of $514 million and $.98, respectively, which was reduced by profitsharing award of $97 million after-tax and $.18 per diluted share, in light of Boeing compensation
- Annual net income and earnings per diluted share of $2.3 billion and $4.27, respectively, which was reduced by profitsharing award of $97 million after-tax and $.18per diluted share, in light of Boeing compensation
- Earnings per diluted share, excluding special items3, was also $4.27 and was an annual record, surpassing the prior record set in 2018 of $4.24, excluding special items
- Full year operating margin1 of 13.2 percent and net margin2 of 10.3 percent, on record operating revenues of $22.4 billion
- Full year operating cash flow of $4.0 billion, and record free cash flow3 of $3.4 billion
- Returned $2.4 billion to Shareholders in the form of share repurchases and dividends in 2019
- Annual return on invested capital (ROIC)3 pre-tax of 22.9 percent, or 17.8 percent on an after-tax basis
- During fourth quarter, reached confidential agreement with The Boeing Company (Boeing) on compensation related to estimated 2019 financial damages due to the March 13, 2019, Federal Aviation Administration (FAA) order to ground the Boeing 737 MAX aircraft (MAX); substantially all of the compensation will be accounted for as a reduction in the cost basis of both owned MAX aircraft and future purchased MAX aircraft, which is expected to reduce depreciation expense in future years
- Accrued a record $667 million in profitsharing for Employees in 2019
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "Our operational and financial performances in 2019 were truly remarkable considering an estimated $828 million reduction in operating income and the significant reduction in planned flights due to the MAX groundings. We currently have 34 MAX aircraft in our fleet, and at the beginning of last year, we expected to have 75 at the end of 2019, and another 38 deliveries in 2020. With the ongoing uncertainty regarding the timing of the MAX return to commercial service, we remained nimble and adjusted our 2019 plans, as necessary, without abandoning our long-term goals. Our financial strength and preparedness for unexpected challenges allowed for sustained high levels of profits, earnings per share, returns on capital, cash flows, and returns to Shareholders; continued capital investments and growth in California and Hawaii; and job security for our resilient Employees. Our People performed superbly and delivered industry-leading Customer Service4, record annual operating revenues, prudent cost control, our best operational performance in years, and our 47th consecutive year of profitability. Once again, Southwest was named to FORTUNE's 2020 list of World's Most Admired Companies. I am extremely grateful to our Employees for their extraordinary efforts, for which we have accrued a record $667 million in profitsharing in 2019, including a discretionary, special $124 million pre-tax contribution—authorized by the Southwest Board of Directors during fourth quarter 2019—in light of the Boeing compensation related to the 2019 MAX groundings.
"I am pleased with the Boeing agreement for 2019. But, we continue to incur financial damages in 2020, and we will continue discussions with Boeing regarding further compensation. No estimated settlement amounts relating to financial damages beyond 2019 have been factored into our 2020 outlook. We recently extended the MAX-related flight schedule adjustments through June 6, 2020. Based on recent guidance from Boeing estimating that the ungrounding of the MAX will be mid-2020, we will likely extend MAX-related flight schedule adjustments further to provide operational reliability and a dependable flight schedule for our Customers booking their summer travel. Upon a rescission of the FAA order to ground the MAX fleet, our priority will be to return our 34 grounded 737 MAX 8 aircraft to service in a safe and controlled manner, and we will be prepared to resume deliveries from Boeing on delayed aircraft orders. The FAA's timetables and directives will determine the timing of MAX return to service, and we offer no assurances that current estimations and timelines are correct.
"Annual 2019 unit revenues grew 3.7 percent, year-over-year, driven by a stable domestic economy and revenue environment, and another strong performance from our award-winning Rapid Rewards® loyalty program. Our revenue management capabilities implemented in 2018 delivered significant revenue benefits, and helped mitigate passenger yield dilution from flight schedule changes due to the MAX groundings. Based on stable revenue trends, thus far, we expect another solid year-over-year unit revenue performance in first quarter 2020. Annual 2019 unit costs, excluding fuel and oil expense, special items3, and profitsharing expense, increased 7.7 percent, year-over-year, driven primarily by an estimated five point year-over-year negative impact due to the MAX groundings. The MAX groundings continue to pressure year-over-year unit costs; however, excluding these impacts, our 2019 unit cost performance was solid and under budget. Controlling costs is one of our top Company-wide priorities, despite the MAX groundings.
"Our network expansion plans were interrupted in 2019 due to the MAX groundings, and this continues in 2020. In particular, we made the difficult decision to close our operation at Newark Liberty International Airport and consolidate our New York City presence at New York LaGuardia Airport. I especially want to thank all of our former Newark Employees who performed magnificently. Still, we were able to launch Hawaii service in March 2019 and continued expanding throughout 2019 by trimming capacity in other parts of our network. The strong Customer response to our Hawaii service supports continued investment in 2020. In addition, we are focused on adding flights to further strengthen our presence in Baltimore, Denver, and Houston.
"We managed extraordinarily well in 2019 and ended the year with a strong balance sheet and healthy cash flows. While our 2020 financial results and year-over-year trends will continue to be significantly impacted by the MAX groundings, demand for air travel remains healthy, and we are well-hedged against rising fuel prices. We remain focused on delivering long-term, Customer-centric, revenue-generating initiatives and driving efficiencies throughout our Company to maintain our low-cost structure. We continue to invest in our People and our Company, in anticipation of the MAX ungrounding and a return to growth, as we have tremendous opportunities across our system. We remain confident that the MAX will return, and once it is cleared to fly, we will add aircraft and flights back into the schedule at a measured pace that we are comfortable with—operationally, commercially, and financially, and with safety top of mind."
Notable 2019 announcements and accomplishments include:
- Achieved 47th consecutive year of profitability
- Launched service to four Hawaii airports: Daniel K. Inouye International Airport in Honolulu, Kahului Airport on Maui, Lihue Airport on Kauai, and Ellison Onizuka Kona International Airport at Keahole; from Oakland Metropolitan Airport, Mineta San Jose International Airport, and Sacramento International Airport
- Announced intention to serve Hilo International Airport, on the Island of Hawaii, from Daniel K. Inouye International Airport in Honolulu beginning January 2020
- Announced intention to serve Kahului Airport on Maui and Daniel K. Inouye International Airport in Honolulu from San Diego International Airport beginning April 2020
- Announced intention to serve Cozumel International Airport beginning March 2020
- Received numerous awards and recognitions, including:
- Named to FORTUNE's list of World's Most Admired Companies; Southwest was ranked #11 (and just named to the 2020 list as #11 again)
- #1 Marketing Carrier in Customer Satisfaction per the US Department of Transportation (DOT) data4
- Highest ranking Low-Cost Carrier for Customer satisfaction for the third year in a row in the J.D. Power 2019 North America Satisfaction StudySM
- Ranked #1 by J.D. Power for Customer Satisfaction with Airline Travel Websites
- Ranked #2 by The Points Guy as a Best Airlines for Family
- Named Program of the Year for Rapid Rewards Program and recognized for providing the Best Loyalty Credit Card, the Best Airline Redemption Ability, and the Best Customer Service by the Freddie Awards
- Ranked among the Best Airline Rewards Programs by US News & World Report
- Recognized by Airlines Reporting Corp. as 2019 Airline of the Year
- Named one of Military Times Best for Vets: Employers 2019
- Recognized as a Best Employer in Forbes' 2019 list
- Named to Glassdoor's Best Places to Work list for the 11th consecutive year
Revenue Results and Outlook
The Company's fourth quarter 2019 total operating revenues increased 0.4 percent, year-over-year, to a fourth quarter record $5.7 billion, on 0.9 percent fewer available seat miles (ASMs, or capacity), year-over-year, due to the MAX groundings. Fourth quarter 2019 operating revenue per ASM (RASM, or unit revenues) increased 1.3 percent, year-over-year, driven primarily by another strong performance from our Rapid Rewards loyalty program, as well as a passenger revenue yield increase of 1.5 percent, offset slightly by a load factor decline of 0.4 points, to 83.1 percent. Fourth quarter 2019 RASM performed in line with Company expectations and benefited year-over-year by two to three points primarily due to the removal of MAX flights that resulted in lower fourth quarter 2019 capacity; however, this benefit was substantially offset by the negative year-over-year RASM effects from adjusting the Company's previously-published fourth quarter 2019 flight schedule. The Company's adjustments to remove the MAX aircraft from its fourth quarter 2019 flight schedule resulted in a uniform week-to-week schedule over the peak holiday period relative to fourth quarter 2018, which was necessary to produce the schedule with limited time and minimize disruption to Customers and the Company's operations. As a result, there was more year-over-year flying in off-peak periods and—due to the MAX groundings and the resulting fleet deficit—less year-over-year flying in peak periods than optimal.
Currently, passenger booking and revenue trends remain healthy, and the Company expects first quarter 2020 RASM to increase in the range of 3.5 to 5.5 percent, year-over-year. The Company's outlook for first quarter 2020 year-over-year RASM includes an estimated 1.5 point tailwind—approximately one point due to the negative impact to passenger bookings from the US government shutdown during first quarter 2019 and approximately one-half point related to unscheduled maintenance disruptions and related flight cancellations during first quarter 2019. Additionally, first quarter 2020 year-over-year RASM is expected to benefit by approximately two points due to the removal of MAX flights, which will result in lower first quarter 2020 capacity.
Annual 2019 total operating revenues increased 2.1 percent, year-over-year, to a record $22.4 billion, on 1.6 percent fewer ASMs due to the MAX groundings. Annual 2019 RASM was a record 14.26 cents, and increased 3.7 percent, year-over-year, largely driven by a passenger revenue yield increase of 3.1 percent, year-over-year, as well as solid passenger demand. Approximately one point of the year-over-year unit revenue increase in annual 2019 results was driven by lower 2019 capacity as a result of the MAX groundings.
Cost Performance and Outlook
Fourth quarter 2019 total operating expenses increased 3.7 percent, year-over-year, to $5.1 billion. Total operating expenses per ASM (CASM, or unit costs) increased 4.6 percent, as compared with fourth quarter 2018.
Fourth quarter 2019 economic fuel costs3 were $2.09 per gallon, in line with the Company's expectations, and included $.04 per gallon in premium expense and no cash settlements from fuel derivative contracts, compared with $2.25 per gallon in fourth quarter 2018, which included $.06 per gallon in premium expense and $.06 per gallon in favorable cash settlements from fuel derivative contracts. Annual 2019 economic fuel costs were also $2.09 per gallon, a decrease of 5.0 percent, year-over-year. Both fourth quarter and annual 2019 ASMs per gallon, or fuel efficiency, decreased 0.8 percent, year-over-year, due primarily to the removal of the Company's most fuel-efficient aircraft from its schedule as of March 13, 2019, due to the MAX groundings. The Company estimates first quarter 2020 fuel efficiency will decrease in the range of 2.0 to 3.0 percent, year-over-year, as a result of the ongoing MAX groundings.
Based on the Company's existing fuel derivative contracts and market prices as of January 17, 2020, first quarter 2020 economic fuel costs are estimated to be in the range of $2.05 to $2.15 per gallon5, including $.05 per gallon in premium expense and $.01 per gallon in favorable cash settlements from fuel derivative contracts, compared with $2.05 per gallon in first quarter 2019, which included $.06 per gallon in premium expense and $.03 per gallon in favorable cash settlements from fuel derivative contracts. In addition, the Company expects annual 2020 economic fuel costs to be in the range of $2.00 to $2.10 per gallon5, including $.04 per gallon in premium expense and no estimated cash settlements from fuel derivative contracts, on a per gallon basis. As of January 17, 2020, the fair market value of the Company's fuel derivative contracts settling in first quarter 2020 was an asset of approximately $2 million and an asset of approximately $31 million for those settling over the remainder of 2020. In addition, the fair market value of fuel derivative contracts settling in 2021 and beyond was an asset of approximately $87 million. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.
Excluding fuel and oil expense, fourth quarter 2019 operating expenses increased 7.2 percent, year-over-year. Fourth quarter 2019 profitsharing expense was $264 million, as compared with $141 million in fourth quarter 2018. The fourth quarter 2019 profitsharing accrual included a discretionary, special $124 million contribution in light of the Boeing compensation for the 2019 MAX groundings. Excluding fuel and oil expense and profitsharing expense, fourth quarter 2019 operating expenses increased 4.1 percent, year-over-year. Fourth quarter 2019 CASM, excluding fuel and oil expense and profitsharing expense, increased 5.0 percent, year-over-year, and performed in line with the Company's expectations. Prior to the MAX groundings, the Company expected fourth quarter 2019 CASM, excluding fuel and oil expense and profitsharing expense, to decrease approximately 2 percent, year-over-year. As expected, approximately six points of the year-over-year unit cost increase in fourth quarter 2019 was driven by lower fourth quarter 2019 capacity as a result of the MAX groundings, net of the year-over-year unit cost benefit driven by more flying in off-peak periods as a result of fourth quarter 2019 flight schedule adjustments. Additionally, as expected, approximately one point of the unit cost increase in fourth quarter 2019 was due to the shifting of maintenance and technology expenses from prior periods into fourth quarter 2019.
Based on current cost trends, the Company expects first quarter 2020 CASM, excluding fuel and oil expense and profitsharing expense, to increase in the range of 6.0 to 8.0 percent, year-over-year. This outlook includes an estimated seven point year-over-year unit cost headwind in first quarter 2020 driven by lower first quarter 2020 capacity as a result of the ongoing MAX groundings, which includes the impact of unabsorbed overhead that will be utilized upon the MAX return to service. It also includes one to two points of inflation primarily due to higher salaries, wages, and benefits; maintenance expense; and operating expenses related to investments in technology and facilities. This inflation was substantially offset by tailwinds in first quarter 2020 due to the non-recurring first quarter 2019 costs associated with the Company's ratified labor agreement with its Mechanics and costs associated with unscheduled maintenance disruptions and related flight cancellations.
Annual 2019 total operating expenses increased 3.8 percent to $19.5 billion, and increased 5.5 percent on a unit basis, both year-over-year. Excluding fuel and oil expense, special items3, and profitsharing expense, annual 2019 total operating expenses increased 6.1 percent, and increased 7.7 percent on a unit basis, both year-over-year. Approximately five points of the year-over-year unit cost increase in annual 2019 results was driven by lower 2019 capacity as a result of the MAX groundings.
Fourth Quarter and Annual Results
Fourth quarter 2019 net income was $514 million, or $.98 per diluted share, compared with fourth quarter 2018 net income of $654 million, or $1.17 per diluted share, and compared with the fourth quarter 2019 First Call consensus estimate of $1.09 per diluted share. Fourth quarter 2019 net income and earnings per diluted share was reduced by a $124 million (pre-tax) profitsharing award, or $97 million after-tax and $.18, respectively, in light of Boeing compensation.
The estimated operating income reductions from the MAX groundings for fourth quarter and annual 2019 were $313 million and $828 million, respectively.
Annual 2019 net income was $2.3 billion, or $4.27 per diluted share, compared with annual 2018 net income of $2.5 billion, or $4.29 per diluted share, and annual 2018 net income, excluding special items, of $2.4 billion, or $4.24 per diluted share. Annual 2019 net income and earnings per diluted share was reduced by a $124 million(pre-tax) profitsharing award, or $97 million after-tax and $.18, respectively, in light of Boeing compensation.
The Company's annual 2019 effective tax rate was 22.2 percent, and the Company estimates its first quarter and annual 2020 effective tax rates will be in the 23 to 24 percent range.
Liquidity and Capital Deployment
As of December 31, 2019, the Company had approximately $4.1 billion in cash and short-term investments and a fully available unsecured revolving credit line of $1.0 billion. Annual 2019 cash provided by operations was $4.0 billion. Annual 2019 capital expenditures were $1.0 billion. The Company received $400 million of supplier proceeds, which the Company considers an offset to its annual 2019 aircraft capital expenditures. Annual 2019 free cash flow was a record $3.4 billion. Boeing currently has 27 MAX 8 aircraft produced and in storage for the Company. Assuming these aircraft are delivered in 2020, the Company currently estimates its annual 2020 capital expenditures to be in the range of $1.4 billion to $1.5 billion, including progress payments for future deliveries, and considering supplier proceeds to be received in 2020. These expected proceeds are included in Accounts and other receivables on the Company's unaudited Condensed Consolidated Balance Sheet as of December 31, 2019, and the Company considers them to be a reduction to its annual 2020 aircraft capital expenditures. The Company repaid $615 million in debt and capital lease obligations during 2019, and expects to repay approximately $819 million in debt and capital lease obligations during 2020.
In fourth quarter 2019, the Company launched a new accelerated share repurchase (ASR) program by advancing $550 million to a third party financial institution in a privately negotiated transaction ("Fourth Quarter 2019 ASR Program"). The Company has received 9.1 million shares of common stock pursuant to the Fourth Quarter 2019 ASR Program, representing the vast majority of the shares expected to be repurchased under that ASR program. The Fourth Quarter 2019 ASR Program is scheduled to be completed no later than February 13, 2020. In 2019, the Company returned $2.4 billion to its Shareholders through the payment of $372 million in dividends and the repurchase of 34.9 million shares of common stock for a total of $2.0 billion, including the Fourth Quarter 2019 ASR Program, and now has $1.35 billion remaining under its current share repurchase authorization approved by its Board of Directors in May 2019.
Fleet and Capacity
The Company ended 2019 with 747 aircraft in its fleet, including 3 leased 737 MAX 8 aircraft delivered in 2019 prior to the MAX groundings. All 34 of the Company's 737 MAX 8 aircraft were grounded as of March 13, 2019, to comply with the FAA emergency order issued for all US airlines to ground all MAX aircraft. The Company's 41 MAX aircraft scheduled for delivery in 2019, as of the time of the MAX groundings, have not been delivered, and Boeing is not currently manufacturing or delivering new MAX aircraft. As the Company previously communicated, 7 of its originally planned 18 retirements in 2019 were deferred to future years to cover a portion of the fleet deficit created by the MAX groundings. The Company retired 6 Boeing 737-700 aircraft in 2019, compared with its most recent plan to retire 11 total, with 5 retirements shifting to 2020.
Upon a rescission of the FAA order to ground the MAX fleet, the Company will work closely with Boeing and the FAA to safely reintroduce the 34 MAX 8 aircraft currently in its fleet and take delivery of the 27 MAX 8 aircraft currently produced and being held in storage by Boeing. Based on Boeing's recent guidance, the Company is currently including these 61 aircraft in its 2020 fleet planning assumptions. The Company also currently expects to retire 16 737-700 aircraft in 2020, including 5 retirements that shifted from 2019. Additional information regarding the Company's aircraft delivery schedule is included in the accompanying tables.
The Company's fourth quarter 2019 available seat miles decreased 0.9 percent, year-over-year. Annual 2019 available seat miles decreased 1.6 percent, year-over-year, which was significantly lower than the Company's original plan to grow capacity nearly 5 percent in 2019, due to the impact of the MAX groundings and resulting fleet deficit. Based on the Company's MAX-related flight schedule adjustments through June 6, 2020, the Company currently expects its first quarter 2020 year-over-year capacity to decrease in the range of 1.5 to 2.5 percent. Based on continued uncertainty regarding the MAX return to service that could materially impact current and future flight schedules, the Company is unable to provide annual 2020 available seat mile guidance at this time.
Regulatory approval of MAX return to service is subject to Boeing's ongoing work with the FAA, whose timetables and directives will determine the timing of MAX return to service. The Company offers no assurances that current estimations and timelines are correct. Any changes to current estimations could result in additional flight schedule adjustments and reductions beyond June 6, 2020, further delays in aircraft deliveries, and additional financial damages. The Company continues to plan for multiple MAX return to service scenarios.