Photo courtesy of Southwest Airlines
Southwest Airlines today reported its first quarter 2018 results:
- Net income of $463 million, net margin of 9.4% and record first quarter earnings per diluted share of $0.79
- Operating income of $616 million and operating margin of 12.5%
- Excluding special items, net income of $438 million, net margin of 8.9% and earnings per diluted share of $0.75
- Excluding special items, operating income of $584 million and operating margin of 11.8%
- Operating cash flow of $1.0 billion and free cash flow of $708 million
- Returned $648 million to shareholders through a combination of share repurchases and dividends
- Return on invested capital (ROIC) pre-tax of 27.1% for the 12 months ending March 31, 2018, or 20.8% on an after-tax basis
- Revised Boeing firm order delivery schedule by exercising 40 737 MAX 8 options, adding 10 firm orders in each year 2019 through 2022, to support future fleet modernization
Gary Kelly, Southwest's chairman and CEO, said: "It remains a somber time for the Southwest family following the Flight 1380 accident, and our thoughts and prayers continue to be with the Riordan family and all of our customers on the flight. I want to extend my immense gratitude for the compassion and support shown by our employees, customers, and airline peers. We continue to cooperate with the NTSB's thorough investigation to understand the cause of the accident. We will never compromise the safety of our customers and employees. It is our highest priority — today and always.
"We continue to expect to begin selling tickets in 2018 for service to Hawaii, and today we announce our intent to begin service to four Hawaiian airports: Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole and Kahului Airport. Additionally, we entered into an agreement with Alaska Airlines to lease 12 slots at New York's LaGuardia Airport and eight slots at Washington Reagan National Airport. These opportunities complement our network and fit within our existing 2018 growth plans, with available seat miles (ASMs) expected to increase in the low 5% range, year over year."
Revenue Results and Outlook
The company's first quarter 2018 total operating revenues increased 1.9% year over year, to a first-quarter record $4.9 billion, driven largely by first-quarter record passenger revenues of $4.6 billion. First quarter operating revenue per available seat mile (RASM, or unit revenues) was comparable with the first quarter last year. Strong travel demand resulted in a first-quarter record load factor of 81.5%. Passenger revenue yield decreased 2.8% year over year, primarily due to the competitive yield environment and the impact from operating a sub-optimal flight schedule as a result of a temporarily reduced fleet size due to the retirement of the Boeing 737-300 Classic fleet last year. The company expects its sub-optimal flight schedule to continue to pressure yields in the second quarter. Based on current bookings and revenue trends, the company expects second-quarter 2018 RASM to decrease in the one to three percent range, compared with second quarter 2017 RASM of 14.27 cents, as recast. Approximately one to two points of this estimated decrease is attributable to recent softness in bookings following the Flight 1380 accident.
Cost Performance and Outlook
First quarter 2018 total operating expenses increased 1.9% to $4.3 billion. Total operating expenses per available seat mile (CASM, or unit costs) increased 0.1%, as compared with first quarter 2017. Excluding special items in both periods, first quarter 2018 total operating expenses increased 1.9% to $4.4 billion, or 0.1% on a unit basis, year over year.
Effective Jan. 1, 2018, the company early adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. As such, the classification of premium expense for the three months ended March 31, 2017, has been recast under the new standard in order to be comparable with current period results. First quarter 2018 economic fuel costs were $2.09 per gallon, including $.07 per gallon in premium expense and $0.05 per gallon in favorable cash settlements from fuel derivative contracts, compared with $2.03 per gallon in first quarter 2017, which included $0.07 per gallon in premium expense and $0.29 per gallon in unfavorable cash settlements from fuel derivative contracts. First quarter 2018 ASMs per gallon, or fuel efficiency, improved 1.3% year over year, driven primarily by the retirement of the Classic aircraft and the addition of the more fuel-efficient 737 MAX 8 aircraft.
Based on the company's existing fuel derivative contracts and market prices as of April 20, 2018, second quarter 2018 economic fuel costs are estimated to be approximately $2.20 per gallon, including $0.06 per gallon in premium expense and an estimated $0.07 per gallon in favorable cash settlements from fuel derivative contracts, compared with $1.99 per gallon in second quarter 2017, as recast, which included $0.06 per gallon in premium expense and $0.32 per gallon in unfavorable cash settlements from fuel derivative contracts. As of April 20, 2018, the fair market value of the company's fuel derivative contracts for the remainder of 2018 was a net asset of approximately $158 million, and the fair market value of the hedge portfolio settling in 2019 and beyond was a net asset of approximately $308 million.
Based on current cost trends, the company estimates second quarter 2018 CASM, excluding fuel and oil expense and profit-sharing expense, to increase in the 1 to 2% range, compared with second quarter 2017's 8.17 cents, as recast, which excluded fuel and oil expense, profit-sharing expense, and special items.
First Quarter Results
First quarter 2018 operating income was $616 million, compared with $606 million in first quarter 2017. Excluding special items, first quarter 2018 operating income was $584 million, compared with $574 million in first quarter 2017.
Other expenses in first quarter 2018 were $14 million, compared with $74 million in first quarter 2017. The $60 million difference resulted primarily from $4 million in other losses recognized in first quarter 2018, compared with $63 million in first quarter 2017. In first quarter 2017, these losses included ineffectiveness and unrealized mark-to-market amounts associated with a portion of the company's fuel hedge portfolio, which are special items. Excluding these special items related to fuel hedging, other losses were $4 million in first quarter 2018, compared with other gains of $2 million in first quarter 2017. Net interest expense in first quarter 2018 was $10 million, compared with $11 million in first quarter 2017.
First quarter 2018 net income was $463 million, or a first-quarter record $.79 per diluted share, compared with first quarter 2017 net income of $339 million, or $.55 per diluted share. Excluding special items, first quarter 2018 net income was $438 million, or $.75 per diluted share, compared with first quarter 2017 net income of $359 million, or $.58 per diluted share, and compared with First Call first quarter 2018 consensus estimate of $.74 per diluted share.
Liquidity and Capital Deployment
As of March 31, 2018, the company had approximately $3.2 billion in cash and short-term investments and a fully available unsecured revolving credit line of $1 billion. Net cash provided by operations during first quarter 2018 was $1.0 billion, capital expenditures were $409 million, and free cash flow was $708 million. The company repaid $82 million in debt and capital lease obligations during first quarter 2018 and expects to repay approximately $254 million in debt and capital lease obligations during the remainder of 2018.
During first quarter 2018, the company returned $648 million to its shareholders through the repurchase of $500 million in common stock and the payment of $148 million in dividends. The company has $850 million remaining under its May 2017 $2.0 billion share repurchase authorization.
Due to revisions to its future fleet order book with Boeing, the Company now estimates its 2018 capital expenditures to be in the $2.0 to $2.1 billion range.
Fleet and Capacity
The company ended the first quarter with 717 aircraft in its fleet. This reflects the first quarter delivery of nine new Boeing 737-800 aircraft, one new Boeing 737 MAX 8 aircraft, and one pre-owned Boeing 737-700 aircraft. Last month, the company revised its future firm order delivery schedule with Boeing to support future fleet modernization. The company exercised 40 737 MAX 8 options which adds 10 additional firm orders in each year 2019 through 2022. Additionally, five 737 MAX 8 firm orders were shifted from 2019 into fourth quarter 2018, and three pre-owned 737-700 aircraft previously scheduled for delivery in 2018 were replaced with three 737 MAX 8 aircraft to be delivered in 2019. The company expects to end 2018 with 752 aircraft in its fleet based on the current aircraft delivery schedule.
Awards and Recognitions
- Named to FORTUNE's list of World's Most Admired Companies. Southwest was ranked as the #8 Most Admired Company and is the only commercial airline to make the Top Ten.
- Ranked #1 in the U.S. Department of Transportation Customer Satisfaction ranking for 2017.
- Named among Forbes' Most Reputable Companies and Best Employers for Diversity.
- Ranked among the top 25 percent of companies in the Newsweek Green Rankings 2017.
- Named Best Airline-North America, Best Airline-United States, Best Economy-North America, and a Top 10 Airline-World—the only U.S. carrier to receive this award—in the 2018 TripAdvisor Travelers' Choice Awards.
- Recognized as a Top 50 Employer by Equal Opportunity Magazine.