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May 18, 2024
Southwest

WN 737-8

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Southwest Airlines reported its financial results for the fourth quarter and all of 2023. The company reported record full-year and 4th quarter operating revenues of $26.1 billion and $6.8 billion, respectively. Full-year net income was $498 million, or $.81 per share, and without special items was $986 million, or $1.57 per share.

The performance in the 4th quarter of 2023, when compared with 2022, showed significant improvements, as the carrier’s meltdown over the 2022 holiday period due to a winter storm set a low bar for improvement. Nonetheless, the company has improved its performance during winter storms, including the storms during the first quarter of 2024, without a system-wide meltdown. During the most recent January storms, only 2% of cancellations were due to crew staffing issues, the major contributor to 2022 problems.

Southwest CEO Bob Jordan stated, “2023 was a year of significant progress. We finished the year a much stronger Company thanks to the efforts of our incredible people. We completed a comprehensive winter action plan, restored our network, reached full utilization of our fleet, delivered significant new capabilities for our customers, and had our best fourth-quarter completion factor in more than a decade. And, importantly, we have maintained the strength of our investment grade balance sheet despite the extraordinary challenges over the past few years. Our quarterly performance was at the better end of our expectations and included fourth quarter and full year records for operating revenues and passengers. We ratified five labor agreements in 2023, and with the successful ratification of an industry-leading contract for our Pilots, we have now ratified a total of nine agreements in just over a year, providing competitive market compensation packages to our outstanding people.”

I am very proud of our many accomplishments in 2023, but we have not yet delivered on our financial targets. As we work urgently to restore our profit margins to historical levels, we believe our 2024 plan provides a line of sight to improve our profitability year-over-year, earn our cost of capital this year, and provide significant progress towards our long-term goal to well exceed our cost of capital. Despite inflationary unit cost pressures from new labor agreements and a planned increase in aircraft maintenance, we plan to counter some of those cost pressures through strategic initiatives and already actioned network adjustments, creating operating margin expansion, excluding special items, in 2024. We also expect to make notable progress regaining efficiencies, with planned headcount at the end of 2024 flat to down year-over-year as we slow hiring to levels below attrition. We currently expect to grow our full year 2024 available seat miles roughly 6 percent, year-over-year, all of which is carryover from 2023 network restoration related growth. So, there is no net-new additional capacity in 2024. With the restoration of our network behind us, we plan to meter growth and continue to make adjustments, including capacity adjustments if needed, as we work vigorously to hit our financial targets.”

Our 2024 plan leverages a set of initiatives which, most importantly, includes better aligning the route network to new demand patterns. While it is early in the first quarter, these initiatives are delivering value and we expect them to contribute roughly $1.5 billion in incremental year-over-year pre-tax profits. As a result, we expect double-digit year-over-year operating revenue growth and year-over-year operating margin3 expansion. We expect our current initiatives to continue to deliver beyond 2024, and we are actively working on new initiatives. We will be relentless in executing against our plans to drive financial results while enhancing our great Hospitality and delivering a reliable and more efficient operation,” said Jordan. 

2024 Outlook

Southwest briefly discussed the outlook for 2024, with more information to come at their investor day later this year. The company credits several revenue initiatives for increasing RASM, particularly its network optimization strategy, GDS, and business travel initiatives. Southwest is also improving its Rapid Rewards loyalty program and focusing on ancillary revenues from early boarding products as it continues a no-assigned seats policy.

The company is pleased with overall demand and is gaining visibility into the remainder of the 1st quarter, encouraged by March bookings. The company expects its initiatives to mature in 2024, provide a double-digit increase in operating revenue year-over-year, and lower jet fuel costs. The company believes it can achieve earnings equal to or above its weighted average cost of capital and return to stronger Return on Invested Capital for its shareholders in 2024.

The Fleet

Southwest operates an all-Boeing fleet. When Bob Jordan was questioned about the risk of having a single supplier, he indicated that even with two suppliers with 400 aircraft each, the impact of a problem would still be significant. He feels the best route for Southwest is to work alongside Boeing to create a better Boeing. While he indicated that Southwest continually looks at alternatives, there are no plans to move away from Boeing in the immediate future. Without a viable alternative to Boeing, as Airbus’ first slots are available in 2030-2031, he has no alternative but to remain with Boeing today.

author avatar
Ernest Arvai
President AirInsight Group LLC