Southwest Airlines: A Productive Buy


  • Southwest Airlines experienced top-line pressures in Q1 that prevented it from being profitable.
  • The airline has a strong plan to meet its future needs and return to higher productivity levels.
  • Inflation and high fuel costs remain important watch items, even for an airlines with a sound plan such as Southwest Airlines.
  • Looking for a helping hand in the market? Members of The Aerospace Forum get exclusive ideas and guidance to navigate any climate. Learn More »

Southwest Airlines Boeing 737-800 airplane Phoenix Sky Harbor airport in Arizona

Boarding1Now/iStock Editorial via Getty Images

Southwest Airlines Co. (NYSE:LUV) provided its first quarter earnings by the end of April. Over the past weeks, I have analyzed earnings of several airlines in North America, Central and Latin America, as well as in Europe and observed different recovery paths as well as earnings call tones. What most calls had in common was the upbeat sentiment for the second quarter of 2022, but we saw also a difference in earnings call angles, from JetBlue being downbeat due to pilot shortages to United Airlines providing a sales pitch for investment in airline stocks. The earnings call from Southwest Airlines was one that, just like the one from American Airlines, I could appreciate very much due to the details that the airline provided.

In this report, I will have a look at the quarterly earnings, the Q2 2022 guidance, as well as the updated guidance, while keeping in mind the details the low-cost carrier provided during the call.

Pressure on revenues

Southwest AirLines revenue impact

Southwest Airlines revenue impact (The Aerospace Forum)

During the first quarter of 2022, Southwest Airlines experienced some pressure on revenues. Omicron pressured revenues by around $380 million, primarily in January and February, and $50 million related to staffing challenges and winter weather. The Omicron impact was around $50 million higher compared to what Southwest Airlines expected earlier. The Omicron and staffing impact in January and February resulted in an eight percent pressure on revenues.

As we saw with many airlines, March looked a lot different, with a significant uptick in leisure and business travel. Business travel was still down 36% compared to 2019, but that was better than the 40% the low-cost carrier had guided for. How stark that contrast between the start of the quarter and the end of the quarter was also visible in managed business revenues which were down 70% in January, but only down 36% in March. So, the recovery trend is extremely strong and business fares exceeded pre-pandemic levels in March. Other revenues increased by 43% driven by loyalty programs such as a credit card agreement with Chase.

Q1 revenues showed in-quarter improvement with a harder than expected hit in the first two months and a stronger than expected recovery in March. Also, the revival in business travel is something to keep in mind. When the pandemic almost completely eroded air travel, I remember how some of my readers were claiming that business travel would never return, and even Delta Air Lines suggested that would be the case. There even were thoughts that online initiatives could reduce flying activity altogether.

I think what we are seeing now is that none of that has been true. People want to fly for leisure as well as business, and airlines are crafting the loyalty products to attract customers. Personally, I flew seven times in the past nine months on three trips compared to six times in the past twelve months prior to the pandemic. While I am located in Europe, I probably am part of the pent-up demand that we are seeing globally and also among North American carriers.

Significant cost growth

Southwest Airlines Q1 2022 results

Southwest Airlines Q1 2022 results (Southwest Airlines)

During the quarter, revenues grew by over $2.6 billion. However, that didn't translate to the bottom line, as there was a $3 billion increase in operating expenses. Half of this was driven by the Payroll support program that reduced costs last year and around 22% is driven by the combination of higher fuel prices and jet fuel consumption. The remaining 30% was driven by higher costs associated with increased flight activity.

The operating loss during the quarter was $151 million compared to a $199 million profit in the same quarter last year. Interesting to note is that Southwest Airlines would have been profitable if it weren't for the Omicron impact on revenues. So, the costs to transport passengers were largely made but the revenue wasn't recognized. During the quarter, the airline had a $229 million gain on fuel hedges. With the fuel hedge policy in place, Southwest mitigated 30% of the increase in fuel costs.

Southwest Airlines unit figures

Southwest Airlines unit figures (Southwest Airlines)

Year-over-year unit figures are not extremely helpful, as they show two completely different environments. Interesting to note is that load factors are up by 12.7 points to 77% and the fares are up 32%, while revenue passengers carried are up 83%. That shows the strong rebound in demand for air travel, as aircraft are not filled by dropping fares but they are filled by solid demand. The unit costs comparisons are not extremely meaningful even when fuel is excluded, as it largely shows the absence of the payroll support.

Compared to Q1 2019, we see load factors down 4 points, but by March 2022 the load factors were already in the mid-80s - meaning at pre-pandemic levels - while fares for the quarter are exceeding 2019 levels by 4.8%. Unit costs excluding fuel are up 18.3%, reflecting inflation and suboptimal utilization of assets.


Outlook Southwest Airlines

Outlook Southwest Airlines (Southwest Airlines)

Southwest Airlines provided a Q2 2022 outlook when it presented its first quarter results and it recently updated its guidance. Revenues were previously expected to be up 8 to 12 percent compared to 2019, and that has now been altered to 12 to 15 percent. Capacity is still expected to be down a bit, while CASM-X will be up 14 to 18 percent and the fuel hedge gains per gallon will be higher as fuel prices continued to rise.

Full-year capacity is expected to be down 4%, with fuel hedge gains to be $0.54 per gallon and CASM-X up 12 to 16 percent. What we are largely seeing is that unit costs will remain at elevated levels, as Southwest Airlines remains operating at suboptimal levels as crews are undergoing training. There also is some realignment in the network, as the airline will be operating shorter business-focused routes which will reduce the average stage length and negatively impact unit costs. Half of the CASM increase is due to suboptimal performance, with the other half being caused by inflationary pressures.

Alignment for the future

Southwest Airlines training center pilots

Southwest Airlines training center (BOKA Powell)

What I could appreciate from Southwest Airlines was the details they provided on crew and fuel. At the moment, too many airlines are talking about hiring staff as if you hire the employee today and tomorrow they will be flying the aircraft, and that is simply not the case. More than any airline, Southwest Airlines provided details on productivity. Southwest Airlines is being extremely realistic by keeping 2023 requires in mind in their current hiring scheme. If you want to have productive employee for next year, that employee should already be undergoing training now, and that is what Southwest Airlines is extremely well aware of:

We are making great progress with hiring, but we have thousands of employees that are in training, and they're still gaining proficiency. So it just takes time before we'll going to have a full complement of frontline employees that are on the job versus either being a new hire and still in the training pipeline. So, we've made trade-offs with lower capacity in order to support operational reliability.

The element of hired staff not enabling higher flight capacity from the start is one thing that many airlines have not sufficiently highlighted or highlighted at all, and Southwest Airlines has been extremely clear about that. The capacity will be down by 4% this year, but the trained staff will enable full network recovery and expansion in 2023, which is also when Southwest Airlines expects to have its network recovered.

Also on pilot shortage, we saw a realistic assessment where it is not just about hiring the pilots but also training them. Southwest Airlines will be expanding their training facilities by adding 3 simulators this year and trying to hire 35 to 38 flight instructors and 50 to 60 to get ahead of its plan. All of that should support the hiring and training process of 1,200 pilots.

Southwest Airlines Boeing 737 MAX

Southwest Airlines Boeing 737 MAX (Boeing)

So, Southwest Airlines is aligning everything from hiring to simulators to flight instructors to aircraft purchases to supports its ability to expand capacity next year. More than any airline, Southwest Airlines is looking beyond the current peak season. The airline is also looking to de-risk its aircraft delivery schedule in order to be able to execute its capacity expansion. In that regard, it has firmed options for additional aircraft, and it has de-emphasized the MAX 7 deliveries in the coming years as the aircraft is still pending certification.

Fuel hedging: A damper on fuel costs

Southwest Airlines fuel hedge

Southwest Airlines fuel hedge (Southwest Airlines)

In the first quarter, Southwest Airlines was able to save $229 million on fuel costs due to its fuel hedging policy. Fuel hedging remains an art that many airlines have burned their fingers on before. However, I believe that with a 63% fuel hedge for the year, Southwest Airlines is well-positioned to reduce fuel bill increases. For the second quarter, this should already provide a $290 million hedging gain. For the full year, the fuel hedge is estimated to be worth around $1 billion, providing a significant relief on upward pressure on fuel costs.


The earnings call from Southwest Airlines was one of the most detailed I have seen in the years I have been writing and following earnings calls. Southwest Airlines saw some revenue pressure in the quarter due to COVID-19, air traffic control challenges, staffing and adverse weather conditions. In April (Q2 2022), it suffered technical difficulties, but the airline is currently managing quite well. Rather than trying to get everything in place for the peak season this year, the airline is already realistically looking ahead to have a proficient and productive staff in available to execute capacity plans for 2023. The result is that this year the capacity will be down somewhat to provide some operational buffer, as crews that are currently in training are not adding to the airline's capability to expand capacity now. That is also baked into the CASM guidance, which will be up 16% for the year compared to 2019, half of which comes from inflationary pressures and the other half comes from suboptimal productivity.

However, overall I am pleased to see that Southwest Airlines is putting hiring, training equipment, and flight instructors in place to meet the requirements of next year and possible exceed that, instead of having a rather short-sighted look on things. I believe that, with this mindset, Southwest Airlines has an extremely productive future ahead. That does not mean that there are no headwinds. Current higher fuel prices require a well-thought fuel hedging policy that should pay off as the fuel environment changes, and inflation remains a concern for the cost side of the equation as well as the demand side of the equation.

This article was written by

Dhierin Bechai profile picture
In-depth insights from an expert on the aerospace and airline industries
Dhierin is a leading contributor covering the aerospace industry on Seeking Alpha and the founder of The Aerospace Forum. With his Aerospace Engineering background he has a more indepth knowledge about aerospace products enabling him to cover a complex niche. Most of his reports will be about companies in the aerospace industry or airlines industry, comparing products and looking at market forecasts providing investors with unique and thorough insights. Dhierin has accumulated nearly 20 million views never failing to spark healthy and thoughtful discussions for investors and aerospace professionals.

His reports have been cited by CNBC, the Puget Sound Business Journal, the Wichita Business Journal and National Public Radio. His expertise is also leveraged in Luchtvaartnieuws Magazine, the biggest aviation magazine in the Benelux.

AeroAnalysis offers wide variety of services, ranging from providing data and cost models to consultancy possibilities. Check out our website for more information. Though we believe in the strong nature of our analysis, we are in no way giving buy or sell recommendations and advise everyone to do their own due diligence before making investment decisions.


Disclosure: I/we have a beneficial long position in the shares of BA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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