Q4 2024 Earnings Summary
- Southwest Airlines is targeting a return on invested capital (ROIC) of at least 15% by 2027 and operating margins (excluding special items) greater than 10%, indicating strong financial goals and a focus on shareholder value.
- The company expects a constructive industry backdrop to persist due to ongoing manufacturing constraints affecting aircraft supply, which could lead to favorable capacity dynamics and a favorable revenue environment for the airline industry in the coming years.
- Southwest is executing a fleet modernization and monetization strategy, including potential aircraft sales and sale-leaseback transactions, which is expected to boost margins and provide significant EBIT contributions, with multiple levers to enhance financial performance depending on Boeing's delivery pace.
- Unit cost inflation is higher than expected, driven by market-driven wage rates, airport costs, and health care, which may pressure profitability. Tammy Romo stated, "We are experiencing above normal unit cost inflation, most notably in market-driven wage rates, airport costs and health care."
- Uncertainty in fleet modernization due to reliance on Boeing deliveries, which could impact the execution of the fleet monetization strategy and capacity plans. Tammy Romo mentioned, "So that would make your question a little bit tricky in terms of timing, but we could have potentially up to 50 to 55 deliveries. And again, those would go towards our fleet modernization efforts." Robert Jordan added, "So the more Boeing can deliver, the more we can execute the strategy in 2025."
- Incremental costs expected from cabin retrofit efforts, with significant impacts hitting in the fourth quarter, potentially pressuring margins. Tammy Romo stated, "Yes. So it ramps up with the biggest impact hitting in the fourth quarter."
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +2% (from $6.82B to $6.93B) | The increase is primarily driven by steady passenger demand and moderate capacity growth, though the pace of growth has slowed due to ongoing inflationary pressures and competitive pricing in certain markets. |
Cost of Goods Sold (COGS) | -8% (from $7.22B to $6.65B) | The decrease reflects efficiencies in fuel consumption, favorable contract renewals, and reduced maintenance expenses compared to the prior year, partially offset by higher labor costs stemming from new union agreements. |
Operating Income (EBIT) | Increased from -$404M to $278M | The turnaround is attributed to improved revenues and cost controls, notably in fuel management and fleet maintenance, as well as fewer one-time expenses compared to the previous period. The result indicates better operating leverage and an ongoing focus on productivity. |
Net Income | Increased from -$252M to $261M | This significant swing to positive net income is driven by the EBIT improvement, along with manageable interest and tax expenses. The company has benefited from stronger passenger traffic, stable pricing, and lower one-time charges than in the prior year. |
Interest Expense | -12% (from $66M to $58M) | The decline reflects continued paydown of higher-cost debt and favorable refinancing rates compared to last year. However, rising rate pressures in broader markets may affect future borrowing costs, prompting careful capital structure management going forward. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
CASM-X | Q4 2024 | 11% to 13% | no current guidance | no current guidance |
Fuel costs | Q4 2024 | $2.25 to $2.35 per gallon | no current guidance | no current guidance |
Capacity | Q4 2024 | -4% year-over-year | no current guidance | no current guidance |
CapEx | FY 2024 | $2.1B | no current guidance | no current guidance |
Operating margin | FY 2025 | 3% to 5% | no current guidance | no current guidance |
CASM-X | Q1 2025 | no prior guidance | 7% to 9% year-over-year | no prior guidance |
RASM | Q1 2025 | no prior guidance | 5% to 7% year-over-year | no prior guidance |
Gross capital expenditures | FY 2025 | no prior guidance | $2.5B to $3B | no prior guidance |
Share repurchases | FY 2025 | no prior guidance | $2.25B | no prior guidance |
Incremental EBIT | FY 2025 | no prior guidance | $1B to $1.5B | no prior guidance |
CASM-X | FY 2025 | no prior guidance | Low single-digit growth by Q4 2025 | no prior guidance |
Cabin retrofit costs | FY 2025 | no prior guidance | $150M | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Boeing aircraft deliveries and manufacturing constraints | Consistently discussed supply chain challenges and delivery delays in Q1–Q3 2024. Delivery expectations were adjusted downward each quarter. Overstaffing partly driven by delayed deliveries. | 22 deliveries in 2024 (aligned with conservative planning); 38 deliveries planned for 2025 with potential upside to 50–55 if Boeing ramps up production. Manufacturing constraints remain a key industry factor. | Recurring topic with slightly more optimism on Boeing’s ramp-up yet ongoing caution about constraints. |
Fleet modernization and monetization strategy | Strategy to retire older 737-700s and leverage strong secondary market. Monetization (sales, sale-leasebacks) regularly discussed in prior quarters, expected to contribute $500M in EBIT by 2027. | All-MAX fleet by 2031 goal. Plans for 51 retirements in 2025, sales and sale-leasebacks generating gains (e.g., $92M in Q4 2024). Monetization relies on limited aircraft supply and strong secondary market. | Ongoing with increasing confidence due to rising aircraft values. Large future impact through cost savings and potential incremental EBIT. |
Cost inflation and unit cost management | Repeatedly highlighted labor cost pressure, Boeing delays fueling overstaffing, and CASM-X inflation each quarter. Previous mentions of voluntary leave programs and staff reductions. | Elevated CASM-X up 11.1% YoY in Q4 2024. A $500M multiyear cost plan launched. Inflationary pressures in wages and overhead. Expected to exit 2025 with CASM-X growth in low single digits. | Consistent concern, but accelerated focus on cost-savings initiatives heading into 2025. |
Revenue management and RASM performance | Revenue management system changes caused some early dilution in Q2 2024, but RASM turned positive in Q3. Notable improvements each quarter via refined yield management. | Q4 2024 RASM up 8% YoY, attributed to optimized demand forecasting and continued capacity discipline. Positive RASM outlook into early 2025. | Recovering from initial system-related headwinds; seeing stronger yields and continued improvement. |
Assigned seating and premium seating | Customer-preference research ongoing in Q1 2024, broader details on premium seating emerged in Q2–Q3. Retrofits, loyalty tie-ins with Chase, and additional cabin features discussed. | Will begin selling assigned seats in 2H 2025, operating flights with assigned/premium seating in 1H 2026. Dynamic pricing for upgraded boarding introduced. | New major initiative gaining clarity and timeline. Material impact expected on revenues and brand perception. |
FAA review and safety concerns | No specific FAA review mentioned in Q3. Brief references to Boeing quality checks in Q1, and a targeted FAA review in Q2 focusing on flight ops. | Finalized cabin layouts for weight and balance certification, expect FAA sign-off by mid-2025. Earned industry safety benchmarking (IATA Operational Safety audit). | Limited mention in Q4. Main focus is cabin certification rather than systemic safety concerns. |
Capacity growth strategies and operational efficiencies | Similar moderate growth strategy in Q1–Q3. Redeye flights, turn-time reduction, expansion to underutilized time windows all noted in prior calls. | 1%–2% capacity growth for 2025, supported by redeye flights in 33 markets and a 5-minute turn reduction at 12 stations, creating ~16 “free” aircraft by end of 2025. | Steady approach to low-capex growth using operational levers instead of large fleet additions. |
Cabin retrofit initiatives | Ongoing references in Q2–Q3 about seat configuration changes. Studying assigned seating layouts and FAA certification steps. | Retrofits begin mid-2025, focusing on 737-800s first, then 737-700s. ~$150M in incremental costs during second half of 2025. Targeting assigned/premium seat ops by 1H 2026. | Escalating from studies to execution phase with clear cost and timeline guidance. |
Return on invested capital and margin targets | Common reference each quarter. Q3 reaffirmed 15% ROIC target and margin ranges by 2027. | Reiterated 15%+ ROIC by 2027, aiming for double-digit operating margins. Initiatives and cost plans expected to drive these goals even without fleet monetization upside. | Unchanged but intensified focus on accelerating cost savings and revenue initiatives to meet targets. |
Industry backdrop: constrained supply & favorable revenue env. | Constrained supply mentioned in prior quarters, though not always explicitly. Recognition of a constructive demand environment from Q3 onward. | Aircraft supply constraints persist, creating strong secondary market for sales/leasebacks. Positive revenue trends from balanced capacity and strong demand. | Increasingly favorable environment for pricing and fleet monetization; supportive tailwind for near-term revenue. |
-
Fleet Strategy and Cash from Aircraft Sales
Q: How much cash can be unlocked from aircraft sales?
A: Tammy Romo stated they have planes in excess of what is needed for their 1%-2% capacity growth target, and the sale of these excess aircraft could generate significant cash. The exact proceeds depend on Boeing deliveries and market conditions, but they are focused on hitting operating margin targets and return on invested capital. Robert Jordan added they are committed to extracting every dime of embedded value from their order book to deliver value to shareholders. -
Revenue Outlook and Management Initiatives
Q: How are revenue management initiatives impacting revenue?
A: Andrew Watterson explained that revenue management had a stronger impact in Q4 and into Q1 than other initiatives, contributing to outperformance in RASM compared to competitors. He expects the $1 billion in tactical revenue-driven initiatives to progress throughout the year, with yield benefits growing and load factor improvements coming later. -
Unit Cost Expectations
Q: Can Southwest achieve modest unit cost growth ahead?
A: Robert Jordan believes it is doable to achieve low single-digit CASM-X growth over the next few years, with a low single-digit exit rate for 2025 indicating their goal. The recent labor rate surety from closed contracts supports this outlook. Tammy Romo added they are focused on cost reduction efforts ramping up throughout the year. -
Balance Sheet Metrics and Capital Returns
Q: Will paying down debt affect capital returns acceleration?
A: Tammy Romo confirmed plans to reduce leverage by paying down debt this year, moving closer to their mid-30% leverage target. Robert Jordan mentioned they are committed to maintaining a strong balance sheet and will address capital returns with the Board as they progress. -
Sale-Leaseback Transactions and EBIT Contribution
Q: How do sale-leasebacks impact EBIT and fleet strategy?
A: Tammy Romo explained that sale-leasebacks are a tool to manage the exit of older aircraft, aiming to do this in an NPV-positive way. While they recognize a gain on sale, increased rents are considered, and the bulk of the EBIT benefit comes from sales of excess aircraft, depending on Boeing deliveries and market conditions. -
Industry Capacity Outlook
Q: Will industry capacity decrease in Q2 through Q3?
A: Andrew Watterson noted that schedules beyond mid-May are still in flux, but what is firm is constructive. Robert Jordan expects the current constructive backdrop to persist due to manufacturing constraints that will last for years, keeping capacity in check. -
Progress on New Seating Configuration
Q: What is the update on new seating configuration certification?
A: Robert Jordan stated they have finalized cabin layouts, allowing completion of weight and balance certification with the FAA in Q1 and STC certification in Q2. Retrofits will start midyear, with the biggest impact hitting in the fourth quarter. -
Amended Credit Card Deal
Q: Will the amended Chase deal increase remuneration?
A: Robert Jordan mentioned that the new deal includes significant additional compensation, competitive with recent market deals, and was contemplated in their Investor Day plan. Ryan Green added they are pleased with the amendment and expect it to drive co-brand card acquisitions. -
DEI Approach
Q: Has there been a shift in Southwest's DEI approach?
A: Robert Jordan stated there is no change in how they think about treating and rewarding people; hiring and promotions have always been merit-based. They aim to create an inclusive environment where employees feel they belong at Southwest.