SOUTHWEST AIRLINES CO. Relevant comparative operating statistics for the three and nine months endedSeptember 30, 2021 and 2020 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company's performance against its results for the prior year period, as well as against the performance of the Company's peers. In the first nine months of both years, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Three months
ended
2021 2020 Change
Revenue passengers carried (000s) 29,303 11,621 152.2 %
Enplaned passengers (000s) 36,534 15,064 142.5 %
Revenue passenger miles (RPMs) (in millions)(a) 31,285 11,888 163.2 %
Available seat miles (ASMs) (in millions)(b) 38,756 26,464 46.4 %
Load factor(c) 80.7 % 44.9 % 35.8 pts.
Average length of passenger haul (miles) 1,068 1,023 4.4 %
Average aircraft stage length (miles) 808 736 9.8 %
Trips flown 305,758 231,105 32.3 %
Seats flown (000s)(d) 47,471 35,491 33.8 %
Seats per trip(e) 155.3 153.6 1.1 %
Average passenger fare $ 144.24 $ 125.07 15.3 %
Passenger revenue yield per RPM (cents)(f) 13.51 12.23 10.5 %
Operating revenues per ASM (cents)(g) 12.07 6.78 78.0 %
Passenger revenue per ASM (cents)(h) 10.91 5.49 98.7 %
Operating expenses per ASM (cents)(i) 10.18 12.11 (15.9) %
Operating expenses per ASM, excluding fuel (cents) 7.63 10.67 (28.5) %
Operating expenses per ASM, excluding fuel and
profitsharing (cents) 7.43 10.67 (30.4) %
Fuel costs per gallon, including fuel tax $ 2.01 $ 1.18 70.3 %
Fuel costs per gallon, including fuel tax, economic $ 2.04
$ 1.23 65.9 % Fuel consumed, in gallons (millions) 491 320 53.4 % Active fulltime equivalent Employees(j) 53,984 57,931 (6.8) % Aircraft at end of period(k) 737 734 0.4 % 34
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Nine months
ended
2021 2020 Change
Revenue passengers carried (000s) 69,686 41,622 67.4 %
Enplaned passengers (000s) 87,247 51,833 68.3 %
Revenue passenger miles (RPMs) (in millions)(a) 73,850 41,437 78.2 %
Available seat miles (ASMs) (in millions)(b) 95,316 79,701 19.6 %
Load factor(c) 77.5 % 52.0 % 25.5 pts.
Average length of passenger haul (miles) 1,060 996 6.4 %
Average aircraft stage length (miles) 794 740 7.3 %
Trips flown 766,979 696,586 10.1 %
Seats flown (000s)(d) 119,088 106,271 12.1 %
Seats per trip(e) 155.3 152.6 1.8 %
Average passenger fare $ 136.45 $ 144.22 (5.4) %
Passenger revenue yield per RPM (cents)(f) 12.88 14.49 (11.1) %
Operating revenues per ASM (cents)(g) 11.27 8.83 27.6 %
Passenger revenue per ASM (cents)(h) 9.98 7.53 32.5 %
Operating expenses per ASM (cents)(i) 9.67 12.15 (20.4) %
Operating expenses per ASM, excluding fuel (cents) 7.29 10.26 (28.9) %
Operating expenses per ASM, excluding fuel and
profitsharing (cents) 7.10 10.26 (30.8) %
Fuel costs per gallon, including fuel tax $ 1.87 $ 1.52 23.0 %
Fuel costs per gallon, including fuel tax, economic $ 1.92
$ 1.56 23.1 % Fuel consumed, in gallons (millions) 1,203 985 22.1 % Active fulltime equivalent Employees(j) 53,984 57,931 (6.8) % Aircraft at end of period(k) 737 734 0.4 % (a) A revenue passenger mile is one paying passenger flown one mile. Also referred to as "traffic," which is a measure of demand for a given period. (b) An available seat mile is one seat (empty or full) flown one mile. Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period. (c) Revenue passenger miles divided by available seat miles. (d) Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period. (e) Seats per trip is calculated by dividing seats flown by trips flown. (f) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares. (g) Calculated as operating revenues divided by available seat miles. Also referred to as "operating unit revenues," or "RASM," this is a measure of operating revenue production based on the total available seat miles flown during a particular period. (h) Calculated as passenger revenue divided by available seat miles. Also referred to as "passenger unit revenues," this is a measure of passenger revenue production based on the total available seat miles flown during a particular period. (i) Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs," "cost per available seat mile," or "CASM" this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies. (j) Included less than 500 and a total of 10,684 Employees on Extended Emergency Time Off as ofSeptember 30, 2021 andSeptember 30, 2020 , respectively. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. (k) Included 24 Boeing 737 Next Generation aircraft in temporary storage as ofSeptember 30, 2021 . Also included 34 Boeing 737 MAX and 70 Boeing 737 Next Generation aircraft in long-term storage as ofSeptember 30, 2020 . See Note 11 to the unaudited Condensed Consolidated Financial Statements for further information. 35 --------------------------------------------------------------------------------
Financial Overview
In lateFebruary 2020 , the Company began to see a negative impact from the COVID-19 pandemic, which quickly accelerated during first quarter 2020 and has continued throughout 2021. While the pandemic has continued to negatively impact results, the Company saw steady improvement as the year progressed through July, although the summer surge in COVID-19 cases decelerated the demand for travel in August and early September. The Company's financial results in both years, on both a GAAP and Non-GAAP basis, were significantly impacted by the pandemic and the resulting effect on demand and passenger bookings. The Company recorded third quarter and year-to-date GAAP and non-GAAP results for 2021 and 2020 as noted in the following tables. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. Three months ended Nine months ended (in millions, except per share amounts) September 30, September 30, GAAP 2021 2020 Percent Change 2021 2020 Percent Change Operating income (loss)$ 733 $ (1,411) n.m.$ 1,526 $ (2,648) n.m. Net income (loss)$ 446 $ (1,157) n.m.$ 909 $ (2,166) n.m. Net income (loss) per share, diluted$ 0.73 $ (1.96) n.m.$ 1.49 $ (3.89) n.m. Non-GAAP Operating loss$ (59) $ (1,577) (96.3)$ (1,490) $ (3,841) (61.2) Net loss$ (135) $ (1,173) (88.5)$ (1,356) $ (2,751) (50.7) Net loss per share, diluted$ (0.23) $ (1.99) (88.4)$ (2.29) $ (4.95) (53.7) The significant increase in GAAP Net income (loss) and Operating income (loss), and significant decrease in non-GAAP Net loss and Operating loss, year-over-year, for both the quarter and year-to-date periods noted above, was primarily due to improvements in domestic leisure demand and bookings in 2021 as impacts from the COVID-19 pandemic eased. These impacts combined to result in a 161.0 percent increase in Operating revenues in third quarter 2021, and a 52.7 percent increase in Operating revenues for the nine months endedSeptember 30, 2021 . In addition, GAAP results for the three and nine months endedSeptember 30, 2021 , included$763 million and$2.7 billion , respectively, in grant allocations of payroll funding support ("Payroll Support") from theUnited States Department of Treasury ("Treasury") utilized to fund salaries, wages, and benefits. See below and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. COVID-19 Pandemic Impacts In response to the far-reaching impacts of the COVID-19 pandemic, the Company took, and continues to assess and modify, measures to support the well-being of both its Employees and passengers, including procedures and policies intended to maintain an elevated level of cleanliness on aircraft and at facilities, and mitigate the spread of the virus. The Company also continues to monitor guidelines and recommendations from theCenters for Disease Control and Prevention applicable to the Company's daily operations, and the manner in which the majority of the Company's office and clerical Employees work on a daily basis.
As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company has received significant financial assistance from
36
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During second quarter 2020, the Company introduced Voluntary Separation Program
2020 ("Voluntary Separation Program") and the Extended Emergency Time Off
("Extended ETO") program which helped closer align staffing to reduced flight
schedules and enabled the Company to avoid involuntary furloughs and layoffs
associated with the impacts of the pandemic. Employees had until July 15, 2020 ,
to determine whether to participate in one of these programs, and approximately
15,000 Employees elected to do so. During third quarter 2021, approximately
1,000 Employees returned from the Extended ETO program and less than 500
Employees remained on Extended ETO leave as of September 30, 2021 . In accordance
with applicable accounting guidance, the Company accrued a total charge of $1.4
billion in 2020 related to the special termination benefits for Employees who
had accepted the Company's offer to participate in its Voluntary Separation
Program and the special benefits for Employees who participated in its Extended
ETO program. The accrual is being reduced as program benefits are paid or as it
becomes no longer probable that Employees will remain on leave for their elected
terms. See Note 2 to the unaudited Condensed Consolidated Financial Statements
for further information. As a result of these voluntary programs, the Company's
salaries, wages, and benefits costs were lowered by approximately $185 million
for the three months ended September 30, 2021 . The Company estimates annual 2021
cost savings from these programs to be in the range of $1.0 billion to $1.1
billion .
The Company has a significantly smaller workforce than it did prior to the
COVID-19 pandemic. However, in addition to recalling a significant portion of
the Employees that remained on Extended ETO during the first nine months of
2021, the Company is also aggressively hiring to a goal of approximately 5,000
new Employees by the end of this year, and the Company is currently more than
halfway toward that goal. The Company has also increased its minimum wage to $15
per hour to retain and attract new Employees in the competitive labor market.
The Company continues to evaluate staffing needs to align with planned flight
activity.
On September 9, 2021 , the President of the United States issued an order
establishing vaccination requirements for employees of covered federal
contractors (the "Vaccine Executive Order"). The Company is considered a covered
federal contractor and, therefore, subject to actions by the government to
implement the Vaccine Executive Order. The Company is requiring all Employees to
submit proof of COVID-19 vaccination, or apply for an accommodation, by November
24, 2021 . The Company recently launched a Vaccination Participation Pay Program
to incentivize Employees with the equivalent of two days of pay, with the
incentive intended to cover the time needed to become vaccinated.
Company Overview
The Company has entered into supplemental agreements with The Boeing Company
("Boeing") to increase aircraft orders and accelerate certain options with the
goal of improving potential growth opportunities, restoring its network closer
to pre-pandemic levels, lowering operating costs, and further modernizing its
fleet with less carbon-intensive aircraft. During third quarter 2021, the
Company exercised eight options for aircraft delivery in 2022, which increased
the Company's 2022 firm orders to 72 with 42 remaining options, and the
Company's order book with Boeing as of September 30, 2021 , consists of a total
of 391 MAX firm orders (242 Boeing 737 MAX-7 ("-7") aircraft and 149 Boeing 737
MAX-8 ("-8") aircraft) and 260 MAX options (-7s or -8s) for years 2021 through
2031. The Company continues to expect that more than half of the MAX aircraft in
its firm order book will replace a significant amount of its 461 Boeing 737-700
("-700") aircraft over the next 10 to 15 years to support the modernization of
the Company's fleet, a key component of its environmental sustainability
efforts.
The Company ended third quarter 2021 with 737 Boeing 737 aircraft in its fleet,
including 69 -8 aircraft. During third quarter 2021, the Company took delivery
of one -8 aircraft, and does not expect any additional deliveries in 2021. As of
September 30, 2021 , 24 -700 aircraft remained in temporary storage due to fourth
quarter 2021 capacity remaining below fourth quarter 2019 levels. The Company
still expects to return one leased -700 aircraft to the lessor in fourth quarter
2021, and in October 2021 made the decision to accelerate the retirement of
eight -700
37
--------------------------------------------------------------------------------owned aircraft from 2022 into fourth quarter 2021, for a total of 18 retirements in 2021. The Company expects to end 2021 with 728 total aircraft.
The Company has published its flight schedule throughApril 24, 2022 . During 2021, the Company is pursuing additional revenue opportunities that utilize idle aircraft to provide service to new, popular destinations. The Company is leveraging additional airports in or near cities where its Customer base is large, along with adding easier access to popular leisure-oriented destinations from across its domestic-focused network. These additional service points on the Company's route map are opportunities it can provide Customers now, all while better positioning the Company for a travel demand rebound. During 2021, the Company has begun service to new destinations including: •Chicago O'Hare International Airport andSarasota Bradenton International Airport -February 14, 2021 •Colorado Springs Municipal Airport andSavannah/Hilton Head International Airport -March 11, 2021 •Houston'sGeorge Bush Intercontinental Airport andSanta Barbara Airport -April 12, 2021 •Fresno Yosemite International Airport -April 25, 2021 •Destin-Fort Walton Beach Airport -May 6, 2021 •Myrtle Beach International Airport -May 23, 2021 •Bozeman Yellowstone International Airport -May 27, 2021 •Jackson-Medgar Wiley Evers International Airport inMississippi -June 6, 2021 •Eugene Airport inOregon -August 29, 2021
The Company has also announced other new destinations and expected service
commencement dates including:
•Bellingham International Airport in
The COVID-19 pandemic has had a particularly negative impact on international operations and led to the Company's suspension of international operations in first quarter 2020. The Company has since resumed service toAruba ,Mexico ,Costa Rica ,Jamaica , theDominican Republic ,Cuba , theBahamas , and Turks and Caicos. With the easing of government restrictions and the continued increase in demand for beach and leisure destinations, the Company intends to resume service toBelize byNovember 7, 2021 and theCayman Islands in 2022. The Company will focus on restoring the frequency of flights between existing airports in the short-term. Although less severe than prior waves of rising COVID-19 cases, the negative effects associated with the Delta variant are estimated to have impacted August andSeptember 2021 operating revenues by approximately$100 million and$200 million , respectively. Despite the demand deceleration, third quarter 2021 operating revenues and revenue passengers reached 83 percent and 87 percent of 2019 levels, respectively, which is meaningful progress and a strong indication of the pent-up demand for air travel. Revenue and booking trends began to significantly improve in the second half ofSeptember 2021 as COVID-19 cases declined, which resulted in an improvement in the Company's September and third quarter 2021 operating revenues, as compared with the Company's previous estimation.September 2021 managed business revenues declined 73 percent compared withSeptember 2019 . The Company is encouraged by recent improvements in underlying revenue trends as COVID-19 cases have declined; however, the lingering effects from the deceleration in bookings in third quarter 2021 are estimated to negatively impact fourth quarter 2021 Operating revenues by approximately$100 million . ForOctober 2021 , despite the improvement in revenue and booking trends experienced in the second half ofSeptember 2021 continuing, thus far, into this month, October operating revenues include two headwinds-an estimated$40 million negative impact due to the lingering effects of the Delta variant and an estimated$75 million negative impact as a result of flight cancellations from operational challenges experienced earlier this month and related Customer refunds and gestures of goodwill. Despite these headwinds, and based on current bookings, the Company's guidance forOctober 2021 operating revenues remains unchanged, as the recent improvement in travel demand trends offsets the aforementioned headwinds. Business revenues continue to lag leisure revenue trends; however, the Company is encouraged by the recent improvement in business travel demand resulting in steady improvements in business 38 --------------------------------------------------------------------------------
bookings, thus far, in
The following table presents selected preliminary estimates of Operating revenues and Load factor for October and fourth quarter 2021:
Estimated Estimated
October 2021 4Q 2021
Operating revenue compared with 2019 (a) Down 20% to 30% Down 15% to 25%
Previous estimation (b) (b)
Load factor 78% to 83% 80% to 85%
Previous estimation (b) (b)
(a) The Company believes that operating revenues compared with 2019 is a more
relevant measure of performance than a year-over-year comparison due to the
significant impacts in 2020 due to the pandemic.
(b) Remains unchanged from the previously provided estimation.
The Company expects its fourth quarter 2021 capacity to remain below fourth
quarter 2019 levels. The following table presents capacity estimates for fourth
quarter 2021:
Estimated Estimated Estimated Estimated
October 2021 November 2021 December 2021 4Q 2021
ASMs year-over-year Up ~68% Up ~42% Up ~55% Up ~54%
Previous estimation (a) (a) (a) (a)
ASMs compared with 2019 Down ~6% Down ~7% Down ~12% Down ~8%
Previous estimation (a) (a) (a) (a)
(a) Remains unchanged from the previously provided estimation.
Based on current cost trends and reduced capacity plans, fourth quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are expected to be comparable with fourth quarter 2019 levels, and increase in the range of 8 percent to 12 percent on a unit basis as compared with fourth quarter 2019. The projection does not reflect the potential impact of Fuel and oil expense, special items, and profitsharing expense because the Company cannot reliably predict or estimate these items or expenses or their impact to the Company's financial statements in future periods, especially considering the significant volatility of the Fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. The Company is experiencing cost increases primarily due to inflation in labor rates and airport costs. Additionally, the Company currently expects four to five points of the unit cost increase in fourth quarter 2021 to be attributable to investments in the operation to bolster staffing, cost inflation related to lower productivity, and vaccination incentive pay. Based on the current cost outlook, and despite the current momentum in revenue trends, the Company does not expect to be profitable in fourth quarter 2021. Except for higher fuel prices, fourth quarter 2021's overall results are trending better than third quarter 2021. DuringAugust 2021 , the Company reached a tentative collective-bargaining agreement with theInternational Association of Machinists and Aerospace Workers ,AFL-CIO , which represents the Company's approximately 6,800 Employees in the Customer Service Agents, Customer Representatives, and Source of Support Representatives workgroup. The ratification vote is scheduled to conclude onOctober 29, 2021 . If the tentative agreement is ratified, it will become amendable in 2025. The Company went live with Sabre's Global Distribution System ("GDS") platform onJuly 26, 2021 , achieving its goal of enabling industry-standard corporate bookings through multiple GDS platforms. In addition to Sabre, the Company is currently accepting corporate bookings through Amadeus's GDS platform and Travelport's multiple GDS platforms (Apollo, Worldspan, and Galileo). The Company's enhancement of its GDS channel strategy is part 39 -------------------------------------------------------------------------------- of its larger "channel of choice" offering and complements its "direct connect" strategy, as well as its existing SWABIZ® direct travel management tool. The goal is to distribute Southwest's everyday low fares to more business travelers through their preferred channel and grow the Company's managed business revenues.
Material Changes in Results of Operations
Comparison of three months ended
Operating Revenues
Total operating revenues for third quarter 2021 increased by$2.9 billion , or 161.0 percent, year-over-year, to$4.7 billion . Third quarter 2021 operating revenues per ASM (RASM) were12.07 cents , an increase of 78.0 percent, compared with third quarter 2020. The dollar increase was driven primarily by the improvements in leisure Passenger demand and bookings in third quarter 2021 versus the severe impacts to demand and bookings from the COVID-19 pandemic in third quarter 2020. The RASM increase was primarily driven by a 10.5 percent improvement in yield and an increase in Load factor of 35.8 points. Passenger revenues for third quarter 2021 increased by$2.8 billion , or 190.7 percent, year-over-year. On a unit basis, Passenger revenues increased 98.7 percent, year-over-year. The increase in Passenger revenues on both a dollar and unit basis was primarily due to travel restrictions easing and an increase in the numbers of persons vaccinated, which resulted in improvements in leisure Passenger demand and bookings.
Freight revenues for third quarter 2021 increased by
Other revenues for third quarter 2021 increased by$107 million , or 35.9 percent, compared with third quarter 2020. The increase was primarily due to an increase in income from business partners, includingChase Bank USA, N.A. ("Chase"), and the impact on spend on the Company's co-branded card, driven by the increase in consumer spending resulting from the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic.
Operating Expenses
Operating expenses for third quarter 2021 increased by$742 million , or 23.2 percent, compared with third quarter 2020, while capacity increased 46.4 percent over the same prior year period. The operating expense increase was primarily due to higher jet fuel prices. These increases were partially offset by the Payroll Support programs grant allocations of$763 million in third quarter 2021, compared with a$1.2 billion Payroll Support grant allocation in third quarter 2020. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. In third quarter 2020, ASMs were significantly impacted by the significant drop in demand as a result of the COVID-19 pandemic, which led to numerous flight cancellations and flight schedule adjustments. The Company increased capacity to match the higher demand during third quarter 2021 and incurred more variable, flight-driven expenses as a result. See "COVID-19 Pandemic Impacts" above and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The following table presents the Company's Operating expenses per ASM for the third quarter of 2021 and 2020, followed by explanations of these changes on a dollar basis. Unless otherwise specified, changes on a per ASM basis were driven by changes in capacity, which increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly more ASMs. 40 -------------------------------------------------------------------------------- Three months ended September 30, Per ASM Percent (in cents, except for percentages) 2021 2020 change change Salaries, wages, and benefits 5.48 ¢ 6.34 ¢ (0.86) ¢ (13.6) % Payroll support and voluntary Employee programs, net (2.00) (0.57) (1.43) 250.9 Fuel and oil 2.55 1.44 1.11 77.1 Maintenance materials and repairs 0.65 0.70 (0.05) (7.1) Landing fees and airport rentals 0.97 1.16 (0.19) (16.4) Depreciation and amortization 0.83 1.19 (0.36) (30.3) Other operating expenses 1.70 1.85 (0.15) (8.1) Total 10.18 ¢ 12.11 ¢ (1.93) ¢ (15.9) % Operating expenses per ASM for third quarter 2021 decreased by 15.9 percent, compared with third quarter 2020. Operating expenses per ASM for third quarter 2021, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 16.1 percent, compared with third quarter 2020. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. Salaries, wages, and benefits expense for third quarter 2021 increased by$444 million , or 26.5 percent, compared with third quarter 2020. On a per ASM basis, third quarter 2021 Salaries, wages, and benefits expense decreased 13.6 percent, compared with third quarter 2020. On a dollar basis, the increase was primarily driven by a significant increase in trips and overtime hours, and wage rate increases. Payroll support and voluntary Employee programs, net (a reduction to expense) for third quarter 2021 increased$627 million , compared with third quarter 2020. On a per ASM basis, third quarter 2021 Payroll support and voluntary Employee programs, net increased 250.9 percent, compared with third quarter 2020. On both a dollar and per ASM basis, the increases were primarily due to the Payroll Support grant benefit of$763 million in third quarter 2021, compared with a net Payroll Support and Voluntary Employee program benefit of$149 million in third quarter 2020, as the$1.2 billion Payroll Support grant was partially offset by a$1.1 billion charge related to costs associated with the Voluntary Separation Program and Extended ETO programs. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Fuel and oil expense for third quarter 2021 increased by$611 million , or 161.2 percent, compared with third quarter 2020. On a per ASM basis, third quarter 2021 Fuel and oil expense increased 77.1 percent. On a dollar basis, approximately 70 percent of the increase was attributable to an increase in jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed. On a per ASM basis, the majority of the change was due to higher jet fuel prices. The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contracts: Three
months ended
2021 2020
Economic fuel costs per gallon $ 2.04 $ 1.23
Fuel hedging premium expense (in millions) $ 25 $ 24
Fuel hedging premium expense per gallon $ 0.05 $ 0.08
Fuel hedging cash settlement gains per gallon $ 0.04 $ -
See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of
Reported Amounts to Non-GAAP Financial Measures for additional detail regarding
non-GAAP financial measures. The Company's third quarter 2021 available seat
miles per gallon ("fuel efficiency") declined 4.5 percent, year-over-year, due
to the Company's return to service of more of its least fuel-efficient aircraft,
the -700. When compared with third quarter
41
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2019, fuel efficiency improved 5.1 percent in third quarter 2021 due to the
March 2021 return to service of the Company's most fuel-efficient aircraft, the
MAX. The Company expects fourth quarter 2021 fuel efficiency to be in line with
third quarter 2021, on a nominal basis.
As of
Period Maximum fuel hedged (gallons in millions) (a)(b)
Remainder of 2021 321
2022 1,220
2023 769
2024 358
(a) The Company's hedge position includes prices at which the Company considers
"catastrophic" coverage. The maximum gallons provided are not indicative of the
Company's hedge coverage at every price, but represent the highest level of
coverage at a single price. See Note 4 to the unaudited Condensed Consolidated
Financial Statements for further information.
(b) The Company's gallons that are covered by derivative contracts represent the
maximum number of gallons hedged for each respective period, which may be at
different strike prices and at strike prices materially higher than the current
market prices. The volume of gallons covered by derivative contracts that
ultimately get exercised in any given period may vary significantly from the
volumes provided, as market prices and the Company's fuel consumption
fluctuates. Based on the Company's available seat mile plans for annual 2021,
its maximum percent of estimated fuel consumption covered by fuel derivative
contracts is 77 percent. The Company believes that providing the maximum percent
of fuel consumption covered by derivative contracts in future years relative to
2019 fuel gallons consumed is a more relevant measure for future coverage, due
to uncertainty regarding available seat mile plans in future years. Based on
2019 fuel gallons consumed, the Company's maximum percent of fuel consumption
covered by fuel derivative contracts is 59 percent in 2022, 37 percent in 2023,
and 17 percent beyond 2023.
As a result of applying hedge accounting in prior periods, the Company has
amounts in Accumulated other comprehensive income (loss) ("AOCI") that will be
recognized in earnings in future periods when the underlying fuel derivative
contracts settle. The following table displays the Company's estimated fair
value of remaining fuel derivative contracts (not considering the impact of the
cash collateral provided to or received from counterparties-see Note 4 to the
unaudited Condensed Consolidated Financial Statements for further information),
as well as the deferred amounts in AOCI at September 30, 2021 , and the expected
future periods in which these items are expected to settle and/or be recognized
in earnings (in millions):
Amount of gains deferred in
Fair value of fuel derivative AOCI at September 30, 2021 (net
Year contracts at September 30, 2021 of tax)
Remainder of 2021 $ 55 $ 15
2022 376 209
2023 192 95
2024 58 20
Total $ 681 $ 339
Assuming no changes to the Company's current fuel derivative portfolio, but
including all previous hedge activity for fuel derivatives that have not yet
settled, and considering only the expected net cash receipts related to hedges
that will settle, the Company is providing the below sensitivity table
for fourth quarter 2021 jet fuel prices at different crude oil assumptions as of
October 14, 2021 , and for expected premium costs associated with settling
contracts.
42
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Estimated economic fuel price per gallon,
including taxes and fuel hedging premiums (d)
Average Brent Crude Oil Fourth Quarter 2021 (c)
price per barrel
$60 $1.80 - $1.90
$70 $2.05 - $2.15
Current Market (a) $2.25 - $2.35
$90 $2.35 - $2.45
$100 $2.50 - $2.60
Estimated fuel hedging
premium expense per gallon
(b) $0.05
Estimated premium costs (b) $25 million
(a) Brent crude oil average market price as of October 14, 2021 , was
approximately $83 per barrel for fourth quarter 2021.
(b) Fuel hedging premium expense per gallon is included in the Company's
estimated economic fuel price per gallon estimates above.
(c) Based on the Company's existing fuel derivative contracts and market prices
as of October 14, 2021 , fourth quarter 2021 economic fuel costs are estimated to
be in the $2.25 to $2.35 per gallon range, including fuel hedging premium
expense of approximately $25 million , or $0.05 per gallon, and $0.18 per gallon
in favorable cash settlements from fuel derivative contracts. See Note Regarding
Use of Non-GAAP Financial Measures.
(d) The Company's current fuel derivative contracts contain a combination of
instruments based in West Texas Intermediate and Brent crude oil; however, the
economic fuel price per gallon sensitivities provided assume the relationship
between Brent crude oil and refined products based on market prices as of
October 14, 2021 . Economic fuel cost projections do not reflect the potential
impact of special items because the Company cannot reliably predict or estimate
the hedge accounting impact associated with the volatility of the energy
markets, the impact of COVID-19 cases on air travel demand, or the impact to its
financial statements in future periods. Accordingly, the Company believes a
reconciliation of non-GAAP financial measures to the equivalent GAAP financial
measures for projected results is not meaningful or available without
unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.
Maintenance materials and repairs expense for third quarter 2021 increased by
$65 million , or 35.1 percent, compared with third quarter 2020. On a per ASM
basis, Maintenance materials and repairs expense decreased 7.1 percent, compared
with third quarter 2020. On a dollar basis, approximately 50 percent of the
increase was due to higher engine maintenance expense due to the increase in
flight hours, and the majority of the remainder of the increase was due to the
timing of regular airframe maintenance checks as some costs had previously been
deferred while a portion of the fleet was placed into temporary storage during
the COVID-19 pandemic.
Landing fees and airport rentals expense for third quarter 2021 increased by $68
million , or 22.1 percent, compared with third quarter 2020. On a per ASM basis,
Landing fees and airport rentals expense decreased 16.4 percent, compared with
third quarter 2020. On a dollar basis, approximately 60 percent of the increase
was due to an increase in space rental rates at many airports, and the remainder
of the increase was due to higher landing fees from the increased number of
Trips flown.
Depreciation and amortization expense for third quarter 2021 increased by $7
million , or 2.2 percent, compared with third quarter 2020. On a per ASM basis,
Depreciation and amortization expense decreased by 30.3 percent, compared with
third quarter 2020. On a dollar basis, the increase was primarily due to the
deployment of new technology assets.
Other operating expenses for third quarter 2021 increased by $174 million , or
35.7 percent, compared with third quarter 2020. Included within this line item
was aircraft rentals expense in the amounts of $53 million and $57 million for
the three-month periods ended September 30, 2021 and 2020, respectively. On a
per ASM basis, Other operating expenses decreased 8.1 percent, compared with
third quarter 2020. On a dollar basis, approximately 35 percent of the increase
was primarily due to higher credit card fees driven by increases in Passenger
revenues in third quarter 2021, and the majority of the remainder of the
increase was due to various flight-driven expenses, both as a result of
improvements in leisure passenger demand and an increased number of Trips flown
in third quarter 2021.
43
--------------------------------------------------------------------------------Other
Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.
Interest expense for third quarter 2021 increased by$4 million , or 3.6 percent, compared with third quarter 2020, primarily due to higher debt balances. Based on current debt outstanding and current market interest rates, the Company currently expects fourth quarter 2021 interest expense to be approximately$115 million . Capitalized interest for third quarter 2021 decreased by$2 million , or 18.2 percent, compared with third quarter 2020, primarily due to timing of aircraft deliveries and payments.
Interest income for third quarter 2021 decreased by
Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 4 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the three months endedSeptember 30, 2021 and 2020: Three months ended September 30, (in millions) 2021 2020
Mark-to-market impact from fuel contracts settling in current and future periods
$ 3 $ 23
Premium cost of fuel contracts not designated as hedges 11 11
Mark-to-market impact from interest rate swap agreements - (1)
Mark-to-market loss on deferred compensation plan investment 1 -
Loss on partial extinguishment of convertible notes 12 -
Other 2 2
$ 29 $ 35
Income Taxes
The Company's effective tax rate was approximately 25.7 percent in third quarter
2021, compared with 25.0 percent in third quarter 2020. The higher tax rate for
third quarter 2021 was due to the significant variance in projected full year
Income (loss) before income taxes between the two periods due to impacts of the
COVID-19 pandemic as well as the Company's ability to carry back 2020 losses to
receive tax refunds on amounts paid from 2015 through 2019, when the statutory
tax rate was 35 percent. The Company currently estimates its annual 2021
effective tax rate to be approximately 27 percent.
Comparison of nine months ended
Operating Revenues
Passenger revenues for the nine months endedSeptember 30, 2021 , increased by$3.5 billion , or 58.4 percent, compared with the first nine months of 2020. On a unit basis, Passenger revenues increased 32.5 percent, year-over-year. The increase in Passenger revenues on both a dollar and unit basis were primarily due to the improvements in leisure Passenger demand and bookings in the first nine months of 2021, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first nine months of 2020. Freight revenues for the nine months endedSeptember 30, 2021 , increased by$22 million , or 18.6 percent, compared with the nine months endedSeptember 30, 2020 , primarily due to increased demand as businesses reduced pandemic driven restrictions during 2021. 44 -------------------------------------------------------------------------------- Other revenues for the nine months endedSeptember 30, 2021 , increased by$177 million , or 19.4 percent, year-over-year. The increase was primarily due to an increase in income from business partners, including Chase, and the impact on spend on the Company's co-branded card, driven by the increase in consumer spending resulting from the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic.
Operating Expenses
Operating expenses for the nine months endedSeptember 30, 2021 , decreased by$470 million , or 4.9 percent, compared with the first nine months of 2020, while capacity increased 19.6 percent over the same prior year period. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. However, the Company's flight schedules are largely fixed once flight schedules are published, and the Company experienced significant ASM reductions in second and third quarter 2020 as a result of flight schedule adjustments related to the COVID-19 pandemic. The Company has experienced significant ASM increases as a result of flight schedule adjustments related to the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic. See "COVID-19 Pandemic Impacts" above and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The following table presents the Company's Operating expenses per ASM for the first nine months of 2021 and 2020, followed by explanations of these changes on a dollar basis. Unless otherwise specified, changes on a per ASM basis were driven by changes in capacity, which increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly more ASMs. Nine months ended September 30, Per ASM Percent (in cents, except for percentages) 2021 2020 change change Salaries, wages, and benefits 5.78 ¢ 6.58 ¢ (0.80) ¢ (12.2) % Payroll support and voluntary Employee programs, net (3.11) (1.17) (1.94) 165.8 Fuel and oil 2.38 1.89 0.49 25.9 Maintenance materials and repairs 0.68 0.75 (0.07) (9.3) Landing fees and airport rentals 1.15 1.16 (0.01) (0.9) Depreciation and amortization 1.00 1.18 (0.18) (15.3) Other operating expenses 1.79 1.76 0.03 1.7 Total 9.67 ¢ 12.15 ¢ (2.48) ¢ (20.4) % Operating expenses per ASM for the first nine months of 2021 decreased by 20.4 percent, compared with the first nine months of 2020. The majority of the year-over-year unit cost decrease in the first nine months of 2021 was driven by the increase in Payroll Support funding. This decrease was partially offset by an increase in jet fuel prices and an increase in fuel gallons consumed, and$222 million of gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses in second quarter 2020. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Operating expenses per ASM for the first nine months of 2021, excluding Fuel and oil expense, profitsharing and special items (a non-GAAP financial measure), decreased 12.8 percent, year-over-year. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. Salaries, wages, and benefits expense for the first nine months of 2021 increased by$273 million , or 5.2 percent, compared with the first nine months of 2020. On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of 2021 decreased 12.2 percent, compared with the first nine months of 2020. On a dollar basis, the majority of the increase was due to the$186 million profitsharing expense accrual in the first nine months of 2021, compared with no profitsharing expense accrual in the first nine months of 2020. The remainder of the increase was primarily due to a significant increase in trips and overtime hours, and wage rate increases. 45 -------------------------------------------------------------------------------- Payroll support and voluntary Employee programs, net (a reduction to expense) for the first nine months of 2021 was an increase of$2.0 billion , or 217.6 percent, compared with the first nine months of 2020. On a per ASM basis, Payroll support and voluntary Employee programs, net for the first nine months of 2021 increased by 165.8 percent. On both a dollar and per ASM basis, the changes were primarily due to the significant increase in Payroll Support grant proceeds received in the first nine months of 2021 compared with the same prior year period. The primary components of this line item included: •The Payroll Support programs' grant allocation of$2.7 billion in the first nine months of 2021, compared with a$2.3 billion allocation in the first nine months of 2020; •The$792 million accrual for charges related to the Voluntary Separation Program in the first nine months of 2020; •The$140 million net reduction in the Extended ETO liability in the first nine months of 2021, compared with the$613 million accrual for charges related to the Extended ETO liability in the first nine months of 2020; and •The$120 million in Employee Retention Tax Credits recorded in 2021 for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.
See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.
Fuel and oil expense for the first nine months of 2021 increased by$754 million , or 50.0 percent, compared with the first nine months of 2020. On a per ASM basis, Fuel and oil expense for the first nine months of 2021 increased 25.9 percent. On a dollar basis, approximately 60 percent of the increase was attributable to an increase in jet fuel prices per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed. On a per ASM basis, the increase was primarily due to higher jet fuel prices. The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contracts: Nine months ended September 30, 2021 2020 Economic fuel costs per gallon $ 1.92$ 1.56 Fuel hedging premium expense (in millions) $ 75$ 73 Fuel hedging premium expense per gallon $ 0.06$ 0.07 Fuel hedging cash settlement gains per gallon $
0.02 $ -
See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. Maintenance materials and repairs expense for the first nine months of 2021 increased by$49 million , or 8.2 percent, compared with the first nine months of 2020. On a per ASM basis, Maintenance materials and repairs expense decreased 9.3 percent, compared with the first nine months of 2020. On a dollar basis, approximately 50 percent of the increase was due to higher engine maintenance expense due to the increase in flight hours, and the majority of the remainder of the increase was due to the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic. Landing fees and airport rentals expense for the first nine months of 2021 increased by$170 million , or 18.4 percent, compared with the first nine months of 2020. On a per ASM basis, Landing fees and airport rentals expense decreased 0.9 percent, compared with the first nine months of 2020. On a dollar basis, approximately 50 percent of the increase was due to an increase in space rental rates at many airports, and the remainder of the increase was due to higher landing fees from the increased number of Trips flown. 46 -------------------------------------------------------------------------------- Depreciation and amortization expense for the first nine months of 2021 increased by$9 million , or 1.0 percent, compared with the first nine months of 2020. On a per ASM basis, Depreciation and amortization expense decreased 15.3 percent, compared with the first nine months of 2020. On a dollar basis, the majority of the increase was associated with the deployment of new technology assets during 2021. Other operating expenses for the first nine months of 2021 increased by$305 million , or 21.7 percent, compared with the first nine months of 2020. Included within this line item was aircraft rentals expense in the amount of$155 million for both the nine-month periods endedSeptember 30, 2021 and 2020, respectively. On a per ASM basis, Other operating expenses increased 1.7 percent, compared with the first nine months of 2020. On a dollar basis, the increase was primarily due to$222 million in gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses in second quarter 2020.
Other
Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.
Interest expense for the first nine months of 2021 increased by
Capitalized interest for the first nine months of 2021 increased by$4 million , or 17.4 percent, compared with the first nine months of 2020, primarily due to Boeing resuming production of the Company's undelivered MAX aircraft. Interest income for the first nine months of 2021 decreased by$24 million , or 80.0 percent, compared with the first nine months of 2020, due to lower interest rates. Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 4 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the nine months endedSeptember 30, 2021 and 2020: Nine months ended September 30, (in millions) 2021 2020
Mark-to-market impact from fuel contracts settling in current and future periods
$ (6) $ 40
Premium cost of fuel contracts not designated as hedges 32 22
Mark-to-market impact from interest rate swap agreements - 28
Mark-to-market gain on deferred compensation plan investment (17) -
Correction on investment gains related to prior periods (a) (60) -
Loss on partial extinguishment of convertible notes 12 -
Other 7 5
$ (32) $ 95 (a) See Note 1 to the unaudited Condensed Consolidated Financial Statements for further information.
Income Taxes
The Company's effective tax rate was approximately 27.1 percent for the first
nine months of 2021, compared with 25.9 percent for the first nine months of
2020. The higher tax rate for the first nine months of 2021 was primarily due to
higher state taxes.
47
--------------------------------------------------------------------------------
Reconciliation of Reported Amounts to Non-GAAP Financial Measures (excluding
special items) (unaudited)
(in millions, except per share amounts and per ASM amounts)
Three months ended September Nine months ended September
30, Percent 30, Percent
2021 2020 Change 2021 2020 Change
Fuel and oil expense, unhedged $ 999 $ 372 $ 2,264 $ 1,472
Add: Premium cost of fuel contracts designated
as hedges 14 13 43 51
Deduct: Fuel hedge gains included in Fuel and
oil expense, net (23) (6) (46) (16)
Fuel and oil expense, as reported $ 990 $ 379 $ 2,261 $ 1,507
Add: Fuel hedge contracts settling in the
current period, but for which losses were
reclassified from AOCI (a) 5 6 19 16
Add: Premium cost of fuel contracts not
designated as hedges 11 11 32 22
Fuel and oil expense, excluding special items
(economic) $ 1,006 $ 396 154.0 $ 2,312 $ 1,545 49.6
Total operating expenses, net, as reported
$ 9,213 $ 9,683 Add: Payroll support and voluntary Employee programs, net 776 149 2,963 933 Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 5 6 19 16 Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) - - 2 - Add: Premium cost of fuel contracts not designated as hedges 11 11 32 22 Add: Gain from aircraft sale-leaseback transactions - - - 222 Total operating expenses, excluding special items$ 4,738 $ 3,370 40.6$ 12,229 $ 10,876 12.4 Deduct: Fuel and oil expense, excluding special items (economic) (1,006) (396) (2,312) (1,545) Operating expenses, excluding Fuel and oil expense and special items$ 3,732 $ 2,974 25.5$ 9,917 $ 9,331 6.3 Deduct: Profitsharing expense (77) - (186) - Operating expenses, excluding Fuel and oil expense, special items, and profitsharing$ 3,655 $ 2,974 22.9$ 9,731 $ 9,331 4.3 Operating income (loss), as reported$ 733 $ (1,411) $ 1,526 $ (2,648) Deduct: Payroll support and voluntary Employee programs, net (776) (149) (2,963) (933) Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (5) (6) (19) (16) Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) - - (2) - Deduct: Premium cost of fuel contracts not designated as hedges (11) (11) (32) (22) Deduct: Gain from aircraft sale-leaseback transactions - - - (222)
Operating loss, excluding special items
(96.3) $ (1,490) $ (3,841) (61.2)
Other (gains) losses, net, as reported
$ (32) $ 95 Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) (3) (23) 6 (40) Deduct: Premium cost of fuel contracts not designated as hedges (11) (11) (32) (22) Add (Deduct): Mark-to-market impact from interest rate swap agreements - 1 - (28) Deduct: Loss on partial extinguishment of convertible notes (12) - (12) - Other (gains) losses, net, excluding special items$ 3 $ 2 50.0%$ (70) $ 5 n.m. 48
--------------------------------------------------------------------------------
Three months ended September Nine months ended September
30, Percent 30, Percent
2021 2020 Change 2021 2020 Change
Income (loss) before income taxes, as reported
$ 1,248 $ (2,925) Deduct: Payroll support and voluntary Employee programs, net (776) (149) (2,963) (933) Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (5) (6) (19) (16) Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) - - (2) - Deduct: Gain from aircraft sale-leaseback transactions - - - (222) Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) 3 23 (6) 40 Add (Deduct): Mark-to-market impact from interest rate swap agreements - (1) - 28 Add: Loss on partial extinguishment of convertible notes 12 - 12 - Loss before income taxes, excluding special items$ (166) $ (1,675) (90.1)$ (1,730) $ (4,028)
(57.1)
Provision (benefit) for income taxes, as reported$ 154 $ (385) $ 339 $ (759) Deduct: Net income (loss) tax impact of fuel and special items (b) (185) (41) (713) (350) Deduct: GAAP to Non-GAAP tax rate difference (c) - (76) - (168) Benefit for income taxes, net, excluding special items$ (31) $ (502) (93.8)$ (374) $ (1,277)
(70.7)
Net income (loss), as reported$ 446 $ (1,157) $ 909 $ (2,166) Deduct: Payroll support and voluntary Employee programs, net (776) (149) (2,963) (933) Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (5) (6) (19) (16) Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) - - (2) - Deduct: Gain from aircraft sale-leaseback transactions - - - (222) Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) 3 23 (6) 40 Add (Deduct): Mark-to-market impact from interest rate swap agreements - (1) - 28 Add: Loss on partial extinguishment of convertible notes 12 - 12 - Add: Net income (loss) tax impact of special items (b) 185 41 713 350 Add: GAAP to Non-GAAP tax rate difference (c) - 76 - 168 Net loss, excluding special items$ (135) $ (1,173) (88.5)$ (1,356) $ (2,751)
(50.7)
Net income (loss) per share, diluted, as reported$ 0.73 $ (1.96) $ 1.49 $ (3.89) Deduct: Impact of special items (1.25) (0.22) (4.84) (1.96) Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares - (0.01) (0.04) (0.03) Add: Net income (loss) tax impact of special items (b) 0.30 0.07 1.17 0.63 Add: GAAP to Non-GAAP tax rate difference (c) - 0.13 - 0.30 Deduct: GAAP to Non-GAAP diluted weighted average shares difference (d) (0.01) - (0.07) - Net loss per share, diluted, excluding special items$ (0.23) $ (1.99) (88.4)$ (2.29) $ (4.95) (53.7) 49
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Three months ended September 30, Percent Nine months ended September 30, Percent
2021 2020 Change 2021 2020 Change
Operating expenses per ASM (cents) 10.18 ¢ 12.11 ¢ 9.67 ¢ 12.15 ¢
Add: Impact of special items 2.00 0.57 3.11 1.45
Deduct: Fuel and oil expense divided by ASMs (2.55) (1.44) (2.38) (1.89)
Deduct: Profitsharing expense divided by ASMs (0.20) - (0.19) -
Operating expenses per ASM, excluding Fuel and
oil expense, profitsharing, and special items
(cents) 9.43 ¢ 11.24 ¢ (16.1) 10.21 ¢ 11.71 ¢ (12.8)
(a) See Note 4 to the unaudited Condensed Consolidated Financial Statements for
further information.
(b) Tax amounts for each individual special item are calculated at the Company's
effective rate for the applicable period and totaled in this line item.
(c) Adjustment related to GAAP and Non-GAAP tax rate differences, primarily due
to the Payroll Support being excluded as a special item, and reflecting the
anticipated benefit of carrying back full year 2020 projected net losses to
claim tax refunds against previous cash taxes paid relating to tax years 2015
through 2019, some of which were at higher rates than the current year.
(d) Adjustment related to GAAP and Non-GAAP diluted weighted average shares
difference, due to the Company being in a Net income position on a GAAP basis
versus a Net loss position on a Non-GAAP basis. See Note 7 to the unaudited
Condensed Consolidated Financial Statements for further information.
50
--------------------------------------------------------------------------------Note Regarding Use of Non-GAAP Financial Measures
The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). These GAAP financial statements may include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult. As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company's performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating loss, non-GAAP; Other (gains) losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income taxes, net, non-GAAP; Net loss, non-GAAP; Net loss per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company's actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.
Further information on (i) the Company's fuel hedging program, (ii) the
requirements of accounting for derivative instruments, and (iii) the causes of
hedge ineffectiveness and/or mark-to-market gains or losses from derivative
instruments is included in the Company's Annual Report on Form 10-K for the
fiscal year ended
The Company's GAAP results in the applicable periods may include other charges
or benefits that are also deemed "special items," that the Company believes make
its results difficult to compare to prior periods, anticipated future periods,
or industry trends. Financial measures identified as non-GAAP (or as excluding
special items) have been adjusted to exclude special items. For the periods
presented, in addition to the items discussed above, special items include:
1.Proceeds related to the Payroll Support programs, which were used to pay a
portion of Employee salaries, wages, and benefits;
2.Charges and adjustments to previously accrued amounts related to the Company's
extended leave program;
51
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3.Adjustments for prior period losses reclassified from AOCI associated with
forward-starting interest rate swap agreements that were terminated in prior
periods related to twelve -8 aircraft leases;
4.Gains associated with the sale-leaseback of ten Boeing 737-800 aircraft and
ten Boeing -8 aircraft to third parties;
5.Unrealized losses related to twelve forward-starting interest rate swap
agreements. During the first nine months of 2020, the interest rate swap
agreements, which were related to twelve -8 aircraft leases (with deliveries
originally scheduled between June 2020 and September 2020 ), were de-designated
as hedges due to the scheduled delivery range no longer being probable,
resulting in the mark-to-market changes being recorded to earnings; and
6.Losses associated with the partial extinguishment of the Company's convertible
notes.
Because management believes special items can distort the trends associated with
the Company's ongoing performance as an airline, the Company believes that
evaluation of its financial performance can be enhanced by a supplemental
presentation of results that exclude the impact of special items in order to
enhance consistency and comparativeness with results in prior periods that do
not include such items and as a basis for evaluating operating results in future
periods. The following measures are often provided, excluding special items, and
utilized by the Company's management, analysts, and investors to enhance
comparability of year-over-year results, as well as to industry trends: Fuel and
oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses,
non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding
Fuel and oil expense and profitsharing; Operating loss, non-GAAP; Other (gains)
losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income
taxes, net, non-GAAP; Net loss, non-GAAP; Net loss per share, diluted, non-GAAP;
and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and
profitsharing (cents).
52
--------------------------------------------------------------------------------Liquidity and Capital Resources
The enormous impact of the COVID-19 pandemic on theU.S. travel industry created an urgent liquidity crisis for the entire airline industry, including the Company. However, due to the Company's pre-pandemic low balance sheet leverage, large base of unencumbered assets, and investment-grade credit ratings, the Company was able to quickly access additional liquidity during 2020, as Customer cancellations spiked and sales and revenues dropped while the Company continued to experience significant fixed operating expenses. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic and assistance obtained under Payroll Support programs. Net cash used in operating activities was$575 million for the three months endedSeptember 30, 2021 , compared with$1.1 billion used in operating activities in the same prior year period. For the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$2.1 billion , compared with$531 million used in operating activities in the same prior year period. Operating cash inflows are primarily derived from providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. Operating cash flows for the nine months endedSeptember 30, 2021 , included$2.7 billion in Payroll Support program grant proceeds received. The net increase in operating cash flows was also a result of a$1.1 billion increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand. The operating cash flows for the nine months endedSeptember 30, 2020 , were negatively affected primarily by (i) the Company's Net loss (as adjusted for noncash items), (ii) the Company's payout in 2020 of its 2019$667 million profitsharing distribution to Employees, (iii) a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the decline in passenger ticket sales, and (iv) the suspension of collection of certain ticket taxes as dictated by the CARES Act. The operating cash flows for the nine months endedSeptember 30, 2020 , were also negatively affected by the amounts paid out under the Company's Voluntary Separation Program 2020 and Extended ETO plans during the nine months endedSeptember 30, 2020 . These net decreases in cash from operating activities were partially offset by a$1.6 billion increase in Air traffic liability and by$2.4 billion in Payroll Support program grant proceeds received. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, and provide working capital. Historically, the Company has also used net cash provided by operating activities to fund stock repurchases and pay dividends; however these shareholder return activities have been suspended due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's amended and restated revolving credit facility. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Net cash used in investing activities totaled$412 million during the three months endedSeptember 30, 2021 , compared with$434 million used in investing activities in the same prior year period. Net cash used in investing activities was$1.1 billion during the nine months endedSeptember 30, 2021 , compared with$107 million used in investing activities in the same prior year period. Investing activities in both years included Capital expenditures, and changes in the balance of the Company's short-term and noncurrent investments. During the nine months endedSeptember 30, 2020 , the Company also raised$815 million from the sale-leaseback of 20 aircraft and received$428 million of Supplier proceeds, which the Company considers an offset to its aircraft capital expenditures. During the nine months endedSeptember 30, 2021 , Capital expenditures were$325 million , compared with$425 million in the same prior year period. Capital expenditures decreased, year-over-year, largely due to a decrease in facilities project expenditures and several projects being placed into service sinceSeptember 30, 2020 . In addition, the Company was not required to make progress payments on future aircraft deliveries or payments for new delivered -8 aircraft during the nine months endedSeptember 30, 2021 , compared to the same prior year period, when progress payments were made. See Notes 2 and 11 to the unaudited Condensed Consolidated Financial Statements for further information.
As a result of previously agreed upon delivery credits provided by Boeing to the
Company due to the settlement of 2020 estimated damages relating to the
53
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$500 million to $600 million driven primarily by technology, facilities, and
operational investments, as well as aircraft related capital expenditures. Based
on 72 firm orders currently planned in 2022, as discussed in "Company Overview,"
the Company's contractual aircraft capital expenditures for 2022 are estimated
to be approximately $1.7 billion . Further, the Company's total contractual
aircraft capital expenditures for all years 2022 through 2026, which currently
represents 200 MAX firm orders (185 -7 and 15 -8 aircraft), are estimated to be
approximately $6.0 billion . Fleet and other capital investment plans are
expected to continue to evolve as the Company manages through this pandemic
recovery period, and the Company intends to evaluate the exercise of its
remaining 42 MAX options for 2022 as decision deadlines occur throughout the
remainder of this year.
Net cash used in financing activities was $157 million during the three months
ended September 30, 2021 , compared with $1.2 billion provided by financing
activities for the same prior year period. Net cash provided by financing
activities was $923 million during the nine months ended September 30, 2021 ,
compared with $10.2 billion provided by financing activities for the prior year
period. During the nine months ended September 30, 2021 , the Company borrowed
$1.1 billion of loan proceeds under Payroll Support programs. See Note 2 to the
unaudited Condensed Consolidated Financial Statements for further information.
The Company repaid $298 million in debt and finance lease obligations, including
the extinguishment of $80 million in principal of its convertible notes for a
cash payment of $121 million during the nine months ended September 30, 2021 ,
and is scheduled to repay approximately $182 million in debt and finance lease
obligations in fourth quarter 2021. During the nine months ended September 30,
2020 , the Company borrowed $13.6 billion , through various transactions, in order
to improve its liquidity position as a result of the onset of the pandemic. An
additional $2.3 billion was raised from a public offering of 80.5 million shares
of common stock. These financings were partially offset by the full repayment of
$3.7 billion borrowed under the Company's Amended and Restated 364-Day Credit
Agreement and $1.0 billion drawn under the Company's Revolving Credit Facility.
The Company also repurchased $451 million of its outstanding common stock, paid
$188 million in cash dividends to Shareholders, and repaid $295 million in debt
and finance lease obligations during the first nine months of 2020.
The Company is a "well-known seasoned issuer" and currently has an effective
shelf registration statement registering an indeterminate amount of debt and
equity securities for future sales. The Company currently intends to use the
proceeds from any future securities sales off this shelf registration statement
for general corporate purposes.
The Company has access to $1.0 billion under its Revolving Credit Facility.
During third quarter 2021, the expiration of this revolving credit facility was
extended to August 2023 . The Revolving Credit Facility has an accordion feature
that would allow the Company, subject to, among other things, the procurement of
incremental commitments, to increase the size of the facility to $1.5 billion .
Interest on the facility is based on the Company's credit ratings at the time of
borrowing. At the Company's current ratings, the interest cost would be LIBOR
plus a spread of 200 basis points. The facility contains a financial covenant to
maintain total liquidity, as defined in the Revolving Credit Facility, of
$1.5 billion at all times under the Revolving Credit Facility; the Company was
compliant with this requirement as of September 30, 2021 . There were no amounts
outstanding under the Revolving Credit Facility as of September 30, 2021 .
Although not the case at September 30, 2021 , due to the Company's significant
financing activities, the Company has historically carried a working capital
deficit, in which its current liabilities exceed its current assets. This is
common within the airline industry and is primarily due to the nature of the Air
traffic liability account, which is related to advance ticket sales, unused
funds available to Customers, and loyalty deferred revenue, which are
performance obligations for future Customer flights, do not require future
settlement in cash, and are mostly nonrefundable. See Note 6 to the unaudited
Condensed Consolidated Financial Statements for further information. The Company
believes it has various options available to meet its capital and operating
commitments, including unrestricted cash and short-term investments of
$16.0 billion as of September 30, 2021 , and anticipated future internally
generated funds from operations. However, the COVID-19 pandemic continues to
evolve and could have a material adverse impact on the Company's ability to meet
its capital and operating commitments. See Note 2 to the unaudited Condensed
Consolidated Financial Statements for further information on the impacts of the
COVID-19 pandemic.
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During 2021, the Company has entered into supplemental agreements to its
aircraft purchase agreement with Boeing to increase its 2022 firm orders of -7
aircraft. Additionally, the Company accelerated options into 2022, 2023, 2024,
and 2025, and added new options into 2026 through 2027, bringing the total firm
and option order book to 660 aircraft as of September 30, 2021 , less 19
purchased aircraft delivered in the first nine months of 2021. See Note 10 to
the unaudited Condensed Consolidated Financial Statements for further
information.
The following table details information on the aircraft in the Company's fleet
as of
Average Number Number Number
Type Seats Age (Yrs) of Aircraft Owned Leased
737-700 143 17 461 (a) 375 86
737-800 175 6 207 190 17
737 -8 175 2 69 40 29
Totals 13 737 605 132
(a) Included 24 Boeing 737 Next Generation aircraft in temporary storage as of
55
--------------------------------------------------------------------------------Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are based on, and include
statements about, the Company's estimates, expectations, beliefs, intentions,
and strategies for the future, and the assumptions underlying these
forward-looking statements. Specific forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts and include, without limitation, statements related to the following:
•the Company's expectations with respect to the benefits associated with its
voluntary separation and extended leave programs;
•the Company's plans and expectations related to the Vaccine Executive Order
(see also Item 1A, Risk Factors);
•the Company's fleet plans and its related goals, strategies, and expectations,
including with respect to fuel efficiency and reduction in carbon emissions;
•the Company's network plans;
•the Company's revenue, load factor, and capacity estimates and expectations;
•the Company's other financial expectations and projected results of operations,
including the Company's underlying assumptions and estimates, in particular
related to expectations regarding investments in the Company's operations and
People;
•the Company's goals with respect to distributing fares to business travelers
and growing managed business revenues;
•the Company's plans, expectations, and estimates related to fuel costs, the
Company's related management of risk associated with changing jet fuel prices,
and the Company's assumptions underlying its fuel-related expectations and
estimates;
•the Company's expectations with respect to capital expenditures and its related
underlying assumptions, in particular with respect to aircraft capital
expenditures;
•the Company's plans for the repayment of debt;
•the Company's expectations with respect to cash flows and liquidity, including
its ability to meet its ongoing capital, operating, and other obligations, and
the Company's anticipated needs for, and sources of, funds;
•the Company's assessment of market risks; and
•the Company's plans and expectations related to legal and regulatory
proceedings.
While management believes these forward-looking statements are reasonable as and
when made, forward-looking statements are not guarantees of future performance
and involve risks and uncertainties that are difficult to predict. Therefore,
actual results may differ materially from what is expressed in or indicated by
the Company's forward-looking statements or from historical experience or the
Company's present expectations. Factors that could cause these differences
include, among others:
•any negative developments related to the COVID-19 pandemic, including, for
example, with respect to (i) the duration, spread, severity, or any recurrence
of the COVID-19 pandemic or any new variant strains of the underlying virus;
(ii) the effectiveness, availability, and usage of COVID-19 vaccines; (iii) the
impact of the Vaccine Executive Order and other governmental actions on the
Company's business plans and its ability to retain key Employees; (iv) the
extent of the impact of COVID-19 on overall demand for air travel and the
Company's related business plans and decisions; and (v) the impact of COVID-19
on the Company's access to capital;
•the impact of labor matters on the Company's business decisions, plans, and
strategies;
•the Company's dependence on Boeing with respect to the Company's operations,
strategies, and goals;
56
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•the Company's ability to timely and effectively implement, transition, and
maintain the necessary information technology systems and infrastructure to
support its operations and initiatives;
•the impact of extreme or severe weather and natural disasters, actions of
competitors (including, without limitation, pricing, scheduling, capacity, and
network decisions, and consolidation and alliance activities), consumer
perception, economic conditions, fears of terrorism or war, and other factors
beyond the Company's control on consumer behavior and the Company's results of
operations and business decisions, plans, strategies, and results;
•the impact of fuel price changes, fuel price volatility, volatility of
commodities used by the Company for hedging jet fuel, and any changes to the
Company's fuel hedging strategies and positions on the Company's business plans
and results of operations;
•the Company's dependence on third parties, in particular with respect to its
fuel supply, carbon emissions strategies, and corporate travel enhancements, and
the impact on the Company's operations and results of operations of any third
party delays or non-performance;
•the impact of the Company's obligations and restrictions related to its
participation in Treasury's payroll support programs and any related negative
impact on the Company's ability to retain key Employees;
•further delays in, or the inability of the U.S. government, to agree upon a
solution regarding budget deficits and the debt ceiling, which could result in a
default or downgrade on its debts. This, in turn, could result in a material
adverse effect of the Company's investment portfolio; and
•other factors as set forth in the Company's filings with the Securities and
Exchange Commission , including the detailed factors discussed under the heading
"Risk Factors" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2020 , its Quarterly Report on Form 10-Q for the quarter ended June
30, 2021 , and in this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2021 .
Caution should be taken not to place undue reliance on the Company's
forward-looking statements, which represent the Company's views only as of the
date this report is filed. The Company undertakes no obligation to update
publicly or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
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