Southwest Airlines Co - September 9, 2021- Investor Booklet - Investor Relations
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Southwest Airlines Co. September 9, 2021– Investor Booklet
Cautionary Statement Regarding Forward-Looking Statements This booklet contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specific forward-looking statements include, without limitation, statements related to (i) the Company’s Vision; (ii) the Company’s financial position, outlook, goals, expectations, strategies, and projected results of operations; (iii) the Company’s network plans, expectations, and opportunities; (iv) the Company's plans and expectations regarding its fleet, including with respect to its fleet delivery schedule, planned retirements, and carbon emissions; (v) the Company’s environmental sustainability goal; (vi) the Company’s expectations with respect to capital expenditures; and (vii) the Company’s initiatives and related plans and expectations. These forward-looking statements are based on the Company’s current intent, expectations, and projections and are not guarantees of future performance. These statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) any negative developments related to the COVID-19 pandemic, including, for example, with respect to the duration, spread, severity, or any recurrence of the COVID-19 pandemic; any variant strains of the underlying virus; the effectiveness, availability, and usage of vaccines; the duration and scope of governmental orders and restrictions related to the COVID-19 pandemic; the extent of the impact of the COVID-19 pandemic on overall demand for air travel and the Company's related business plans and decisions; the impact of the COVID-19 pandemic on the Company's ability to retain key Employees; and the impact of the COVID-19 pandemic on the Company's access to capital; (ii) the impact of fears or actual outbreaks of other diseases, 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, fuel prices, 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; (iii) the Company’s dependence on its workforce, including its ability to employ sufficient numbers of qualified Employees to effectively and efficiently maintain its operations; (iv) the impact of governmental actions and governmental regulations on the Company's plans, strategies, financial results, and operations; (v) the Company's dependence on Boeing with respect to the Company's fleet delivery schedule and related fleet modernization, as well as the Company’s capital expenditure plans and expectations; (vi) the Company's and Boeing's dependence on other third-party providers to perform in accordance with expectations in connection with the manufacture and delivery of aircraft; (vii) the Company's dependence on other third parties, in particular with respect to its fuel supply and its corporate travel enhancements, and the impact on the Company's operations and results of operations of any third party delays or non-performance; (viii) 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; (ix) the impact of labor matters on the Company's results of operations, business decisions, plans, and strategies; and (x) other factors, as described 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 fiscal year ended December 31, 2020, and in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021. Notice Regarding Third Party Content This presentation may contain information obtained from third parties, including ratings from credit ratings agencies such as S&P Global Ratings. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs or losses caused by negligence) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. 2
Company Overview 3
Purpose and Vision Deliver an efficient
operation with a
highly-
Purpose: Connect engaged workforce
people to what’s Offer Customers low
fares, convenient
important in their flights, and industry-
lives through friendly, leading Customer
Service
reliable, low-cost air Invest in airplanes
travel. and People to grow
and develop market
leadership
Vision: To become
the world’s most
loved, most efficient,
Drive Customer
and most profitable Generate profit and loyalty and grow
airline. strengthen financial share
of wallet
position
Our successful business model starts with an efficient operation and
highly-engaged Employees. This combination makes Southwest unique
and has produced the U.S. airline industry’s most successful low-cost,
low-fare, growth carrier for nearly five decades
4
Unparalleled brand consistently loved by Customers
Unmatched profitability record in the U.S. airline industry
with cost discipline and a strong balance sheet
Outstanding Customer Service and Hospitality
that drives brand loyalty and recognition
The best People and Culture in the industry
Low fares and a robust point-to-point network
that support market leadership and non-stop service
Reliable, efficient, low-cost operations
5
Robust point-to-point, non-stop route network
2010
2021
Including the AirTran acquisition in 2011, added 52 airports to the Southwest route
network since 2010, with 14 near-international destinations in 10 countries
6 Source: Diio Mi. Diio scheduled for FY2021 as of 7/23/21.
Note: Includes some seasonal/less than daily routes
Announced 18 new airports
Pursuing new revenue opportunities by enhancing options in large metro areas and
adding new leisure destinations
New airport map with service launch date New airport timeline
Airports announced in 2020 and 2021 By service start date
BLI Bellingham, WA MIA 11/15/2020
11/7/21 PSP 11/15/2020
HDN 12/19/2020
EUG Eugene, OR
MTJ 12/19/2020
8/29/21 ✔ SYR Syracuse, NY
BZN Bozeman, MT ORD 2/14/2021
Seasonal
5/27/21 ✔ 11/14/21
SRQ 2/14/2021
MTJ Telluride, CO
12/19/20 ✔
Seasonal COS 3/11/2021
HDN Steamboat Springs, CO SAV 3/11/2021
ORD Chicago (O’Hare), IL
FAT Fresno, CA 12/19/20 ✔
2/14/21 ✔ IAH 4/12/2021
4/25/21 ✔
SBA 4/12/2021
SBA Santa Barbara, CA FAT 4/25/2021
COS Colorado Springs, CO
4/12/21 ✔
3/11/21 ✔ MYR Myrtle Beach, SC VPS 5/6/2021
5/23/21 ✔ MYR 5/23/2021
PSP Palm Springs, CA JAN Jackson, MS
11/15/20 ✔ BZN 5/27/2021
6/6/21 ✔
JAN 6/6/2021
SAV Savannah, GA
IAH Houston (Bush), TX 3/11/21 ✔
EUG 8/29/2021
4/12/21 ✔ VPS Destin, FL BLI 11/7/2021
5/6/21 ✔ MIA Miami, FL SYR 11/14/2021
11/15/20 ✔
City access via co-terminals1 SRQ Sarasota, FL
New sources of origin Customers 2/14/21 ✔
Leisure destinations
Page 7
Proprietary & Confidential
1Co-terminal: Airports that share a common city or region; for example, Baltimore, Washington Reagan, and Washington Dulles are considered co-terminals to one another.
Strong presence in top business and leisure markets
Market leader in top 50 U.S. metro areas1
25
9
5 5
2 2 1 1 0
SWA AAL DAL UAL ALK JBLU HA SAVE ALGT
Legacy LCC ULCC
Southwest has 22% of total domestic market share and is the market leader
in 25 of the top 50 U.S. metro areas1 (including co-terminal airports2).
International operations represent
Financial preparedness has been our enduring strength
Southwest remained profitable for 47 consecutive years
through 2019, prior to the COVID-19 pandemic.
Our preparedness was due to a balanced approach:
Financial Operations Strategy Culture
• Investment-grade • Prudent • Robust point-to- • Low-cost mindset
balance sheet investments and point, non-stop with focus on
• Ample cash and growth rate network Culture and
modest debt • Balance between • Sustainable empowering
market expansion business model Employees
• Sensible financial
commitments opportunities, • All Boeing 737 fleet • History of no pay
operational cuts, furloughs, or
• Consistent reliability, and • Reliable, efficient layoffs
Shareholder returns financial returns operations
Southwest entered the COVID-19 crisis prepared with the U.S. airline
industry’s strongest balance sheet and business model; tremendous fleet
flexibility; meaningful fuel hedging protection with no floor risk; and ability
to be nimble in uncertain environments
9
Updating strategic plan
In process of updating strategic plan with initiatives for next five years
Aggressive expansion of our route network, having opened or
announced 18 new airports since the pandemic began
Launch of Global Distribution System (GDS) access for
corporate travelers
Acceleration of fleet modernization to replace older
737-700 aircraft with the MAX, reduce carbon emissions
Development of steps to support environmental sustainability
goal to be carbon neutral by 2050
10Recent Updates 11
Steps taken in 2020 to address impacts from COVID-19
Focus Areas Actions
• Significantly reduced capacity
Capacity • Continuously monitored demand and booking trends and adjusted capacity on an ongoing
basis
• Reduced annual 2020 cash outlays and spending by ~$8 billion compared with original plans
• Voluntary Separation Program and Extended Emergency Time Off Program; approximately
25% of workforce participated resulting in approximately $1.0 billion in estimated cost savings
Reduce Costs in 2021
• Canceled or deferred hundreds of capital spending projects, cut discretionary spending, and
modified vendor and supplier payment terms
• Reduced combined 2020 and 2021 CapEx by ~$5.5B compared with original plans
• Raised $18.9 billion (net of transaction fees) in 2020: $13.4 billion in debt issuances and sale-
Preserve
leaseback transactions, $2.2 billion through a common stock offering, and $3.4 billion of PSP
Liquidity and
proceeds1
Cash
• Repaid $5.5 billion of debt during 2020; Fully available $1.0 billion revolving credit line
• Pursued additional revenue opportunities that utilized idle aircraft and Employees
New Revenue • Added a total of 18 new airports that have either been opened or announced since the
Opportunities beginning of the pandemic
• GDS participation live with Travelport and Amadeus; Sabre is live as of July 26, 2021
• Southwest Promise—additional cleaning practices; physical-distancing procedures; required
Employees
face masks; additional policies for our Employees to protect themselves and safely transport
and
our Customers; science-based approach
Customers
• Customer policy changes: extended flight credits and status
1Amounts received pursuant to the Payroll Support Program (the “PSP”) under the CARES Act were utilized to directly offset payroll expenses incurred by the Company, including specified benefits,
between April 2020 and September 2020. For further information regarding the PSP, refer to the Company’s Forms 8-K filed April 21, 2020, June 1, 2020, June 30, 2020, July 31, 2020, and September
30, 2020. In January 2021, the Company entered into definitive documentation with the U.S. Treasury for further payroll support under the Consolidated Appropriations Act, 2021 (the "PSP
Extension"). Refer to the Company’s Forms 8-K filed on January 15, 2021 and March 5, 2021 for further information regarding the PSP Extension. In April 2021, the Company entered into definitive
12 documentation with the U.S. Treasury with respect to funding support pursuant to the American Rescue Plan Act of 2021 (the “ARP”). Refer to the Company’s Form 10-Q filed on April 27, 2021, Form
8-K filed on June 3, 2021, and Form 10-Q filed on July 27, 2021, for further information regarding funding under the ARP.Second quarter 2021 financial results
297.6% 86.8% 113.0%
(32.2)% (16.4)% (18.9)%
operating available seat RASM, y/y & y/2y
revenues, y/y & y/2y miles, y/y & y/2y
(39.3)%
$(206)M $(0.35) 7.6%
net loss1 loss per non-fuel
diluted share1 CASM1,2, y/y & y/2y
$85M 82.9% $(1)M
Profitsharing average core
load factor
daily cash burn3
1Excluding special items.
2Excluding profit sharing.
3Average core cash burn is calculated as Loss before income taxes, non-GAAP, adjusted for Depreciation and amortization expense; Capital expenditures; and adjusted amortizing debt
service payments; divided by the number of days in the period. The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to
13 achieve sustainable cash and profit break-even results. Refer to the Company’s Form 8-K filed on July 22, 2021, for further information.
Note: See reconciliation of reported amounts to non-GAAP financial measures.Restructured Boeing 737 order book
As of July 22, 2021
The Boeing Company 737
-7 firm -8 firm
-8 options Additional -8s Total
orders orders
2021 -- 19 -- 9 28 (a)
2022 67 -- 47 -- 114 (b)
2023 30 -- 60 -- 90
2024 30 -- 56 -- 86
2025 30 -- 56 -- 86
2026+ 80 130 46 -- 256
Total 237 149 (c) 265 9 (d) 660
Our restructured order book allows us to preserve the low-cost advantages
of a single fleet type, and the balance of firm orders and options—along
with flexibility with 737-700 retirement plans—allows the opportunity to
manage our fleet needs over the next decade
Note: As of July 22, 2021, and is not being updated herein.
(a) Includes 27 737 MAX 8s delivered as of June 30, 2021, consisting of 19 owned and 8 leased aircraft.
(b) The Company intends to exercise three of its 47 options for delivery in 2022 by the end of July 2021. Upon the planned exercise of these options, the
Company’s 2022 order book will consist of 70 MAX 7 firm orders and 44 MAX options. At that point, the Company’s order book will consist of 389 MAX firm orders
(240 MAX 7 and 149 MAX 8) and 262 MAX options.
14 (c) The Company has flexibility to designate firm orders or options as MAX 7 or MAX 8, upon written advance notification as stated in the contract.
(d) These 9 additional MAX 8 aircraft are leases from various third parties.The Southwest Promise A multi-layered approach to protecting public health 15
Sustaining a strong financial position for the future
Cash and short-term investments of $16.2 billion as of September 7, 2021,
and a fully available revolving credit facility of $1.0 billion
Maintained unencumbered assets with an estimated value of more than
$11 billion, including $9 billion to $10 billion in aircraft1
Net cash position2 of $5.5 billion1, and leverage of 56 percent
Maintained investment-grade rating for 30+ years and is currently the only
U.S. airline with an investment-grade rating by all three rating agencies
Generated profit, on both a GAAP and non-GAAP basis, in both June and
July 2021
The recent negative effects of the pandemic on August and September
revenue trends will make it difficult for the Company to be profitable in
third quarter 2021, without taking into account the benefit of temporary
salaries and wages cost relief provided by payroll support program
proceeds
16 1As
2Net
of July 22, 2021, and is not being updated herein.
cash position is calculated as the sum of cash and cash equivalents and short-term investments, less the sum of short-term and long-term debt.Sustained high net margins prior to COVID-19
2019 net margin
15%
10%
12.6%
5% 10.3% 10.1%
8.8% 8.8%
7.9%
7.0% 7.0%
3.7%
0%
SWA DAL UAL AAL ALK HA JBLU ALGT SAVE
Legacy LCC ULCC
17
Source: Based on company research calculated as net income divided by operating revenues, as reported in each respective airline’s 2019 Form 10-K.Proven ability to maintain reliable operations and control
costs
Domestic operating expenses per ASM, ex-fuel
30.00
Southwest Legacy 1
25.00 2 3
LCC ULCC
20.00
(in cents)
15.00
10.00
5.00
-
2012 2021
Southwest business model and point-to-point network provide
sustainable, long-term unit cost advantages compared with the majority
of the domestic airline industry
1Legacy airlines: Trans World, American, US Airways, Northwest, Delta, Continental, United, America West (post-American merger)
2LCC airlines: JetBlue, Alaska, Virgin America, America West (pre-AA merger), AirTran (pre-Southwest merger)
3ULCC airlines: Spirit, Frontier, Allegiant
18 Source: DOT form 41 and T100 data, through March 31, 2021. 2012 is as of 4Q12; 2021 is as of 1Q21. Estimated unit costs have been stage-length adjusted to Southwest’s average
2017 stage-length, represents domestic mainline.Leading the U.S. airline industry in Customer Service
In 2020…
Southwest produced the Southwest produced its Southwest generated its
best Customer Satisfaction best annual ontime best-ever annual
ranking among Marketing performance since 2003 baggage handling
Carriers results
Customer Satisfaction ranking among Marketing Carriers
2018 2019 2020
#1 #1 #1
Southwest has set the bar high for customer satisfaction, earning the
DOT’s best ranking among Marketing Carriers for 27 of the past 30 years
Source: Department of Transportation (DOT) Air Travel Consumer Report (ATCR). The DOT ranks all U.S. carriers based on the lowest ratio complaints per 100,000 passengers enplaned.
Note: Southwest earned the best Customer Satisfaction ranking among U.S. Marketing Carriers with the lowest ratio of complaints to the DOT per 100,000 enplaned passengers for 2018,
2019, and 2020. A Marketing Carrier is an airline that advertises under a common brand name, sells reservations, manages frequent flyer programs, and is ultimately responsible for the
19 airline’s consumer policies. Operating Carriers only handle the flight operations, passenger check-in/boarding, and baggage handling for the respective Marketing Carriers they serve—
Operating Carriers are not responsible for DOT complaints related to policies, procedures, and advertising associated with the Marketing Carrier’s brand.Pillars of our strength position us strongly amidst impact
from COVID-19 pandemic
1 Robust Network with Strong Presence in Many Attractive Metro Areas
2 Unparalleled Brand and Customer Loyalty with Award-Winning Rapid Rewards Program
3 Highly Defensible, Low Fare, Point-to-Point Network
Large Fleet of Modern Boeing 737s, Industry ‘Workhorses’,
4 a Substantial Portion of Which are Unencumbered
5 Proven Ability to Maintain Reliable Operations and Control Costs & Capex
Organic Growth Opportunities: New Destinations,
6 Densifying Existing Network, Reservation System, and GDS1
7 Commitment to Strong Balance Sheet with Sustainable Debt Balance and Significant Liquidity
20 1Global Distribution SystemProven Leadership Team
GARY C. KELLY MIKE VAN DE VEN BOB JORDAN
Chairman of the Board & President & Chief Executive Vice President and
Chief Executive Officer Operating Officer Incoming Chief Executive
34 years at Southwest 28 years at Southwest Officer
33 years at Southwest
TAMMY ROMO LINDA RUTHERFORD MARK SHAW
Executive Vice President & Executive Vice Executive Vice
Chief Financial Officer President People & President, Chief Legal
29 years at Southwest Communications and Regulatory Officer
29 years at Southwest 21 years at Southwest
ANDREW WATTERSON ALAN KASHER
Executive Vice President Executive Vice President
and Chief Commercial Daily Operations
Officer 20 years at Southwest
7 years at Southwest
21Non-GAAP reconciliation
in millions, except per share amounts Three months ended June 30,
2019 2020 2021
Fuel and oil expense, unhedged $ 1,138 $ 254 $ 802
Add: Premium cost of fuel contracts 28 13 14
Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense, net (30) (10) (13)
Fuel and oil expense, as reported $ 1,136 $ 257 $ 803
Add: Fuel hedge contracts settling in the current period, but for which losses were
- 10 5
reclassified from AOCI
Add: Premium cost of fuel contracts not designated as hedges - 11 10
Fuel and oil expense, excluding special items (economic) $ 1,136 $ 278 $ 818
Total operating expenses, as reported $ 4,941 $ 2,135 $ 3,414
Add: Payroll support and voluntary Employee programs, net - 784 740
Add: Fuel hedge contracts settling in the current period, but for which losses were
- 10 5
reclassified from AOCI
Add: Interest rate swap agreements terminated in a prior period, but for which losses
- - 1
were reclassified from AOCI
Add: Premium cost of fuel contracts not designated as hedges - 11 10
Add: Gain on sale of retired Boeing 737-300 aircraft - 222 -
Total operating expenses, excluding special items $ 4,941 $ 3,162 $ 4,170
Deduct: Fuel and oil expense, excluding special items (economic) (1,136) (278) (818)
Operating expenses, excluding Fuel and oil expense and special items $ 3,805 $ 2,884 $ 3,352
Deduct: Profitsharing expense (170) - (85)
Operating expenses, excluding Fuel and oil expense, special items, and
$ 3,635 $ 2,884 $ 3,267
profitsharing
22Non-GAAP reconciliation (continued)
in millions, except per share amounts Three months ended June 30,
2021
Net income (loss), as reported $ 348
Deduct: Payroll support and voluntary Employee programs, net (740)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were
(5)
reclassified from AOCI
Deduct: Interest rate swap agreements terminated in a prior period, but for which
(1)
losses were reclassified from AOCI
Add: Mark-to-market impact from fuel contracts settling in current and future periods (11)
Add (Deduct): Net income (loss) tax impact of special items (a) 203
Net income (loss), excluding special items $ (206)
Net income (loss) per share, diluted, as reported $ 0.57
Add (Deduct): Impact of special items (1.21)
Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive
(0.03)
shares
Add (Deduct): Net income (loss) tax impact of special items (a) 0.33
Deduct: GAAP to Non-GAAP diluted weighted average shares difference (b) (0.01)
Net income (loss) per share, diluted, excluding special items $ (0.35)
(a) 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.
23 (b) 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.24
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