Southwest Airlines recorded net income of $67 million, or $0.11 per diluted share, in its third quarter 2024 earnings results on October 24, 2024. Net income dropped 65.3% from last year’s third quarter.
The drop in profits came as operating expenses climbed 6.6% to $6.8bn, surpassing revenue growth of 5.3%, totalling $6.9bn in the quarter.
Labour costs climbed 12.5% to $3.1bn. However, fuel and oil expenses declined by 9.4% to $1.4bn. Passenger revenues were up 5.7% to $6.3bn in the third quarter while freight revenues were down slightly at 2.3% to $43 million. Its operating income totalled $38 million, down from $117 million in the same quarter last year.
Load factor was up 0.5 percentage points to 81.2%, with revenue passenger miles (RPM) up 3.1%. Passenger revenue per available seat mile (PRASM) was up 3.3% to 15.19 and cost per available seat mile (CASM) was up 4.1% to 15.11.
The airline’s capacity increased 2.4% in the quarter with it receiving nine aircraft and retired 15 during the quarter, ending the quarter with 811 aircraft. It said capital expenditures in the quarter totalled $517 million, driven mostly by its aircraft-related capital spending along with technology, facilities, and operational investments. It has retired 41 aircraft year-to-date, consisting of 37 737-700s and four 737-800s.
The company paid $11 million during third quarter 2024 to retire debt and finance lease obligations, including $5 million in principal related to lease return and lease buyout transactions and $6 million in scheduled lease payments.
It now expects 2024 capital spending to be roughly $2.1bn - $825 million of which will be allocated to aircraft capital spending, assuming 737-8 full year deliveries reaches 20 jets.
“The reduction from prior guidance of approximately $2.5bn is primarily due to changes in expectations of future aircraft delivery timing as Boeing delivery delays persist into 2025,” the company read in its report. It added that it is having “ongoing discussions” with Boeing in connection to the delivery delays’ “financial impacts to the company”.
The airline also reached an agreement with activist investor Elliott Investment Management on the same day as its results. The two parties had had a contentious relationship since the investor acquired an approximate 11% stake in the airline. Elliott had pushed for leadership change in the airline, originally planning to nominate 10 members to Southwest’s board of 15 directors before nominating eight members. The agreement shows five of those nominees being appointed to the board – avoiding an impending board battle after the investor called for a special meeting to be held on December 10, 2024.
Southwest said Elliott has now withdrawn its request to call a special meeting of shareholders and no longer intends to nominate candidates to stand for election to the airline’s board. In addition, the board will be reduced to 13 members as of Southwest’s 2025 annual shareholder meeting.
As part of the ‘cooperation and information sharing agreements’ with Elliott, Southwest has appointed five of Elliott’s original nominees David Cush, Sarah Feinberg, Dave Grissen, Greg Saretsky, and Patricia Waston as independent directors of the board. In addition, former CFO of Chevron Pierre Breber was also appointed to the board.
Saretsky, Cush and three additional directors to be appointed by the reconstituted board will serve on the finance committee, with Saretsky serving as chair.
The appointments will be effective as of November 1, 2024. Furthermore, previously announced retirement of chairman Gary Kelly along with the six other Southwest director retirements have been accelerated to November 1, 2024. However, Southwest’s CEO will remain at the helm, despite previous protests from Elliott.
In a rather significant tonal shift, Elliott partner John Pike and portfolio manager Bobby Xu said in a joint statement: “The strategic changes Southwest has announced since we commenced our engagement, together with the new independent directors and governance improvements, will position the company to enhance business performance, drive operational execution and evaluate additional changes to create long-term shareholder value.”
Cush most recently served as CEO of Virgin America. Feinberg is a former administrator at the Federal Railroad Administration, chief of staff to the US Secretary of Transportation and interim president and CEO of the New York City Transit Authority. Grissen is a former group president of Marriott International. Saretsky is a former CEO of WestJet. Watson has served as chief information and technology officer at NCR Atleos since 2023.
In addition, the two parties entered into an information sharing agreement, enabling Southwest to share confidential information with Elliott.
Elliott’s Stronger Southwest website is no longer available following the agreement announcement, as well as its Stronger Southwest podcast being removed from Apple, Spotify, and YouTube. Reading the agreement on an 8-K form filed to the SEC, it does not mention the removal of these platforms as part of the agreement.
As part of its $2.5bn share repurchase programme authorised by its board in September 2024, the company intends to launch an initial $250 million accelerated share repurchase programme at some point in the fourth quarter.
The airline ended the quarter with $9.4bn in cash and cash equivalents and short-term investments, as well as fully available revolving credit line of $1bn. Unencumbered assets have a net book value of around $17.1bn, including $14.2bn in aircraft value and $2.9bn in non-aircraft assets.
Liabilities and stockholders’ equity totalled $34.8bn as of the quarter’s end.
The company recorded an operating cash flow of $113 million, down $616 million last year.
Southwest estimates revenue per available seat miles (RASM) to be up 3.5% to 5.5%, with capacity expected to be down around 4%. Fuel costs are forecast to be around $2.24 to $2.35 per gallon. It has also published its schedule through June 4, 2025, and expects capacity in the first quarter of next year to be down around 1-3%.
The airline also anticipates cost per available seat mile excluding fuel (CASMex) to be up 11-13% for the fourth quarter. Southwest said this was particularly driven by new labour contracts, as well as capacity reduction and 0.5 point of unit cost headwind from flight cancellations associated with Hurricane Milton. It continues to estimate its full year 2024 effective tax rate to be around 25%.