Southwest Airlines(LUV) - 2025 Q4 - Annual Report

Fuel and Operating Costs - In 2025, the Company's fuel and oil expense was $5,240 million, accounting for 19.0% of operating expenses, making it the second largest operating cost category [22] - The average cost of jet fuel per gallon in 2025 was $2.41, a decrease from $2.64 in 2024 [22] - The airline industry is particularly sensitive to economic conditions, with jet fuel and oil representing approximately 19% of the Company's operating expenses for 2025 [145] - The Company’s strategic plans and future profitability are likely to be affected by fuel availability, price increases, and fuel price volatility [144] - The Company terminated its remaining fuel hedge positions in Q2 2025, making its earnings more vulnerable to volatile fuel prices [149] Fleet and Aircraft Management - The Company added 55 Boeing 737-8 aircraft to its fleet in 2025, while retiring 48 Boeing 737-700 aircraft and seven Boeing 737-800 aircraft, improving fuel efficiency to 83.0 ASMs per fuel gallon consumed [24][23] - The Company held 300 Boeing 737-8 aircraft in its fleet as of December 31, 2025, with 465 firm orders of MAX aircraft to be delivered through 2031 [22] - The introduction of the MAX aircraft has improved fuel efficiency, reducing CO₂ emissions per ASM compared to previous 737 models [58] - The Company is heavily reliant on Boeing for aircraft, and any delays in delivery or certification of the MAX aircraft could materially affect its operations and growth plans [165] Labor and Workforce Management - Salaries, wages, and benefits expense constituted approximately 46.9% of operating expenses in 2025, with a workforce reduction of 1,750 corporate positions, or 15% [25] - As of December 31, 2025, the Company had 72,790 active full-time equivalent employees, a 0.5% year-over-year increase [116][118] - Approximately 84% of the Company's employees were represented by labor unions as of December 31, 2025 [120] - The Company has experienced significant inflationary cost pressure, particularly with respect to salaries, wages, and benefits, impacting its low-cost structure [151] - Approximately 84% of the Company's workforce is unionized, leading to increased labor costs due to contractual pay scale increases [153] Customer Experience and Loyalty Programs - The Company introduced a new "Basic" fare in 2025, replacing the "Wanna Get Away" offering, and added new fare products including "Choice," "Choice Preferred," and "Choice Extra" [26] - The Rapid Rewards loyalty program allows members to earn points based on fare class, with higher fare products earning more points, and points do not expire [31] - The Rapid Rewards loyalty program allows members to earn points through various channels, including higher fare tickets and qualifying purchases with partners, enhancing flexibility in earning and redeeming rewards [32] - A-List members earn a 25% bonus on eligible revenue flights, while A-List Preferred members earn a 100% bonus, with additional benefits such as free Wi-Fi and priority boarding [33] - The Company launched Getaways, a new vacation package product, in August 2025, allowing customers to earn five Rapid Rewards points per dollar spent and check two bags for free [45] Technology and Digital Enhancements - Southwest's digital enhancements in 2025 included a new mobile app and website, improving customer experience and operational efficiency [52] - Significant investments in technology include enhancements to inflight Wi-Fi, digital customer service modernization, and operational systems modernization [57] - The Company has modernized its financial management systems and data processing capabilities as part of its technology initiatives [57] - The Company is expanding its use of AI and machine-learning, which could materially affect its operations and financial position if not managed effectively [139] - The Company has a dedicated cybersecurity team to address evolving data security matters, but the risk of cyber-attacks remains significant [190] Regulatory and Compliance Challenges - The Company is subject to evolving data privacy and cybersecurity regulations, which could result in increased compliance costs and operational changes [89] - New regulations from the DOT may impose substantial costs related to accessible lavatories on new aircraft [68] - The Company is subject to extensive government regulation, which may disrupt operations and increase costs, potentially leading to lower operating revenues and net income due to factors like flight cancellations and operational disruptions [196] - Regulatory requirements, including airport capacity constraints and air traffic control inefficiencies, could continue to limit the Company's growth and impose substantial costs [197] - The Company is currently subject to regulatory actions and pending litigation, which could adversely affect its operating results if judgments or fines are rendered against it [214] Competitive Landscape - The airline industry remains highly competitive, with 14 major U.S. airlines, including the Company, competing on pricing, routes, and customer service [100] - The Company continues to experience a highly competitive fare environment, with pricing driven by various factors including market stimulation and cost reduction measures [102] - The Company is expanding its network and developing strategic relationships with airlines, facing significant challenges and risks in forming these commercial relationships [213] - The Company has begun entering international partnerships in 2025 to expand its service offerings, which could lead to financial losses if not managed effectively [163] - The Company may face challenges in attracting and retaining qualified employees, which could limit its operational capacity and growth [171] Environmental and Sustainability Considerations - The Company anticipates that future environmental regulations could significantly affect capital expenditures and operational costs [60] - The Company has not historically experienced any material environmental liability at airport sites, but increasing regulatory focus on PFAS could lead to significant costs related to remediation and compliance [83] - The EPA's aircraft GHG emissions standards, finalized in February 2024, mandate improved fuel efficiency for airplanes manufactured after January 1, 2028, but the Company does not expect material costs related to these rules at this time [84] - Changing consumer preferences regarding climate change may lead to reduced demand for air travel, affecting the Company's revenue and financing costs [202] - The Company has set sustainability goals that are dependent on third-party performance and government support, with potential risks from changes in policies or market dynamics [204] Financial Management and Shareholder Value - The Company has maintained its investment-grade rating from all three major credit agencies, supporting its strategic plans and capital allocation framework [112] - The Company plans to preserve its balance sheet strength through manageable debt maturities and a targeted liquidity balance [112] - The Company plans to continue returning value to shareholders through dividends and opportunistic share repurchases [112] - The Company is implementing transformational initiatives for 2024 and 2025, including an assigned seating model and introducing bag fees, to increase revenues and offset rising costs [159] - The Company may face fluctuations in stock price due to activist shareholder initiatives, which could affect its ability to attract investors and business partners [218]