Southwest Airlines 10-K SEC Report Financial Analysis

Income Statement Highlights Over Three Years

The income statement reveals several important items about Southwest Airlines' financial performance. In 2015, the company had an exceptionally strong year financially. Total revenues grew considerably while total operating expenses dropped significantly, resulting in total operating income that was nearly double that of the prior reporting year. Passenger ticket sales were up, fueling revenue growth, while costs — primarily driven by decreases in aviation fuel prices — contributed to one of the best years in the company's history.

There are also more subtle insights that can be drawn from the income statements. For example, the aircraft rental account shows a steady decrease over the three-year period covered in the report. It is likely that Southwest uses third-party vendors from which it rents planes when its own internal fleet is at capacity. These rentals are also likely associated with freight operations rather than passenger revenues. Given that the freight business showed increases in revenues while simultaneously using fewer aircraft rentals, it is reasonable to suspect that Southwest expanded its own internal fleet during this period.

Supporting this inference, the "acquisition and integration" account indicates that the company made a large investment in acquisitions in 2014 ($126 million). This helps explain the subsequent decreases in aircraft rental expenses that appear on the income statement, as Southwest likely relied less on third-party aircraft once its own expanded fleet was operational.

Most of the asset accounts that Southwest Airlines maintains show increases over the two-year period represented on the balance sheet. However, some accounts decreased. For example, the short-term investment account shows a significant decline. This could reflect several types of activity within the company. Short-term investments may include fuel or fuel contracts, and since fuel costs are known to have decreased during this period, the same volume of fuel held at lower prices would translate into a smaller recorded investment value.

Balance Sheet Insights Over Two Years

Another notable movement in the asset accounts is the increase in deposits for flight equipment purchase contracts. It is clear that Southwest leveraged its recent financial success to reinvest in company assets. Over the two years represented on the balance sheet, the company nearly doubled its deposits on contracts for new equipment. It is also likely that this new equipment will enable Southwest to expand its operations or retire older, less efficient aircraft. Newer aircraft generally offer marginal operating efficiencies, meaning the company may also benefit from lower per-unit operating costs as the new fleet enters service.

The cash flow statements indicate that Southwest used a substantial portion of the cash generated by its strong 2015 performance to finance investing activities. Net cash provided from operations in 2015 was $3,238 million, of which $1,913 million was directed toward various asset investments. The company also spent over $2 billion in capital expenditures, representing a fairly consistent trend across the three years covered in the reporting statements.

Southwest also decreased its purchases of short-term investments, which may reflect reduced spending on fuel as a result of lower fuel prices. Additionally, the company significantly increased both its accounts payable and accrued liabilities accounts, likely as a result of the purchasing activity associated with the equipment deposit contracts referenced in the balance sheet discussion. The SEC EDGAR filing for Southwest Airlines provides the full detail underlying these figures for readers seeking primary source verification.

Southwest Airlines prepares its own financial content through its accounting department, but these figures go through a variety of rigorous checks at various stages of auditing. The corporation has an internal auditing team designated to oversee these practices. According to the company's Audit Committee Charter:

Major Sources of Funding: Cash Flow Statement Analysis

"The Audit Committee of the Board of Directors of Southwest Airlines Co. shall consist of at least three directors, each of whom shall meet the independence and experience requirements of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934, as amended (Southwest Airlines, N.d.)."

Southwest Airlines must also have a team of external auditors sign off on all financial statements. Ernst & Young has served as the company's external auditor since the inception of the company (wikinvest, 2009).

The assurances regarding the validity of the financial statements and their compliance with Generally Accepted Accounting Principles (GAAP) are verified by the various stages of auditors identified above. However, in addition to the standard auditing channels, the CEO and CFO are now required — under the Sarbanes-Oxley Act — to both personally sign off on the accuracy of the financial statements in their entirety. In the case of Southwest Airlines, these responsibilities were fulfilled by the respective CEO and CFO as identified in the SEC filing (SEC, 2017).