Southwest Expects a Tax Reform Windfall Will Keep Its Momentum Going in 2018

The last year has been relatively smooth for Southwest Airlines, and the carrier expects that a tax windfall in 2018 will enhance its competitive position and keep the momentum going.

Southwest posted record fourth quarter income of $1.9 billion and annual operating income of $3.5 billion, topping analyst expectations, which results in an operating margin of 16.6 percent for the year. Passenger volume also beat projections.

Tax reform will save the airline a bundle over the next few years; Southwest will save $1.15 billion on deferred and future tax payments overall, the company said. It paid a $1,000 bonus to every employee as a result of the tax savings, garnering positive publicity from the move.

The extra cash will help them deal with aircraft and airport maintenance this year, the airline said, but there are no big spending plans in the future beyond what they’d already planned for.

“Unlike the last seven years, we have no major strategic initiative that’s landing in 2018,” said Gary Kelly, Southwest Airlines chairman and CEO. “Capital spending will also be down this year.”

Southwest expects to spend $1 billion on new aircraft each year for the next five years.

Targeted expansion is still happening; Southwest will begin flights from Seattle’s Paine Field beginning in September, alongside United and Alaska Airlines, and start flights to Hawaii sometime soon.

The airline is still trying to figure out what to do with its tax savings, but replacing old planes with newer ones is a commonsense option, even if a change to the company’s plans aren’t happening right now. Other companies are using part of the tax windfall for share buybacks.

“It’s about time we level the playing field competitively on this matter as well as comparing our industry to other sectors,” said Kelly. “We’re very happy with that, it helps us lower our costs and were not going to squander our savings. It puts us in a much better competitive position.

“There is enough money available to us where we can think about investments in the business…. We can buy more airplanes and use them to grow the fleet or we can buy new airplanes and use them to replace older aircrafts. We have opportunities in the latter we will be exploring aggressively. We are not today thinking were going to increase our growth rate by buying more aircraft.”

Kelly also thinks tax cuts will increase gross domestic product and travel demand once consumers start seeing the savings, although it could prove to be “much ado about nothing.”