Tammy Romo
Executive Vice President & Chief Financial Officer at Southwest Airlines
Thank you, Bob, and hello everyone. First, I'd also like to thank our employees for their outstanding efforts this quarter, which resulted in solid operational and record financial performance. The demand surge, coupled with constrained capacity, resulted in a strong yield environment and record quarterly operating revenues of $6.7 billion.
The record revenue performance drove record quarterly net income, excluding special items, of $825 million despite higher fuel and inflationary cost pressures. We have also posted a strong operating margin, excluding special items, of 17.4%, which exceeded second quarter 2019 levels.
All around, this was an impressive quarter and an important milestone along our pandemic recovery. Andrew will speak to our revenue trends in a minute, including why we made the policy change regarding flight credits that don't expire, but I want to make a few comments regarding the timing of revenue recognition for breakage revenue for tickets expected to go unused.
The pandemic caused an extremely high number of customer flight cancellations during 2020, and to a lesser degree, last year and even the beginning of this year with Omicron wave. As a result, we have had more flight credits outstanding than normal.
Today's policy change to eliminate the expiration dates for unused funds will result in lower breakage revenue for third quarter than we would record under our previous policy in large part due to the COVID-related travel funds that were set to expire in September.
Andrew will cover the sequential impact to revenue in a minute, but we expect the policy change to result in significantly lower breakage revenue in third quarter, which we factored into our third quarter revenue guidance. We currently expect that impact to be in the $250 million to $300 million range.
As we look beyond third quarter, we expect breakage as a percentage of revenue to normalize back to pre-pandemic levels and any ongoing impact from this policy change is estimated to be immaterial beyond this quarter. Our people did a great job, managing costs in second quarter and our fuel hedge performed very well.
While market prices have moderated a bit lately, they are still elevated and volatile given the current geopolitical climate, regardless of the continued uncertainty surrounding the market our fuel hedge significantly offset the market price increase in jet fuel in second quarter 2022, saving us $330 million in fuel expense.
We are 59% hedged for third quarter and estimate our third quarter fuel price to be in the $3.25 to $3.35 per gallon range, slightly below our second quarter fuel price. That includes an estimated $0.46 of hedging gains, which represents cost savings of more than $230 million in third quarter alone. Of course, this is a snapshot of our fuel guidance at a point in time and market oil prices and jet fuel cracks can move materially on a daily basis.
We continue to seek opportunities to expand our 2023 and 2024 portfolio. The fair market value of our fuel hedge for the second half of this year is approximately $430 million, which would bring our full year 2022 fuel hedge benefit to roughly $1 billion based on price assumptions outlined in our earnings release, and the fair market value of our fuel hedge in 2023 and beyond is estimated at roughly $580 million.
Taking a look at non-fuel costs, second quarter CASM-X was favorable to our previous guidance range at up 13.1% compared with second quarter 2019 and due to lower-than-anticipated benefit cost and the shifting of some maintenance costs into the second half of this year. For our third quarter, we currently estimate non-fuel CASM-X to increase in the range of 12% to 15% when compared with 2019 levels. More than half of that increase continues to be driven by inflationary pressures, primarily in higher rates for our labor, benefits and airports. The remainder of the CASM-X increase is attributable to headwinds from operating at suboptimal productivity levels as we continue to work to get adequately staffed and our new employees trained, while third quarter capacity levels are expected to be roughly in line with 2019 levels.
Overall, I am pleased that we remain on track with our 2022 cost plan, especially in this environment, and our full year CASM-X guidance remains unchanged at 12% to 16% compared with 2019. As a reminder, this includes labor accruals for all work groups beginning April 1st, taking into account our best estimate in this labor environment.
Turning to our fleet. We have revised our expectations for aircraft deliveries this year due to supply chain challenges that Boeing is dealing with as well as the current status of the -7 MAX certification. Through the first half of this year, we took delivery of 12 -8 MAX aircraft, and we now expect to take delivery of 23 aircraft in the third quarter and 31 aircraft in fourth quarter. All -8 MAX aircraft for a total of 66 deliveries this year.
We do not expect to take delivery of any -7 MAX aircraft this year. We plan to retire a total of 29 -700 aircraft this year and currently estimate will end the year with 765 aircraft in our fleet, which supports our currently published flight schedules through March 8 of next year.
We have additional information in our press release, so I won't reiterate all the fleet details. You will see that our contractual order book still reflects 114 MAX deliveries, including options this year, but we are providing you our best estimate for what we think we will receive this year based on recent discussions with Boeing.
We will continue working with Boeing with the focus on this year and next. Based on our updated planning assumption that we will receive a total of 66 -8 MAX aircraft this year, we have lowered our 2022 capex guidance to approximately $4 billion, 1 billion lower than our previous guidance that assumed the delivery of 114 MAX aircraft.
On our balance sheet, we ended the quarter with cash and short-term investments of $16.4 billion. We also recently extended our $1 billion revolving line of credit by two years with no change to our covenants, and it remains undrawn and fully available to us.
We are in a net cash position and leverage is at a very manageable 53%. We continue to be the only US airline with an investment-grade rating by all three rating agencies, which remains one of our key competitive advantages. We have modest scheduled debt payments for the remainder of this year. However, we have been opportunistic and have repurchased some of our convertible notes, $302 million so far this year and $505 million in total with $1.8 billion still outstanding.
As a reminder, the payroll support restrictions on dividends and share repurchases remain in place until the end of this quarter. As always, we will be evaluating our capital plans with our board as we began planning for 2023. Throughout the pandemic, we've been surgical in our capital allocation decisions to drive future growth and value.
And in terms of priority, as we move forward, we intend to continue investing in the business as we scale for future growth. We will continue paying down debt, and we will continue to be opportunistic where we can and we may have opportunities to reduce our leverage at a faster pace.
As ever, we are committed to generating returns on capital, well in excess of our cost of capital and intend to outline our future capital plans at our Investor Day later this year. So more to come on that.
In closing, I am very pleased with our second quarter results. As Bob mentioned, we remain on track with our plans this year, have better stability and have good momentum heading into the second half of this year.
With that, I will turn it over to Andrew.
