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Southwest Airlines is All Set to Fly Higher

July 14, 2014 | About:
abirk

abirk

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Southwest Airlines (LUV) operates Southwest Airlines and AirTran Airways, passenger airlines that provide scheduled air transportation in the United States and near-international markets. Southwest Airlines is the largest U.S. domestic airlines serving 93 destinations in 40 states, Washington DC and Puerto Rico.

Financials

Southwest Airlines reported strong June results. Southwest saw its load factor for the month increase from 85% to 86.1%. This strong demand helped drive a 7%-8% unit revenue increase. Earnings are expected to grow 37.3% in 2014 and another 17% in 2015. Southwest is expected to report second quarter results in late July.

Southwest delivered solid Q4 results on January 23. For the full year, Southwest generated free cash flow of $1.0 billion. The company returned $611 million of that to shareholders through stock buybacks and dividends. It also reduced debt and capital lease obligations by $313 million.

Total operating revenues were also a fourth quarter record at $4.4 billion, increasing 6.1% year-over-year. Revenue passenger miles (RPMs), which calculates the number of miles traveled by paying passengers (# of paying passengers X distance traveled), rose 3.3%, while average passenger fare increased 5.4% to $156.05.

Due to lower fuel costs, Southwest reported strong growth in its first quarter results. The carrier’s first quarter revenues rose by 2% annually to $4.2 billion even as severe winter storms during January and February reduced its revenues by around $45 million. The carrier cancelled approximately 7,500 flights during the quarter due to severe winter weather, but it is commendable that it could still post this growth in its top line. Southwest’s first quarter profits also rose to $152 million, from $59 million in the year ago.

Reasons for the Solid First Quarter Results

In the first quarter, even as severe weather forced many flight cancellations, the overall demand for air travel remained resilient. In the first quarter, this solid demand environment raised occupancy rates by 2.2 points annually to 79.3% This represents the average number of seats that were occupied by passengers across all Southwest flights during the first quarter.

First quarter profits were higher due to the lower fuel costs. During the quarter, crude oil prices remained stable and Southwest, on added gains from its fuel hedges incurred lower jet fuel prices on a year-over-year basis. In the first quarter, thereby, the carrier’s fuel expenses declined by $143 million annually. This fueled in the growth of Southwest’s first quarter profits to $152 million, from $59 million in the same period last year. During its earnings presentation, Southwest also said that this fuel price stability could continue through 2014 and we figure if that happens then the carrier’s results will likely see strong growth in the remaining three quarters of this year.

Ongoing Modernization

Southwest’s first quarter results also benefited from its ongoing fleet modernization. Through the end of the first quarter, Southwest added 54 Boeing 737-800s to its airplane fleet. These airplanes with their higher seating capacity are enabling the carrier to fly more passengers out of high density slot controlled airports such as New York and Washington. This added to the carrier's revenue growth. At the same time, these -800s are lowering Southwest’s costs as they are more efficient compared to many other older planes in its fleet.

Southwest is alsocashin in on the ongoing transition of Boeing 717s in its fleet to Delta. These 717s are being replaced with 737s which are larger and therefore generate revenue opportunities at similar per seat costs. In addition to adding the larger -800s to its fleet and transitioning 717s to Delta, Southwest is also gaining from retirement of 737 Classics from its fleet that are old and have much lower fuel efficiency levels.

Immediate Future

In the coming months Southwest will be beginning flights from many key airports. The carrier will start flying from the slots (specific take-off and landing timings) it recently acquired at Washington Reagan Airport and New York LaGuardia Airport. These slots were vacated by American as a result of the merger approval conditions laid by the Justice Department.

Southwest will also start additional flights from the Dallas Love Field Airport as a result of repeal of the Wright Amendment. And, beginning in July, Southwest will fly international routes. Thus, in the coming months, Southwest will begin service on many key routes and we figure with lower costs and a solid demand environment, the carrier in 2014 could better its 2013 profits of $754 million.

To End

The airline industry has turned itself around and has strong fundamentals going forward. There's great potential for future growth through the impact of acquisitions, expansion into additional markets, and growth in passenger fees. Southwest is up 21% year to date, and with an ongoing share repurchase program has the potential to do even better in the coming months.

With strong earnings momentum, stellar growth projections, a history of profitability and reasonable valuation, shares of Southwest Airlines offer attractive upside potential.


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