It is raining happiness for the investors of Southwest Airlines (LUV, Financial), the legacy airline giant, which reported a better-than-expected performance in the fourth quarter. While the steady decline in the oil prices have troubled certain industries, it has come as a boon to the aviation industry across the globe. Southwest Airlines is no different because the company topped $1 billion in profits in 2014, a feat that it achieved for the first time ever. The existing oil glut and improvement in overall economy have bolstered the prospects of airliners. Let's see if Southwest can be an ideal investment candidate.
Decoding the results
As I mentioned, Southwest topped $1 billion in profits for the first time ever and its previous best came in 2013, when it reported a profit of $754 million. Excluding special items, Southwest said its 2014 income hit $1.4 billion, compared to $805 million in 2013. In the fourth quarter, the airliner earned $190 million, or 28 cents a share, on $4.63 billion in operating revenues. That compares to $212 million, or 30 cents a share, on $4.04 billion in revenues in the year-ago period. However, investors should note that excluding special items and charges, Southwest reported Q4 2014 earnings of $404 million, or 59 cents a share. In Q3 2014, it had earned $236 million or 33 cents a share.
The collapse in oil prices had an extremely favorable impact on the bottom line and going ahead, the company expects to derive positive ramifications from the ongoing oil glut. Perhaps this is the reason why Southwest has closed fuel hedges going into 2015. This implies that the company is “essentially unhedged” for 2015. The company estimates it will save $1.7 billion more in 2015 than in 2014 thanks to the oil glut, which includes an average 20 cent bump in its fuel price in part from costs related to closing its hedges, according to the CFO Tammy Romo. Accordingly, investors can expect to see better margins in 2015, as compared to the last quarter of 2014, because the company will be able to avoid losses on hedged positions.
Further insight
Over the years, Southwest has maintained its position as a leading airliner in the US, due to dedicated customer service. The company has used a two-way approach to build and maintain its customer base. Besides providing a wonderful in-flight experience, Southwest has actively offered promotional offers and rewards to its customers in exchange for their brand loyalty. The Rapid Rewards program initiated by the company last year is the best example of Southwest’s consistent approach to customer welfare. This is what CEO Gary Kelly had to say about the Raid Rewards program:
“The operating performance was propelled by the successful deployment of our strategic initiatives, very pleased with the Rapid Rewards for the year, that was an almost $400 million revenue contribution.”
In 2015, Southwest is poised to continue with its Rapid Rewards program that will complement the boom in travel industry, prompted by the improvement in US economy. In the fourth quarter of 2014, Southwest completed the integration of AirTran network. The AirTran network contributed $500 million to Southwest’s operations and prompted a total increase of 12 percent of Y-o-Y in freight revenues. However, the management expects that the decline in AirTran fees will lead to a lower than expected growth through the fourth quarter of 2015. To be honest, this is not a major concern because the integration process is now completely over and though the implications will stretch to 2015 end, the benefits of this integration will outdo the current losses after 2015.
Takeaway
There is no doubt that Southwest has gained because of the drop in oil prices. The company expects the tailwinds to continue in 2015. Additionally, the closed hedge positions will help the airliner cut losses in the next year. All in all, the current results clearly indicate bright future prospects for Southwest, which the investors should not miss.
