Southwest Airlines Co. (LUV, Financial), a major domestic U.S. airline, said fourth-quarter 2017 earnings reached a record $3.18 per share, capping the 45th consecutive year of profitability.
The Dallas-based airline reported total operating revenues of $5.3 billion for the quarter, including $4.7 billion in passenger revenues.
Company reports strong revenue growth and returns on invested capital
Southwest CEO Gary Kelly said that Fortune Magazine listed the company as one of the world’s most admired companies for 24 consecutive years. The airline delivered an annual return on invested capital of 25.9%, driven by “strong profits, cash flow and financial position.” Since 2013, Southwest’s ROIC has consistently exceeded its weighted average cost of capital, suggesting it has a good economic moat.
Southwest’s revenue per available seat miles (RASM) increased 1.9% compared to the final three months of 2016, driven primarily by a 3.9% increase in operating revenues. For the year, the airline’s operating revenues increased 3.7% year over year due to higher passenger demand for low fares.
Southwest’s profitability ranks 7 out of 10, driven by expanding operating margins and good revenue growth. The airline’s three-year revenue growth rate outperforms 72% of global competitors.
Company reports lower operating income as costs rise
Although the company reported higher revenues for the quarter, operating income declined by $73 million from the prior-year quarter. Southwest’s economic fuel costs per gallon increased two cents, contributing to a 7.7% year-over-year increase in fuel and oil costs. Salaries, wages and benefits expense increased 12.6% year over year.
Southwest increased its cost guidance for 2018: the company expects economic fuel costs between $2.10 and $2.15 per gallon, which would represent up to a six-cent increase in fuel and oil costs per gallon.
Company price falls as airline price war looms
Southwest expects a 5% increase in available seat miles for 2018. According to a CNBC article, United Continental Holdings Inc.’s (UAL, Financial) growth plans can “squeeze [the company’s] profit margins” because other airlines would be pressured to increase capacity as well, thus lowering prices for airfare.
Southwest traded 2.5% lower than its previous close of $62.22. Other airline stocks followed suit: United, American Airlines Group Inc. (AAL, Financial) and Delta Air Lines Inc. (DAL, Financial) tumbled 2.92%, 2.35% and 2.42% respectively.
Disclosure: I do not have positions in the stocks mentioned.
