Southwest Defies Winter with Q1 Earnings Beat - Analyst Blog

Despite extreme weather conditions, leading U.S. carrier Southwest Airlines Co. LUV reported impressive first quarter 2014 results. The company reported earnings of 18 cents per share, surpassing the Zacks Consensus Estimate of 16 cents. The results were way above the prior-year quarter earnings of 7 cents.

Quarterly revenues moved up 2.0% year over year to $4,166 million, in line with the Zacks Consensus Estimate. On a year-over-year basis, Passenger and Freight revenues increased 2.5% and 2.6% respectively, while Other revenues decreased 6.8%. Notably, the company cancelled 7,500 flights owing to harsh winter in January and February.

Operating Statistics

Airline traffic, measured in billions of revenue passenger miles moved up 1.7% year over year to 24.15 billion in the first quarter. Capacity or available seat miles decreased 1.1% to 30.47 billion, while load factor (percentage of seats filled with passengers) leaped 220 basis points year over year to 79.3%. Passenger revenue per available seat mile (PRASM) increased 3.53% year over year.

Operating Expenses & Operating Income

For the first quarter, operating income increased to $215 million from $70.0 million in the year-ago quarter. Total operating expenses decreased 1.6% year over year to $3,951 million due to lower fuel prices, maintenance costs and aircraft rentals. Fuel price (economic) accounted for $3.08 per gallon, down from $3.29 in the year-ago quarter. Consolidated unit cost or cost per available seat mile CASM, excluding fuel and special items, increased 4.0% year over year.

Liquidity

At the end of first quarter, Southwest had $3,498 million in cash and short-term investments and $1 billion in undrawn revolving credit facilities. The company had long-term debt (including current portion) of $2,814 million, representing debt-to-capitalization ratio of 28.1%.

In the first quarter of 2014, Southwest generated operating cash flow of $1,119 million and capital expenditures were $407.0 million. The company repurchased 12 million shares for approximately $315 million and paid total dividends of $56 million. As of Mar 31, 2014, return on invested capital (before taxes and excluding special items) for the past one-year period was 14.2%.

Guidance

The company announced that it has started the second quarter on a brighter note due to shift of Easter holidays to April and stable fuel prices. Based on current revenue and booking trends, Southwest expects unit revenue to grow again in the ongoing quarter.

The company also expects a 2–3% increase in the second quarter and 2014 unit costs, excluding fuel, profit sharing and special items. Fuel price (economic) is estimated at approximately $3.06 per gallon.

Other Airline Stocks

Delta Air Lines Inc. DAL reported first-quarter 2014 results on Apr 23, with adjusted earnings of 33 cents coming ahead of the Zacks Consensus Estimate of 29 cents. The bottom line leaped 230.0% from the year-ago adjusted profit of 10 cents.

Other carriers like Alaska Airlines Group Inc. ALK and Spirit Airlines Inc. SAVE will release first quarter financial results on April 25 and 29, respectively.

Our Take

Southwest currently holds a Zacks Rank #1 (Strong Buy). Several strategies including fleet restructuring, introduction of international services, increased ancillary product offerings and capacity management are expected to boost the company's revenue and reduce expenses. Further, integration of AirTran along with slot pair wins in New York's LaGuarida and Washington's Reagan National are expected to enhance the company's performance.