Southwest Airlines: Updated Research Report - Analyst Blog

On May 16, 2014, we issued an updated research report on Southwest Airlines Co. LUV. The carrier reported a steady first quarter performance with the bottom line beating the Zacks Consensus Estimate, while revenues met the same.

We believe Southwest Airlines is poised to benefit from several strategies adopted like fleet restructuring, introduction of international services, capacity management, the Airtran integration and slot wins in LaGuardia and Reagan National airports, which should boost revenues and reduce expenses over the next three years. Southwest currently carries a Zacks Rank #1 (Strong Buy).

Southwest Airlines is expected to report strong revenues and earnings for full-year 2014 based on a stable outlook for the economy, favorable fuel prices, the forthcoming launch of international services, a stable Rapid Reward Program, fleet modernization efforts and pet fees.

Moreover, the AirTran acquisition is posing substantial opportunities for future revenue growth. Southwest Airlines and AirTran Airways have fully interconnected their networks, and the integration is progressing well. We expect the full integration of AirTran to boost Southwest Airlines' operational performance will, in turn, be accretive to the company's earnings.

Southwest Airlines is set to start operations in the international market from the third quarter of 2014 with flights to the Caribbean, Central America, Latin America and Mexican markets, in a bid to boost its network coverage. Further, after winning slots in the LaGuardia and Reagan DCA airports, the carrier has decided to extend daily departures from DCA to 44 from the current 17, thus increasing its operations from the airport more than 2.5 times. These efforts are expected to add significantly to the company's top line in the near term.

Furthermore, the airline's board of directors recently approved a $1 billion share buyback program along with a 50% hike in its current 4 cent-quarterly dividend to 6 cents per share. This action depicts the company's commitment to enhance its shareholders' value.

However, a highly competitive environment and regulations imposed by the federal authority pose major impediments to its performance. Further, an expected increase in non-fuel costs and high integration cost can affect Southwest Airlines' bottom line going forward.

Key Pick from the Sector

Some other stocks worth considering within this sector are Alaska Air Group Inc. ALK, American Airlines Group Inc. AAL and Delta Airlines Inc. DAL. All the stocks currently carry a Zacks Rank #1 (Strong Buy).