Why Southwest Is Likely To Be One Of The Only Airlines To See Its Earnings Liftoff In 2017

Imperial Capital maintains its Outperform rating on Southwest Airlines Co LUV as it believes Southwest is likely to be one of the only airlines to post higher earnings in 2017 despite it being a transition year.

Despite reporting a quarterly earnings beat, Southwest’s profit was lower due to higher costs from fuel, amended union contracts and retirement of its Boeing 737 planes. That said, the airline expects first quarter RASM to be flat to down 1 percent, sequential improvement from a decline of 2.9 percent in the fourth quarter.

Analyst's Expectations

“We anticipate the improving RASM trends to continue throughout FY17 as a result of strong demand, modest capacity growth, and higher yields to offset higher labor and fuel costs,” analyst Michael Darchin wrote in a note.

Darchin also raised his FY 2017 EPS estimate to $4 from $3.90 and his new estimate assumes capacity increases 3.5 percent, RASM increases 1 percent, CASM ex-fuel increases 3 percent and jet fuel averages $2.00 per gallon.

The analyst also raised his price target to $63 from $59 on higher unit revenues and lower unit costs.

Shares of Southwest closed Friday’s regular trading at $52.70. The $63 price target is about 17 percent above the recent share price.

At last check, shares of Southwest were down 1.4 percent at $51.96.