Southwest Airlines Tops Q2 Earnings

Leading U.S. carrier Southwest Airlines Co. LUV reported impressive second-quarter 2014 results. The company reported earnings of 70 cents per share surpassing the Zacks Consensus Estimate of 61 cents. The results were also considerably higher than the prior-year quarter earnings of 38 cents. This marks the carrier's fifth consecutive quarter of record profits, achieved on the back of successful execution of its strategic initiatives.

Quarterly revenues moved up 7.9% year over year to $5,011 million, ahead of the Zacks Consensus Estimate of $4,932 million. On a year-over-year basis, Passenger and Freight revenues increased 8.5% and 2.3% respectively, while Other revenues fell 2.3%.

Operating Statistics

Airline traffic, measured in billions of revenue passenger miles, moved up 2.4% year over year to 28.59 billion in the second quarter. Capacity or available seat miles decreased 0.4% to 34.10 billion, while load factor (percentage of seats filled with passengers) leaped 230 basis points year over year to 83.9%. Passenger revenue per available seat mile (PRASM) increased 9.0% year over year to 13.94 cents.

Operating Expenses & Operating Income

For the second quarter, adjusted operating income scaled up to $819 million from $479.0 million a year ago, resulting in an operating margin of 16.3%. Total adjusted operating expenses increased 0.7% year over year to $4,192 million due to lower fuel prices, maintenance costs and aircraft rentals. Fuel price (economic) accounted for $3.02 per gallon, down from $3.06 in the year-ago quarter. Consolidated unit cost or cost per available seat mile CASM excluding fuel and special items, increased 3.4% year over year to 8.14 cents.

Liquidity

At the end of the second quarter, Southwest Airlines had $3,994 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 $2,153 million, representing debt-to-capitalization ratio of 22.3%.

In the second quarter of 2014, Southwest Airlines generated operating cash flow of $1,338 million while capital expenditures amounted to $500.0 million. The company repurchased 7.6 million shares for approximately $240 million and paid total dividends worth $42 million. As of Jun 30, 2014, return on invested capital (before taxes and excluding special items) through the past one -year period is 17.1%.

Guidance

Southwest Airlines announced that it has started the third quarter on a bright note. Based on current revenue and booking trends, the carrier expects unit revenues to grow 3% in Jul 2014. Southwest Airlines forecasts its capacity to remain flat in 2014 and expects to expand its network in a disciplined manner.

The company also expects an increase in the third quarter and 2014 unit costs, excluding fuel, profit sharing and special items. Fuel price (economic) is estimated to be in the range of $2.95–$3.00 per gallon.

Other Airline Stocks

Delta Air Lines Inc. DAL reported second-quarter 2014 results on Jul 24, with adjusted earnings of $1.04 ahead of the Zacks Consensus Estimate of $1.03. Hawaiian Holdings Inc.'s HA earnings of 35 cents per share also steered ahead of our estimate of 33 cents.

Upcoming Release

Spirit Airlines Inc. SAVE will release its second quarter financial results on Jul 29.

Our Take

Southwest Airlines currently sports a Zacks Rank #1, implying a Strong Buy rating. Several strategies including fleet restructuring, introduction of international services, increased ancillary product offerings, capacity management and slot wins are expected to boost the company's revenues and reduce expenses, going forward.

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