(LUV) Southwest Airlines Plans Share Buyback

One of the leading low cost carriers, Southwest Airlines Co.’s (LUV) board of directors has announced a share repurchase authorization of $500 million.

In 2008, the company repurchased 4.4 million shares for approximately $54 million under a $500 million program announced that same year. However, given weak market conditions, management had suspended the buyback plan.

The company has now regained its repurchase authorization, highlighting its strong cash flow position and short-term investments of approximately $4.4 billion. Further, the company is banking upon rising synergies from the AirTran merger, which will likely remain accretive to earnings in 2011.

However, Southwest Airlines recently announced lower-than-expected its second quarter earnings which remained lower than expected. The company’s adjusted earnings dropped deteriorated from its year-ago performance, reflecting its failure to counter sky-high fuel expenses (increased up approximately 72% in the reported quarter) despite record a high load factor and strong passenger revenue yields.

Despite our negative outlook on fuel prices and market conditions, we believe the company will continue to benefit from it AirTran acquisition that marked a milestone achievement, expanding its presence in key markets. Integration of both carriers has provided more opportunities to drive combined synergies in terms of revenues and profits as well as a streamlined cost structure.

Further, the company remains focused on yielding benefits from the launch of programs like All-New Rapid Reward and introducing services to new markets that were untapped. However, discounts on ticket prices, labor costs concerns, fuel price volatility and stiff competition from giant carriers like Delta Air Lines (DAL), United Continental Holdings (UAL) and US Airways Group (LCC) keep us on the sidelines.

Consequently, we maintain our long-term Neutral recommendation on Southwest Airlines, supported by our Zacks #3 Rank (Hold).

DELTA AIR LINES (DAL): Free Stock Analysis Report

US AIRWAYS GRP (LCC): Free Stock Analysis Report

SOUTHWEST AIR (LUV): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

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