(LUV) Southwest Airlines Earnings Tops Forecast

Leading U.S. low-cost carrier Southwest Airlines Co. (LUV) reported mixed fourth quarter and full-year 2012 results, owing to contributions from the strategic steps taken by management and better bookings, partially offset higher expenses associated with wages as well as fuel.

The company’s fourth quarter adjusted earnings were 9 cents per share that slivered past the Zacks Consensus Estimate of 7 cents. The quarter’s results remained at the same level with that of the prior-year quarter.

Quarterly revenues moved up 1.6% year over year to $4,173 million but missed the Zacks Consensus Estimate of $4,214 million. On an annualized basis, Passenger and Freight revenues increased 1.9% and 16.7%, respectively, while other revenues decreased 6.8%.

For full-year 2012, Southwest posted earnings of 56 cents per share (surpassing our projection by 5.7% and increasing 30.2% year over year), on revenues of $17,088 million (up 9.1% from the prior year).

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, slid 1.4% year over year to 24.8 billion in the fourth quarter. Capacity or available seat miles fell 0.3% to 31.2 billion, while load factor (percentage of seats filled with passengers) dipped 9 basis points year over year to 79.6%. Passenger revenue per available seat mile (PRASM) inched up 2.3% year over year.

Operating Expenses & Operating Income

For the fourth quarter, operating income decreased 18.6% to $136 million from the year-ago quarter. Total operating expenses, excluding special items, increased 2.4% year over year to $4,037 million due to higher maintenance and airport costs. Fuel price (economic) accounted for $3.32 per gallon, up from $3.29 in the year-ago quarter. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, grew 5.8%.


At the end of 2012, Southwest had $2,970 million in cash and short-term investments and $800 million in undrawn revolving credit facilities. The company had long-term debt (including current portion) of $3,154 million, representing debt-to-capitalization ratio of 31.2%.

In 2012, Southwest generated operating cash flow of $2,064 million and capital expenditures were $1,348 million. The company repurchased 46 million shares for approximately $400 million and paid total dividends of $22 million. As of Dec 31, 2012, return on invested capital (before taxes and excluding special items) was 7%.


Based on current traffic trends, Southwest expects unit revenue to grow again in first quarter 2013. The company also expects an upward movement in the first quarter unit costs, excluding fuel, profit sharing and special items. Fuel price (economic) is estimated at approximately $3.30 per gallon.

With regard to its AirTran merger, the company remains on track to generate net synergies of more than $400 million by 2013 on full integration.

Other Airline Stocks

Delta Air Lines (DAL) reported fourth-quarter 2012 results on Jan 22, with adjusted earnings of 28 cents coming on par with the Zacks Consensus Estimate. The results, however, dropped 37.8% from the year-ago adjusted profit of 45 cents. Revenues edged up 2% year over year to $8.60 billion but fell marginally short of our projection of $8.61 billion.

Another firm United Continental Holdings Inc. (UAL) has released its fourth quarter results today, while JetBlue Airways Corporation (JBLU) will release the same on Jan 29.

Our Take

Southwest currently holds a Zacks Rank #1, implying a short-term Strong Buy rating. We expect the company to remain committed to sustain its brand and operational excellence via its cost-cutting measures, fleet rightsizing as well as the addition of new and attractive destinations.

The company’s Evolve retrofit program, steady capacity growth, All-New Rapid Rewards and several steps to enhance ancillary revenues will position it advantageously in the coming days.

DELTA AIR LINES (DAL): Free Stock Analysis Report

JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report

SOUTHWEST AIR (LUV): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

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