Southwest (LUV) Q3 Earnings Top Estimates Amid Rising Costs

Southwest Airlines Co. (NYSE:LUV) delivered third-quarter 2019 earnings per share of $1.23, beating the Zacks Consensus Estimate of $1.09. Moreover, the bottom line improved 13.9% year over year despite higher costs from the MAX groundings. Following this impressive performance, shares of the company rose in early trading.

Meanwhile, operating revenues of $5,639 million lagged the Zacks Consensus Estimate of $5,642 million. However, the top line rose 1.2% year over year. Passenger revenues accounting for bulk (92.7%) of the top line inched up 0.7% year over year.

Operating Statistics

Airline traffic, measured in revenue passenger miles, dipped 3.3% year over year to 32.9 billion in the quarter under review. Also, capacity or available seat miles (ASMs) slipped 2.9% to 39.38 billion. Load factor (percentage of seats filled by passengers) came in at 83.5%, down 40 basis points on a year-over-year basis as traffic decline was more than the capacity contraction.

Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) increased 3.8% to 13.28 cents. Moreover, in the reported quarter, revenue per available seat mile (RASM) rose 4.2% year over year to 14.32 cents owing to 4.1% increase in passenger revenue yield.

Operating Expenses & Income

In the third quarter, operating income (excluding special items) totaled $819 million compared with $796 million in the year-earlier period. The Boeing (NYSE:BA) 737 MAX 8 grounding affected operating income to the tune of $210 million in the period and $435 million in the first nine months of 2019. The company expects the adversity to persist in 2020. Further, total adjusted operating expenses (excluding profit sharing, fuel and oil expense plus special items) climbed 4.3% year over year. The increase in costs was due to the groundings and the resultant lower capacity during the quarter.

Fuel price per gallon (inclusive of fuel tax: economic) was down 8% year over year to $2.07. However, with the company’s most fuel-efficient aircraft being grounded, its fuel efficiency slid 0.9% in the third quarter. Additionally, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and special items increased 7.5% year over year to 9.47 cents. The Boeing 737 MAX groundings pushed up costs.

Liquidity

This Zacks Rank #3 (Hold) company had cash and cash equivalents of $2,488 million at the end of the third quarter compared with $1,854 million at the end of 2018. As of Sep 30, 2019, the company had a long-term debt (less current maturities) of $2,398 million compared with $2,771 million at 2018 end. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While the carrier generated a free cash flow of $2.4 billion during the first nine months of 2019, it returned $1.8 billion to its shareholders through $372 million in dividends and $1.45 billion via share repurchases.

Q4 & 2019 Outlook

Southwest anticipates RASM to either remain flat year over year or ascend up to 2%. With the removal of the MAX aircraft from its fourth-quarter flight schedule, the carrier’s peak travel period is being hampered due to fleet deficit. Economic fuel costs are envisioned in the range of $2.05-$2.15 per gallon, indicating a decline from $2.25 reported in the fourth quarter of 2018.

Fuel efficiency is estimated to slid 1-2% in the fourth quarter. Moreover, CASM — excluding fuel and oil expense and profit-sharing expense — is estimated to augment 4-6% in the ongoing quarter, primarily due to lower capacity from the MAX groundings. Effective tax rate is predicted to be approximately 23% in the quarter.

ASMs are expected to dip 0.5-1% year over year in the fourth quarter. The same for 2019 is estimated to slip approximately 1.5% (previous estimate: fall between 1% and 2%).

Due to delivery delays of the MAX aircraft, Southwest now anticipates capital expenditures between $1.1 billion and $1.2 billion in 2019 compared with $1.2-$1.3 billion guided previously.

Upcoming Releases

Investors interested in the broader Transportation sector are keenly awaiting third-quarter earnings reports from key players like Expeditors International of Washington, Inc. (NASDAQ:EXPD) , Air Lease Corporation (NYSE:AL) and Hertz Global Holdings, Inc (NYSE:HTZ) . While Hertz will report third-quarter earnings numbers on Nov 4, Expeditors and Air Lease will announce the same on Nov 5 and Nov 7, respectively.

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