The largest U.S. low-cost carrier
Southwest Airlines Co
) is slated to release its second quarter 2012 earnings on July 19
before the opening bell. The current Zacks Consensus Estimate for
the second quarter is 32 cents, representing a substantial 113.33%
increase from the year-ago level.
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Looking at surprises, Southwest had positive earnings surprises of
18.85% in the last four quarters.
Over the past two months, fuel price, the major threat to the
company's profitability, dropped to a certain extent, which has
made airline operations less expensive.
At the first quarter conference call, Southwest projected second
quarter unit costs (excluding fuel and special items) to increase
from the year-ago level and fuel price, including taxes in the
range of $3.40-$3.45 per gallon. It also predicted strong passenger
revenue in the second quarter.
First Quarter Flashback
Southwest Airlines' earnings surpassed the Zacks Consensus Estimate
by a couple of cents but remained below the year-ago earnings.
Better-than-expected performance was attributable to robust revenue
growth driven by fare hikes, cost-cut measures, network
optimization, All-New Rapid Rewards and synergies from the AirTran
acquisition that offset rising fuel costs in the quarter.
Airlines traffic showed an impressive growth of about 23.4% on
strong capacity growth, which was partially offset by the decline
in load factor (percentage of seats filled with passengers).
On the cost side, total operating expense, excluding special items,
spiked 33% year over year. Fuel expenses surged 45.2% in the first
Agreement of Analysts
Estimates for the second quarter of 2012 have been trending upward
over the last 7 and 30 days with 3 and 4 out of 13 analysts making
upward revisions, respectively. None of them made a downward
revision. For fiscal 2012, out of 15 analysts, 3 and 5 made
positive revisions over the last 7 and 30 days, respectively, while
1 moved in the opposite direction in both periods.
The analysts believe that Southwest is poised to benefit from its
fleet modernization plan, Evolve retrofit program, All-New Rapid
Rewards, AirTran merger synergies and several ancillary product
offerings such as EarlyBird check-in, unaccompanied minor travel
and pet fees. The company is also improving its services and
introducing new products, which are enhancing its value and
The analysts believe the lower fuel expenses along with the
cost-cutting measures would offset high maintenance costs
associated with the fleet modernization program as well as other
operating costs including higher salaries, wages and benefits, and
airport costs amidst the ongoing market turmoil.
The fleet modernization plan will boost pre-tax income by about $70
million in 2012, $300 million in 2013 and $500 million in 2014.
Additionally, the Evolve retrofit program and the addition of new
The Boeing Co.
) 737-800 planes have revenue potential of roughly $200 million and
$100 million, respectively, for this year.
Further, the AirTran merger would generate net synergies of more
than $400 million by 2013. Half of this ($200 million) is expected
this year, with two-thirds realized from revenue and one-third from
Most of the analysts are also encouraged by Southwest's plan to
double shareholders return. The company boosted its quarterly
dividend by 122% to one cent per share. This marks the first
increase in nearly a decade. Moreover, Southwest also increased its
share repurchases authorization to $1 billion from $500 million.
Southwest is the first low-cost carrier to pay dividend to its
shareholders, and thus strengthen its position against its major
JetBlue Airways Corporation
Spirit Airlines Inc.
Magnitude - Consensus Estimate Trend
Over the last 7 days, the magnitude of second quarter estimate
revisions increased by 2 cents over the last 7 days and 30 days.
The Zacks Consensus Estimate for 2012 remained static at $1.08 over
the last 7 days and grew by 3 cents over the last 30 days.
We are upgrading our long-term recommendation on Southwest Airlines
from Neutral to Outperform based on falling fuel prices and strong
growth opportunities. Falling fuel prices, fare hikes, hedging
strategies, cost-cutting measures, network optimization and All-New
Rapid Rewards are expected to generate strong profitability going
For the short term (1-3 months), the stock holds a Zacks #2 (Buy)