In an industry where major US commercial airlines have
experienced near-constant flirtation with bankruptcy,
Southwest Airlines Co.
) has defied the odds by achieving a four-decade streak of profits.
As America's iconic low-cost carrier, Southwest continues to spread
its wings to become a behemoth in the industry and to carry on its
deep-rooted legacy of success.
The airliner operates with a "point-to-point" strategy instead of a
conventional "hub-and-spoke" system, which allows for more direct
nonstop routing, and thus enables the carrier to control delays and
total trip time. The "point-to-point" structure helps the company
offer cheap flights to passengers who just want to get from point A
to point B with no bells and whistles.
While justly famous for its productivity, the low-cost carrier has
seen its cost base edge up over the years as it has matured and
gained in scale. In response Southwest has
adapted its business model
, and has started to fly from crowded markets, such as New York's
2011 AirTran acquisition
, the biggest in Southwest's history, further accelerated the
process of expansion, bringing the company a
large position in the Atlanta domestic market
and also short-haul international destinations in the Caribbean and
The integration with AirTran supports management's plan to achieve
$400 million of net synergies in 2013. Higher fares and synergy
benefits from the AirTran integration have supported Southwest's
revenue growth by 2.3% year over year to $4.1 billion in Q1 2013.
The carrier's passenger traffic has also increased marginally due
to support from the AirTran integration.
For Q1 2013, Southwest reported earnings and revenue that exceeded
Wall Street expectations (EPS: $0.07 per share, Revenue: $4.08
billion vs. EPS: $0.02 per share, Revenue: 4.07 billion).
Additionally, average passenger revenue per available seat mile
rose 1.8% along with an increase in passenger traffic by 0.3%.
Keeping the strong numbers in mind from the last quarter, analysts
are optimistic about Q2 2013 earnings ($0.39 a share, up from $0.36
during Q2 2012).
Q2 2013 covers the early part of the summer vacation season, so
it's expected that Southwest will earn higher revenue. Southwest
Airlines is also expected to benefit from lower jet fuel prices
witnessed during the quarter: Jet fuel prices declined from $3.22
per gallon in February 2013 to $2.77 per gallon in June 2013,
driven in part by the weak global economic growth outlook. As fuel
costs constitute nearly 37% of the company's operating expenses,
the decline in jet fuel prices will improve the carrier's operating
profits. However, hedging losses will likely offset some gains from
lower fuel prices.
Investors will be closely eyeing Southwest's expectations for
travel demand, including whether there might be a chance to push
fares higher. Since Southwest has an oversized influence on prices
charged by rivals, a decision to increase fares would help increase
revenues across the industry.
Market IQ proprietary Fundamental metrics give Southwest Airlines a
Neutral rating. Market IQ characterizes Southwest Airlines as an
average quality but low value stock (see below).
The company's qualitative strengths can be seen in multiple areas
such as revenue growth, return on equity (ROE), and financial
- Over the trailing 12 months, revenues have increased by
3.84%. Growth in revenue appears to have helped boost the
earnings per share. Additionally, revenue growth surpasses the
industry average of 3.75%.
- ROE increased to 5.47% in Q1 2013 vs. 3.8% in Q1 2012.
- Southwest Airlines has an equity to debt ratio of 0.86, which
is higher than the industry average of 0.42, indicating strong
financial strength relative to its peers.
Based on Market IQ's valuation metrics, Southwest is trading at a
premium relative to its peers (see below).
Going forward, favorable macroeconomic conditions and improving
will likely aid growth for the company. Southwest Airlines has also
adopted a number of strategies to increase revenues and reduce
costs in the upcoming quarters. These include fleet restructuring,
network expansion, capacity management and various customer
friendly programs such as Wi-Fi on board. These initiatives will
attract customers and strengthen the company's position in the
industry. A healthy financial profile will further support its
However, a highly competitive environment and technological
failures may adversely impact the performance of the company.
Moreover, increased regulations and higher taxes may pose major
impediments to growth in the near-term: In May 2013, the Obama
administration announced a proposal for a $14 tax on all airline
passengers in an effort to boost revenue for airport maintenance.
This might unnerve some of Southwest's clients since the charge may
be more prominent for those looking for cheap flying options.
Southwest is at a pivotal point in its life. From being what was
once a mere domestic carrier, it has now reached beyond to
transport its fliers internationally - spreading some love from its
domestic hubs into the outskirts of the US and, perhaps soon, into
the rest of the world.
This article was written by Selena Ing, an analyst at
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