Before the opening bell, the largest U.S. low-cost carrier
Southwest Airlines Co
) reported its third quarter 2012 adjusted earnings of 13 cents
per share that slivered past the Zacks Consensus Estimate by a
penny. The quarter's earnings declined 13.3% from 15 cents in the
Though the company's better-than-expected performance was
credited to several cost-cutting measures, network optimization
and All-New Rapid Reward program as well as synergies from the
AirTran acquisition; headwinds related to the global economic
uncertainties, rising fuel prices, weak travel demand and high
maintenance costs associated with the fleet modernization program
kept the profitability in check.
Southwest recorded $110 million pre-tax synergies from the
AirTran acquisition in the first nine months of 2012.
Revenue was flat year over year at $4.31 billion and missed the
Zacks Consensus Estimate of $4.35 billion. Airlines traffic,
measured in billions of revenue passenger miles, slid 0.6% year
over year. Capacity or available seat miles fell 0.7% while load
factor (percentage of seats filled with passengers) nudged up 10
basis points year over year to 82.1%.
On an annualized basis, Passenger and Freight revenue increased
0.3% and 11.4%, respectively, while other revenue decreased 7.4%.
Passenger revenue per available seat mile (PRASM) inched up 1%
year over year.
Operating Expenses & Operating Income
Total operating expenses, excluding special items, increased 1.9%
year over year to $4.1 billion due to higher maintenance and
airport costs. Fuel price (economic) accounted for $3.16 per
gallon, down from $3.18 in the year-ago quarter.
Consolidated unit cost or cost per available seat mile (CASM),
excluding fuel and special items, grew 5.8%. Including fuel and
special items, CASM increased 5% year over year.
Operating income declined 27% to $208 million from the year-ago
At the end of the third quarter, the company had $3.5 billion in
cash and short-term investments and $800 million in undrawn
revolving credit facilities. Long-term debt reduced to $2.96
billion from $3.11 billion at the end of fiscal 2011.
Southwest generated operating cash flow of $464 million compared
to negative $218 million in the year-ago quarter. Capital
expenditures were $406 million, up from $276 million in the
Return on invested capital (before taxes and excluding special
items) was 7% as of September 30.
Further, Southwest repurchased 37 million shares for
approximately $325 million as of September 30 and paid total
dividends of $22 million in the first nine months of 2012.
Based on current traffic trends, the company expects unit revenue
to grow again in fourth quarter.
Southwest expects similar year-over-year increase in the fourth
quarter unit costs, excluding fuel, profit sharing and special
items. Fuel price (economic) is estimated to be approximately
$3.45 per gallon.
The company continues to enhance its shareholder value and
expects to achieve 15% pre-tax return on invested capital.
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. The merger will also result in a one-time
charge of $550 million, of which $1310 million has been exhausted
until the third quarter of 2012.
We believe Southwest Airlines is expected to benefit from the
cost leadership position, strong balance sheet, low cost,
flexibility, network optimization, fleet modernization, and
increasing revenue initiatives.
Nevertheless, high operating costs like fuel, maintenance,
salaries, wages and airport fees, new advertising policy along
with intense competition from major rivals -
United Continental Holdings Inc
Delta Air Lines Inc.
), heavy investments and failure to successfully integrate
AirTran are expected to limit the earnings upside potential of
We are maintaining our long-term Neutral recommendation on
Southwest. For the short term (1-3 months), the stock retains a
Zacks #3 (Hold) Rank.
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