Before the opening bell, the largest U.S. low-cost carrier
Southwest Airlines Co.
) reported its second quarter 2012 adjusted earnings of 36 cents
per share that surpassed the Zacks Consensus Estimate by 3 cents.
The quarter's earnings were more than double the year-ago earnings
of 15 cents.
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Despite the prevailing depressed economic conditions, the company's
outstanding performance was credited robust revenue growth, driven
by strategic initiatives including cost-cutting measures, network
optimization and All-New Rapid Reward program as well as synergies
from the AirTran acquisition. Southwest recorded $40 million
pre-tax synergies from the AirTran acquisition in the quarter. The
company also benefited from the falling fuel prices of late.
Revenue climbed 11.6% year over year to a record $4.62 billion,
outpacing the Zacks Consensus Estimate of $4.6. Airlines traffic,
measured in billions of revenue passenger miles, increased 5.1%
year over year. Capacity or available seat miles rose 5.6% while
load factor (percentage of seats filled with passengers) fell 40
basis points year over year to 81.9%.
On an annualized basis, Passenger, Freight and Other revenues
increased 11.5%, 16.7% and 13.5%, respectively, in the reported
quarter. Passenger revenue per available seat mile (PRASM) grew
5.5% year over year.
Operating Expenses & Operating Income
Total operating expenses, excluding special items, increased 7%
year over year to $4.1 billion due to higher maintenance and
airport costs. Fuel price (economic) accounted for $3.22 per
gallon, down from $3.28 in the year-ago quarter.
Consolidated unit cost or cost per available seat mile (CASM),
excluding fuel and special items, grew 3.8% and CASM, including
fuel and special items, crept up 0.2% year over year.
Despite the higher operating cost, operating income spiked 75.7% to
$485 million from the year-ago quarter.
At the end of the second quarter, the company had $3.7 billion in
cash and short-term investments and $800 million in undrawn
revolving credit facilities. Long-term debt reduced to $3.02
billion from $3.05 billion at the end of first quarter.
Southwest generated operating cash flow of $145 million, down from
$235 million in the year-ago quarter. Capital expenditures were
$416 million compared to $215 million in the year-ago quarter.
Further, Southwest repurchased 59 million shares for approximately
$500 million as of June 30 since the initial $500 million share
buyback plan announced on August 5, 2011. The company recently
increased its share repurchase authorization to $1 billion from
Based on robust traffic trends, the company expects unit revenue to
grow again in third quarter.
Southwest expects third quarter unit costs, excluding fuel and
special items, to increase from the year-ago level. Fuel price
(economic), including taxes, is estimated to be in the range of
$3.05-$3.10 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. The merger will also result in a one-time charge of
$500 million, of which $165 million has been exhausted until the
second quarter of 2012.
Fuel price, the major threat to the company's profitability, has
dropped to a certain extent, which has made airline operations less
expensive. This lower cost along with the cost-cutting measures is
offsetting higher maintenance costs associated with the fleet
modernization program amidst the ongoing market turmoil.
Additionally, Southwest is expected to generate strong
profitability from fleet rightsizing, Evolve retrofit program,
steady capacity growth, All-New Rapid Rewards, several ancillary
revenues and AirTran merger synergies. These initiatives would also
provide the company a competitive edge over its major rivals -
United Continental Holdings Inc
Delta Air Lines Inc.
Based on falling fuel prices and strong growth opportunities, we
recently upgraded our recommendation on Southwest to Outperform.
For the short term (1-3 months), the stock holds a Zacks # 2(Buy)