Southwest Beats on Strong Top Line (revised) - Analyst Blog


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Before the opening bell yesterday, Southwest Airlines Co. ( LUV ), a low-cost airline carrier in the US, declared its fourth quarter 2011 adjusted earnings of 9 cents per share. The quarter's results beat the Zacks Consensus Estimate by a couple of cents but remained below the year-ago level of 15 cents, excluding the positive impact of fuel hedging, which offset the rise in fuel price.

For fiscal 2011, adjusted earnings decreased 41.9% year over year to 43 cents from 74 cents in the year-ago period.

Adjusted earnings in the fourth quarter and fiscal 2011 excluded the impact of approximately $86 million of favorable and $152 million of unfavorable special items, primarily related to the acquisition and integration costs of AirTran and impacts of fuel contracts. Including this, the company reported earnings per share of 20 cents in the quarter as against 18 cents in the year-ago period. For fiscal 2011, the company reported earnings per share of 23 cents compared to 61 cents in fiscal 2010.

Total operating revenue for the quarter jumped 31.9% year over year to a record $4.1 billion, in line with the Zacks Consensus Estimate. For the full year, total operating revenue increased 29.4% to $15.7 billion.

On a year-over-year basis, Passenger, Freight and Other revenues climbed 31.1%, 12.5% and 54.7%, respectively, in the fourth quarter. The growth was based on record high load factors as well as strong passenger revenue yields.

In the fourth quarter, Airline traffic, measured in revenue passenger miles, upped 25.9% year over year in the reported quarter while capacity or available seat miles increased 26.3%. Load factor (percentage of seats filled with passengers) declined 20 basis points year over year to 80.7%. In fiscal 2011, Airline traffic increased 25% year over year while capacity grew 22.5%. Load factor improved 160 basis points year over year to 80.9%.

Total operating expenses for the quarter, including special items, increased 36.7% year over year on a 58.9% year-over-year rise in fuel. Excluding the special item, operating expenses increased 38.2%. Consolidated unit cost or cost per available seat mile ( CASM ), excluding fuel and special items, dipped 1.5% year over year. CASM, including fuel, leaped 9.4% from the year-ago quarter.

Total operating expenses for fiscal 2011, including special items, increased 34.6% year over year on a 55.9% year-over-year surge in fuel. Excluding the special item, operating expenses increased 35.5%. CASM, excluding fuel and special items, remained flat year over year while CASM, including fuel, grew 10.6% from the year-ago period.

Operating income in the fourth quarter declined 31.9% to $147 million from $216 million in the year-ago quarter. Excluding the special item, operating income declined 36.5% year over year to $167 million from $263 million from a year ago. The decline was primarily due to higher fuel prices.

For the full year, total operating income declined 29.9% to $693 million compared with $988 million in the year-ago period. Excluding the special item, operating income declined 28.1% year over year to $839 million from $ 1,167 million. For 2011, the company realized $80 million in net pre-tax synergies, related to the acquisition and integration of AirTran that was modestly accretive to supported 2011 financial results.


Southwest Airlines ended 2011 with cash and cash equivalents of $829 million compared with $1,261 million a year ago. The company generated $1,385 million in cash from operations compared with $1,561 million at the end of 2010. The company made debt repayment of $638 million during 2011.

The company generated return on invested capital (before taxes and excluding special items) of 7% for fiscal 2011. Capital expenditures were $968 million for fiscal 2011.

Share Repurchase

The company purchased 27.5 million shares for approximately $225 million under its $500 million share buy back plan announced previously on August 5, 2011.


Based on the on-going traffic, management expects strong passenger revenue in the first quarter of 2012.

Management did not provide any specific projection for the first quarter 2012 unit costs but expects to register higher growth compared to 7.83 cent (excluding fuel and special item) in the first quarter 2011. Fuel costs, including fuel taxes are estimated at approximately $3.35 per gallon for the first quarter of 2012.

For 2012, management projects capital expenditure of $1.3 billion. Management expects to end 2012 with a fleet of 691 aircraft. Over the next 40 years, management expects 15% return (before tax) on its invested capital.

For 2012, Management expects deliveries of 33 Boeing ( BA ) 737 and 800, with the first Boeing 800 scheduled in March.

Southwest Airlines maintained its projection on total acquisition and integration costs related to AirTran at approximately $500 million. The company continues to believe that the acquisition of AirTran will generate net annual pre-tax synergies of $400 million by 2013.

Management expects debt repayment of approximately $560 million in 2012, including $430 million in first quarter of 2012.

Our Analysis

Despite the negative impacts of fuel hedging, Southwest Airlines managed to surpass the market consensus based on higher yield, load factor and capacity addition through the acquisition of AirTran. The air carrier continues to gain market share through the launch of new products like All-New Rapid Rewards program and adding new destination to its network like Greenville-Spartanburg and Charleston, South Carolina and Newark, New Jersey.

The company's low fare and quality services that led to achievements such as Customer Service Champion and the Customer Satisfaction Leader in 2011. Further, the acquisition of AirTran has also been accretive to the company by increasing its fleet by 140 aircraft and extending combined network into key markets like Atlanta and Washington, D.C. as well as in the Caribbean and Mexico.

Although management expects several years to complete full integration of AirTran, it seeks to drive significant synergies out of this deal over the long-term.

However, discounts on ticket prices, labor costs concerns, fuel price volatility and stiff competition from the likes Delta Air Lines ( DAL ), United Continental Holdings ( UAL ) and US Airways Group ( LCC ) keep us on the sidelines.

Consequently, we maintain our long-term Neutral recommendation on Southwest Airlines, supported by our Zacks #3 (Hold) Rank.

(We are reissuing this article to correct a mistake. The original article, issued yesterday, January, should no longer be relied upon.)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
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