On May 9, 2013, we maintained our Neutral recommendation on
), based on its operational excellence, cost-efficient business
model, strong liquidity position and better-than-expected first
quarter results, partially offset by certain risk factors. The
passenger airline holds a Zacks Rank #2 (Buy).
Why Kept at Neutral?
We believe that Southwest is favorably positioned to generate
high revenues and earnings in the coming couple of quarters owing
to a number of profit-inducing initiatives. Additionally, the
company's All-New Rapid Rewards program, increased ancillary
product offerings plus the introduction of international
reservation system and new revenue management program are
expected to support its profitability.
Southwest continues to optimize its combined networks with the
introduction of new national and international services across
various locations. The integration of the AirTran acquisition is
providing substantial opportunities for future growth.
We expect this merger to be accretive to Southwest's earnings
with net, annualized, pre-tax synergies of $70 million realized
in the first quarter. The merger is expected to generate net
synergies of more than $400 million by year-end 2013.
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Being one of the most profitable low-cost global airlines, the
company remains focused on cost control. Southwest's attention on
fleet resizing seems to be the appropriate strategy to lower
non-fuel costs. The company is taking several efforts including
interior redesigning, offering of technology-based facilities and
more entertainment options to enhance the quality of its fleet so
as to generate increased profitability.
However, high operating costs like fuel, maintenance, salaries,
wages and airport fees plus a new advertising policy along with
intense competition from another economic airline -
) - and heavy investments are expected to limit the upside
potential of the stock.
For the second and third quarters of 2013, the Zacks Consensus
Estimates for earnings are 41 cents and 28 cents per share,
respectively. This reflects a respective year-over-year growth of
12.9% and 117.6%.
Other stocks operating within the airline sector that are worth
Alaska Air Group Inc.
Bristow Group Inc.
). Both the companies currently hold a Zacks Rank #2 (Buy).