Traffic at
Southwest Airlines Co.
(
LUV
), the largest U.S. low-cost carrier, inched down 0.9% year over
year in March. Airline traffic is customarily measured in billions
of revenue passenger miles.
On a year-over-year basis, consolidated capacity (or available
seat miles) fell 0.9% and the load factor (percentage of seats
filled by passengers) deteriorated 10 basis points (bps) to 81.8%.
Passenger revenue per available seat mile (PRASM) rose 5% year over
year in March compared to increases of 4% in February and 7% in
January.
In the first quarter of this year, traffic dipped 0.1% on load
factor decline of 110 bps year over year partially offset by
capacity increase of 1.2%. In addition, Southwest expects strong
passenger revenue in the first quarter. Management did not provide
any specific projection for the first quarter unit costs but it
expects to register higher growth compared to $0.0783 (excluding
fuel and special item) in first quarter 2011.
The company, slated to release first quarter earnings on April
19, does not expect to report profits due to high fuel costs. The
Zacks Consensus estimates a loss of 5 cents for the first quarter,
representing a substantial 266.67% decline on an annualized
basis.
Fuel costs, including fuel taxes are estimated at approximately
$3.50 per gallon, which is higher than its previous expectation of
$3.35 per gallon. Coupled with surging fuel prices, Southwest
expects non-fuel costs to grow modestly this year primarily due to
higher salaries, wages and benefits, and airport costs.
Although Southwest is poised to benefit from fleet rightsizing,
the Evolve retrofit program, steady capacity growth, All-New Rapid
Rewards, AirTran merger synergies and several ancillary revenues,
we are mainly concerned about high maintenance and operating costs
associated with fleet rightsizing and modernization. Additionally,
the successful integration of AirTran would result in a one-time
charge of $500 million, of which $134 million was expended last
year.
Moreover, new advertising rules and stiff competition from
United Continental Holdings Inc.
(
UAL
) and
Delta Air Lines
Inc.
(
DAL
) keep us cautious on the stock. Besides, Southwest is dependent on
Boeing Co.
(
BA
) as its sole supplier for aircraft. If Southwest is unable to
acquire additional aircraft from Boeing or if the latter is unable
to provide adequate support, the company's profitability will
inevitably be hampered.
The company also launches fare sales from time-to-time, with
discounted ticket prices in order to boost sales. These actions,
however, hurt overall revenues.
Based on expected weak first quarter projections and feeble
macro data points in the entire airline industry, we recently
downgraded our long-term recommendation to Underperform on
Southwest. For the short term (1-3 months), the stock retains a
Zacks #3 (Hold) Rank.
BOEING CO (
BA
): Free Stock Analysis Report
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (
UAL
): Free Stock Analysis Report
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