Southwest Traffic Falls in March - Analyst Blog

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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.

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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
Referenced Symbols: BA , DAL , LUV , UAL

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