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Leading U.S. low-cost carrier Southwest Airlines Co. (LUV - Analyst Report) reported second quarter 2013 adjusted earnings of 38 cents per share, a penny short the Zacks Consensus Estimate. The results, however, improved from the prior-year quarter adjusted earnings of 36 cents per share on fleet re-designing, expansion of network and less fuel expense.

Quarterly revenues moved up 0.6% year over year to $4.6 billion and were in-line with the Zacks Consensus Estimate. On an annualized basis, Passenger and Freight increased 0.8% and 2.4% respectively, while Other revenues dropped 3.1%.

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, increased 2.7% year over year to 27.9 billion in the second quarter. Capacity or available seat miles increased 3.0% to 34.2 billion, while load factor (percentage of seats filled with passengers) dropped 30 basis points year over year to 81.6%. Passenger revenue per available seat mile (PRASM) moved down 2.2% year over year.

Operating Expenses & Operating Income

For the second quarter, non-GAAP operating income was $479 million, down 1.2% from the year-ago quarter. Total operating expenses, excluding special items, increased 0.7% year over year to $4.1 billion. Fuel price (economic) accounted for $3.06 per gallon, down from $3.22 in the year-ago quarter. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, increased 1.8% year over year to 7.87 cents.

Liquidity

At the end of the second quarter, Southwest had $3.7 billion in cash and short-term investments. The company has a $1.0 billion unsecured revolving credit facility. Long-term debt (including current portion) was $2.9 million, representing debt-to-capitalization ratio of 30.2%.

In the second quarter, Southwest generated operating cash flow of $778 million and capital expenditures were $193 million. The company revised its share buyback program to $1.5 billion from $1.0 billion. During the quarter, the airline repurchased 18 million shares for approximately $251 million and paid total dividend of $28 million. As of Jun 30, 2013, return on invested capital (before taxes and excluding special items) was 9%.

Outlook

Based on current traffic trends, Southwest expects unit revenues to grow again in the coming months. Fuel price (economic) in the third quarter is estimated at $3.05 to $3.10 per gallon.

Other Airline Stocks

Delta Air Lines (DAL - Analyst Report) second-quarter 2013 adjusted earnings of 98 cents surpassed the Zacks Consensus Estimate of 95 cents. The results also improved considerably from the year-ago adjusted earnings of 69 cents. The company’s performance was buoyed by strong sales along with operational efficiency and growing demand.

Our Take

Southwest – which carries the maximum number of U.S. passengers compared to any other player such as United Continental Holdings (UAL - Analyst Report) and JetBlue Airways (JBLU - Analyst Report) – currently holds a Zacks Rank #3, implying a Hold rating.

We believe that the company will benefit from the implementation of a number of strategies to increase revenues and reduce costs over the next three years. These include efficiency in operations, introduction of various customer friendly programs, network optimization and capacity management.
 

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