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Dallas, Texas-based Southwest Airlines Co. (LUV - Analyst Report) posted a slight drop in traffic for Jul 2013. The company’s traffic – measured in revenue passenger miles (RPMs) – was 9.98 billion for the reported month, down 0.7% from 10.04 billion recorded a year ago. On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) moved up 0.6% to 11.95 billion. The load factor or percentage of seats filled by passengers dropped to 83.5% from 84.6% in Jul 2012.

For the first seven months of this year, Southwest generated RPMs of 61.66 billion (up 1.2% year over year) and ASMs of 76.98 billion (up 1.6% year over year). Load factor was 80.1%, reflecting a decline of 40 basis points.

We believe that Southwest remains committed to sustain its brand and operational excellence based on five major strategic actions. The company with its cost-efficient business model targets to expand its network through the transition of AirTran aircraft and the addition of new domestic and international destinations.

To combat further cost increases, Southwest is rightsizing its fleet. Over the last couple of months, the airline placed three The Boeing Company’s (BA - Analyst Report) 737-800s into service and retired two Boeing 737-300s.  

The U.S. low-cost carrier reported second quarter 2013 adjusted earnings of 38 cents per share, a penny short of 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.

Southwest – which operates along with other prominent players 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 apprehend that high operating costs associated with maintenance, salaries, wages and airport fees plus new advertising policy along with intense competition and heavy investments are expected to limit the upside potential of the stock.

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