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Southwest Airlines Co. (LUV - Analyst Report) reported strong fourth quarter and full-year 2013 results, owing to contributions from the strategic steps taken by management and better bookings. The partial dampeners were higher expenses associated with fuel, maintenance and integration costs.

The company reported record fourth quarter earnings of 33 cents per share that surpassed the Zacks Consensus Estimate of 28 cents. The results were way above the prior-year quarter earnings of 9 cents.

Quarterly revenues moved up 6.1% year over year to $4,428 million and were ahead of the Zacks Consensus Estimate of $4,374 million. On an annualized basis, Passenger revenues increased 6.5% while Freight and Other revenues decreased 2.4% and 1.0% respectively.

For full-year 2013, Southwest posted earnings of $1.12 per share (surpassing our projection by 3.7% and increasing 100.0% year over year) on revenues of $17,699 million (up 3.6% from the prior year).

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles moved up by 1.1% year over year to 25.6 billion in the fourth quarter. Capacity or available seat miles increased 2.2% to 31.9 billion, while load factor (percentage of seats filled with passengers) leaped 80 basis points year over year to 80.4%. Passenger revenue per available seat mile (PRASM) increased 4.2% year over year.

Operating Expenses & Operating Income

For the fourth quarter, operating income increased to $386 million from $91.0 million in the year-ago quarter. Total operating expenses, decreased 1% year over year to $4,042 million due to lower fuel and maintenance costs. Fuel price (economic) accounted for $3.05 per gallon, down from $3.32 in the year-ago quarter. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, grew 1.5%.

Liquidity

At the end of 2013, Southwest had $3,152 million in cash and short-term investments and $1 billion in undrawn revolving credit facilities. The company had long-term debt (including current portion) of $2,820 million, representing debt-to-capitalization ratio of 27.8%.

In 2013, Southwest generated operating cash flow of $2,490 million and capital expenditures were $1,447 million. The company repurchased 38 million shares for approximately $540 million and paid total dividends of $71 million. As of Dec 31, 2013, return on invested capital (before taxes and excluding special items) was 13.1%.

Guidance

Based on current revenue and booking trends, Southwest expects unit revenue to grow again in first quarter 2014. The company also expects an upward movement in first quarter unit costs, excluding fuel, profit sharing and special items. Fuel price (economic) is estimated at approximately $3.05 to $3.10 per gallon.

Other Airline Stocks

Delta Air Lines Inc. (DAL - Analyst Report) reported fourth-quarter 2013 results on Jan 21, with adjusted earnings of 65 cents coming ahead of the Zacks Consensus Estimate of 63 cents. The bottom line leaped 142.1% from the year-ago adjusted profit of 28 cents.

Other carriers like American Airlines Group Inc. (AAL - Snapshot Report) and JetBlue Airways Corp. (JBLU - Analyst Report) will release fourth quarter financial results on Jan 28 and Jan 29 respectively.

Our Take

Southwest currently holds a Zacks Rank #1, implying a Strong Buy 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.

Nevertheless, high non-fuel operating costs, a new advertising policy along with intense competition and heavy investments are expected to limit the company’s earnings potential.

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