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Southwest Airlines Co. (LUV - Analyst Report) witnessed a 1.5% year-over-year drop in traffic – that is measured revenue passenger miles (RPMs) – for November 2012. During the said period, the company flew 8.1 billion RPMs, against 8.3 billion RPMs in the second last month of 2011.

On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) increased 0.4% to 10.2 billion. The load factor (percentage of seats filled by passengers) deteriorated to 80.0% from 81.6% in the prior-year month. Passenger revenue per available seat mile (PRASM) rose 1% year over year last month.

For the first eleven months of 2012, Southwest generated RPMs of 94.7 billion (down 1% year over year) and ASMs of 117.7 billion (down 0.3% year over year), while load factor was 80.5%, down 50 basis points.

Dallas, Texas based Southwest is the largest U.S. low-cost carrier that provides scheduled air transportation in the United States. The company primarily provides short-haul, high frequency, point-to-point and low-fare services serving more than 70 cities across states.

We expect the company to benefit from its cost leadership position, strong balance sheet, favorable cost-structure, flexibility, network optimization, fleet modernization, and increasing revenue initiatives. Along with these productive steps, Southwest is expected to report strong revenue and earnings growth in the coming quarters based on the All-New Rapid Rewards program and increased ancillary product offerings such as EarlyBird check-in, unaccompanied minor travel and pet fees.

Nevertheless, high operating costs like fuel, maintenance, salaries, wages and airport fees, new advertising policy along with intense competition from other strong industry players such as United Continental Holdings Inc. (UAL - Analyst Report) and Delta Air Lines Inc. (DAL - Analyst Report) and heavy investments are expected to limit the earnings upside potential of the stock. Moreover, we believe that Southwest will take some more time to fully reap the advantages of the AirTran Holdings acquisition.

We maintain our long-term Neutral recommendation on the company. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.
 

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