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Southwest Airlines (LUV) Sees Air Travel Demand, Cost Woes Stay

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Southwest Airlines Co.’s (LUV - Free Report) top line is benefiting from continued recovery in air-travel demand (mainly on the leisure front).

The company recently reported third-quarter 2022 earnings of 50 cents per share, which outpaced the Zacks Consensus Estimate of 41 cents. Moreover, the bottom line improved by more than 100% year over year.

Revenues of $6,220 million lagged the Zacks Consensus Estimate of $6,228.1 million but improved 32.9% year over year on the back of an improvement in leisure demand and close-in bookings in September 2022.

Southwest Airlines Co. Price, Consensus and EPS Surprise

Southwest Airlines Co. Price, Consensus and EPS Surprise

Southwest Airlines Co. price-consensus-eps-surprise-chart | Southwest Airlines Co. Quote

How is Southwest Airlines Doing?

Continued recovery in air-travel demand (mainly on the leisure front) has been aiding Southwest Airlines’ top-line performance. Notably, in the third quarter of 2022, air traffic, measured in revenue passenger miles, rose 7.2% year over year to 33.53 billion. The company’s top line also benefitted from its loyalty program, including elevated point redemptions for flights and incremental revenues from its co-brand credit card agreement, along with increased upgraded Boarding take-rates following the new digital self-service launch in August 2022.

Anticipating the trend to continue, Southwest Airlines’ management expects fourth-quarter 2022 operating revenues to register 13-17% growth compared with 2019.

LUV’s liquidity position further raises optimism in the stock. At the end of the third quarter, the carrier’s cash and cash equivalents stood at $10,443 million, higher than the long-term debt (less current maturities) of $8,315 million, implying that the company has enough cash to meet its debt obligations.

Despite the aforementioned tailwinds, escalating fuel prices continue to remain a concern. In third-quarter 2022, fuel cost per gallon (inclusive of fuel tax: economic) surged 68.7% year over year to $3.39. Economic fuel costs per gallon are expected between $3.15 and $3.25 for the fourth quarter. For 2022, economic fuel costs per gallon are now estimated between $3.05 and $3.15 (prior view: $2.95 - $3.05).

Apart from the increase in fuel costs, the rise in labor and airport costs are also likely to dent bottom-line growth by resulting in a spike in operating expenses. Due to an increase in labor and airport costs, as well as lower productivity levels, LUV expects consolidated unit cost or cost per available seat mile (CASM), excluding fuel, oil and profit-sharing expenses, and special items, to increase 14-18% in the fourth quarter of 2022 from the comparable period in 2019. For 2022, CASM, excluding fuel, oil and profit-sharing expenses, and special items, is expected to rise 14-15% (prior view: 12-16%) from 2019. High capex may also play a spoilsport.

Softness in managed business revenues continues. Managed business revenues declined 28% in third-quarter 2022 from the comparable 2019 level. The metric softened in July and August compared with June 2022 and experienced sequential improvement from August to September. Managed business revenues fell 25% in September from the comparable 2019 level. For fourth-quarter 2022, managed business revenues are expected to decline in the 20-25% band from fourth-quarter 2019.

Zacks Rank & Stocks to Consider

Southwest Airlines currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the broader Zacks Transportation sector are Air Transport Services Group (ATSG - Free Report) , Ryder Systems (R - Free Report) and Teekay Tankers Ltd. (TNK - Free Report) ), each currently carrying a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ATSG has an expected earnings growth rate of 34.34% for the current year. ATSG delivered a trailing four-quarter earnings surprise of 17.78%, on average.

The Zacks Consensus Estimate for ATSG’s current-year earnings has improved 5.2% over the past 90 days.

Ryder has an expected earnings growth rate of 67.12% for the current year. R delivered a trailing four-quarter earnings surprise of 30.13%, on average.

The Zacks Consensus Estimate for R’s current-year earnings has improved 6.9% over the past 90 days. Shares of R have gained 7.2% over the past year.

Teekay Tankers has an expected earnings growth rate of 214.91% for the current year. TNK delivered a trailing four-quarter earnings surprise of 42.23%, on average. Teekay Tankers has a long-term expected growth rate of 3%.

The Zacks Consensus Estimate for TNK’s current-year earnings has improved 95% over the past 90 days. Shares of TNK have soared 182.5% over the past year.

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