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Southwest Airlines (LUV) Rides on Air Travel Demand, Costs Ail

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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). Continued recovery in air-travel demand (mainly on the leisure front) bodes well for Southwest Airlines. In the fourth quarter of 2023, air traffic, measured in revenue passenger miles, increased 13.7% year over year to 35.58 billion. Capacity or available seat miles (ASMs) climbed 21.4% year over year to 45.51 billion. Load factor (percentage of seats filled by passengers) came in at 78.2%. Anticipating the trend to continue, for first-quarter 2024, ASMs are estimated to improve 10% from the year-ago reported figure. For 2024, Southwest expects capacity to improve 6% from the 2023 level.

Southwest Airlines' liquidity position raises optimism in the stock. At the end of the fourth quarter of 2023, the carrier’s cash and cash equivalents stood at $9,288 million, higher than the long-term debt (less current maturities) of $7,978 million, implying that the company has enough cash to meet its debt obligations.

On the flip side, high fuel costs due to an escalation in oil prices are a bane and have hurt Southwest Airlines' fourth-quarter results. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally hurt LUV’s bottom line in the fourth quarter. In the fourth quarter, economic fuel price per gallon was $2.78, up 7.9% from third-quarter 2023 levels. LUV expects first-quarter 2024 economic fuel cost per gallon in the range of $2.70-$2.80. For 2024, economic fuel costs per gallon are estimated to be between $2.55 and $2.65.

Apart from the increase in fuel costs, a rise in labor and airport costs is also likely to dent bottom-line growth by resulting in a spike in operating expenses.

Zacks Rank and Stocks to Consider

LUV currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Zacks Transportation sector are GATX Corporation (GATX - Free Report) and SkyWest, Inc. (SKYW - Free Report) . Each stock presently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

GATX has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the last four quarters (missing the mark in the remaining one). The average beat is 16.47%.

The Zacks Consensus Estimate for 2024 earnings has been revised 6.1% upward over the past 90 days. GATX has an expected earnings growth rate of 3.68% for 2024. Shares of GATX have gained 18% in the past year.

SkyWest's fleet-modernization efforts are commendable. The Zacks Consensus Estimate for SKYW’s 2024 earnings has improved 6.3% over the past 90 days. Shares of SKYW have surged 205.3% in the past year.

SKYW has an expected earnings growth rate of more than 100% for 2024. SKYW delivered a trailing four-quarter earnings surprise of 128.02%, on average.

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