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Southwest Q3 Revenue Surges While Fuel Costs Test Margin Momentum
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Key Takeaways
LUV's Q3 revenues jumped 21.2% to $8.42 billion, driven by higher fares and record unit revenues.
LUV's fuel expenses surged 61.7% to $2.15 billion, creating a $1.08-per-share headwind to adjusted earnings.
LUV's adjusted operating margin rose to 5.4%, while Q4 fuel costs are projected at $4.55 per gallon.
Southwest Airlines Co. (LUV - Free Report) delivered a sharp third-quarter revenue acceleration as stronger fares and commercial initiatives lifted unit revenues to a record. The quarter also showed that the airline can expand margins even when capacity is roughly flat.
The counterweight is fuel. A steep rise in jet-fuel costs absorbed a large part of the operating improvement and remains a key variable for fourth-quarter earnings.
Southwest Airlines' Q3 Pricing Power Drove Record Revenue
Third-quarter operating revenues rose 21.2% year over year to a record $8.42 billion. Revenue per available seat mile increased 21.6% to an all-time high, while capacity declined 0.4%.
Pricing did most of the work. Average passenger fare climbed 26.9% to $231.69, even as revenue passengers carried fell 3.2% and traffic slipped 0.4%. That mix points to stronger revenue productivity rather than volume-led growth.
LUV’s Fuel Bill Absorbed Much of the Operating Upside
Aircraft fuel and related taxes surged 61.7% to $2.15 billion, while average fuel cost rose 63.3% to $3.92 per gallon. Fuel expense was $821 million higher than a year earlier and created a $1.08-per-share headwind to adjusted earnings.
The pressure is not unique to Southwest Airlines. Delta Air Lines (DAL - Free Report) reported a 62% year-over-year increase in adjusted fuel expense for its September quarter. United Airlines Holdings, Inc. (UAL - Free Report) assumes an average fuel price of about $4.80 per gallon for the fourth quarter, highlighting the broader industry's exposure to elevated energy costs.
Southwest Airlines' Margin Expansion Shows the Model Can Work
Adjusted operating income jumped to $452 million from $42 million a year earlier. Adjusted operating margin expanded 4.8 percentage points to 5.4%, while reported operating income rose to $379 million from $35 million.
Revenue growth outpaced the 16.3% increase in total operating expenses. That spread suggests Southwest Airlines’ commercial overhaul can create meaningful operating leverage when stronger pricing offsets cost inflation.
LUV’s Guidance Keeps Cost Pressure in Focus
For the fourth quarter, Southwest Airlines expects revenue per available seat mile to increase 19% to 21% year over year. Capacity is projected to rise 3% to 4%, while cost per available seat mile excluding fuel, special items and profit sharing is expected to increase 4% to 4.5%.
Fuel remains the larger swing factor. Management assumes an average fourth-quarter fuel cost of about $4.55 per gallon and projects adjusted earnings of 55 cents to 80 cents per share. Full-year adjusted earnings are expected at $2.60 to $2.85 per share.
Southwest Airlines' Ratings Temper the Post-Earnings Story
Southwest Airlines’ third-quarter results show that pricing, product changes and network actions are improving revenue quality and margins. The durability of that progress, however, will depend on whether revenue gains can continue absorbing fuel and nonfuel cost pressure.
LUV currently carries a Zacks Rank #4 (Sell). It has a Growth Score of A, Value Score of B, Momentum Score of B and VGM Score of A, indicating favorable characteristics across several investment styles.
Those Style Scores complement rather than override the Zacks Rank, which places greater weight on earnings estimate revisions over the near term. The Zacks Consensus Estimate for current-year earnings has declined 11.3% in the past four weeks, supporting a cautious near-term view despite the stronger operating performance.
View the Zacks #1 Rank List
Image: Bigstock
Southwest Q3 Revenue Surges While Fuel Costs Test Margin Momentum
Key Takeaways
Southwest Airlines Co. (LUV - Free Report) delivered a sharp third-quarter revenue acceleration as stronger fares and commercial initiatives lifted unit revenues to a record. The quarter also showed that the airline can expand margins even when capacity is roughly flat.
The counterweight is fuel. A steep rise in jet-fuel costs absorbed a large part of the operating improvement and remains a key variable for fourth-quarter earnings.
Southwest Airlines' Q3 Pricing Power Drove Record Revenue
Third-quarter operating revenues rose 21.2% year over year to a record $8.42 billion. Revenue per available seat mile increased 21.6% to an all-time high, while capacity declined 0.4%.
Southwest Airlines Co. Revenue (TTM)
Southwest Airlines Co. revenue-ttm | Southwest Airlines Co. Quote
Pricing did most of the work. Average passenger fare climbed 26.9% to $231.69, even as revenue passengers carried fell 3.2% and traffic slipped 0.4%. That mix points to stronger revenue productivity rather than volume-led growth.
LUV’s Fuel Bill Absorbed Much of the Operating Upside
Aircraft fuel and related taxes surged 61.7% to $2.15 billion, while average fuel cost rose 63.3% to $3.92 per gallon. Fuel expense was $821 million higher than a year earlier and created a $1.08-per-share headwind to adjusted earnings.
The pressure is not unique to Southwest Airlines. Delta Air Lines (DAL - Free Report) reported a 62% year-over-year increase in adjusted fuel expense for its September quarter. United Airlines Holdings, Inc. (UAL - Free Report) assumes an average fuel price of about $4.80 per gallon for the fourth quarter, highlighting the broader industry's exposure to elevated energy costs.
Southwest Airlines' Margin Expansion Shows the Model Can Work
Adjusted operating income jumped to $452 million from $42 million a year earlier. Adjusted operating margin expanded 4.8 percentage points to 5.4%, while reported operating income rose to $379 million from $35 million.
Revenue growth outpaced the 16.3% increase in total operating expenses. That spread suggests Southwest Airlines’ commercial overhaul can create meaningful operating leverage when stronger pricing offsets cost inflation.
LUV’s Guidance Keeps Cost Pressure in Focus
For the fourth quarter, Southwest Airlines expects revenue per available seat mile to increase 19% to 21% year over year. Capacity is projected to rise 3% to 4%, while cost per available seat mile excluding fuel, special items and profit sharing is expected to increase 4% to 4.5%.
Fuel remains the larger swing factor. Management assumes an average fourth-quarter fuel cost of about $4.55 per gallon and projects adjusted earnings of 55 cents to 80 cents per share. Full-year adjusted earnings are expected at $2.60 to $2.85 per share.
Southwest Airlines' Ratings Temper the Post-Earnings Story
Southwest Airlines’ third-quarter results show that pricing, product changes and network actions are improving revenue quality and margins. The durability of that progress, however, will depend on whether revenue gains can continue absorbing fuel and nonfuel cost pressure.
LUV currently carries a Zacks Rank #4 (Sell). It has a Growth Score of A, Value Score of B, Momentum Score of B and VGM Score of A, indicating favorable characteristics across several investment styles.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Those Style Scores complement rather than override the Zacks Rank, which places greater weight on earnings estimate revisions over the near term. The Zacks Consensus Estimate for current-year earnings has declined 11.3% in the past four weeks, supporting a cautious near-term view despite the stronger operating performance.