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Here's Why Southwest Shares Ascend More Than 16% in 9 Months

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Shares of Southwest Airlines Co. (LUV - Free Report) have rallied 16.2% in the first nine months of 2019, significantly outperforming the industry’s 6% increase.

9-Month Price Performance


Reasons Behind the Price Appreciation

Despite reduced capacity from the Boeing 737 MAX grounding issues (Southwest has 34 MAX aircraft in its fleet, the largest among all U.S. carriers), the carrier’s passenger revenue trends have been impressive owing to strong demand for its services. Notably, passenger revenues inched up 2.9% year over year in the first six months of 2019. Moreover, the airline’s passenger revenue per available seat mile (PRASM) climbed 4.2% year over year in the first half of 2019. In the third quarter of 2019, operating revenue per available seat mile (RASM) is expected to increase in the 3-5% range year over year, courtesy of solid demand and higher passenger yields.

On another positive note, the Dallas, TX-based low-cost airline does not see much of an impact on third-quarter results from the 600 flight cancellations due to Hurricane Dorian. However, fellow airline players, namely Spirit Airlines, Inc. (SAVE - Free Report) and JetBlue Airways Corporation (JBLU - Free Report) are likely to see some sluggishness in third-quarter results from this natural calamity. With 768 flight cancellations due to the hurricane, Spirit  anticipates total revenue per available seat mile (TRASM) to dip 2.5-3.5% year over year while JetBlue expects RASM to either slide up to 2% or remain flat year over year. Delta Air Lines, Inc. (DAL - Free Report) too faced numerous flight cancellations in the wake of Hurricane Dorian but the natural disaster is not likely to take a significant toll on its third-quarter performance.

Modest fuel prices are another boon to the company’s prospects. Evidently, economic fuel costs have slipped 2.8% year over year in the first six months of 2019. Moreover, the carrier estimates the same in the range of $2.05-$2.15 per gallon in the third quarter of 2019, much lower than $2.25 reported in third-quarter 2018. The lower costs should support the bottom line as fuel expenses comprise a major chunk of airline expenditures.

The carrier’s measures to add shareholder value also positively impacted its share price movement. During the first half of 2019, Southwest returned $1.23 billion to its shareholders through buybacks ($950 million) and dividends ($276 million). In line with its shareholder-friendly attitude, this May, the company hiked its quarterly dividend by 12.5% to 18 cents per share. Additionally, the company’s board of directors approved a new share repurchase program worth $2 billion. Robust free cash flow generation ($1.7 billion in first-half 2019) is a major positive in this regard and should lead to an uptick in shareholder-friendly activities.

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