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Southwest Posts Positive Surprise

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Leading U.S. low-cost carrier Southwest Airlines Co. (LUV - Free Report) reported better-than expected first quarter 2013 results, thanks to fleet restructuring, introduction of various customer friendly programs and the effects of the AirTran integration.

The company’s adjusted earnings of 7 cents per share beat the Zacks Consensus Estimate of 3 cents. The results improved considerably from the prior-year quarter loss of 2 cents per share.

Quarterly revenues moved up 2.3% year over year to $4.1 billion and were in-line with the Zacks Consensus Estimate of $4.1 billion. On an annualized basis, Passenger, Freight and Other revenues increased 2.3%, 5.4% and 2.0%, respectively.

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, increased just 0.3% year over year to 23.8 billion in the first quarter. Capacity or available seat miles increased 0.6% to 30.8 billion, while load factor (percentage of seats filled with passengers) dipped 20 basis points year over year to 77.1%. Passenger revenue per available seat mile (PRASM) inched up 1.8% year over year.

Operating Expenses & Operating Income

For the first quarter, non-GAAP operating income was $112 million, up from $10 million in the year-ago quarter. Total operating expenses, excluding special items, decreased 0.2% year over year to $3.9 billion. Fuel price (economic) accounted for $3.29 per gallon, down from $3.44 in the year-ago quarter. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, increased 3.4% to 8.26 cents.


At the end of the first quarter, Southwest had $1.3 billion in cash and short-term investments. The company currently has replaced the previous $800 million credit facilities with a $1.0 billion five-year unsecured revolving credit facility. The company had long-term debt (including current portion) of $3.0 million, representing debt-to-capitalization ratio of 30.0%.

In the first quarter, Southwest generated operating cash flow of $983 million and capital expenditures were $534 million. The company repurchased 9 million shares for approximately $115 million and paid total dividend of $15 million. As of Mar 31, 2013, return on invested capital (before taxes and excluding special items) was 8%.


Based on current traffic trends, Southwest expects unit revenues to grow again in the coming months. Fuel price (economic) in the second quarter is estimated at $3.00 to $3.05 per gallon.

Other Airline Stocks

Delta Air Lines (DAL - Free Report) reported first-quarter 2013 adjusted earnings of 10 cents, surpassing the Zacks Consensus Estimate of 7 cents. The results also improved considerably from the year-ago adjusted loss of 5 cents. Revenues nudged up 1% year over year to $8.50 billion but fell short of the Zacks Consensus Estimate of $8.51 billion.

Our Take

Southwest – which carries the maximum number of U.S. passengers compared to any other player such as United Continental Holdings (UAL - Free Report) and JetBlue Airways (JBLU - Free Report) – currently holds a Zacks Rank #3, implying a Hold rating.

We believe that Southwest’s cost-cutting measures, fleet rightsizing, diversification into untapped territories, revenue management program and the launch of attractive service offerings will help it to register better results in the coming quarters.

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