Southwest And JetBlue’s Earnings Preview: Will Gains From Capacity Expansion Offset Rising Costs?

Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) will announce their third quarter earnings Thursday, October 24, and Tuesday, October 29, respectively. These two low cost carriers are coming off a mixed first half. In the first quarter, the carriers posted growth in their top lines on higher passenger traffic driven by capacity expansion. However, in the second quarter, their top line growth driven by capacity expansion was more than offset by rising costs.

In the third quarter, we anticipate both Southwest and JetBlue to post strong growth in their top lines driven by gains from capacity expansion. However, the carriers’ profits will likely get impacted from rising costs. While, Southwest’s third quarter profits will face pressure from AirTran’s integration expenses, JetBlue’s third quarter profits will get impacted from sharply rising maintenance costs.

Southwest’s Earnings Preview

Southwest raised its flying capacity by 1% annually in the third quarter. ^[1] The carrier’s revenue collection per unit its flying capacity, which provides a measure of passenger fares, also grew in the quarter, from its year ago level. This means that Southwest will post higher passenger revenues in the third quarter, compared to the same period last year.

We currently have a stock price estimate of $14.24 for Southwest, around 10% below its current market price.

See our complete analysis of Southwest here

Third Quarter Profits Will Be Impacted From AirTran Integration Costs

Southwest’s expenses related to its integration of AirTran, which was acquired a couple of years back, will impact its third quarter profits. The carrier anticipates to incur a total of $550 million in AirTran integration expenses, and by the end of the last quarter, it had incurred $363 million of these. ^[2] Thus, Southwest’s profits over the next few quarters including the third quarter will continue to get impacted from these integration expenses.

On the bright side, these integration costs are expected to be offset in the long term from the synergies arising from the acquisition. Last year, Southwest realized $142 million in synergies arising out of this transaction and in the current year it expects to realize $400 million in AirTran acquisition synergies. ^[3]

JetBlue’s Earnings Preview

Separately, during the third quarter, JetBlue continued its strategy of raising flying capacity to drive growth in passenger traffic and top line. The carrier raised its flying capacity by 5.1% annually, which lifted its passenger traffic by around 5.4% from the last year. ^{[4] [5]} The carrier’s gains from higher passenger traffic will be supported by growth in its unit revenues (amount collected from passengers per seat for a mile of flight) which provides a measure of passenger fares. In all, JetBlue will post strong growth in passenger revenues in the third quarter.

We currently have a stock price estimate of $7.20 for JetBlue, approximately in line with its current market price.

See our complete analysis of JetBlue here

Rising Maintenance Costs Will Hit Third Quarter Profits

Additionally, we anticipate JetBlue’s third quarter profits to continue to get impacted from sharply rising aircraft maintenance and repair costs. In the previous quarter, the carrier’s repair costs rose by 30% annually – surpassing single-digit growth in its top line. ^[6] Even though the rise in these costs is expected to temper in the third quarter, it could again exceed top line growth to squeeze margins.

The issue arises from the aging JetBlue fleet that now requires more frequent, heavier maintenance checks and repairs. At the end of 2012, the average age of the carrier’s fleet was around 6.7 years – the youngest among the six largest airlines in the U.S.. ^[7] However, with increasing age, these new aircraft require greater checks and repairs which will increase JetBlue’s maintenance costs.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Southwest’s September traffic results, October 7 2013, www.swamedia.com [↩]
2. Southwest’s Q2 2013 earnings 10-Q, July 31 2013, www.swamedia.com [↩]
3. Southwest’s Q4 and full year 2012 earning results, January 24 2013, www.swamedia.com [↩]
4. JetBlue’s September traffic results, October 10 2013, www.jetblue.com [↩]
5. JetBlue’s June traffic results, July 11 2013, www.jetblue.com [↩]
6. JetBlue’s Q2 2013 earnings results, July 30 2013, www.jetblue.com [↩]
7. JetBlue’s 2012 10-K, February 21 2013, www.jetblue.com [↩]