Higher Fares Give Southwest’s Results A Lift
Southwest (NYSE:LUV) posted 2% year-over-year growth in its fourth quarter revenues on higher passenger fares. The carrier’s fourth quarter earnings, excluding the impact of special items, were $0.09 per share, comparable to its year-ago levels. [1]
For full year 2012, Southwest’s revenues grew 3% y-o-y to $17.1 billion, but its operating income declined 6% y-o-y to $623 million on higher integration expenses and maintenance costs. [1]
For 2013, the carrier forecasts 6% y-o-y growth in revenues and $400 million in synergies from the AirTran integration. [1]
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Higher passenger fares offset the impact from lower passenger traffic
Southwest lowered its flying capacity in the fourth quarter, in-line with the demand environment in the domestic U.S. market. Stiff competition from other carriers also saw its load factor (percentage of occupied seats in a flight) decline 0.9 points y-o-y to 79.6%. As a result, passenger traffic declined 1.4% y-o-y. [1]
However, this decline in passenger traffic was more than offset by higher passenger fares. The average passenger fare for the carrier increased 5.4% y-o-y to $148.02 in the fourth quarter. [1] As a result, passenger revenues increased for the period.
Outlook for 2013
In 2013, Southwest targets to grow its top-line by $1.1 billion or 6% year-over-year. [1] It plans to achieve this through not only higher passenger revenues but also higher incremental revenues which are generated from the sale of frequent flier miles and premium boarding positions and access to on-board WiFi and live television. Additionally, the carrier anticipates to realize $400 million in synergies from AirTran integration which will help its profits.
Southwest will also continue to modernize its fleet in 2013. It will take delivery of 20 Boeing 737-800 aircraft during the year and use these to replace aging aircraft in its fleet. [1] This will help save on maintenance, repair and fuel costs.
We currently have a stock price estimate of $9.54 for Southwest, approximately 15% below its current market price. We are in the process of incorporating fourth quarter earnings and will update our analysis shortly.
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