Southwest & JetBlue Earnings Preview: What We’re Watching

by Trefis Team
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Southwest Airlines
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    Quick Take 

  • In the first quarter, Southwest’s passenger traffic increased marginally on slightly higher flying capacity. This will drive growth in its passenger revenues.
  • In addition, the carrier’s profits are expected to benefit from its ongoing fleet modernization and higher synergies from the AirTran integration.
  • JetBlue has raised its passenger traffic by nearly 8% in the first quarter on significant expansion in flying capacity.
  • However, its growth from higher passenger traffic will likely be partially offset from increased maintenance costs.
  • All in all, both Southwest and JetBlue will likely post a good first quarter.

Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) will announce their first quarter earnings Thursday, April 25. These two leading low-cost carriers are coming off a good last year in which they posted strong growth in their profits. In 2012, Southwest had increased its profits by 136% year-over-year to $421 million on higher fares while JetBlue raised its profits by 49% year-over-year to $128 million on higher passenger traffic. [1] [2]

Southwest’s Earnings Preview

In the first quarter, Southwest increased its flying capacity marginally to drive growth in its passenger traffic, which grew 0.3% year-over-year. [3] Additionally, we anticipate that the yield levels of the carrier, which provides a measure of passenger fares, will remain at least stable to grow its overall passenger revenues. In the previous quarter, Southwest had benefited from its fare hikes implemented during 2012, to realize 5.4% higher average year-over-year fares. [4] In light of no major downward fare revisions from the carrier during the first quarter, it is likely that it will continue to realize the benefits from its fare hikes of last year, to sustain its yield levels.

We currently have a stock price estimate of $12.17 for Southwest, approximately 5% below its current market price.

See our complete analysis of Southwest

Further, Southwest’s profits in the first quarter are expected to benefit from its ongoing fleet restructuring, which aims to reduce its costs through induction of 737-800s, retrofit 737-700s with Evolve seating and replace older planes with newer ones. (See How Is Southwest’s Fleet Modernization Aiding Its Growth?)

The carriers profits are also not expected to be impacted significantly from fuel costs as crude oil prices did not see any significant spikes during the first quarter. In 2012, fuel costs constituted over 37% of Southwest’s overall operating expenses; thus, the carrier’s profits are vulnerable to any major moves in crude oil prices. [1] The chart below shows Southwest’s fuel expenses as a percentage of its passenger revenues.

Southwest also anticipates to realize AirTran integration synergies of around $400 million in 2013, up from $142 million in 2012. [4] These higher synergies will also contribute to growth in its profits. All in all, Southwest will likely post a good first quarter.

JetBlue’s Earnings Preview

On the other hand, JetBlue added significant flying capacity in the first quarter with a focus on U.S.-Caribbean routes and markets connecting Boston. The carrier increased its flying capacity by 6.3% year-over-year, which increased its passenger traffic by nearly 8% year-over-year. [5] This significantly higher passenger traffic will drive growth in its revenues in the first quarter.

We currently have a stock price estimate of $7.30 for JetBlue, approximately in line with its current market price.

See our complete analysis of JetBlue here

On the flip side, we anticipate JetBlue’s growth from higher passenger traffic to be partially offset from growth in its maintenance and aircraft repair costs. JetBlue currently operates one of the youngest aircraft fleet among U.S. airlines. The average age of its aircraft was 6.7 years at the end of 2012; however, with increasing age its aircraft require heavier and more frequent maintenance checks. [2] In addition, rising flying capacity through operation of a higher number of aircraft also contributes to growth in the carrier’s maintenance costs.

Last year, JetBlue’s maintenance and aircraft repair costs had increased by nearly 50% on a year-over-year basis. [2] Though we anticipate the increase in these costs to be more moderate in 2013, they will nonetheless continue to impact the growth in JatBlue’s profits.

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Notes:
  1. Southwest 2012 10-K, February 26 2013, www.swamedia.com [] []
  2. JetBlue’s 2012 10-K, February 21 2013, www.jetblue.com [] [] []
  3. Southwest’s March operational results, April 5 2013, www.swamedia.com []
  4. Fourth quarter and full year 2012 earning results, January 24 2013, www.swamedia.com [] []
  5. JetBlue’s March operational performance, April 10 2013, www.jetblue.com []
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