Southwest’s Profits Rise On Lower Fuel Costs & Gains From Fleet Modernization

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Southwest Airlines (NYSE:LUV) reported strong growth in its first quarter results on lower fuel costs and gains from fleet modernization. The carrier’s first quarter revenues rose by 2% annually to $4.2 billion even as severe winter storms during January and February reduced its revenues by around $45 million. The carrier cancelled approximately 7,500 flights during the quarter due to severe winter weather, but it is commendable that it could still post this growth in its top line. Southwest’s first quarter profits also rose to $152 million, from $59 million in the year ago period, on lower fuel costs and gains from fleet modernization. [1] We figure the solid demand environment for flights in the domestic U.S. market also played a key role in enabling Southwest to post this strong growth in its first quarter results.

See our complete analysis of Southwest here. We are in the process of incorporating the first quarter results and shall update our analysis shortly.

Stable Demand Environment & Lower Fuel Costs Drive First Quarter Results

In the first quarter, even as severe weather forced many flight cancellations, the overall demand for air travel remained resilient. For Southwest, this solid demand environment raised occupancy rates by 2.2 points annually to 79.3% in the first quarter. [1] This represents the average number of seats that were occupied by passengers across all Southwest flights during the first quarter.

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Additionally, lower fuel costs were instrumental in growing Southwest’s first quarter profits. During the quarter, crude oil prices remained stable and Southwest, on added gains from its fuel hedges incurred lower jet fuel prices on a year-over-year basis. As a result, the carrier’s fuel expenses declined by $143 million annually in the first quarter. [1] This played a big part in growing Southwest’s first quarter profits to $152 million, from $59 million in the same period last year. During its earnings presentation, Southwest also said that this fuel price stability could continue through 2014 and we figure if that happens then the carrier’s results will likely see strong growth in the remaining three quarters of this year.

Ongoing Fleet Modernization Also Aided Growth

Southwest’s first quarter results also benefited from its ongoing fleet modernization. Through the end of the first quarter, Southwest added 54 Boeing 737-800s to its airplane fleet. These airplanes with their higher seating capacity are enabling the carrier to fly more passengers out of high density slot controlled airports such as New York and Washington. As a result, they are adding to the carrier’s revenue growth. At the same time, these -800s are lowering Southwest’s costs as they are more efficient compared to many other older planes in its fleet. Southwest is also benefiting from the ongoing transition of Boeing 717s in its fleet to Delta. These 717s are being replaced with 737s which are larger and therefore generate revenue opportunities at similar per seat costs. In addition to adding the larger -800s to its fleet and transitioning 717s to Delta, Southwest is also gaining from retirement of 737 Classics from its fleet that are old and have much lower fuel efficiency levels. We figure these ongoing fleet initiatives also supported revenue and profit growth in Southwest’s first quarter results.

In the coming months Southwest will be beginning flights from many key airports. The carrier will start flying from the slots (specific take-off and landing timings) it recently acquired at Washington Reagan Airport and New York LaGuardia Airport. These slots were vacated by American as a result of the merger approval conditions laid by the Justice Department. Southwest will also start additional flights from the Dallas Love Field Airport as a result of repeal of the Wright Amendment. And, beginning in July, Southwest will fly international routes. Thus, in the coming months, Southwest will begin service on many key routes and we figure with lower costs and a solid demand environment, the carrier in 2014 could better its 2013 profits of $754 million. [2]

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Notes:
  1. Southwest’s 2014 Q1 earnings form 8-K, April 24 2014, www.swaamedia.com [] [] []
  2. Southwest’s 2013 Q4 earnings form 8-K, January 23 2014, www.swamedia.com []