Southwest Is Well Positioned For Growth As Higher Passenger Fares Lift Second Quarter Results

Southwest Airlines (NYSE:LUV) posted strong growth in its second quarter results on fare hikes and higher passenger traffic. The low cost carrier’s revenues rose by 8% annually to $5 billion, and its profits more than doubled to $465 million in the second quarter. ^[1] Even though Southwest did not expand its flying capacity in the second quarter, its passenger traffic rose by over 2% annually driven by higher demand for air travel in the domestic U.S. market. However, the solid growth in the carrier’s results was primarily driven by a sharp rise in its passenger fares. On a year-over-year basis, Southwest’s average passenger fare rose by nearly 8% annually to $163 in the second quarter, reflecting that the carrier hiked its fares on many routes across its system over the past year. ^[1] This sharp growth in its passenger fares in turn raised Southwest’s second quarter top line at a solid rate of 8% annually.

The carrier’s second quarter profits gained from its ongoing fleet modernization. Southwest is adding Boeing 737-800s to its airplane fleet. These airplanes with their higher cost efficiency standards, compared with many older airplanes in Southwest’s fleet, are lowering the carrier’s costs. At the same time, Southwest is benefiting from the ongoing transition of Boeing 717s from its airplane fleet to Delta. These 717s are being replaced with 737s, which are larger, and therefore generate revenue opportunities at similar per seat costs. We figure these fleet initiatives supported profit growth in Southwest’s second quarter results.

We are in the process of incorporating Southwest’s second quarter earnings in our analysis and shall update the same shortly.

See our complete analysis of Southwest here

Repeal of Wright Amendment & Acquisition Of Washington Slots Will Drive Future Growth

Looking ahead, Southwest forecasts its flying capacity to remain flat in 2014, compared with 2013. This is primarily due to the removal of 717s from the carrier’s fleet, while the replacement rate of these airplanes with 737s is not allowing the carrier to expand its overall capacity. Nonetheless, with the incorporation of the larger -800s, which have higher seating capacity, Southwest is able to fly more passengers out of high density slot controlled airports such as New York and Washington.

Southwest’s growth in the second half of 2014 will be supported by a variety of factors. Primary among these are the repeal of the Wright Amendment and acquisition of additional slots at Washington Reagan Airport. The repeal of the Wright Amendment will allow Southwest to increase its flights from the Dallas Love Field Airport beginning October 13. We figure as Southwest already has an established presence in the Dallas market, it will find it easier to fill up the new flights from this airport. On the other hand, it typically takes a while before an airline is able to achieve healthy occupancy rates on its flights in a new market. Additionally, from earlier this month, Southwest started international services with flights to Aruba; Montego Bay, Jamaica; and Nassau in The Bahamas. The carrier plans to convert the remaining international flights of AirTran to Southwest by the end of this year and, with the acquisition of slots vacated by American Airlines at Washington Reagan National Airport, Southwest is ready to triple its flying capacity from this airport beginning November. ^[1] In all, we figure these unique developments will enable Southwest to continue to drive growth in its results in the second half of 2014.

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1. Southwest’s 2014 Q2 earnings form 8-K, July 28 2014, www.swamedia.com [↩] [↩] [↩]