Southwest, JetBlue and Alaska’s Earnings Preview: Solid Demand For Air Travel Will Likely Lift Results

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Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU) and Alaska (NYSE:ALK) will announce their third quarter results Thursday, October 23. These carriers are coming off a good first half in which they reported healthy growth in their revenue and profit on higher demand for air travel. We anticipate these carriers to retain their growth momentum in the third quarter as the demand environment has remained healthy, allowing these carriers to continue to expand their flying capacities. In addition, lower global crude oil prices during the quarter will likely provide some tailwind to the third quarter profit of these carriers.

Southwest’s Q3 Earnings Preview

In the third quarter, Southwest expanded its flying capacity marginally, but the solid demand for air travel in the domestic market raised the carrier’s average occupancy rate (percentage of seats occupied by revenue paying passengers) by around 3.5 points to over 84%, from under 81% in the same period last year. [1] We figure this sharp growth in occupancy rate coupled with marginally higher flying capacity will significantly raise Southwest’s third quarter passenger traffic.

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In addition, in the second quarter, we saw Southwest’s average passenger fare rise by 8% annually to $163, reflecting that the carrier hiked its fares on many routes across its system over the past year. [2] We figure gains from these past passenger fare hikes will likely continue to lift Southwest’s average passenger fare in the third quarter. Higher passenger fare and higher passenger traffic will in turn lift Southwest’s third quarter top line.

On the margin front, Southwest will gain from its ongoing fleet modernization. The carrier 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. In addition, Southwest is benefiting from the ongoing transition of Boeing 717s from its airplane fleet to Delta’s fleet. These 717s are being replaced by larger 737s generating revenue opportunities at similar per seat costs. In our opinion, these fleet initiatives will help lower Southwest’s costs supporting growth in its second quarter profit.

All in all, Southwest looks set to post a solid third quarter.

We currently have a stock price estimate of $34 for Southwest, around 4% ahead of its current market price.

See our complete analysis of Southwest here

JetBlue’s Q3 Earnings Preview

The solid demand for air travel also raised JetBlue’s average occupancy rate by around 1 point in the third quarter. This rate of increase in JetBlue’s occupancy rate is below that of the increase in Southwest’s occupancy rate, as JetBlue added flying capacity to its system at a much higher rate. During the third quarter, JetBlue raised its flying capacity by about 4% annually, compared with about a 1% year-over-year hike in Southwest’s flying capacity. [3] However, despite the lower rate of an increase in occupancy rate, JetBlue’s overall passenger traffic rose by over 5% annually in the third quarter driven by the sharp rise in its flying capacity. So, we figure JetBlue too will likely post strong growth in its third quarter top line.

Additionally, we see no major cost increases for JetBlue in the third quarter. The carrier’s profit might see some tailwind from sale of its LiveTV subsidiary. In July, JetBlue had said that it anticipates growth in costs to moderate with divestiture of LiveTV, which provides in-flight entertainment options. On the whole, like Southwest, JetBlue looks set to post a good third quarter.

We currently have a stock price estimate of $12 for JetBlue, around 5% ahead of its current market price.

See our complete analysis of JetBlue here

Alaska’s Q3 Earnings Preview

In the third quarter, Alaska raised its flying capacity by about 8% annually – the highest rate of capacity addition for any major U.S. carrier. This again testifies to the solid demand for air travel in the domestic U.S. market. This aggressive capacity expansion by Alaska raised its third quarter passenger traffic also by about 8% annually. [4] Additionally, Alaska will likely see strong growth in its ancillary revenue driven by rate hikes that the carrier implemented in its baggage fee and ticket change fee in October last year. So, Alaska too will likely post growth in its top line in the third quarter on higher passenger traffic and higher ancillary revenue.

We will however be noting the trend in Alaska’s third quarter unit revenue – amount collected from each passenger per seat for a mile of flight. In the second quarter, growth in Alaska’s unit revenue had lagged other carriers due to rising competition that the carrier faced from Delta in its core Seattle market. We figure Delta’s rapid expansion at Seattle since the start of 2014 has hit Alaska’s pricing ability in this market, which provides a significant portion of Alaska’s overall passenger traffic. Till last year, Alaska dominated the Seattle market, and therefore had considerable pricing power in this market. But, beginning 2014, with Delta raising its number of flights at Seattle in order to establish the city as its international gateway to Asia, Alaska’s pricing ability in this market has declined. So, we will be noting how Alaska’s unit revenue trends in the third quarter. A decline in the carrier’s unit revenue could temper gains from its higher passenger traffic.

On the margin front, we expect Alaska to gain from its past cost cutbacks. (See How successful has Alaska been in lowering its costs?) So, Alaska too will likely post a good third quarter.

We currently have a stock price estimate of $48.20 for Alaska, around 5% ahead of its current market price.

See our complete analysis of Alaska Air Group here

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Notes:
  1. Southwest’s September traffic report, October 8 2014, www.swamedia.com []
  2. Southwest’s 2014 Q2 earnings form 8-K, July 28 2014, www.swamedia.com []
  3. JetBlue’s July investor update, July 24 2014, www.jetblue.com []
  4. Alaska’s September passenger traffic & Q3 forecast update, October 2 2014, www.alaskaworld.com []