Southwest Is Poised For Growth As Fuller Planes Lift Its Third Quarter Results

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Southwest (NYSE:LUV) recently got free from flight restrictions imposed on it by the Wright Amendment. As a result, since October 13, the low-cost carrier has launched nonstop flights to several destinations from its home airport, Dallas Love Field. So far, the carrier has launched nonstop flights from Dallas Love Field to seven destinations – Denver, Chicago (Midway), Baltimore, Washington D.C., Las Vegas, Los Angeles and Orlando. In early November, the carrier will launch nonstop flights to eight more destinations and in January next year, it will launch nonstop flights from Dallas Love Field to two more destinations. [1] We figure this sudden increase in the number of Southwest flights in the Dallas market, in which the carrier is very well established, will drive its near term growth.

Separately, at its third quarter earnings presentation, Southwest said that bookings for November and December are good and that it is seeing no impact from Ebola on advance booking rates. In early October, all airline stocks including Southwest fell sharply due to mounting Ebola concerns, and we at the time wrote that this sudden sell-off seemed to be factoring in a worst-case scenario, which was not likely. In line with our expectations, airline stocks have recovered through the past 2-3 weeks. We currently have a stock price estimate of $35 for Southwest, marginally above its current market price.

See our complete analysis of Southwest here

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Solid Demand For Flights & Lower Fuel Costs Lift Southwest’s Q3 Results

Southwest reported solid growth in its third quarter results on higher demand for flights in the U.S.. Even though the carrier expanded its flying capacity just marginally, its occupancy rate (percentage of seats occupied by passengers in a flight) rose by about 3.5 points to over 84% in the third quarter. Fuller flights coupled with slightly higher average passenger fare lifted Southwest’s third quarter revenue by nearly 6% annually to $4.8 billion. [2]

Lower crude oil prices during the third quarter also helped lower Southwest’s fuel costs, which constitute nearly a third of its overall operating costs. Together, the higher revenue and lower fuel cost increased Southwest’s third quarter profit (excluding special items) by nearly 62% annually to $382 million. [2]

Southwest Is Well Poised For Growth

Looking ahead, as Southwest takes over the remaining international routes being serviced by AirTran currently and completes integrating AirTran by 2014-end, we figure the carrier will be able to increase its focus on growth. Accordingly, Southwest could begin expanding its flying capacity at higher rates in 2015. The carrier has near term growth opportunities out of Dallas Love Field and long term growth opportunity in near international markets, which currently constitute a very small portion of its overall service network. This growth oriented capacity stance will in turn boost Southwest’s passenger traffic, growing its results in coming months.

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Notes:
  1. Southwest Airlines celebrates Love Field’s freedom to fly, October 13 2014, www.swamedia.com []
  2. Southwest’s Q3 2014 earnings form 8-K, October 23 2014, www.swamedia.com [] []