Capacity Expansion To Boost Southwest’s Fourth Quarter Results
Southwest (NYSE:LUV) will announce its fourth quarter and full year 2014 results on Thursday, January 22. The low-cost carrier has had a phenomenal 2014 in which it started international service and won rights to expand at the high value Washington Reagan and New York LaGuardia airports. These two major developments helped Southwest to grow its top line by 5% annually and nearly double its profit to $946 million in the first three quarters of 2014. [1] During the fourth quarter, the carrier came out of Wright Amendment restrictions, which had prevented it from expanding nonstop flights at the Dallas Love Field airport. Gains from this major development will drive growth in Southwest’s fourth quarter revenue and profit.
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Capacity Expansion Will Lift Q4 Revenue
On October 13, 2014, the Wright Amendment expired, enabling Southwest to fly nonstop to a greater number of destinations from its home airport, Dallas Love Field. This amendment had restricted Southwest’s nonstop flights from this airport for decades, and was consequently preventing the carrier from fully serving the Dallas market. As soon as this amendment expired, Southwest launched nonstop flights to about a dozen U.S. cities, witnessing occupancy rates (percentage of seats occupied by passengers in a flight) of over 90% on these new flights. [2] Typically, it takes several weeks for occupancy rates of an airline to reach even around 75-80% on new routes. However, as Southwest was already well established in the Dallas market, these new flights from the carrier have found many takers. This growth from the Dallas market enabled Southwest to expand its flying capacity by 2.4% year-on-year in the fourth quarter. The carrier’s system-wide occupancy rate also improved, lifting its fourth quarter passenger traffic by over 4% annually. [3] This higher passenger traffic will grow Southwest’s top line in the fourth quarter.
Fleet Modernization Will Help Expand Q4 Margin And Profit
Cost savings from fleet modernization will add to the top line growth, lifting Southwest’s fourth quarter profit. Southwest is adding Boeing 737-800s to its airplane fleet. These airplanes, with their higher cost efficiencies, are helping reduce the carrier’s overall operating costs. In addition, in the fourth quarter, Southwest took out the last of AirTran’s 717 from its active fleet. The carrier flew this last 717 on December 28. Southwest now flies an all Boeing 737 fleet, realizing cost savings on maintenance and personnel training that come with operating a single aircraft type. Apart from introducing new 737-800s and taking out 717s, Southwest is cutting costs by retiring 737 Classics from its fleet. These airplanes are old and have significantly lower fuel efficiency standards compared to the airplanes of today. All these fleet modernization measures will help expand Southwest’s margin and profit in the fourth quarter.
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- Southwest’s 2014 Q3 10-Q, October 23 2014, www.swamedia.com [↩]
- Southwest Airlines 2014 investor day transcript, November 10 2014, www.swamedia.com [↩]
- Southwest’s December traffic report, January 12 2015, www.swamedia.com [↩]