Lower Oil Prices Lift Southwest’s Net And Outlook

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Southwest Airlines

Southwest‘s (NYSE:LUV) fourth quarter profit, excluding special items, jumped nearly 70% per year to $404 million on gains from lower fuel costs and capacity expansion. Southwest’s fuel expense fell by about 14% or $200 million annually in the fourth quarter, lifting its profit. [1] Like Delta (NYSE:DAL), which reported earlier in the week, Southwest too benefited from the sharp drop in global crude oil prices. The low-cost carrier’s fourth quarter top line also rose by nearly 5% to $4.6 billion on higher passenger traffic driven by capacity expansion.

The solid fourth quarter enabled Southwest to post its highest ever annual profit of $1.4 billion in 2014. [1] We figure that the acquisition of slots at Washington Reagan and New York LaGuardia airports, the expiry of Wright Amendment restrictions, and the launch of international service during 2014 enabled Southwest to post this record profit. (See A Look At Southwest’s Three Major Business Developments In 2014)

We currently have a price estimate of $46 for Southwest, approximately in line with its current market price.

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See our complete analysis of Southwest here

Capacity Addition Grows Top Line

In the fourth quarter, Southwest expanded its flight capacity by over 2% per year, benefiting from the expiry of the Wright Amendment. [1] This amendment had restricted Southwest’s non-stop flights out of its home airport, Dallas Love Field. As soon as this legislation expired on October 13, Southwest launched non-stop flights to a dozen U.S. cities from Dallas. As the carrier was already well established in the Dallas market, these new flights found many takers, growing Southwest’s fourth quarter passenger traffic and passenger revenue.

First Quarter Outlook

Looking ahead, Southwest plans to accelerate its capacity growth in the first quarter of 2015, aiming to grow its capacity by 6% annually. Based on booking levels observed so far in January, Southwest expects its passenger revenue to also grow in line with its capacity. [1] This guidance tempers the fear that aggressive capacity expansion could pressure the carrier’s air fares. In our view, acceleration in Southwest’s capacity addition will enable it to grow its market share in 2015.

Additionally, Southwest anticipates to spend just $1.90 per gallon on jet fuel in the first quarter, which would result in $500 million year-on-year fuel cost savings for the carrier. [1] Coupled with capacity expansion, this lower fuel cost will allow Southwest to retain its growth momentum in the first quarter.

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Notes:
  1. Southwest’s 2014 Q4 earnings form 8-K, January 23 2015, www.swamedia.com [] [] [] [] []