Southwest Airlines 2Q Preview: Expect A Solid Quarter Driven By Capacity Expansions And Lower Fuel Prices

+20.76%
Upside
29.39
Market
35.50
Trefis
LUV: Southwest Airlines logo
LUV
Southwest Airlines

Southwest Airlines (NYSE: LUV), which shares its earnings release date with its competitors Alaska Air Group (NYSE:ALK) and United Continental Holdings (NYSE:UAL), is slated to announce its second  quarter operating results on Thursday, 23rd July 2015 [1]. Despite a decline of almost 17% in its stock price over the last two months due to concerns over an excess supply of seats in the domestic market, the Dallas-based airline continued to increase its capacity to overcome the rising competition in its home market. However, unlike its competitors, the airline’s unit revenue is expected to remain resilient, due to strong demand in Dallas, and deliver a notable increase in its top line. Further, the company is also likely to post an impressive growth in its earnings on the back of weak crude oil prices during the quarter. In this note, we take a look at what we expect from Southwest’s earnings release.

We will be updating our valuation model for the airline shortly after its earnings release.

See Our Complete Analysis For Southwest Airlines Here

Relevant Articles
  1. What’s Behind The 15% Fall In Southwest Airlines Stock Earlier This Week?
  2. What’s Next For Southwest Stock After A 20% Rise This Year?
  3. Gaining 20% In 2023 Will Delta Continue To Outperform Southwest Stock?
  4. Will Southwest Airlines Stock Recover To Its Pre-Inflation-Shock Level?
  5. Here’s A Better Pick Over Southwest Airlines Stock
  6. Southwest Airlines Stock Has Shed 30% Since Late 2019: Here’s Why

Capacity Expansions To Drive Revenue Growth

Since the expiration of the Wright Amendment last year, Southwest has been aggressively adding capacity at Dallas, increasing its daily departures from 115 last year to 166 this quarter. In the wake of its ongoing dispute with Delta over leasing of gates at the Dallas Love Field airport, the airline continued to expand its capacity at a rate of 7%((Southwest Announces June Traffic Results, 8th July 2015, www.southwest.com)), primarily to create a pricing pressure for Delta and make it difficult for the airline to operate out of Dallas. Southwest’s passenger traffic improved 7.9% during the June quarter as the airline managed to attract more customers for its growing capacity driven by the strong air travel demand at Dallas. Further, the airline’s load factor, a metric used to judge the operational efficiency of the airlines, also went up by 70 basis point to 84.6% in the last three months. While the airline did not provide details about its unit revenue for the quarter in its latest traffic release, we expect it to improve moderately, similar to last quarter, on the back of rapid capacity additions. Consequently, we anticipate the airline to report an increase in its revenues for the quarter. The market is also positive on Southwest, estimating the airline’s second quarter revenue to be $5.13 billion, 2.5% higher compared to last year.

Lower Fuel Expenses To Boost Earnings

Southwest had previously guided its fuel prices to average around $2 per gallon((Southwest Announces First Quarter 2015 Results, 23rd April 2015, www.southwest.com)) for the second quarter. Further, the airline had indicated in its first quarter earnings release that it had locked in all the fuel hedges for the current year. Thus, with the slower-than-expected recovery of global crude oil prices during the quarter, we expect the airline to realize an average fuel price lower than its expectations. Accordingly, the airline’s fuel cost savings should rise, boosting its bottom line growth. The analysts forecast Southwest to earn a profit of $1.01 per share, more than 50% higher from a year ago.

Even though Southwest has been the worst hit by the recent sell-off of airline stocks over fears of excess supply of seats in the domestic market, we expect the airline to deliver strong second quarter results driven by rapid capacity expansions and lower fuel prices.

2 month price movement

Source: Google Finance

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. Southwest To Announce Second Quarter Results, 16th July 2015, www.southwest.com []