How Will Different Capacity And Fuel Cost Forecasts Impact Southwest’s 2016 EBITDA?

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Southwest Airlines

Like most of the US Airlines, Southwest has been flying high on the wave of low jet fuel costs driven by  plummeting crude oil prices. However, unlike its peers, the airline has been rapidly growing its capacity to expand its market share. Based on the company’s capacity expansion target of 5%-6%, we estimate Southwest’s capacity to grow by 5.2%, to almost 148 billion miles in 2016. Further, keeping in mind the current crude oil prices and the company’s hedging position, we anticipate Southwest’s fuel cost to average at around 18% of its revenue during the year, resulting in an EBITDA of $5,569 million (highlighted in Blue) in 2016. Since these two factors have played a crucial role in improving the airline’s EBITDA margins over the last couple of years, we aim to show how different combinations of system capacity and fuel costs (as a percentage of revenue) will impact Southwest’s EBITDA in 2016.

In a scenario where the Dallas-based airline expands its system capacity by more than 5%, the airline could grow its EBITDA at a notable rate. If, however, this capacity addition is accompanied by a sudden increase in the airline’s fuel cost, due to a recovery in crude oil prices, then the airline could see a negative impact on the its 2016 EBITDA. From the table below, we can deduce that if Southwest’s capacity increases to 153 billion miles, almost 3.5% higher than our base case, then the airline’s 2016 EBITDA will stand at $6,103 million, ~10% higher than the EBITDA calculated in our base case. However, if this capacity growth is accompanied by a rise in fuel costs to 25% of its revenue, 7% higher than our base case, then Southwest’s EBITDA will drop to $4,707 million, more than 15% lower than in our base case.

Using the table below, investors can assume a number of capacity and fuel costs scenarios and visualize their impact on Southwest’s 2016 EBITDA.

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Have more questions about Southwest Airlines (NYSE:LUV)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Southwest Airlines

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