Southwest Faces Market Heat As It Reports Disappointing Q3’16 Results; Future Guidance Bleak
Releasing its third quarter results on 26th October 2016, Southwest Airlines (NYSE:LUV) reported a decline in its revenues and earnings, missing the consensus estimate for revenues. The fall in revenues was primarily due to the technology outage episode that occurred in July (accounting for $55 million worth of losses), worsened by the 5% drop in air fares. This, coupled with the bleak outlook for the rest of the year, caused Southwest’s stock price to tumble as much as 8%. We deem the new growth forecasts as the “new normal” for the airline, marking its graduation from the low-cost carrier to a step away from joining the big league legacy carriers.
On the expense side, a significant increase was seen in unit costs (excluding fuel), which were up 6% y-o-y. Further, unlike other airlines the company did not succeed in making any fuel savings, causing the operating income to fall tremendously. The increase in operating expenses is attributable to the higher depreciation charges related to the company’s Classic fleet retirement, and the aforementioned technology outage in July. Going forward, these operating costs are expected to continue their upward trend not only due to the new labor contract coming into effect, but also due to the rising crude oil prices.
- What’s Behind The 15% Fall In Southwest Airlines Stock Earlier This Week?
- What’s Next For Southwest Stock After A 20% Rise This Year?
- Gaining 20% In 2023 Will Delta Continue To Outperform Southwest Stock?
- Will Southwest Airlines Stock Recover To Its Pre-Inflation-Shock Level?
- Here’s A Better Pick Over Southwest Airlines Stock
- Southwest Airlines Stock Has Shed 30% Since Late 2019: Here’s Why
Despite higher expenses and pricing pressure, the company returned approximately $312 million back to its equity owners in the quarter in the form of share buybacks and dividend payments, providing value to the shareholders. Moreover, the company continued to pare off the debt built on its balance sheet.
One of the key metrics which is eagerly watched by all analysts is passenger revenues per available seat mile (PRASM), the main driver of the revenues, and thus the share price at an airline. Southwest’s PRASM figure deteriorated in Q3’16, as compared to the previous quarter. Not only was the decline steep by industry standards, the metric was also much higher than the 1H’16 when there was far more pressure on yields as opposed to now. Furthermore, the decline of 5% in unit revenues occurred despite capacity moderation to roughly 4.2%. The company attributed this to the tough fare environment and the technology glitch of July. Going forward the PRASM decline is expected to sustain through the fourth quarter due to the placement of Christmas on a Sunday. However, Southwest is hopeful to turn the metric positive in January due to impressive bookings it has received for the month. On the other hand, the carrier projects its full year capacity to come down to 5%-6% in Q4’16 to keep the unit revenues under check and then decline further in the coming year 2017 to 3.5% y-o-y.
Have more questions about Southwest Airlines (NYSE:LUV)? See the links below:
- Why Trefis Revised Southwest’s Price Estimate From $46 To $38 Per Share
- Southwest Drops Post 2Q’16 Results As The Airline Restricts Its Capacity Growth For 2017-2018
- Southwest Q2’16 Earnings Preview: Capacity Growth To Partially Offset The Impact Of Declining PRASM
- How Will Different Capacity And Fuel Cost Forecasts Impact Southwest’s 2016 EBITDA?
- Rapid Capacity Additions And Lower Fuel Expense Drive Southwest’s 1Q’16 Earnings
- What Will Be The Impact On Southwest’s EBITDA, If Crude Oil Prices Rebound To $100 Per Barrel by 2018?
- Will Southwest’s International Operations Contribute A Significant Portion Of Its Revenue By 2020?
- What Will Be Southwest’s Value In 2020?
- What Factors Caused A Sharp Jump In Southwest’s 2015 Operating Margin?
- How Has Southwest’s Revenue And EBITDA Composition Changed Over The Last Five Years?
- Southwest Airlines: The Year 2015 In Review
- What Is Southwest’s Outlook For 2016?
- What Is Southwest’s Fundamental Value Based On 2016 Estimated Numbers?
- What Is Southwest’s Revenue And EBITDA Composition?
- How Has Southwest’s Revenue And EBITDA Grown Over The Last Five Years?
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
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap