Southwest & JetBlue’s Top Line Will Rise On Gains From Capacity Expansion

by Trefis Team
Southwest Airlines
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Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) will announce their fourth quarter earnings Thursday, January 23, and Wednesday, January 29, respectively. The low cost carriers are coming off good results in the first nine months of 2013. Both Southwest and JetBlue posted strong growth in revenues and profits in the first three quarters of 2013 on higher passenger traffic driven by capacity expansion and higher passenger fares supported by a stable demand for flights.

In the fourth quarter, we anticipate the trend to continue. However, growth in these carriers’ top lines driven by capacity expansion will likely be impacted by rising costs. While expenses related to the AirTran integration will weigh on Southwest’s profits, rising maintenance costs will weigh on JetBlue’s margins and profits.

Southwest’s Earnings Preview

In the fourth quarter, Southwest raised its flying capacity by over 2% annually on support from a stable demand environment for flights in the domestic US market. Higher capacity in turn raised the carrier’s fourth quarter passenger traffic by around 3% annually. [1] A stable demand environment during the quarter also helped Southwest raise its fourth quarter unit revenues (amount collected from passengers per seat for a mile of flight) which indicates passenger fares. Overall, higher flying capacity, higher passenger traffic and higher unit revenues effectively mean that Southwest should post good growth in passenger revenues in the fourth quarter.

We currently have a stock price estimate of $19.11 for Southwest, around 10% below its current market price.

See our complete analysis of Southwest here

AirTran Integration Costs Will Weigh On Southwest’s Margins

We figure that Southwest’s fourth quarter top line growth will be partially offset by AirTran integration expenses. Southwest expects to incur $550 million in AirTran acquisition and integration expenses. By the end of the third quarter of 2013, it had incurred $391 million related to the integration. [2] So, we figure in the fourth and coming quarters, Southwest’s profits will continue to get impacted from these one-time costs.

However, over the long term, gains from the AirTran acquisition will far outweigh its one-time costs. In 2012, Southwest realized $142 million in synergies from this combination and, for 2013, it anticipates this figure to rise to $400 million. [3]

JetBlue’s Earnings Preview

Separately, JetBlue (NYSE:JBLU) added flying capacity to its network at a much higher rate than Southwest in the fourth quarter. This we believe is in part a result of the carrier’s much smaller size that provides it with many more markets to expand to. In the fourth quarter, JetBlue raised its flying capacity by over 8% annually. This lifted its passenger traffic by over 7% annually. [4] [5] The carrier’s unit revenues also rose on support from higher passenger fares enabled by a stable demand environment. In all, like Southwest, JetBlue too will likely post higher passenger revenues in the fourth quarter on higher passenger traffic driven by capacity expansion.

We currently have a stock price estimate of $9 for JetBlue, approximately in line with its current market price.

See our complete analysis of JetBlue here

Rising Maintenance Costs Will Likely Weigh On Margins

Additionally, we anticipate JetBlue’s margins in the fourth quarter to continue to be impacted from its sharply rising maintenance costs. In the first nine months of 2013, the carrier’s maintenance and repair costs rose by nearly 30% annually, far outweighing single digit growth in revenues. [6] This sharp growth in JetBlue’s maintenance costs is a result of its aging airplane fleet, which though one of youngest in the industry is requiring more frequent and heavier checks and repairs. In the fourth quarter, we anticipate growth in these costs to outpace top line growth and weigh on profits. However, this growth in JetBlue’s maintenance and repair costs in the fourth quarter will likely be more moderate than that in the last few quarters.

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  1. Southwest’s December 2013 traffic results, January 8 2014, []
  2. Southwest’s 2013 Q3 10-Q, October 24, 2013, []
  3. Southwest’s Q4 and full year 2012 earning results, January 24 2013, []
  4. JetBlue’s September traffic results, October 10 2013, []
  5. JetBlue’s December traffic results, January 13 2014, []
  6. JetBlue’s 2013 Q3 earnings, October 29 2013, []
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