Southwest Q3’16 Earnings Preview: Labor Agreement, Rising Oil Prices To Weigh On Earnings
Key Trends:
- The decline in Southwest Airlines’ passenger revenue per available seat mile (PRASM) has been much lower than that witnessed by its peers in the first half of the year. In the third quarter, the company expects to see its unit revenues decline as per the trend seen through the year, despite the carrier’s efforts at lowering capacity from the highs of 10% y-o-y to approximately 5% y-o-y. The company attributes 0.5% of the total decline in unit revenues to the technology outage episode of July.
- However, since it was among the first to offer flights across the U.S. and Mexico to Cuba, the PRASM figures for Latin America are likely to have turned around. Further, the Dallas-based carrier is considering expanding to Canada, Caribbean, Central America, and South America. It is also looking at routes across the Atlantic. The management gave a timeline of 15 to 25 years, to establish its services across 48 states in South and Central America. According to our estimates, international operations would translate to approximately 15% of total capacity and 5% of total revenues for the company, over the next five years.
- The company’s system-wide capacity should come in lower at 4%-5%, than that seen in the year so far. The carrier is undertaking moderation in capacity to improve its unit revenue and manage the rising fuel costs.
- Southwest reached a new agreement with its pilots to raise pay by 15% with effect from late 2016, and then by 3% a year for the next four years (2020). The contract is to be back dated to when the discussion regarding the agreement began (2013), providing an overall increment of close to 30% to its 8,500 pilots. This, in turn, will increase the company’s operating expenses, and consequently pressure the carrier’s margins.
- We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output between 32.5 and 33 million barrels per day, a potential reduction of 200 to 700 MBPD (thousand barrels per day) compared to the output in August. However, the increase is unlikely to have any material impact on the fuel expenditure of the airline in the quarter, as the prices continue to be much lower than the historical $100 per barrel.
- Southwest’s aggressive share buyback program is likely to support earnings, even as the power outage episode of July pressures the top-line.
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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?
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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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