What Can We Expect From Southwest Airlines’ Q1 Earnings?

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Southwest Airlines (NYSE:LUV) is all set to report Q1 2017 earnings on April 27. In the previous quarter, the company managed to beat both the revenue and earnings consensus estimates by quite a margin. Revenues rose by a modest 2% year-over-year on the back of disciplined capacity growth and improvement in yields over the holiday season. However, the bottom line continued to suffer due to higher unit costs, although the company did manage to support its earnings by way of share buybacks. We can expect a similar trend to persist in Q1 as well, as well as the coming few quarters.

Probable Highlights:

  • Earlier in the year, members of the Organization of Petroleum Exporting Countries (OPEC) imposed severe production cuts. This led to a sudden surge in oil prices. In the first two months of the year, oil prices traded between $50-$55 per barrel. However, in March, the price fell to below $50 per barrel again, as the U.S. inventory and production compensated for the decline in OPEC oil supply.
  • A major point of concern for Southwest in the previous quarter was its rising fuel costs. The trend has been seen to be persistent. After rising 0.5% year-over-year in Q3 2016, the fuel expenses went up a staggering 19.3% year-over-year in Q4 2016. As mentioned above, Q1 saw fuel costs rise even further. This is bound to have weighed on earnings significantly.
  • Additionally, its non-fuel costs are expected to peak in Q1 2017, at around 6-7% year-over-year, of which almost 4 percentage points are related to higher labor wages, consequent of a labor deal inked by the company recently. Post the first quarter, these costs may normalize as wages grow in line with inflation.
  • On a positive note, despite the high capacity, the company has shown improvement in occupancy rate, which is an indicator of how efficiently the company is using its capacity. We can expect the improvement in unit revenue, alongside the occupancy rate, to have a supporting impact on the top line.

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