Southwest Airlines Q1 Earnings: Shares Fall On Weaker-Than-Expected Earnings Outlook

Southwest Airlines (NYSE:LUV) reported a rather disappointing earnings this time around. The company missed on both the earnings and revenue estimate figures marginally. It reported earnings of $0.61, while revenues came in around $4.88 billion. The earnings were hurt this time around on the back of higher wages and increased fuel expenses. The air carrier witnessed a significant decline of about 4% in its stock price, post the earnings call. Revenues were up by about 1.2% year-over-year on a notable improvement in passenger revenues. Despite this, unit revenue declined by about 2.8% due to a sustained competitive fare environment and the unfavorable timing of Easter.

Key Highlights:

• The company reported a unit revenue of 13.3 cents, down about 2.8% year-over-year, as mentioned above. The improvement in  passenger revenues was more than offset by Easter coming in April and pricing pressures it currently faces in the U.S. low-cost carrier market. That said, we can expect unit revenues to rise in the 1-2% bracket in the second half of the year as Southwest continues to restrict capacity. However, this figure reflects a lower-than-expected increase in the revenue per available seat mile (RASM).

• Cost per available seat mile (CASM) ex-fuel came in higher on the recently ratified pilot contract. However, one must keep in mind that these wage costs are only temporary and that the effect of the additional costs will dissipate by the end of the year. CASM ex-fuel was recorded 4.5% higher year-on-year 9 cents this quarter. For the full year, we can expect the CASM ex-fuel to rise by close to 3% year-over-year.

• Fuel costs in the quarter came in only 10% higher at $1.96 per gallon. The price increase seems relatively smaller in comparison to last year due to Southwest’s significant fuel hedging losses in Q1 2016. Consequently, EBITDA margins fell to 20.4% as compared to 27% in the same quarter last year. Net margin also fell to 7.6% as compared to 11.7%.

•  In terms of capacity, the company is on track to reduce airplanes in service to best improve profitability. The quarter ended with 727 aircraft in the fleet. The company expects this figure to fall to just over 700 by the end of the year. This takes into consideration the retirement of the remaining 79 Classics by the end of September and the addition of about 41 more NG aircraft and 14 MAX 8s later this year.

• In the first quarter, the company returned close to $673 million to shareholders through buybacks and dividends. The shareholder returns increased by about 13% year-over-year. In this quarter alone, Southwest has managed to give back more than a third of shareholder returns for all of last year.

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