What To Expect From Southwest’s Q1 Earnings

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Southwest Airlines (NYSE:LUV) managed to post a better-than-expected earnings last time around. The company saw revenues and earnings beat the consensus estimates comfortably. Revenues in the previous quarter were driven by increased passenger demand from the holiday season, while the earnings benefited from better operational efficiency. Further, like many of its competitors, the airline realized a $1.4 billion one-time benefit to its net income on the recent corporate tax cut. To celebrate this moment, the company paid out about $70 million in bonuses to its employees.

Through 2018, it looks as though the company is poised for healthy year-over-year revenue growth for much of the year. In general, the company’s main aim is to maintain positive unit revenues throughout.

The company’s stock price has fallen considerably through the beginning of the year. While some correction in the stock price is warranted, we believe that the market has priced it quite unfairly at the moment. In this respect, we have created an interactive dashboard to help best put forth our reasoning behind this. Click on the link to come up with your own price estimate.

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  • Unit revenue is a very important metric used to determine an airline’s revenue generating capacity. Southwest has done well to maintain positive unit revenues over the last year, and expects to carry forth a similar momentum going forward as well. As mentioned previously, this is one of the company’s main priorities in the year. In this respect, management expects the key metric to lie between 1-2% for the first quarter of 2018.
  • In keeping with the general trend of industry wide sector and capacity expansion, Southwest recently announced its intentions to begin flights to Hawaii very soon. While this is expected to add to revenues significantly, new operations usually tend to cause a rise in costs due to additional advertising costs and more salaries paid out. For Q1, the company expects costs to increase by about 0.5-1.5%.
  • In general, fuel costs have been on the rise and this development has been spooking investors for some time now. However, much to their relief, Southwest, like many of its competitors, don’t expect to see much of an adverse impact from this. Management is certain that 2018 will see better protection against cash drop prices and energy prices without the forward exposure. In this respect, the company is expecting to see fuel prices rise by about $2.10-$2.15 in Q1.
  • Lastly, like all the other airlines, Southwest too, is looking to increase capacity in 2018. The company aims to increase the key metric by about 5% for the full-year. This comes at a time when legacy airlines have decided to up their capacity growth significantly in order to maintain market share.

 

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