How Did Southwest Perform In Q1?

Southwest Airlines (NYSE:LUV) managed to post a decent quarter this time around, with revenues and earnings coming in line with analyst expectations. Despite this, the airline saw its shares fall as it prepares for softness in bookings following the accident on April 17. So far, the impact of the incident on the low cost carrier has been much larger than previously anticipated. In this respect, the company expects to see a fall in unit revenue estimates in Q2, and perhaps, beyond as well.

Shares fell to about $53 recently, and while the fall is warranted, we believe that the stock has much room to grow in 2018. In this respect, we have created an interactive dashboard to best elaborate on our valuation process and reasoning behind this. Click on the link to come up with your own price estimate.

• Probably the most worrying news coming out of the quarter is the adverse impact the April 17 incident is expected to have on sales. In this respect, the company anticipates unit revenues in Q2 to fall by almost 1-3% as it battles to make sure all the safety inspections on its jets are carried out in the fastest and most efficient manner.
• In order to carry out these inspections, Southwest was forced to cancel hundreds of flights over the last few days. On Thursday itself, the airline canceled nearly 40 flights, most because of the expedited inspection plans, airline officials said. Further, these inspections are expected to cost the airline anywhere between $50-$100 million, which are consequently expected to take a toll on earnings.
• On the positive side of things, Southwest announced its plans for service to Hawaii with flights to four main airports, and not just Honolulu. Pending regulatory approval, we expect the flights to holiday destinations to start late this year or early next year. The airline hasn’t yet revealed where the Hawaii flights will originate from, however, we expect an update on the matter within a week. The move into Hawaii raises the stakes in a looming competition with other carriers that fly to the islands from the West Coast.
• Lastly, like all the other airlines, Southwest too, is increasing 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.