Rising Fuel Costs To Weigh Down Southwest’s 3Q Results
Southwest Airlines (NYSE: LUV) is expected to report earnings on the 25th of October. On the back of steady passenger traffic, and strong domestic demand during the quarter, Southwest is expected to report revenue of $5.5 billion and earnings per share of $1 for the quarter. This represents a 5% and 20% increase on a year-on-year basis, respectively.
Our price estimate for Southwest Airlines is $61 per share, which is higher than its market price. View our interactive dashboard for Outlook For Southwest In The 3Q and modify the key drivers to visualize the impact on the company’s price estimate.
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Southwest Airlines’ passenger revenue is likely to continue to show a positive trend for the quarter, with RASM (revenue per average seat mile) expected to increase by 1.5% y-o-y. The load factor is expected to be in the range of 83%-84% for the quarter, despite the setback from the hurricane which impacted most airlines during the quarter.
The carrier continued to face pressure from rising crude prices as fuel costs increased by 50% over the past couple of quarters. This increase is expected to weigh down the company’s 3Q earnings. This could be particularly detrimental for Southwest, since it is a low-cost carrier whose margins are already quite tight. Despite these headwinds, Southwest continues to maintain a strong position within the industry, mainly owing to its reliance on a point-to-point network as compared to a hub and spoke network, which allows the company to keep its costs under control. Furthermore, the company’s strong balance sheet, with long term debt of only $3 billion, gives it significant room to take on additional capital and weather macro volatility better than its competitors.
Southwest is increasingly looking to add new routes in order to increase its efficiency, with Hawaii possibly being the latest addition to Southwest’s vast network, as the management looks to increase flights to holiday destinations. Southwest believes its low-cost model will serve a currently under-served demographic on key holiday routes.
In conclusion, we expect mostly a muted quarter from Southwest. Results will depend on how well Southwest managed the hurricane and the increasing fuel costs during the quarter.