Southwest’s 3Q Earnings In Line

Southwest Airlines (NYSE:LUV) reported its third quarter earnings on 24^th October. Revenues in the third quarter came in 5.1% higher at $5.6 billion, and net income came in at $615 million. The earnings per share came in at $1.08, mostly in line with what we had expected.

Our price estimate for Southwest Airlines is $61 per share, which is higher than its market price. View our interactive dashboard for 3Q Results for Southwest, and modify the key drivers to visualize the impact on the company’s price estimate.

Southwest’s continued work on improving its service led to RASM (revenue per average seat mile), coming in at 1.2% year-over-year. The results would have been better had it not been for the slight offset by load factor. Current trends point to RASM improving anywhere from 100-200 basis points in the fourth quarter.

Despite an increase in fuel costs, net margins grew over the year, as a lower tax rate, and share buy backs shored up the bottom-line. Secondly, Southwest’s hedges were able to offset large parts of the price increases in fuel, allowing margins to be steady for the quarter. The company’s adoption of improved accounting and hedging standards in the third quarter is expected to start paying dividends into the fourth quarter. This should further help offset any volatility in fuel and non-fuel costs during the quarter.

The airline continues to add to and replace its fleet. The addition of this new fleet is expected to help margins in the long term. Management, therefore, projects that average seat miles for the year of 2018 to increase by 6.0-6.5%. Overall, the moderate increases have been key for Southwest maintaining efficiency, and not seeing the type of earnings, and overcapacity issues faced by other budget airlines through the year, as crude prices rose.

Southwest’s quarter was overall as expected. Earnings and revenues came in near guidance, and the trend is expected to continue as the year moves forward.