Capacity Additions and Lower Oil Prices to Lift Southwest's Profits in 1Q15 - Forbes

Southwest Airlines is set to announced its first quarter operating results on Thursday, 23rd April 2015, along with Alaska Air Group and United Continental Holdings. Based on preliminary statistics released earlier this month, the low-cost carrier is expected to report an increase of 5.5% year-on-year in its passenger traffic on a capacity increase of 6% during the first quarter. Consequently, the market expects the airline to earn a net income of $450 million or 65 cents per share, more than double that of its earnings in the previous quarter. We currently have a price estimate of $48 per share for Southwest, 12% ahead of its market price.

See our complete analysis for Southwest Airlines here

Capacity Expansion’s to Boost Top line Growth

Southwest’s flying capacity is expected to record an increase of 6% year-on-year during the first quarter. This growth will be driven by the expiration of the Wright Amendment which had previously restricted the number and destinations of flights Southwest operated from its home base at Dallas Love Field. With the conclusion of this amendment, the Dallas-based airline has launched a number of non-stop flights from its home airport at Love Field, achieving an occupancy rate (percentage of seats occupied by passengers in a flight) of over 90% on these new flights. The high occupancy rates are expected to translate into an increase in passenger traffic, contributing to the carrier’s top-line growth during the quarter.

For the full year, Southwest plans to increase its capacity by 6% on a year-on-year basis, unlike the legacy carriers who continue to adopt capacity discipline. To achieve this, the airline has acquired slots from American Airlines at New York’s LaGuardia Airport and Washington’s Reagan Airport which will add 2% to the airline’s capacity growth during the year. Further, the airline has plans to introduce non-stop flights to eight new cities from Dallas by August this year. The airline aims to offer 180 daily departures to about 50 destinations from Dallas by the end of this year, representing a 3% increase in its flying capacity. Additionally, the low-cost carrier is building an international gateway at Houston in order to serve the Latin American and the Caribbean markets, contributing 1% increase in the carrier’s international capacity. This capacity growth will boost the airline’s passenger traffic, resulting in a strong top-line growth for the full year.

Low Oil Prices and Efficient Fleet Mix to Lift Earnings

The airline completely phased out AirTran’s 717 airplanes in the last quarter and currently operates only Boeing 737s. Also, the airline has been substituting its older and less fuel efficient planes (B-737 Classic) with newer cost-efficient aircrafts. As a result, the airline expects its occupancy rate to improve to 80.1% in this quarter versus 79.3% a year ago. Hence, we expect Southwest’s bottom-line to improve on the back of the cost savings from operating a single aircraft type and fleet modernization.

In addition, Southwest uses future contracts (24-month period) to hedge itself against oil price volatility. At current prices, these contracts will result in an overall loss for the entire year. However, if the oil prices recover, as is anticipated by the market, this loss is expected to shrink, boosting the airline’s full year earnings. At the current earning pace, the analysts forecast Southwest to post an annual net income of approximately $2.5 billion or $3.55 per share. The low-cost carrier also has significant hedges for 2016 and 2017, which will enable it to take advantage of the current low oil prices well into the future.

Source: southwest - Google News http://ift.tt/1DD6lBG