Summary
- Southwest Airlines has recently reported strong quarterly results.
- Southwest Airlines’ profits soared to record levels as the company benefited from lower fuel costs.
- But let’s not forget that Southwest Airlines is also a very well run and a shareholder friendly company.
It's a great time to be an airline these days, thanks to lower jet fuel costs and strong demand. It also helped that carriers did not witness any severe weather conditions that have often plagued first quarter results. Southwest Airlines (NYSE:LUV), one of the biggest U.S. airlines, was the latest to report its quarterly results that came in ahead of market's estimates.
The 44 year old Dallas-based Southwest pioneered the low-cost-carrier model which is followed by dozens of airlines all over the world, including ultra-low-cost-carriers like Ryanair (NASDAQ:RYAAY) and Spirit Airlines (NASDAQ:SAVE) who took Southwest's idea to create a new niche. For the three months ending March, Southwest reported 6.2% year-over-year increase in passenger revenues to $4.18 billion while operating expenses dropped by 8% to $3.6 billion due in large part to the 33% drop in fuel spending to $877 million. Consequently, the company's operating income jumped by 263% to a first quarter record $780 million while net income also increased to a record of $453 million. In adjusted terms, this translated into a profit of $0.66 per share, up from $0.18 per share a year earlier. Analysts, on the other hand, were expecting earnings of $0.65 per share, as per data from FactSet.
Moreover, the record first-quarter load factor of 80.1%, which increased by 0.8 percentage points from last year, shows that Southwest is enjoying robust demand. The significant drop in oil prices, however, played a major role in lifting the company's profits to their highest levels ever. The economic fuel costs were $2 per gallon, down from $3.08 a year earlier. This translated into economic fuel cost savings of $450 million - that's about 80% of the increase in operating profits.
The lower fuel costs did the heavy lifting for the triple-digit earnings growth, but let's not take anything away from Southwest - it has done a remarkable job of keeping a lid on costs. During the quarter, the company's unit revenues were flat from last year while its core unit costs, which excludes fuel costs, special items and profit sharing expenses, declined by 3.6%. This means that if the fuel prices hadn't changed, then the company's earnings would still have gone up by 80%.
Besides, Southwest has taken a number of strategic initiatives that are playing an important role in driving its growth, which is a testament to this well run company. This includes the integration with AirTran which made Southwest the leading domestic airline, in terms of number of passenger flown, and put the company in a better position to compete against Delta Airlines (NYSE:DAL), United Continental (NYSE:UAL) and American Airlines (NASDAQ:AAL). Southwest has also ramped up competition against American by flying routes from Dallas Love Field, which is the reason behind the latter's decision to slash fares. Besides, Southwest has also increased capacity at Washington Reagan and New York LaGuardia. The company is also eying international expansion, particularly after AirTran's acquisition, as a key driver for future growth over the long-term.
In addition to being a well-run airline, what I particularly like about Southwest is that it is a shareholder friendly company. Southwest is a free cash flow generation machine and uses these resources to reward shareholders through dividends and buybacks. In the last two fiscal years, the company generated more than $2 billion in free cash flows, and returned 78% of those to shareholders through dividends and share repurchases. In the last quarter, with support from lower crude prices, Southwest generated $879 million in free cash flows -- that's a first quarter record and greater than $712 million for the full fiscal year 2012. With this kind of momentum, it is safe to assume that Southwest will report its highest-ever free cash flows in the current fiscal year and return more than 50% of this to shareholders, as per its promise. In a report emailed to me, Credit Suisse's analyst Julie Yates, forecast that Southwest will report $2.23 billion in free cash flows in 2015, of which 95% will be returned to shareholders, just as it did in 2014.
Conclusion
Although it is true the Southwest's growth is being driven in large part by the weakness in crude prices, it is still a very well run and a shareholder friendly company. This is evident in its various strategic decisions that have fueled Southwest's growth over the last few years and its promise to return a majority of the annual free cash flow to shareholders. In this context, the company's May 13 board meeting in which Southwest will provide an update on dividend and possibly announce a new buyback program could act as a catalyst for upside. The company's current $1 billion buyback authorization will conclude next month.
Southwest was the top performing S&P-500 stock in 2014. Over the last six months, the company's shares have climbed 28.4%, easily outperforming S&P-500 which climbed 7.7% in the same period. I am bullish on this stock and expect the shares to continue to outperform as the company moves forward with strong earnings and cash flow growth.
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Source: southwest - Google News http://ift.tt/1Aauz62
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