Before the opening bell, the low-cost carrier Southwest Airlines Co. (LUV) declared its third quarter 2011 adjusted earnings of 15 cents per share. The quarter’s results beat the Zacks Consensus Estimate of 13 cents but remained below the year-ago earnings of 26 cents mainly due to the negative impacts of fuel hedging, which suffered losses following the drop in fuel price.
Adjusted earnings in the third quarter excluded approximately $262 million of unfavorable special items, primarily related to impacts of fuel contracts as well as the acquisition and integration costs of AirTran. Otherwise, the company reported loss per share of 18 cents as against a profit of 27 cents in the year-ago period.
Total operating revenue jumped 35.1% year over year to a record $4.3 billion, which surpassed the Zacks Consensus Estimate of $4.2 billion. On a year-over-year basis, Passenger, Freight and Other revenues climbed 32.4%, 12.9% and 103.1%, respectively, on record high load factors coupled with strong passenger revenue yields. Solid growth in Other revenue can be attributed to the All-New Rapid Rewards program and continued growth in EarlyBird Check-In revenues.
Airline traffic, measured in revenue passenger miles, upped 32.2% year over year while capacity or available seat miles increased 30.4%. Load factor (percentage of seats filled with passengers) rose 110 basis points year over year to 82.0%.
Total operating expenses, including special items, increased 44.0% year over year on a 71.0% year over year rise in fuel and oil expense. Excluding the special item, operating expenses increased 43.6%. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, dipped 1.2% year over year. CASM, including fuel, leaped 10.0% from the year-ago quarter.
Operating income in the third quarter was $225 million compared with $355 million in the year-ago quarter. Excluding the special item, operating income declined 26.7% year over year to $285 million from $389 million.
Liquidity
Southwest Airlines ended the quarter with cash and short-term investments of $3.7 billion. The company generated $985 million in cash from operations compared with $1,292 million at the end of year-ago period. Capital expenditures were $548 in the third quarter.
Share Repurchase
The company purchased 21 million shares worth approximately $175 million under its $500 million share buyback plan announced previously on August 5.
Guidance
Southwest Airlines did not provide any specific projection for fourth-quarter 2011 unit costs but expects to register a modest growth from 7.72 cent (excluding fuel and special item) in the year-ago quarter. Fuel costs, including fuel taxes are estimated at approximately $3.30 per gallon for the fourth quarter.
For 2011, management projects capital expenditure of $800–$900 million.
Southwest Airlines maintained its projection on total acquisition and integration costs related to AirTran at approximately $500 million for 2011. The company continues to believe the acquisition of AirTran will likely be accretive to its fully diluted earnings per share in 2011 and net annual pre-tax synergies cloud exceed $400 million by 2013.
Our Analysis
The drop in the fuel prices during the third quarter resulted in losses for Southwest Airlines. The company managed to surpass market consensus based on strong load count and capacity addition by the acquisition of AirTran. We believe that in the coming quarters, the company will continue to reap benefits from its AirTran acquisition, marking a milestone achievement expanding its reach in key markets. The integration of both carriers has provided more opportunities to drive combined synergies in terms of revenues and profit as well as to streamline the cost structure.
Further, the company remains focused on yielding benefits from the launch of programs like All-New Rapid Reward and introducing services to new markets that were untapped. However, discounts on ticket prices, labor costs concerns, fuel price volatility and stiff competition from giant carriers like Delta Air Lines (DAL), United Continental Holdings (UAL), and US Airways Group (LCC) keep us on the sidelines.
Consequently, we maintain our long-term Neutral recommendation on Southwest Airlines, supported by our Zacks #3 Rank (Hold).
DELTA AIR LINES (DAL): Free Stock Analysis Report
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SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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