Before the opening bell, the low-cost carrier Southwest Airlines Co. (LUV) declared its first quarter 2011 adjusted earnings of 3 cents per share. The quarter’s results were at par with the Zacks Consensus Estimate as well as year-ago earnings. The company delivered strong results in terms of revenue and traffic growth that largely offset higher fuel and oil expenses in the quarter.
Net income, excluding special items, fell 16.7% year over year to $20 million.
Total operating revenue jumped 18.0% year over year to $3.1 billion as well as above the Zacks Consensus Estimate of $3.0 billion. On a year-over-year basis, Passenger, Freight and Other revenues climbed 17.8%, 3.3% and 26.7%, respectively, on solid load factors coupled with strong passenger revenue yields. Solid growth in Other revenue can be attributable to growth in EarlyBird Check-In revenues. Airlines traffic, measured in revenue passenger miles, upped 11.9% year over year while capacity or available seat miles increased 8.3%. Load factor (percentage of seats filled with passengers) rose 240 basis points year over year.
Total operating expenses, including special items, increased 16% year over year on a 26.4% year over year rise in fuel and oil expense. Excluding special items, operating expenses increased 18.4%. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, inched up 1.9% year over year. CASM, including fuel, climbed 9.2% from the year-ago quarter.
Operating income in the first quarter was $114 million compared with $54 million in the year-ago quarter. Excluding special items, operating income grew 7.8% year over year to $110 million from $102 million in the year-ago quarter.
Liquidity
Southwest Airlines ended the quarter with cash and short-term investments of $4.5 billion. The company generated $965 million of cash from operations compared with $373 million in the year-ago quarter. Capital expenditures were $57 million versus $139 million in the year-ago quarter.
Guidance
Southwest Airlines expects second-quarter unit costs, excluding fuel and special items, to exceed the first quarter primarily due to advertising expenses associated with the launch of All-New Rapid Rewards program. For fiscal 2011, unit costs, excluding special items are expected to increase approximately 2% from fiscal 2010.
For 2011, Southwest Airlines also expects available seat mile capacity in the range of 5% to 6% increase over 2010, driven by increased aircraft utilization.
For the second quarter of 2011, Southwest Airlines expects fuel costs, including fuel taxes to be approximately $3.35 per gallon.
The company projects fiscal 2011 effective tax rate to be approximately 40%.
Our Analysis
Despite steeply rising fuel prices and harsh weather, the company reported impressive results in the first quarter. Given this positive performance the company remains optimistic on improving revenues and operating income in second quarter. The company remains focused on yielding benefits from the launch of programs like All-New Rapid Reward and introducing services to new markets that remained untapped.
Further, the company looks forward to accelerate its growth by the launch of the Boeing 737-800 model in 2012 and expand its network by acquiring AirTran Airways, which is expected to be settled on May 2. However, discounts on ticket prices, concerns on labor costs and 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.
We are currently maintaining our Neutral rating, supported by a Zacks #3 (Hold) Rank.
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