Southwest Airlines Will Continue Getting BetterLUV) continued cost-optimization efforts, combined with weaker global commodity prices, have helped the company do well in the past year. But, apart from the focus on cost reduction, I think investors will do well to take a look at the company’s expansion moves.
A closer look at the expansion moves
Southwest’s efforts to expand global operations through increasing aircraft fleet size and growing the number of destinations is forecasted to give a significant push to its top line growth.
In second quarter of 2015, Southwest Airlines enhanced its fleet count by 10 to 689 aircraft by the quarter end, reflecting the second quarter delivery of five pre-owned Boeing 737-700s and six new Boeing 737-800s coupled with the retirement of one Boeing 737 Classic aircraft. Southwest Airlines is presently managing approximately 700 aircraft during 2015 and forecasts to expand its net fleet by about two percent on year-over-year basis during 2016.
Also, Southwest Airlines expects to start its newest service by this year’s end between Houston (Hobby) and eight global cities that includes opening service to Belize City, Belize during October 2015, and Costa Rica, Liberia during November 2015, both awaiting foreign government consent.
The move on Southwest’s part to expand its business is important since the company’s revenue growth has been slow of late. For example, in the previous quarter, it posted total operating revenue of $5.1 billion, an increase of 2% over last year. Moreover, apart from fleet expansion, Southwest is increasing its service profile to tap more growth.
For instance, the company recently introduced its transfer agent called Wells Fargo Shareowner Services which administers and sponsors the Shareowner Service Plus Plan. This allows interested Investors and registered Shareholders to buy the stock. In addition, this plan also enables registered shareholders to buy extra shares of Southwest Airlines stock by leveraging limited or complete reinvestment of dividends.
The strategic launch of Wells Fargo Shareowner Services to assist its investors with planned share repurchases and the company’s continued strong efforts to deliver excellent investor returns is believed to increasingly attract several other strategic investors.
Cost control and other positives
Southwest Airlines has successfully executed its cost control efforts, continuing fleet modernization, and enhanced aircraft utilization leading to a 1.8 percent year-over-year reduction in its unit costs for second quarter 2015. Southwest airlines also gained from the ongoing weaker global commodity pricing environment, allowing for low-cost fuel supply for the airlines.
According to Wolfe Research airline analyst Hunter Keay, cheap fuel is making airline sector growth significantly attractive with Southwest Airlines at the center of this growth story having 8% of growth potential for this year and 7% expansion next year. However, majority of its growth is attained in Dallas, where new regulations have enabled it to fly farther from the secondary airport.
In addition, smaller carriers such as Frontier Airlines, Spirit Airlines Inc. and JetBlue Airways Corp. are also growing aggressively still, Southwest‘s growth has a larger impact on the general market supply as it alone controls approximately a sixth of the U.S. domestic market.
Southwest Airlines hugely enhanced its margins and delivered extremely significant cash flows in the beginning of fiscal year 2015, encouraging it to return $811 million to the key stakeholders through planned share buybacks and dividend payments for this fiscal year. Further, the company estimates to soon introduce a $500 million key share buyback program and in line with its continued commitment to deliver improved shareholder returns. Importantly, Southwest Airlines has a solid investment grade balance sheet, and it was recently upgraded by the Moody's to Baa1 rating.
Given, Southwest Airlines is a major player in the airlines industry giving it a key competitive advantage among its smaller peers coupled with its significant expansion plans and low-cost fuel supply advantage is expected to drive long-term sustainable growth for the company thus benefiting the key stakeholders.
Southwest Airlines’ performance has been strong in the past year and the trend is expected to continue going forward. So, in my opinion, investors should remain invested in the stock for more upside.
Published on Sep 25, 2015By Yaggyaseni Mittra