Will Southwest Airlines Fly Higher?

Southwest Airlines (LUV) announced first quarter ended March 31, 2016 total operating revenue of $4.83 billion, up 9.3 percent year-over-year from $4.41 billion during the same period last year.

Southwest Airlines declared first quarter of 2016 adjusted operating income of $4.12 billion or $0.79 per diluted share, up 39 percent year-over-year from adjusted operating income of $2.97 billion or $0.66 per diluted share in first quarter of 2015.

The global airlines company reported continued year-over-year expansion in both its top and bottom lines primarily driven by robust customer bookings coupled with an attractive 9.2 percent in the company’s available seat mile.

Better times ahead 

Southwest Airlines is continuing to deliver solid year-over-year top line performance that is industry-leading as well.
In addition, the company is significantly expanding its year-over-year net income coupled with notable net margin expansion that indicates impressive operational execution of the key airlines major through improved user base including the growing count of frequent flyers. Going forward, the company estimates a healthy year-over-year growth in second quarter of 2016 RASM considering the existing top line growth and ongoing booking trend.

The global airlines is believed to be the country’s major domestic airline having 24% of the entire native market share and it is considered to be a leading airline among 24 of the major 50 metro regions in the US. At present, Southwest Airlines serve about 94 of the leading 100 native O&D city pairs that include co-terminal airports as well.

Moving ahead, the company targets on expanding and optimizing the domestic network nearby Canada, Caribbean, Latin America and northern portion of South America. The 2016 ASM or capacity year-over-year growth is estimated to be in the range of 5% to 6% while capacity growth for 2017 and 2018 is believed to be lesser than growth in 2016. Going forward, network density has grown significantly since last many years coupled with expansion, developing the greatest point-to-point shipper.

The already strong market presence of Southwest Airlines is further strengthened by the company’s key efforts to buy new aircrafts to increase its fleet while starting operations at new destinations across the country which is believed to continue to deliver sustainable long-term company growth while offering attractive shareholder returns.

Improving efficiency

Southwest Airlines has employed notable cost minimization initiatives with a keen focus on regulating cost inflation through planned fleet modernization and accelerated depreciation. Moving ahead, second quarter and full fiscal year 2016 unit expenses are believed to grow nearly 2% and about 1% on year-over-year basis respectively. Southwest Airlines is keen on delivering year-over-year industry-leading cost structure to preserve a significant cost benefit.

Southwest Airlines is consistently modernizing its fleet to notably contribute to its cost control initiatives with a sequential 6 percent growth in the number of aircrafts added according to the type of fleet. Further, the company has continued to increase the average seat count per aircraft coupled with superior fleet modernization that has positively resulted in driving down the overall unit costs.

Also, the key airline has strategically implemented several fuel saving efforts including, electronic flight bags, single engine taxi, new seats, superior flight and fuel planning, gallery refresh and split scimitar winglets. Going forward, second quarter of 2016 fuel pricing per gallon is believed to be in $1.80 to $1.85 range.

The sheer market size of Southwest Airlines provides it with a unique cost advantage to continue to add new and innovative aircrafts to its already robust fleet while allowing it to pass on this significant cost advantage to customers in the form of attractive travelling discounts and offers.

Conclusion

Overall, the investors are advised to “Buy” equity in Southwest Airlines Co. considering the company’s notable near-term and longer term growth prospects with PEG ratio of $0.69 and further, being supported by a robust financial position with notable total cash of $3.58 billion against smaller total debt position of $3.35 billion only, encouraging the company to make future growth investments while delivering attractive shareholder returns. The profit margin of 11.16% also seems satisfactory.
Published on Jul 25, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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