Lower Fuel Costs, Credit Card Deal Drive Southwest Airlines Earnings

The airline’s net income benefited from its amended co-branded credit card agreement with Chase, under which Southwest sells loyalty points and other items to the bank. The agreement added $172 million to third-quarter revenues that were classified as a special item and excluded from the calculation of revenue per available seat mile. The quarter’s revenue total did include a benefit of $130 million attributed to the combined impact of the amended agreement with Chase and the effect of a resulting change in an accounting methodology.

CEO Gary Kelly said:

Based on favorable booking and revenue trends thus far in October, and including the ongoing benefit to operating revenues from our amended Chase agreement (estimated to be approximately $130 million for fourth quarter 2015), we are currently expecting an increase to fourth quarter 2015 unit revenue of approximately one percent, year-over-year. … Our favorable third quarter 2015 cost trends and outlook for fourth quarter 2015 costs reflect significantly lower jet fuel prices and ongoing fleet modernization benefits. Our third quarter 2015 economic fuel costs declined nearly $300 million, year-over-year. Based on our existing fuel derivative contracts and market prices as of October 19, 2015, we currently expect full year 2015 economic fuel costs to decline approximately $1.3 billion, year-over-year.

Third-quarter 2015 fuel costs came in at $2.20 per gallon, including $0.50 per gallon in unfavorable cash settlements from fuel derivative contracts, compared with $2.94 per gallon in the same period last year, which included $0.05 per gallon in favorable cash settlements from fuel derivative contracts. Excluding fuel and special items, third-quarter operating costs rose 8.4%, compared with the same period in 2014. Including fuel and all other costs, operating costs declined 2.2% year over year.

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Available seat miles rose 7.6% year over year, and load factor rose 1% to 85.4%. The average passenger fare declined by 4% and passenger revenue per available seat mile also declined by 4%.

Analysts are looking for fourth-quarter EPS of $0.87 on revenues of $4.95 billion. For the full 2015 fiscal year, EPS are pegged at $3.48 on revenues of $19.59 billion.

Southwest’s shares closed down about 0.9% Wednesday, at $41.02 in a 52-week range of $31.36 to $47.17. The shares were inactive in Thursday’s premarket session. The consensus price target on the stock is $50.46.