Southwest Airlines Earnings Boost on Low Fuel Costs

Transportation

Published: April 21, 2016 2:00 pm

Last Updated: January 13, 2020 10:28 am

When Southwest Airlines Co. (NYSE: LUV) reported first quarter results Thursday morning, the focus was on the solid earnings beat. Profits were up 13% year over year in the quarter and the company also said it planned to modernize its fleet of Boeing 737s more quickly than previously planned.

Fuel costs averaged $1.78 per gallon in the quarter, down from $2 a gallon a year ago. The airlines expects fuel costs to remain around the first-quarter average for the second quarter.

Southwest accelerated the replacement of 129 Boeing 737 Classic aircraft from a prior date in 2016 to the third quarter of 2017. The airlines expects to take delivery of 155 new 737s through 2018 and has options on 18 more. Southwest expects to have about 720 aircraft, all 737s, by the end of 2017.

The best news for Southwest, though, had to be that unit revenues per available seat mile were comparable to the prior year level but available seats rose by 9.2%. Adding capacity often causes unit costs to rise, so this metric is a good measure of Southwest’s performance. The airline expects to post “modestly positive” second-quarter unit revenues.

Unit operating costs slipped 0.5% in the first quarter, but the company expects those costs to rise 1% in the second quarter largely due to an accelerated depreciation expense associated with the early retirement of the 737 Classic fleet.

Shares traded up about 1.3% Tuesday afternoon at $47.67 in a 52-week range of $31.36 to $51.34. The consensus price target on the stock is $55.00.

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