Before the opening bell,the low-cost carrier Southwest Airlines Co. (LUV) declared its third-quarter 2010 adjusted earnings of 26 cents per share surpassing the Zacks Consensus Estimate of 25 cents and the year-ago earnings of 4 cents. Higher business travel demand and strong traffic led to the better-than-expected earnings.
Net income, excluding special items, shot up 529% year over year to $195 million driven by strong revenues partially offset by higher fuel prices and other cost pressures.
Total revenue climbed 19.7% year over year to an all-time high of $3.2 billion, better than the Zacks Consensus Estimate of $3.15 billion. On an annualized basis, Passenger revenue, Freight revenue and Other revenue climbed 18.9%, 10.7% and 46.6%, respectively. Airlines traffic, measured in revenue passenger miles, upped 4.9% year over year while capacity or available seat miles increased 3.2%. Load factor (percentage of seats filled with passengers) rose 130 basis points year over year.
Total operating expenses, including special items, increased 7.3% year over year. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, upped 5.1% year over year. CASM, including fuel, leaped 7.1% from the year-ago quarter.
Operating income in the third quarter was $355 million compared with $22 million in the year-ago quarter. Excluding special items, operating income jumped 200.8% year over year to $388 million compared with $129 million in the year-ago quarter.
Liquidity
Southwest Airlines ended the third quarter with cash and short-term investments of $3.38 billion. The company generated $385 million of cash from operations compared with $72 million in the year-ago quarter. Capital expenditures were $100 million versus $198 million in the year-ago quarter.
Guidance
Southwest Airlines expects solid unit revenue improvement in the fourth quarter as a result of growing momentum for airline traffic. Profit forecast for the fourth quarter also remains very healthy due to increasing revenue trend which will more than offset cost inflation and higher energy prices.
Our Analysis
We believe Southwest Airlines is well positioned for growth due to its cost leadership position, strong balance sheet, low cost, flexibility, network optimization, increasing revenue initiatives and hedging. However, the discounts on ticket prices, concerns on labor costs and fuel price volatility keep us on the sidelines. Further, Southwest Airlines is investing heavily in technology to code share agreements with other airlines and to fly to international markets.
We are currently maintaining our Neutral rating, supported by our Zacks #3 Rank (Hold).
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