On July 29, the low-cost carrier Southwest Airlines Co. (LUV) declared its second-quarter 2010 adjusted earnings of 29 cents per share surpassing the Zacks Consensus Estimate of 26 cents and the year-ago earnings of 8 cents. The company reported its earnings before market opens. Higher business travel demand and strong traffic led to the better-than-expected earnings.
Net income, excluding special items, shot up 266% year-over-year to $216 million driven by strong revenues partially offset by higher fuel prices and other cost pressures. This represents the second-best earnings in the company’s history after the second quarter of 2006.
Total revenue jumped 21.1% year-over-year to an all-time high of $3.2 billion. On an annualized basis, Passenger revenue, Freight revenue and Other revenue climbed 20.4%, 13.8% and 46.9%, respectively. Airlines traffic, measured in revenue passenger miles, upped 2.7% year-over-year while capacity or available seat miles dipped by a modest 0.3%. Load factor (percentage of seats filled with passengers) rose 230 basis points year over year.
Total operating expenses, including special items, increased 12% year over year. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, grew 6.4% year over year. CASM, including fuel, rose 13.6% from the year-ago quarter.
Operating income in the second quarter was $363 million compared with $123 million in the year-ago quarter. Excluding special items, operating income stretched 126.2% year-over-year to $414 million compared with $183 million in the year-ago quarter.
Liquidity
Southwest Airlines ended the quarter with cash and short-term investments of $3.4 billion. The company generated $540 million of cash from operations compared with $135 million in the year-ago quarter. Capital expenditures were $159 million versus $187 million in the year-ago quarter.
Guidance
Southwest Airlines expects third-quarter unit costs, excluding fuel and special items, to increase at the same pace as in the second quarter.
For 2010, Southwest Airlines also expects capacity to be relatively flat with 2009. The company expects 2010 capital expenditure to be less than $600 million.
Our Take
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 maintain our long-term Neutral recommendation, and a short-term Zacks #3 Rank (Hold) rating.
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