Southwest Airlines Delivers Mixed Q4 2015 Earnings

  • Southwest Airlines delivered mixed Q4 2015 results after missing on revenue expectations while delivering in-line EPS.
  • Southwest Airline's efficiency metrics were mostly positive with a few worrying elements.
  • Is LUV stock still a worthwhile investment in 2016?

Giant low-cost carrier Southwest Airlines (NYSE:LUV) has delivered mixed Q4 2015 results. Southwest reported fourth quarter revenue of $4.98B representing a healthy 7.9% Y/Y growth but $20M less Wall Street consensus. On a segment basis, passenger and other revenue were up 3.3% Y/Y and 119.1%, while freight revenues were down 2.2%.

Non-GAAP EPS of $0.90 was in-line with consensus estimates and 52.5% higher than Q4 2014 reading. On a GAAP basis, Southwest Airlines reported EPS of $0.82, a blistering 193% higher than that by the previous year’s comparable quarter. The company’s vastly improved bottom line was as a result of prevailing low oil prices, with 2015 average oil prices more than 70% lower than average price in 2014. Southwest reported that it realized cost savings of $189M in fuel prices during the fourth quarter alone. Southwest's fuel costs for the entire year were $1.3B lower in 2015 compared to 2014. Ultra-low oil prices helped Southwest to post a non-GAAP EPS of $3.52 for the full year, a record by the company and 75.1% higher than the previous year’s reading. Southwest’s Return on Invested Capital, or ROIC, hit an all-time high of 32.7% in 2015. The same reading in 2014 clocked in at 21.2%.

Southwest Airlines’ mixed results had a similar effect on investors. LUV stock finished the session essentially flat having gained just 0.6%. LUV stock is down 8.27% YTD.

Southwest Results Reveal Improved Efficiency Metrics

Southwest’s efficiency metrics were mostly positive, with a few worrying points here and there. Fourth quarter load factor was up 21 basis points to 84.1% compared to Q4 2014. Load factor for the full year was 83.6%, 110 basis points better than 2014.

But perhaps the biggest positive about Southwest Airlines’ efficiency metrics was the fact that traffic growth continued to outpace capacity growth. Revenue Passenger Miles, or RPM, the unit used to measure airline traffic, were up 11% to $29.727B, significantly better than the 8% increase in Southwest Airline’s capacity to $35.367B available seat miles, or ASM. Some of the company’s increase in capacity came from a 4% growth in average aircraft stage length to 748 miles. This should help to ease investor worries that Southwest was adding capacity at an unsustainable rate.

Unfortunately, low oil prices have continued taking a toll on another closely watched metric-passenger revenue per available seat mile, or PRASM. As oil prices fall, airlines are forced to pass on some of the benefits to customers in the form of lower fares. Southwest Airline’s average passenger fare fell 5.1% Y/Y during the fourth quarter to $149.94. The lower fares led to a 4.7% decline in the company’s PRASM.

Southwest Has Room For Growth

Southwest Airlines has been expanding into international markets, most notably Central American and Mexico. The new opportunity came after the Wright Amendment that restricted the airline’s routes from Dallas Love Field expired in late 2014. Investors have been worried that Southwest has been expanding too fast and this would soon start impacting negatively on its efficiency metrics. The latest set of results prove that the company still has plenty of room to expand, which provides a solid growth opportunity.

Investor Takeaway

Eventually oil prices will stabilize and this should help airlines such as Southwest Airlines to go easy on their fare cuts. This in turn will help Southwest Airlines’ PRASM to stabilize during the coming quarters.

In 2016, Southwest Airlines might not be able to expand its bottom line at the blistering clip it did in 2015 due to difficult comps set up in 2015. But the company’s capacity addition and international growth should help to keep investors interested in LUV stock.

Brian Wu Brian Wu   on Amigobulls :
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