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Southwest Airlines' 1Q17 Earnings: High Costs Prevent Takeoff

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Part 7
Southwest Airlines' 1Q17 Earnings: High Costs Prevent Takeoff PART 7 OF 9

What Are Analysts Estimating for Southwest Airlines in 2017?

Analyst revenue estimate

For Southwest Airlines’ (LUV) 2Q17 earnings, analysts estimate that revenues will rise 5.8% year-over-year (or YoY) to $5.7 billion. Part of this will come from increased capacity growth. The Easter holiday will boost traffic growth.

What Are Analysts Estimating for Southwest Airlines in 2017?

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For 3Q17 and 4Q17, revenues are expected to grow 6.5% YoY and 4.7% YoY to $5.5 billion and $5.3 billion, respectively. These estimates equal full-year 2017 revenue growth of 4.6% YoY to $21.4 billion.

Analyst earnings estimate

The effect of increased costs will also be somewhat visible in the second quarter. For 2Q17, EBITDA is expected to fall 5% YoY to $1.5 billion. EBITDA is expected to grow for the rest of the year. For 3Q17, EBITDA is expected to rise 4.5% YoY to $1.4 billion and for 4Q17 by 16% YoY to $1.3 billion. Despite the growth the company could see in 2H17, the declines in the first two quarters would lead to a full-year 2017 EBITDA decline of 3% YoY to $5.2 billion.

Analysts estimate that earnings per share (or EPS) will rise 1.8% YoY to $3.82 for the full-year 2017.

Analyst margin estimate

Most of the decline discussed above is a result of rising fuel and labor costs that will result in declining EBITDA margins. For 1Q17, Southwest Airlines’ EBITDA margin fell to 20.4% from 27.0% in 1Q16. Analysts are expecting Southwest Airlines’ margin to continue declining for the rest of the year. Margins are expected to drop to 27.1% in 2Q17 as compared to 30.2% in 2Q16. They’re expected to drop to 25.6% in 3Q17 as compared to 26.1% in 3Q16 and to 24.9% in 4Q17 as compared to 22.5% in 4Q16. For the full year 2017, EBITDA margins are expected to fall 24.5% from 26.5% in 2016.

Investors can gain exposure to airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests ~3% of its holdings in Southwest Airlines (LUV) and Alaska Airlines (ALK), 2.8% in Allegiant Travel (ALGT), 2.7% in United Continental (UAL), 2.7% in American Airlines (AAL), and 2.7% in Delta Air Lines (DAL). Next, we’ll look at analysts’ recommendations for the stock.

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