Why Southwest showed improved earnings and profitability in 1Q

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Southwest’s improved earnings and profitability

Southwest’s operating revenue increased by 2% in 1Q14 to $4,166 million due to increase in passenger and freight revenue. Passenger revenue increased by 2.5% to $3,933 million in 1Q14 primarily due to a 3.1% increase in air fares and a 2.2% increase in the length of passenger haul. There was also a slight increase in load factor which was partially because of a decrease in capacity. Both these factors led to a 3.5% increase in passenger revenue per available seat miles (or PRASM) to 12.9 cents in 1Q14 from 12.46 cents in 1Q13, despite the cancellations of 7,500 flights due to severe winter storm. This resulted in an estimated reduction in revenue of $45 million. Freight revenues also increased by 2.6% in 1Q14. However, there was a 6.8% decrease in ancillary revenue.

Operating cost decreased due to fuel cost reduction

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Salary and fuel expense accounted for 66% of the total operating expenses. The operating cost per available seat mile (or CASM) decreased by 0.5% primarily due to the decrease in fuel cost by 8.9%. The decrease in fuel cost was driven by a 6.4% decrease in fuel price per gallon to $3.08 in 1Q14. Maintenance and aircraft rentals expenses also decreased by 12.8% and 10%, respectively. However, salary expense increased by 8.9% due to increases in contractual wages, increased benefits, and higher profit sharing expense.

Profitability and EPS doubled due to improved revenue and cost structure

The increase in revenue and improvement in operational efficiency resulted in a 116% increase in operating profit to $242 million in 1Q14. There was also a 138% increase in net income resulting in an increase in diluted earnings per share (or EPS) by more than double to $0.18 in 1Q14 from $0.07 in 1Q13. In December, 2013, the operating profit margin of Southwest (LUV) and Jet Blue (JBLU) were higher at 7.2% and 7.9%, respectively, compared to United’s (UAL) 3.3% and American’s (AAL) 5.2%, but lower than Delta’s (DAL) 9%.

Southwest's first quarter results

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