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Southwest’s 2Q15 Profits Surge due to Lower Fuel Costs

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Earnings overview

The second quarter earnings for Southwest Airlines (LUV) supported the company’s guidance for the year. The company reported diluted earnings per share of $1.03 for 2Q15, a 43% increase over 2Q14. The company’s operating income grew by 40.2% year-over-year, which helped the company’s operating margin surge to a strong 22.5% at the end of the second quarter.

The top line, or revenues, of the company did not grow as expected. The company’s revenues grew only by 2% year-over-year to stand at $5.1 billion, even when the capacity or available seat miles (or ASM) grew by 7% year-over-year. The main reasons behind this lackluster performance were longer average stage lengths, higher average seats per trip (or gauge), and a softer yield environment.

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Fuel savings help reduce unit costs

The strong performance in Southwest’s bottom line was possible because of savings in fuel costs. The fuel costs for the quarter stood at $2.02 per gallon, including $0.8 per gallon in unfavorable cash settlements from fuel derivative contracts, as compared to $3.02 per gallon in the corresponding quarter last year. The company saved more than $550 million in fuel costs, which is a 29% year-over-year (or YoY) reduction. This helped Southwest offset the lower revenue. Total adjusted operating expenses decreased to $3.96 billion, a 5.5% year-over-year decline.

The decline in crude oil prices has helped all major airlines reduce their fuel costs in 2Q15:

  • Delta’s (DAL) fuel cost for 2Q15 was $2.40 per gallon, a 18% YoY decline
  • Alaska Airlines’ (ALK) fuel cost for 2Q15 was $2.12 per gallon, a 34% YoY decline
  • United Alirlines’ (UAL) fuel cost, including hedging losses, was $2.17, a 29.5% YoY decline

These airlines are part of many ETFs, including the iShares Transportation Average ETF (IYT), which has 16.85% of its holdings in airline stocks.

New and international markets grow according to expectations

Southwest saw better-than-expected growth and returns in its newly developed markets in Dallas. The company added nine additional daily non-stop flights from its Dallas Love Field, taking the total to 166.

The company also expanded its international operations as planned. It started services to Puerto Vallarta in June. The company plans to start flights to eight more international cities by the end of this year.

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