Southwest Airlines’ (LUV) earnings operating income increased 20% year-over-year (or YoY) to $834.0 million. Net profits rose 29.6% YoY to $503 million, which led to 35.5% YoY growth in diluted earnings per share (or EPS) to $0.84.
New labor contracts and hurricanes
The airline’s unit cost, or cost per available seat mile (or CASM), excluding fuel increased 3.3% YoY to 8.3 cents in the third quarter. Of this, almost 2.0% impact was from the hurricanes.
Labor costs also increased due to the pilot contract renewal that was completed in 4Q16. Despite this, operating expenses were almost flat at -0.02% YoY, as all other costs declined in the quarter.
Fuel costs rose
Crude oil prices have also risen in the third quarter. Southwest Airlines’ fuel costs rose 10.1% YoY to $1.96 per gallon.
Southwest Airlines expects CASM ex-fuel to increase 0.0%–1.5% YoY in the fourth quarter of 2017, as the impact of renewed labor contract wanes. Fuel costs are expected to increase to $2.10 per gallon, including a $0.25 cost from Southwest Airlines’ fuel hedging losses.
Southwest Airlines’ hedging losses will also come to an end in 2018, which is expected to provide a good tailwind to the airline’s margins.
Investors can gain exposure to Southwest Airlines by investing in the PowerShares Dynamic Large Cap Value Portfolio ETF (PWV), which holds 1.5% of its portfolio in the stock. It also holds 1.5% in Delta Air Lines (DAL).