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Southwest Airlines: Analysts’ Q4 Expectations

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Analysts’ expectations

Analysts expect Southwest Airlines’ (LUV) fourth-quarter top and bottom-line results to continue benefiting from the healthy passenger travel demand environment. Analysts expect the company’s fourth-quarter revenues to grow 7.7% YoY (year-over-year) to $5.7 billion. The EPS is expected to increase ~34% YoY to $1.03 from $0.77 reported in the fourth quarter of 2017.

The strong bottom-line growth projection reflects strong top-line growth, lower income taxes, and reduced share counts. However, increased operating expenses and a decline in the passenger load factor are expected to partially offset the benefits.

For the fourth quarter, analysts expect the RASM (revenue per available seat mile) and revenue per RPM (revenue passenger miles) to remain flat YoY at 14 cents and 15 cents, respectively. The tax rate is expected to fall to 23.4% from 35.1% in the fourth quarter of 2017.

The operating expenses for the fourth quarter are projected to increase 8.4% YoY to $4.9 billion. The passenger load factor will likely be 84.8% in the fourth quarter—down by 20 basis points from 85% in the fourth quarter of 2017.

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Third-quarter performance

Southwest Airlines’ third-quarter revenues rose 5.1% YoY to $5.6 billion. The company’s EPS grew 22.7% YoY to $1.08. Southwest Airlines’ RASM rose 1.2% YoY to 13.74 cents, while its passenger yield rose 2.3% YoY to 15.27 cents. The average fare paid rose to $153.40—an increase of 2.5%.

However, Southwest Airlines’ load factor fell 0.9% to 83.9%. The company’s capacity growth of 3.9% outpaced its traffic growth of 2.7%. Southwest Airlines’ third-quarter operating expenses increased 7.2% to $4.8 billion. The company’s total operating expenses per available seat mile, or unit costs, rose 3.1%. Fuel hedges helped offset higher oil prices.

Peers’ performance

Almost every player in the airline industry (JETS) is benefiting from a healthy passenger travel demand environment. Delta Air Lines (DAL), United Continental (UAL), and American Airlines (AAL) all topped analysts’ EPS expectations. Delta Air Lines and United Continental recorded 16.6% and 37.8% growth YoY in their respective third-quarter EPS. However, American Airlines’ third-quarter EPS declined 24% YoY mainly due to increased operating expenses.

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