25 Jul

Southwest Beat Q2 Earnings Estimate Despite MAX Jets

WRITTEN BY Anirudha Bhagat

Southwest Airlines (LUV) reported better-than-expected second-quarter earnings results despite the massive negative impact from Boeing’s (BA) 737 MAX grounded jets. The company’s second-quarter earnings grew 8.7% YoY (year-over-year) to $1.37 per share. The earnings beat analysts’ estimate of $1.34. Increased revenues and lower fuel costs mainly drove the company’s second-quarter earnings.

Southwest Beat Q2 Earnings Estimate Despite MAX Jets

Southwest’s revenues

Southwest’s second-quarter revenues increased 2.9% YoY to $5.91 billion. The top-line growth increased due to higher revenues from non-ticket sources and a rise in the unit revenue. However, the revenues fell marginally short of analysts’ estimate of $5.94 billion.

The company’s unit revenues or operating revenue per available seat mile grew 6.8% YoY to 14.78 cents. During the second quarter, the passenger yield increased 4.2%, while the load factor improved 1.7% YoY. Southwest experienced healthy leisure and corporate demand during the second quarter. The company’s top-line results would have also benefited from higher ticket fares. In a report of June 13, JPMorgan Chase revealed that Southwest hiked ticket fares twice in the second quarter.

Notably, Southwest reported a YoY improvement in top and bottom-line results despite massive flight cancellations due to Boeing’s troubled aircraft. Airline regulators around the world have banned the 737 MAX from flying since mid-March following two deadly accidents with five months. Southwest owns 34 of the Boeing 737 MAX planes. In the earnings release, the company revealed that it faced over 20,000 flight cancellations due to the MAX grounding.

Southwest’s operating expenses increased

Although the company recorded a YoY improvement in its earnings, the growth rate slowed down drastically in the second quarter. Southwest registered 21% YoY growth in its fiscal 2018 bottom-line results. The sluggish earnings growth was mainly due to Boeing’s MAX problem.

The grounding of the MAX jets reduced Southwest’s overall capacity, which put pressure on its second-quarter unit costs. The company’s total seating capacity fell 3.6% in the second quarter. As a result, the unit cost increased 7.5% YoY to 12.36 cents. Southwest’s total operating expenses increased 3.5% YoY to $4.94 billion. The company stated that its second-quarter operating income took a $175 million hit due to the MAX troubles.

Moderate oil prices partially offset the negative impact of the factors mentioned above. The average fuel cost for the quarter fell 3.6% to $2.13 per gallon compared to $2.21 in the second quarter of 2018. Notably, oil prices fell slightly in the second quarter compared to the second quarter of 2018. According to the Fed’s economic data, the average WTI oil price was $59 in the second quarter—down 13.2% from $68 in the second quarter of 2018.

Dismal outlook

Citing uncertainty about MAX’s return to service, Southwest extended the cancellations until January 5, 2020. The company expects its capacity to fall 2%–3% in the third quarter and 1%–2% in fiscal 2019.

Southwest expects its third-quarter unit revenues to increase 3%–5% due to the strong travel demand environment. However, the unit cost is expected to rise significantly due to a capacity reduction in the third quarter. The unit costs are expected to increase 8%–10%.

With a YTD (year-to-date) return of 17.7%, Southwest is one of the top performers among US airlines. American Airlines (AAL), United Airlines (UAL), and Alaska Air Group (ALK) shares have gained 7.7%, 13.6%, and 7.8%, respectively. The stock has outperformed the US Global Jets ETF (JETS), which has risen 15.9% YTD. JETS has exposure to companies that are engaged in aircraft manufacturing and passenger and cargo airlines.

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