Can Southwest Earnings Fly Past Delta and American?

Southwest Airlines (NYSE: LUV  ) will release its quarterly report on Thursday, and investors have been increasingly optimistic about the prospects for the popular airline. In a favorable environment for air travel generally, Southwest has held its own against Delta Air Lines (NYSE: DAL  ) and American Airlines Group (NASDAQ: AAL  ) , despite passing up some of the lucrative money-making opportunities that its rivals have used to bolster their net income.

Southwest Airlines was the darling of the airline industry for decades, as its discount model was able to generate profits even when Delta, American, and other airlines were losing billions of dollars. Yet as its rivals have taken off, Southwest has found itself in the unusual situation of lagging behind. Can Southwest get its momentum back even despite the success of its airline peers? Let's take an early look at what's been happening with Southwest Airlines over the past quarter and what we're likely to see in its report.

Stats on Southwest Airlines

Analyst EPS Estimate

$0.29

Change From Year-Ago EPS

222%

Revenue Estimate

$4.39 billion

Change From Year-Ago Revenue

5.2%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

How high can Southwest earnings fly this quarter?
Analysts have gotten more optimistic about Southwest earnings in recent months, raising their fourth-quarter estimates by $0.04 per share and their full-year 2014 projections by more than twice that amount. The stock has continued its steep climb, gaining 37% just since mid-October.

Southwest's third-quarter earnings showed that the airline is flying in the right direction, with the company setting a new all-time record for net income. Operating income more than doubled on a 5.5% jump in operating revenue, with Southwest benefiting from lower fuel prices and more fuel-efficient operations. The company's ongoing fleet modernization continued to move forward, with the company finally starting to tackle the transition of the Boeing 717 fleet it acquired as part of the AirTran acquisition, with a deal that will eventually have Delta lease all 88 717s.

Southwest has continued to follow a high-growth strategy, challenging Delta, American, and United Continental (NYSE: UAL  ) on their own turf. The company's decision to go up against United by expanding its Houston-based service is just one example of how Southwest hasn't hesitated to attack other airlines even in their hub cities. To facilitate that growth, though, Southwest has started to make some strategic decisions to pull out of weaker markets, especially small ones where profit opportunities haven't panned out the way the carrier had hoped.

Yet one consequence of Southwest's growth is that other carriers are challenging the airline with lower prices. So far, that hasn't had a major impact on Southwest's customer-service ratings, with the company maintaining its track record of having extremely low customer-complaint rates. One reason might well be that when you include the impact of Southwest's more favorable baggage-checking policies, which allow most passengers to travel fee-free, what might look like a higher fare actually equates to a lower total cost.

Still, Southwest should get some lucrative new opportunities due to the American merger. American and US Airways will have to give up 44 round-trip flights in and out of Washington's Reagan National Airport, and Southwest is likely to have the chance to outbid JetBlue (NASDAQ: JBLU  ) to get a significant share of those open slots. Similar concessions in New York's LaGuardia Airport could lead to further gains for Southwest.

In the Southwest earnings report, watch to see how the airline's ongoing efforts to boost its profitability have panned out. Despite impressive share-price gains, investors still don't seem convinced that the industry's newfound profits will last. That leaves some upside potential for Southwest shareholders if the airline can execute well and continue to grow.

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