Profit Soars at Southwest Airlines Co.

Southwest Airlines Co. doubled its EPS in 2013. Is there any upside left?

Jan 27, 2014 at 9:59AM

For much of the last decade, Southwest Airlines Co. (NYSE:LUV) was the terror of the airline industry. Southwest's superior cost structure, dedication to customer service, and commitment to low fares allowed it to rapidly gain market share in the U.S. From the beginning of 2001 to the end of 2010, Southwest more than doubled annual revenue to $12 billion, despite the impact of two recessions!

LUV Revenue (TTM) Chart

LUV Revenue (TTM), data by YCharts.

However, the legacy carriers have made big strides to reduce their costs in the last few years. Meanwhile, a new crop of "ultra-low-cost carriers" -- led by Spirit Airlines -- have taken cost-cutting to the extreme, becoming the new low-fare leaders. Southwest has also been distracted as it tries to integrate the Southwest and AirTran brands.

In spite of these headwinds, Southwest managed to make a lot of progress in 2013. It got much closer to completing the AirTran integration, and this helped Southwest double adjusted EPS year over year from $0.56 to $1.12! Southwest is poised to finish the AirTran integration by the end of 2014, and this bodes well for continued earnings growth in the next few years.

EPS leaps higher
On Thursday, Southwest reported a big jump in earnings for Q4. Southwest's adjusted EPS of $0.33 beat the analyst consensus by $0.04, and it was a huge jump from its Q4 2012 adjusted EPS of $0.09.

Images

Southwest Airlines' profit has finally gotten off the ground recently.

The company saw strong demand in both business and leisure travel, with Christmas leisure demand being particularly robust. This drove a 4.2% increase in PRASM (a common measure of unit revenue) during the quarter, which was much better than the recent trend. This strong result was particularly notable because the government shutdown in early October had temporarily dampened travel demand.

Southwest also turned in a great performance on the cost side. Non-fuel unit costs declined during the quarter (excluding the impact of profit sharing), fuel efficiency improved, and fuel prices fell. All of these tailwinds caused Southwest's operating margin to widen by more than six percentage points.

Integrating Southwest and AirTran
The Southwest-AirTran integration has been a long process -- the two airlines agreed to merge more than three years ago -- but the end is near. On the Southwest earnings call, CEO Gary Kelly stated that "this time next year, the AirTran brand will be retired, and it will be all Southwest." 

Arguably the most important milestone in the integration occurred earlier this year, when the company connected the Southwest and AirTran networks. This allowed travelers to connect seamlessly between Southwest and AirTran flights, which made more itineraries available for customers.

More recently, Southwest has started to optimize the combined route network. Most notably, in November, the company revamped its schedule in Atlanta, where AirTran has operated a hub. Atlanta flights were previously concentrated in big morning and evening blocks to facilitate connections. Now, Southwest has instituted a "point-to-point" schedule designed to capture more profitable origin/destination traffic in Atlanta.

The finish line is in sight
In 2014, Southwest will be able to capture the full benefit of these integration initiatives. It will also continue to optimize its route network in preparation for the move to a single brand by the end of the year. By 2015, Southwest should be achieving the full benefit of its merger synergies.

For investors, this means you can probably expect continued margin expansion from Southwest for the next two years. A return to double-digit, operating margins seems very achievable within that time frame, and this will drive significant earnings growth. At that point, the company would be well-positioned to consider a return to faster organic growth.

Discover even bigger growth opportunities
If you're looking for even bigger growth potential, look no further. David Gardner has proved doubters wrong time and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently, one of his favorite stocks became a 100-bagger! And he's ready to do it again. You can uncover his scientific approach to crushing the market and his six carefully chosen picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers