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Why Southwest Airlines Stock Popped 5%

By Rich Smith - Updated Apr 22, 2019 at 2:46PM

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Earnings beat, and guidance looks good.

What happened

Shares of Southwest Airlines (LUV 4.98%) stock surged nearly 6% in early trading Thursday before retracing toward a 4.7% gain as of noon EST. The discount airline reported this morning that it earned $1.17 per share on $5.7 billion in revenue in its fiscal fourth quarter 2018, beating expectations on both fronts despite suffering from higher fuel and labor costs .

So what

Nevertheless, the news wasn't all good. The $1.17 per share that Southwest earned, although greater than the $1.06 that Wall Street had expected it to earn, was a full 60% below the company's earnings a year ago, in Q4 2017. Earnings for the full fiscal year were also down, albeit not as much. Earnings per share for 2018 came to $4.29, a 23% decrease from 2017 profits.

Southwest noted that fuel costs rose about 4% year over year in the fourth quarter, and 7% for the full year, in comparison to fiscal 2017 costs.

Tanker truck fueling an airplane

Even higher fuel costs couldn't keep Southwest Airlines from reporting an earnings beat. Image source: Getty Images.

Now what

The good news is that with a lower cost of oil, fuel costs are already moderating and likely to fall significantly in 2019. Southwest is projecting an average cost of $2 to $2.05 per gallon in Q1 2019, as much as an 11% drop from Q4 2018 levels, with full-year 2019 fuel costs not much higher -- from $2 to $2.10. If it's correct, these falling fuel costs should help to offset an expected 3%-to-3.5% rise in other operating costs this year.

Although management didn't give firm guidance for what it expects to earn after deducting these costs, it did note that "passenger demand is healthy," and Southwest is forecasting "first quarter 2019 RASM to increase in the four to five percent range" -- so more than enough increase in traffic to keep profits growing despite the rising cost of doing business in any case.

Check out the latest Southwest Airlines earnings call transcript.

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