Southwest Airlines Earnings: an Early Look

With hundreds of companies having already reported quarterly results, we're now in the heart of earnings season. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Southwest Airlines (LUV -6.96%). The airline has long been one of the few consistently profitable players in the industry, but as competitors have combined forces, Southwest has had to take steps to preserve its leadership. 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 quarterly report on Thursday.

Stats on Southwest Airlines

Source: Yahoo Finance.

Will Southwest Airlines fly higher?
Southwest has analysts a bit uncertain about where the company's fourth-quarter earnings will land. The consensus calls for a year-over-year decline in earnings, but the fairly wide range of individual estimates makes it hard to predict whether Southwest will once again give investors an earnings beat. Shareholders are optimistic, however, with the stock up more than 25% since mid-October.

One of the big success stories in the airline industry has been the rise of baggage fees. Delta Air Lines (DAL 4.05%) and United Continental (UAL 1.59%) have both turned baggage fees into big business, with Delta collecting more than $660 million during the first three quarters of 2012, while United took in $187 million in the third quarter alone. Even though Southwest's legacy flights don't charge baggage fees for customers' first two bags, the routes it picked up in its AirTran acquisition do, giving Southwest more than $100 million in revenue during the first nine months of 2012.

But Southwest has searched for revenue from other ancillary fees. Last month, it said it would start charging passengers who don't show up for flights, and earlier this week, Southwest added an option to pay $40 more to board early in its "A" boarding group. The airline hopes the moves will help it reach its goal of increasing revenue by $1.3 billion, or about 7%-8%, in 2013.

In this quarter's report, factors like Hurricane Sandy and relatively low overall traffic may well weigh on short-term results. But the bigger question for the long run is how Southwest will deal with the potential for an American/US Airways merger that could once again up the ante for the biggest carriers in the industry. Look for signs this week that Southwest is taking long-term steps to recapture its leadership among airlines once and for all.

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