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Category: Stock Market and SouthWest Airlines
Date: 28 October 2019 Stock Price: $57.39 We take a look at the 3rd quarter earnings report of their 2019 fiscal year of SouthWest Airlines, the airline operator that at its peaks sees more than 4000 weekday departures to 101 destinations across the United States and 10 other countries.
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About Southwest Airlines
In its 49th year of service, Dallas-based Southwest Airlines Co. (NYSE: LUV) continues to differentiate itself from other air carriers with exemplary Customer Service delivered by more than 60,000 Employees to a Customer base topping 130 million passengers annually. Southwest became the nation’s largest domestic air carrier in 2003 and maintains that ranking based on the U.S. Department of Transportation’s most recent reporting of domestic originating passengers boarded. In peak travel seasons, Southwest operates more than 4,000 weekday departures among a network of 101 destinations in the United States and 10 additional countries.
Southwest coined Transfarency® to describe its purposed philosophy of treating Customers honestly and fairly, and low fares actually staying low. Southwest is the only major U.S. airline to offer bags fly free® to everyone (first and second checked pieces of luggage, size and weight limits apply, some carriers offer free checked bags on select routes or in qualified circumstances), and there are no change fees, though fare differences might apply.
Southwest is committed to returning value to its Shareholders. Since 2010, Southwest has returned more than $11.7 billion to Shareholders through share repurchases and dividends, through September 30, 2019. In the first nine months of 2019, Southwest returned $1.8 billion to Shareholders through the repurchase of $1.45 billion in common stock and the payment of $372 million in dividends.
Southwest coined Transfarency® to describe its purposed philosophy of treating Customers honestly and fairly, and low fares actually staying low. Southwest is the only major U.S. airline to offer bags fly free® to everyone (first and second checked pieces of luggage, size and weight limits apply, some carriers offer free checked bags on select routes or in qualified circumstances), and there are no change fees, though fare differences might apply.
Southwest is committed to returning value to its Shareholders. Since 2010, Southwest has returned more than $11.7 billion to Shareholders through share repurchases and dividends, through September 30, 2019. In the first nine months of 2019, Southwest returned $1.8 billion to Shareholders through the repurchase of $1.45 billion in common stock and the payment of $372 million in dividends.
Overview of Southwest's 3rd quarter 2019 earnings report
Data below refers to quarterly data unless specified otherwise:
- Revenues: $5.639 billion (up from $5.575 billion for the same period of the previous year)
- Revenues increased by 1.1% over the last 12 months
- Operating expenses: $4.820 billion (down from $4.777 billion for the same period of the previous year)
- Operating expenses increased by 0.9% over the last 12 months
- Net income: $659 million (up from $615 million from for the same period of the previous year)
- Diluted earnings per share: $1.23 (up from $1.08 for the same period of the previous year)
- Diluted weighted-average shares outstanding: 534 million (down from 569 million for the same period of the previous year)
- Cash and cash equivalents: $2.488 billion
- Cash and cash equivalents per share: $4.66
- Cash and cash equivalents makes up 8.1% of Southwest Airlines market capital
- Cash and cash equivalents makes up 9.4% of Southwest Airlines total assets
- Accounts receivable: $867 million
- Stockholders equity in Southwest Airlines: $9.931 billion
- Stockholders equity per Southwest Airlines share: $18.59
- Southwest Airlines is trading at 3.1 times its stockholders equity per share which is within the expected range of between 2 and 4 that most firms tend to trade at
- Cash generated from operations: $1.096 billion
- Cash generated from operations per share: $2.05
Southwest Airlines' management commentary on their 3rd quarter 2019 results
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "Our third quarter 2019 record financial performance was notable considering an estimated $210 million reduction in operating income due to the continued grounding of the Boeing 737 MAX 8 aircraft (MAX). Notwithstanding this challenge, we generated record third quarter operating and unit revenues; solid margins; strong cash flows and returns to Shareholders; and a healthy profitsharing accrual for our Employees. I am extremely grateful to our People for their unwavering commitment to the highest levels of Customer Service, and applaud them for one of the best third quarter operational performances in our history.
"We are engaged in ongoing discussions with The Boeing Company (Boeing) regarding compensation for damages related to the MAX groundings. The operating income reduction from the MAX groundings is estimated to be $435 million for the nine months ended September 30, 2019, and we expect the damages to continue to grow into 2020. We have not reached a settlement with Boeing, and no estimated settlement amounts have been included in our third quarter 2019 results.
"Boeing stated yesterday they are targeting regulatory approval of MAX return to service in fourth quarter 2019. Upon a rescission of the Federal Aviation Administration (FAA) order to ground the MAX, we continue to estimate it will take us one to two months to comply with applicable FAA directives, including all necessary Pilot training. As such, the MAX has been removed from our flight schedule through February 8, 2020. The FAA will determine the timing of MAX return to service, and we offer no assurances that current estimations and timelines are correct.
"I am proud of the superb job our People are doing to manage the financial and operational impacts of the MAX-related flight schedule adjustments. Third quarter 2019 unit revenue growth was a strong 4.2 percent, year-over-year, which was in line with our expectations. And, we continue to control costs despite significant year-over-year unit cost pressures resulting from the MAX groundings.
"Looking ahead to fourth quarter 2019, our financial outlook remains stable and solid. Thus far, Customer demand remains strong and the revenue environment remains healthy. Based on these trends and current bookings, we are expecting another positive year-over-year unit revenue performance in fourth quarter 2019, despite the suboptimized flight schedule during the holiday time periods, as a result of the extended MAX groundings. While we expect the MAX groundings will put pressure on fourth quarter 2019 unit costs, we remain diligent in our cost control efforts and currently expect fourth quarter 2019 year-over-year unit cost growth to ease from third quarter 2019's year-over-year unit cost growth, excluding fuel and oil expense and profit sharing expense, of 7.6 percent.
"We recently announced that new service between Sacramento and Honolulu, and between Honolulu and Lihue, will begin in November 2019, accelerated from our previous plan to start in January 2020. New flights from Oakland and San Jose to both Lihue and Kona, and new interisland service between Honolulu and Hilo, and between Kona and Kahului, will begin in January 2020. By March 2020, we plan to offer 12 daily departures from California to Hawaii, and 34 daily departures among the Hawaiian Islands. We are very pleased with the strength of Customer demand for Southwest service in Hawaii, and it will continue to be a focus for growth in 2020.
"Our network is performing extremely well, and we look forward to resuming our growth next year once the MAX is returned safely to service. Although our 2019 and 2020 plans have been affected, our long-term financial goals remain unchanged: maintain a strong balance sheet, investment-grade credit ratings, and ample liquidity; generate robust operating and free cash flows; grow earnings, margins, and capital returns; and maintain healthy Shareholder returns."
Revenue Results and Outlook
The Company's third quarter 2019 total operating revenues increased 1.1 percent, year-over-year, to a third quarter record $5.6 billion, despite the negative impacts as a result of the MAX groundings. Third quarter 2019 operating revenue per available seat mile (RASM, or unit revenues) was a record 14.32 cents, and increased 4.2 percent, driven largely by a passenger revenue yield increase of 4.1 percent, and offset slightly by a load factor decrease of 0.4 points, all year-over-year. Third quarter 2019 RASM benefited year-over-year by approximately two points as a result of lower third quarter 2019 available seat miles (ASMs, or capacity) due to the MAX groundings, as well as an approximate one-point tailwind—with one-half point related to the Company's third quarter 2018 suboptimal schedule from the 2017 accelerated retirement of its 737-300 (Classic) fleet, and one-half point related to the revenue effects from the Flight 1380 accident in April 2018. Third quarter 2019 RASM also benefited year-over-year by an approximate one-half point due to revenue management capabilities implemented in 2018.
Currently, passenger booking and revenue trends remain solid, and the Company expects fourth quarter 2019 RASM to be in the range of flat to up 2 percent, compared with fourth quarter 2018. The Company's outlook for fourth quarter 2019 assumes no year-over-year RASM net benefit due to the MAX groundings, unlike second and third quarter 2019. The estimated year-over-year RASM benefit of two to three points driven by lower fourth quarter 2019 capacity from the MAX groundings is expected to be offset by the negative year-over-year RASM effects from the complexity of adjusting the Company's previously published fourth quarter 2019 flight schedule. The Company's adjustments to remove the MAX aircraft from its fourth quarter 2019 flight schedule provide for a more uniform week-to-week schedule over the peak holiday period relative to fourth quarter 2018, which is needed to maintain schedule feasibility and minimize disruption to Customers and the operation. As a result, there is more year-over-year flying in off-peak periods and—due to a fleet deficit—less flying in peak periods than planned, or optimal.
Cost Performance and Outlook
Third quarter 2019 total operating expenses increased 0.9 percent, year-over-year, to $4.8 billion. Total operating expenses per ASM (CASM, or unit costs) increased 4.0 percent, compared with third quarter 2018. Excluding last year's special items, third quarter 2019 total operating expenses increased 0.9 percent to $4.8 billion, or 3.9 percent on a unit basis, year-over-year.
Third quarter 2019 economic fuel costs3 were $2.07 per gallon and included $.04 per gallon in premium expense with no cash settlements from fuel derivative contracts, compared with $2.25 per gallon in third quarter 2018, which included $.06 per gallon in premium expense and $.10 per gallon in favorable cash settlements from fuel derivative contracts. Third quarter 2019 ASMs per gallon, or fuel efficiency, decreased 0.9 percent, year-over-year, due to the removal of the Company's most fuel-efficient aircraft from its schedule as a result of the MAX groundings. The Company expects fourth quarter 2019 fuel efficiency to decrease in the range of 1 to 2 percent, year-over-year, as a result of the MAX groundings.
Based on the Company's existing fuel derivative contracts and market prices as of October 18, 2019, fourth quarter 2019 economic fuel costs are estimated to be in the range of $2.05 to $2.15 per gallon4, including $.04 per gallon in premium expense with no cash settlements from fuel derivative contracts, compared with $2.25 per gallon in fourth quarter 2018, which included $.06 per gallon in premium expense and $.06 per gallon in favorable cash settlements from fuel derivative contracts. As of October 18, 2019, the fair market value of the Company's fuel derivative contracts for the remainder of 2019 was an asset of approximately $2 million, and the fair market value of the fuel hedge portfolio settling in 2020 and beyond was an asset of approximately $134 million. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.
Excluding fuel and oil expense and special items, third quarter 2019 operating expenses increased 4.4 percent, compared with third quarter 2018. Third quarter 2019 profitsharing expense was $144 million, compared with $135 million in third quarter 2018. Excluding fuel and oil expense, special items, and profitsharing expense, third quarter 2019 operating expenses increased 4.3 percent, or 7.6 percent on a unit basis, year-over-year. Approximately six to seven points of this year-over-year unit cost increase was due to the MAX groundings and the resulting lower third quarter 2019 capacity. The year-over-year increase of 7.6 percent in third quarter 2019 CASM, excluding fuel and oil expense, special items, and profitsharing expense, was better than expected primarily due to favorable airport settlements, lower than expected airport rate increases, and continued cost control.
Based on current cost trends, the Company expects fourth quarter 2019 CASM, excluding fuel and oil expense and profitsharing expense, to increase in the 4 to 6 percent range, compared with fourth quarter 2018. Prior to the MAX groundings, the Company expected fourth quarter 2019 CASM, excluding fuel and oil expense and profitsharing expense, to decrease approximately 2 percent, year-over-year. Approximately six points of the expected incremental year-over-year unit cost increase in fourth quarter 2019 are driven by lower fourth quarter 2019 capacity as a result of the MAX groundings, net of two to three points of year-over-year unit cost benefit driven by more year-over-year flying in off-peak periods as a result of fourth quarter 2019 flight schedule adjustments. Additionally, the Company expects approximately one point of year-over-year unit cost increase in fourth quarter 2019 due to the shifting of maintenance and technology expenses from third quarter into fourth quarter 2019. Once the Company publishes its flight schedule, its operating costs are largely fixed. The Company currently has flights for sale through April 13, 2020, with the MAX removed from its flight schedule through February 8, 2020.
"We are engaged in ongoing discussions with The Boeing Company (Boeing) regarding compensation for damages related to the MAX groundings. The operating income reduction from the MAX groundings is estimated to be $435 million for the nine months ended September 30, 2019, and we expect the damages to continue to grow into 2020. We have not reached a settlement with Boeing, and no estimated settlement amounts have been included in our third quarter 2019 results.
"Boeing stated yesterday they are targeting regulatory approval of MAX return to service in fourth quarter 2019. Upon a rescission of the Federal Aviation Administration (FAA) order to ground the MAX, we continue to estimate it will take us one to two months to comply with applicable FAA directives, including all necessary Pilot training. As such, the MAX has been removed from our flight schedule through February 8, 2020. The FAA will determine the timing of MAX return to service, and we offer no assurances that current estimations and timelines are correct.
"I am proud of the superb job our People are doing to manage the financial and operational impacts of the MAX-related flight schedule adjustments. Third quarter 2019 unit revenue growth was a strong 4.2 percent, year-over-year, which was in line with our expectations. And, we continue to control costs despite significant year-over-year unit cost pressures resulting from the MAX groundings.
"Looking ahead to fourth quarter 2019, our financial outlook remains stable and solid. Thus far, Customer demand remains strong and the revenue environment remains healthy. Based on these trends and current bookings, we are expecting another positive year-over-year unit revenue performance in fourth quarter 2019, despite the suboptimized flight schedule during the holiday time periods, as a result of the extended MAX groundings. While we expect the MAX groundings will put pressure on fourth quarter 2019 unit costs, we remain diligent in our cost control efforts and currently expect fourth quarter 2019 year-over-year unit cost growth to ease from third quarter 2019's year-over-year unit cost growth, excluding fuel and oil expense and profit sharing expense, of 7.6 percent.
"We recently announced that new service between Sacramento and Honolulu, and between Honolulu and Lihue, will begin in November 2019, accelerated from our previous plan to start in January 2020. New flights from Oakland and San Jose to both Lihue and Kona, and new interisland service between Honolulu and Hilo, and between Kona and Kahului, will begin in January 2020. By March 2020, we plan to offer 12 daily departures from California to Hawaii, and 34 daily departures among the Hawaiian Islands. We are very pleased with the strength of Customer demand for Southwest service in Hawaii, and it will continue to be a focus for growth in 2020.
"Our network is performing extremely well, and we look forward to resuming our growth next year once the MAX is returned safely to service. Although our 2019 and 2020 plans have been affected, our long-term financial goals remain unchanged: maintain a strong balance sheet, investment-grade credit ratings, and ample liquidity; generate robust operating and free cash flows; grow earnings, margins, and capital returns; and maintain healthy Shareholder returns."
Revenue Results and Outlook
The Company's third quarter 2019 total operating revenues increased 1.1 percent, year-over-year, to a third quarter record $5.6 billion, despite the negative impacts as a result of the MAX groundings. Third quarter 2019 operating revenue per available seat mile (RASM, or unit revenues) was a record 14.32 cents, and increased 4.2 percent, driven largely by a passenger revenue yield increase of 4.1 percent, and offset slightly by a load factor decrease of 0.4 points, all year-over-year. Third quarter 2019 RASM benefited year-over-year by approximately two points as a result of lower third quarter 2019 available seat miles (ASMs, or capacity) due to the MAX groundings, as well as an approximate one-point tailwind—with one-half point related to the Company's third quarter 2018 suboptimal schedule from the 2017 accelerated retirement of its 737-300 (Classic) fleet, and one-half point related to the revenue effects from the Flight 1380 accident in April 2018. Third quarter 2019 RASM also benefited year-over-year by an approximate one-half point due to revenue management capabilities implemented in 2018.
Currently, passenger booking and revenue trends remain solid, and the Company expects fourth quarter 2019 RASM to be in the range of flat to up 2 percent, compared with fourth quarter 2018. The Company's outlook for fourth quarter 2019 assumes no year-over-year RASM net benefit due to the MAX groundings, unlike second and third quarter 2019. The estimated year-over-year RASM benefit of two to three points driven by lower fourth quarter 2019 capacity from the MAX groundings is expected to be offset by the negative year-over-year RASM effects from the complexity of adjusting the Company's previously published fourth quarter 2019 flight schedule. The Company's adjustments to remove the MAX aircraft from its fourth quarter 2019 flight schedule provide for a more uniform week-to-week schedule over the peak holiday period relative to fourth quarter 2018, which is needed to maintain schedule feasibility and minimize disruption to Customers and the operation. As a result, there is more year-over-year flying in off-peak periods and—due to a fleet deficit—less flying in peak periods than planned, or optimal.
Cost Performance and Outlook
Third quarter 2019 total operating expenses increased 0.9 percent, year-over-year, to $4.8 billion. Total operating expenses per ASM (CASM, or unit costs) increased 4.0 percent, compared with third quarter 2018. Excluding last year's special items, third quarter 2019 total operating expenses increased 0.9 percent to $4.8 billion, or 3.9 percent on a unit basis, year-over-year.
Third quarter 2019 economic fuel costs3 were $2.07 per gallon and included $.04 per gallon in premium expense with no cash settlements from fuel derivative contracts, compared with $2.25 per gallon in third quarter 2018, which included $.06 per gallon in premium expense and $.10 per gallon in favorable cash settlements from fuel derivative contracts. Third quarter 2019 ASMs per gallon, or fuel efficiency, decreased 0.9 percent, year-over-year, due to the removal of the Company's most fuel-efficient aircraft from its schedule as a result of the MAX groundings. The Company expects fourth quarter 2019 fuel efficiency to decrease in the range of 1 to 2 percent, year-over-year, as a result of the MAX groundings.
Based on the Company's existing fuel derivative contracts and market prices as of October 18, 2019, fourth quarter 2019 economic fuel costs are estimated to be in the range of $2.05 to $2.15 per gallon4, including $.04 per gallon in premium expense with no cash settlements from fuel derivative contracts, compared with $2.25 per gallon in fourth quarter 2018, which included $.06 per gallon in premium expense and $.06 per gallon in favorable cash settlements from fuel derivative contracts. As of October 18, 2019, the fair market value of the Company's fuel derivative contracts for the remainder of 2019 was an asset of approximately $2 million, and the fair market value of the fuel hedge portfolio settling in 2020 and beyond was an asset of approximately $134 million. Additional information regarding the Company's fuel derivative contracts is included in the accompanying tables.
Excluding fuel and oil expense and special items, third quarter 2019 operating expenses increased 4.4 percent, compared with third quarter 2018. Third quarter 2019 profitsharing expense was $144 million, compared with $135 million in third quarter 2018. Excluding fuel and oil expense, special items, and profitsharing expense, third quarter 2019 operating expenses increased 4.3 percent, or 7.6 percent on a unit basis, year-over-year. Approximately six to seven points of this year-over-year unit cost increase was due to the MAX groundings and the resulting lower third quarter 2019 capacity. The year-over-year increase of 7.6 percent in third quarter 2019 CASM, excluding fuel and oil expense, special items, and profitsharing expense, was better than expected primarily due to favorable airport settlements, lower than expected airport rate increases, and continued cost control.
Based on current cost trends, the Company expects fourth quarter 2019 CASM, excluding fuel and oil expense and profitsharing expense, to increase in the 4 to 6 percent range, compared with fourth quarter 2018. Prior to the MAX groundings, the Company expected fourth quarter 2019 CASM, excluding fuel and oil expense and profitsharing expense, to decrease approximately 2 percent, year-over-year. Approximately six points of the expected incremental year-over-year unit cost increase in fourth quarter 2019 are driven by lower fourth quarter 2019 capacity as a result of the MAX groundings, net of two to three points of year-over-year unit cost benefit driven by more year-over-year flying in off-peak periods as a result of fourth quarter 2019 flight schedule adjustments. Additionally, the Company expects approximately one point of year-over-year unit cost increase in fourth quarter 2019 due to the shifting of maintenance and technology expenses from third quarter into fourth quarter 2019. Once the Company publishes its flight schedule, its operating costs are largely fixed. The Company currently has flights for sale through April 13, 2020, with the MAX removed from its flight schedule through February 8, 2020.
Southwest Airlines (NYSE: LUV) stock price history
The image below, obtained from Google, shows the stock price history of Southwest over the last 5 years. And its been a pretty good time for Southwest stockholders. 5 years ago the stock was trading at around $34.50 a stock and its currently trading at $57.39 a stock. That's a decent return of 66.34% provided to Southwest stockholders over the last 5 years. The opportunity cost of holding Southwest stock instead of say Netflix that returned over 300% over a 5 year period becomes significant.
The stock of Southwest is trading at a lot closer to its 52 week high of $58.77 than it is to its 52 week low of $44.28 which to us is a clear indication that the short term sentiment and momentum of Southwest stock is positive right now.
The stock of Southwest is trading at a lot closer to its 52 week high of $58.77 than it is to its 52 week low of $44.28 which to us is a clear indication that the short term sentiment and momentum of Southwest stock is positive right now.
Recent coverage of Southwest Airlines
The extract below discusses the latest news regarding Soutwest Airlines as obtained from TheStreet,com
Southwest Airlines ( LUV - Get Report) reported third-quarter earnings of $1.23 a share, beating estimates of $1.08, but said operating income was reduced by $435 million in the first nine months of the year on the grounding of Boeing's ( BA - Get Report) 737 MAX jet. Revenue of $5.64 billion matched Wall Street forecasts. The company last year earned $1.08 a share on revenue of $5.58 billion.
Southwest Airlines is the biggest customer for Boeing's 737 Max jet, which has been grounded worldwide after two fatal crashes. "While we expect the MAX groundings will put pressure on fourth-quarter 2019 unit costs, we remain diligent in our cost control efforts and currently expect fourth-quarter 2019 year-over-year unit cost growth to ease from third quarter 2019's year-over-year unit cost growth, excluding fuel and oil expense
and profit-sharing expense, of 7.6%" said CEO Gary Kelly in a statement.
Read the full article here
Southwest Airlines ( LUV - Get Report) reported third-quarter earnings of $1.23 a share, beating estimates of $1.08, but said operating income was reduced by $435 million in the first nine months of the year on the grounding of Boeing's ( BA - Get Report) 737 MAX jet. Revenue of $5.64 billion matched Wall Street forecasts. The company last year earned $1.08 a share on revenue of $5.58 billion.
Southwest Airlines is the biggest customer for Boeing's 737 Max jet, which has been grounded worldwide after two fatal crashes. "While we expect the MAX groundings will put pressure on fourth-quarter 2019 unit costs, we remain diligent in our cost control efforts and currently expect fourth-quarter 2019 year-over-year unit cost growth to ease from third quarter 2019's year-over-year unit cost growth, excluding fuel and oil expense
and profit-sharing expense, of 7.6%" said CEO Gary Kelly in a statement.
Read the full article here
Southwest Airlines (NYSE: LUV) latest stock valuation
So what is Southwest Airlines stock worth based on the release of their latest earnings report? Based on the earnings report and fiscal guidance provided by Southwest Airlines our our valuation models provide a target (full value) price for Southwest Airlines stock at $70.8 a stock. We therefore believe that the stock of Southwest Airlines is undervalued
We usually suggest that long term and fundamental investors get in at least 10% below our target (full value) price which in this case is $70.80. Therefore we believe a good entry point into Southwest Airlines stock is at $63.70 or below. We expect the stock price of Southwest Airlines to increase to levels to closer to our target price in coming weeks and months.
We usually suggest that long term and fundamental investors get in at least 10% below our target (full value) price which in this case is $70.80. Therefore we believe a good entry point into Southwest Airlines stock is at $63.70 or below. We expect the stock price of Southwest Airlines to increase to levels to closer to our target price in coming weeks and months.
Next earnings release date for Southwest Airlines
It is expected that Southwest Airlines 4th quarter and full year results of their 2019 fiscal year will be released in late January 2020.