Airline Fills Seats Faster Than It Adds

5/18/2015


  Recent Price
$41
  Dividend
$0.30
  Yield
0.7%
  P/E Ratio
17
  Shares (millions)
682
  Long-Term Debt as % of Capital
26%
  52-Week Price Range
$47.17 - $24.41

Like the dieter who pushes back the plate as the rest of the table gorges, Southwest Airlines ($41; LUV) is exercising impressive discipline.

Over the last year, Southwest's revenue passenger miles (traffic) rose 7.1%, while available seat miles (capacity) rose 6.0%, boosting the load factor to 80.1% in the March quarter from 79.3% in the year-earlier quarter. Most airlines, and the industry in general, have grown capacity faster than traffic and seen load factors decline.

Southwest's capacity rose 6.7% in April, accompanied by an 8.6% increase in traffic for a load factor of 83.1%, up from 81.7% a year ago. The company expects capacity growth of 7% for the full year, mostly on flights added at Love Field in Dallas.

At 17 times trailing earnings, Southwest shares command a premium to the median airline stock but trade 20% below the company's five-year average. A Quadrix Overall score of 98 is supported by five category scores above 75, including 80 in Value and 97 in Quality. Southwest is a Long-Term Buy.

Steady course for growth

In the 12 months ended March, Southwest grew per-share profits 103% and operating cash flow 24%. Operating profit margins rose to 20.4% from 13.5% a year earlier, helped by a 13% decline in fuel expenses, mostly driven by a plunge in oil prices. However, margins have been trending higher for two years, dating back to before oil's drop, helped by broader cost controls and remodeling of aircraft to accommodate more seats.

The consensus projects per-share-profit growth of 76% this year and 4% next year. The 2016 estimate reflects a rebound in oil prices but still seems overly conservative.

Southwest, which controls 18 of the 20 gates at Love Field, has expanded aggressively since the 2014 repeal of a law that limited the number of nonstop flights from the airport. The airline's daily departures from Love Field rose 8% in April and will jump another 8% in August to 180, at which point Southwest will serve 50 cities, up from 33 in February.

Contract talks between Southwest and its pilots union have bogged down, and the union announced May 12 that it had convened a strike committee. However, it's way too early to panic, as federal mediators continue to oversee negotiations, which are scheduled to continue through June. The pilots cannot strike unless they are released from mediation, and at the moment a strike seems unlikely.

Where the cash goes

Operating cash flow has more than doubled over the last three years. During that period, the airline committed 65% of that cash flow to capital projects, mostly new aircraft. Another 25% of cash from operations funded share buybacks that reduced the stock count 12% over the last three years.

Spending on both buybacks and dividends rose at least 40% in the 12 months ended March. Southwest continued the trend this month, boosting its dividend 25% and authorizing $1.5 billion in stock buybacks, with $300 million (roughly 1% of stock-market value) in an accelerated program.

Obtain an annual report for Southwest Airlines Co. at P.O. Box 36611, Dallas, TX 75235; (214) 792-4000; www.southwest.investorroom.com.

SOUTHWEST AIRLINES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '15
0.66
vs.
0.18
6%
47.17
-
38.26
23 - 19
Dec '14
0.59
vs.
0.33
5%
43.19
-
28.40
25 - 16
Sep '14
0.55
vs.
0.34
6%
35.49
-
25.86
23 - 17
Jun '14
0.70
vs.
0.38
8%
27.70
-
22.35
23 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
18.61
2.01
0.16
43.19
-
18.78
21 - 9
2013
17.70
1.12
0.10
19.00
-
10.36
17 - 9
2012
17.09
0.56
0.03
10.61
-
7.76
19 - 14
2011
15.66
0.43
0.02
13.59
-
7.15
32 - 17
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
86
80
97
79
84
58

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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