Southwest Airlines (LUV) Faces Expense, Cancelation Woes
Southwest Airlines Co. LUV continues to grapple with rising expenses. Additionally, massive flight cancelations during the Christmas holiday weekend in December 2022 unfavorably impacted LUV’s fourth-quarter 2022 results.
Let’s discuss these factors in detail.
Escalating fuel prices represent a concern. In fourth-quarter 2022, fuel cost per gallon (inclusive of fuel tax: economic) rose 41.3% to $3.18. For first-quarter 2023, economic fuel costs per gallon are expected between $3.25 and $3.35. For 2023, economic fuel costs per gallon are estimated between $2.90 and $3.00. Higher fuel expenses weigh on the company's bottom line.
Apart from the increase in fuel costs, a rise in labor and airport costs is likely to dent bottom-line growth. In fourth-quarter 2022, consolidated unit cost or cost per available seat mile (CASM), excluding fuel, oil and profit-sharing expenses, and special items, increased 31% year over year. Due to an increase in labor and airport costs, as well as lower productivity levels, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 2-4% in the first quarter of 2023 from that reported in the comparable period of 2022. High capex may also play a spoilsport.
Massive flight cancellations due to unfavorable weather conditions during the Christmas holiday weekend in December 2022 unfavorably impacted LUV. The company had to cancel in excess of 16,700 flights between Dec 21 and Dec 31, 2022, due to the inclement weather. As a result, LUV had to bear a fourth-quarter 2022 pre-tax negative impact of almost $800 million (or $620 million on an after-tax basis), which led to a fourth-quarter 2022 net loss. LUV’s fourth-quarter 2022 revenues were also unfavorably impacted by almost $410 million due to the flight cancellations in December 2022.
Partly due to these headwinds, shares of Southwest Airlines have declined 33.5% over the past year compared with the 22% fall of the industry it belongs to.
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Despite such tailwinds, continued recovery in air-travel demand (mainly on the leisure front) bodes well for Southwest Airlines. In the fourth quarter of 2022, air traffic, measured in revenue passenger miles, increased 5.4% year over year to 31.30 billion.
Load factor (percentage of seats filled by passengers) improved to 83.5% from 81% in the year-ago quarter. Passenger revenue per available seat mile ascended 19% year over year to 14.78 cents. Anticipating the trend to continue, Southwest Airlines’ management expects first-quarter 2023 operating revenues to register 20-24% year-over-year growth.
Currently, Southwest Airlines carries a Zacks Rank #5 (Strong Sell).
Investors interested in better-ranked stocks from the Zacks Transportation – Airline industry can consider Copa Holdings, S.A. CPA, Alaska Air Group, Inc. ALK and American Airlines AAL. Copa Holdings presently sports a Zacks Rank #1 (Strong Buy), whereas Alaska Air and American Airlines carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Copa Holdings has an expected earnings growth rate of 39.83% for the current year. CPA delivered a trailing four-quarter earnings surprise of 33.35%, on average.
The Zacks Consensus Estimate for CPA’s current-year earnings has improved 21.1% over the past 90 days. Shares of CPA have jumped 32.6% over the past six months.
Alaska Air has an expected earnings growth rate of 32.64% for the current year. ALK delivered a trailing four-quarter earnings surprise of 8.98%, on average.
The Zacks Consensus Estimate for ALK’s current-year earnings has improved 11.4% over the past 90 days.
AAL has an expected earnings growth rate of more than 100% for the current year. AAL delivered a trailing four-quarter earnings surprise of 7.79%, on average.
The Zacks Consensus Estimate for AAL’s current-year earnings has improved 31.1% over the past 90 days. Shares of AAL have gained 13.8% over the past six months.
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