Earnings preview: Unit costs to doom Southwest Airlines Q1 results

Southwest Airlines (NYSE: LUV) is scheduled to report its earnings results for the first quarter of 2019 on Thursday before the market opens. The results will be hurt by margin pressure as well as higher unit costs. However, the oil prices moderation could turn beneficial to the company’s bottom line.

The prolonged shutdown of the government and the trade battle between the US and China could hurt the quarterly performance. Airliners have been depending on passenger traffic for revenue accumulation and Southwest’s passenger demand remained healthy across the booking curve since the fourth quarter. The current yield trends, including close-in bookings and corporate travel, remained strong for Southwest Airlines.

For the first quarter, the unit costs are expected to rise by about 6% driven largely by underutilization of its fleet in the first half of 2019 due to the delay in its impending service to Hawaii. The increase in unit costs was also driven by the resulting one-time start-up costs, higher airport costs, higher depreciation, and ownership costs as well as the timing of maintenance events and technology investments.

Analysts expect the company’s earnings to drop by 18.70% to $0.61 per share while revenue will rise by 3.50% to $5.12 billion for the first quarter. In comparison, during the previous year quarter, Southwest posted a profit of $0.75 per share on revenue of $4.94 billion.

The company has surprised the investors in the past four quarters as it has beat analysts’ expectations all the time. Traders also predict Southwest Airlines to surprise the market by exceeding the consensus. Majority of the analysts recommended a “strong buy” or “buy” rating while expecting the stock to reach $59.06 per share in the next 52 weeks.

For the fourth quarter, the company reported a 63% dip in earnings due to an income tax provision in the latest quarter compared to a benefit in the prior-year quarter. Operating revenues rose by 8.5% due to an increase in the demand of passengers. The profit fall remained in line with the expected impact of the fuel price estimate, which remained at a pretty high level for the fourth quarter.

Also read: JetBlue Airways first-quarter earnings results

For the full year 2019, the company had expected growing profits and earnings per share, expanding margins, improving returns on invested capital, and maintaining an investment-grade balance sheet. Annual 2019 economic fuel costs were predicted to be in the range of $2.00 to $2.10 per gallon, including premium expense and favorable cash settlements from fuel derivative contracts.

Southwest ended 2018 with 750 aircraft in its fleet. This reflected the delivery of 26 new 737-800s, 18 new 737 MAX 8s, and 1 pre-owned 737-700 during the year. The company had expected to add about 25 aircraft in 2019 and end the year with about 775 in its fleet based on the current aircraft delivery schedule and net of expected 737-700 retirements.

Shares of Southwest Airlines opened higher on Wednesday but changed course to the red territory. The stock has fallen over 4% in the past year while it has risen over 12% in the year so far.

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