Must-know: Key drivers of Southwest’s second quarter margin expansion

Market Realist

Southwest Airlines – second quarter earnings overview (Part 8 of 12)

(Continued from Part 7)

Operating margin

Southwest’s operating income increased by 79% year-over-year in 2Q14 despite the increase in operating costs, driving operating margin up to 15.5%, from 9.3% in 2Q13. The operating margin expansion was primarily due to a 6% increase in yield . The increase in load factor (increased by 2.3% in 2Q14) contributes to the margin improvement by spreading fixed cost across more number of revenue passengers. The operating margin after adjusting for special items (primarily comprising of costs related to AirTran integration) was 16.3%. In 2Q14, among its peers, Delta (DAL) reported the highest operating margin of 17% followed by Southwest’s (LUV) operating margin of 15.5%, American’s (AAL) 12.3%, JetBlue’s (JBLU) 9.4% and United’s (UAL) 8.8%.

Net profit margin:

Net profit margin increased to 9.7% in 2Q14 from 5.9% in 2Q13. Net income and Diluted EPS more than doubled to $465 million and $0.67, respectively. Net income increased primarily due to the decreases in expenses related to fuel hedging. Total non-operating expenses decreased to $29 million from $70 million.

There was however an increase in interest expenses in 2Q14 due to imputed interest on the Love Field Modernization Program ( or LFMP), an airport development project which the company has agreed to manage as per the agreement with the City of Dallas and Love Field Airport Modernization Corporation. In 3Q14 the company expects interest expenses to decrease as compared to 3Q13.


 

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