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Solid Sept Traffic for Southwest

Zacks Equity Research

Dallas, Texas-based Southwest Airlines Co. (LUV) posted a rise in traffic for Sep 2013. Nevertheless, shareholders remain unmoved by the news as the stock ended flat in Monday trading on the Nasdaq.

The company’s traffic – measured in revenue passenger miles (RPMs) – was 7.86 billion for the reported month, up 1.3% from 7.76 billion recorded in the comparable month a year ago. On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) moved up 1.2% to 10.20 billion. The load factor or percentage of seats filled by passengers increased to 77.1% from 77.0% in Sep 2012.

For the first nine months of this year, Southwest generated RPMs of 78.70 billion (up 0.8% year over year) and ASMs of 98.45 billion (up 1.6% year over year). Load factor, however, moved down to 79.9%, reflecting a year-over-year decline of 60 basis points.

Notably, the significant increase in PRASM (passenger revenue per available seat mile) remains the highlight of the quarter. For Sep 2013, PRASM is estimated to have increased in the 7–8% range from Sep 2012.

Southwest focuses on a number of initiatives to increase revenues and reduce operational costs over the next three years. With its cost-efficient business model, the company targets to expand its network through the integration of AirTran aircraft and the addition of new domestic and international destinations.

The solid Sep 2013 results comes on the back of poor operational performance in the previous month of this year, where RPM’s declined 2% and load factor moved down 290 basis points.

To accommodate international flights to the Caribbean, Mexico and the northern part of Latin America the company is building a new facility at the William. P. Hobby international airport in Houston. The new facility is expected to be up and running from 2015 and will enhance Southwest’s international operation.

To combat cost escalation, Southwest is rightsizing its fleet and making several efforts to enhance the quality of its fleet so as to improve profitability. During the second quarter of 2013, the airline took delivery of three 737-800s aircrafts of The Boeing Company (BA), which provide enhanced revenue opportunities and operational flexibility.

However, the troubles of U.S. government partial shutdown have started to spread to the U.S. airline industry. Major U.S. carrier JetBlue Airways Corp. (JBLU) and U.S. Airways Group Inc. (LCC), failed to get the delivery of their A-321’s from Europe due to the closure of FAA (Federal Aviation Administrator).

Although Southwest’s vendor Boeing is not yet hit by the crisis, we remain concerned about the recent state of the U.S. economy, which could hurt airline carriers like Southwest if the current condition persists for long.  

Southwest currently holds a Zacks Rank #3 (Hold).

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