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Will Solid Travel Demand Lift Southwest's (LUV) Q3 Earnings?

Zacks Equity Research

Southwest Airlines Co. LUV is slated to release third-quarter 2019 earnings numbers on Oct 24, before the market opens.

The company has an impressive earnings history, having outperformed the Zacks Consensus Estimate in each of the preceding four quarters. We expect the company to repeat its success story in the soon-to-be-reported quarter as well.

Factors Likely at Play

Solid travel demand is likely to have boosted passenger revenues (contributes more than 90% to the top line) in the third quarter. Evidently, the Zacks Consensus Estimate for passenger revenues in the quarter implies an approximate 1% rise from the figure reported in third-quarter 2018.

Robust demand apart, higher passenger yields are expected to get reflected in the airlines’ unit revenues. Southwest anticipates operating revenue per available seat mile (RASM) to rise in the 3-5% range year over year in the third quarter. The consensus mark for the same is pegged 1.4% higher than the third-quarter 2018 reported figure. The same for passenger revenue per available seat mile (PRASM) indicates a 3.8% increase from the year-ago reported number.

Additionally, modest fuel prices (comprise a major chunk of airline expenditures) should have driven the bottom line in the to-be-reported quarter. While the company expects fuel costs in the band of $2.05-$2.15 per gallon for the third quarter, lower than $2.25 reported in third-quarter 2018, the Zacks Consensus Estimate for the same suggests a 6.7% reduction from the year-ago reported figure.

However, the bottom line is likely to have been partly offset by the persistent rise in non-fuel unit costs due to lower capacity from the MAX groundings. Notably, the carrier expects operating costs per available seat mile excluding fuel and oil expense plus profit-sharing expense (non-fuel unit costs) to increase between 8% and 10% in the third quarter. Additionally, with Southwest’s most fuel-efficient aircraft being grounded, the company estimates a 1-2% year over year dip in third-quarter fuel efficiency. Thanks to the groundings, capacity is anticipated to slide nearly 3% in the third quarter.

Southwest Airlines Co. Price and EPS Surprise

 

Southwest Airlines Co. Price and EPS Surprise

Southwest Airlines Co. price-eps-surprise | Southwest Airlines Co. Quote

Why a Likely Positive Surprise?

Our proven model predicts an earnings beat for Southwest this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Southwest has an Earnings ESP of +0.31%.

Zacks Rank: Southwest carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Highlights of Q2 Earnings

In the last reported quarter, the company delivered a positive earnings surprise of 1.5%. The bottom line also improved year over year despite higher costs due to the MAX groundings. While operating revenues lagged the Zacks Consensus Estimate, it increased year over year owing to higher passenger revenues.

Other Stocks to Consider

Investors interested in the broader Transportation sector may also check out American Airlines Group Inc. AAL, Expeditors International of Washington, Inc. EXPD and Allegiant Travel Company ALGT as these stocks too possess the right mix of elements to beat on earnings in their next releases.

American Airlines has an Earnings ESP of +1.64% and a Zacks Rank of 3. The company will announce third-quarter earnings results on Oct 24.
 
Expeditors is a #3 Ranked stock and has an Earnings ESP of +0.74%. The company will report third-quarter 2019 results on Nov 5.

Allegiant has an Earnings ESP of +1.39% and is Zacks #3 Ranked. The company will announce third-quarter earnings results on Oct 24.

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