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Southwest Cuts Q4 Fuel Cost View, Joins Alaska Air, Spirit

High fuel costs have weighed on Southwest Airlines LUV for most of 2018 like other players in the airline space. Mainly due to this headwind, shares of the Dallas-based carrier declined 25% in the first 10 months of the year.

 

However, fuel costs have been decreasing lately due to fears of oversupply and a weakening demand outlook. In fact, oil prices registered the steepest monthly decline (around 22%) in a decade during November. With fuel expenses comprising a major chunk of airline expenditure, the fall in oil price certainly bodes well for Southwest Airlines and other airlines.

The effect of waning oil prices is reflected in Southwest Airlines’ much improved price performance of late. The stock has slid 0.1% since November.

 

Given this backdrop, the Zacks Rank #3 (Hold) carrier trimmed its fourth-quarter 2018 forecast for fuel cost per gallon. The airline now expects fuel costs between $2.25 and $2.30 per gallon (earlier projection was in the $2.30-$2.35 range). The current estimate includes premium expenses to the tune of 7 cents per gallon and an expected amount of 7 cents toward favorable cash settlements arising from fuel derivative contracts.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Southwest Airlines is not the only carrier to lower its fuel cost outlook for the final quarter of 2018. Last month, Spirit Airlines SAVE and Alaska Air Group ALK also took similar actions in response to the downward trend of oil prices. While Spirit Airlines anticipates economic fuel cost to be $2.27 per gallon compared with $2.46 predicted earlier, Alaska Air Group reduced its guidance for the metric by 3 cents to $2.33.

Coming back to Southwest Airlines, this low-cost carrier reiterated its fourth-quarter views for other key metrics like unit revenues, non-fuel unit costs and capacity. The company envisions revenue per available seat miles (RASM: a key measure of unit revenues) to inch up in the 1-2% band year over year. Cost per available seat miles (excluding fuel and oil expense plus profit-sharing expense) might rise 0-1% year over year. Fourth-quarter capacity is likely to expand between 6% and 6.5%.

Airline Stocks to Bet on

Considering the low fuel cost environment, this is the apt time to add some airline stocks to one’s portfolio. Spirit Airlines and United Continental Holdings UAL are two such investment options. While Spirit Airlines sports a Zacks Rank of 1, United Continental carries a Zacks Rank #2 (Buy).

Both Spirit Airlines and United Continental boast impressive track records with respect to earnings surprises. While the former outshined the Zacks Consensus Estimate in each of the trailing four reported quarters, the latter exceeded the same in three of the last four reported quarters.

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United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
 
Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
 
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
 
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