Thursday, January 21, 2016

$500M fuel savings: Five takeaways from Southwest Airlines’ earnings call

With record profits, cheaper fuel, an increasingly youthful aircraft fleet and an expanding presence at its home base at Dallas Love Field, Southwest Airlines seems to be flying high.
Here are my key takeaways from CEO Gary Kelly and Chief Financial Officer Tammy Romo, mined from a conference call with investors and reporters after the airline released its earnings today.
How is Southwest performing at Dallas Field?
Southwest’s margins and returns continue to outperform other markets in Dallas after the airline’s dramatic expansion in the year-plus after the lifting of federal flight restrictions at Dallas Love Field, Romo said.
Southwest controls 18 of Love Field's 20 gates, operating 180 daily flights at the airport. The airline is being forced by a federal judge’s order to split one of those gates with Delta Air Lines.
Kelly sounded confident that Southwest will prevail in getting sole use of the disputed gate.
“When we finally get access to all the gates,” Kelly said, “we’ll be able to put more flights in there.”
What’s new with Southwest’s fleet modernization initiative?
The airline recently ordered 33 new 737-800s from Boeing spread out for delivery in 2016, 2017 and 2018, Kelly said. The purpose is to speed the retirement of older planes, he said. “We’re replacing the classics with next-generation airplanes,” he said.
Southwest ended 2015 with 704 aircraft in its fleet, Romo said. Of those, 129 were “classic,” or older models, she said. The airline now intends to retire its older aircraft by mid-2018, as opposed to having older planes in the fleet through 2021, Romo said.
Overall, the accelerated fleet retirement plan will yield an after-tax return on investment of about 21 percent for the airline, Romo said, adding “It was an easy decision for us.”
Fuel costs decreased almost $200 million year-over-year, driven by a 23 percent decline in fuel prices, Romo said. With the current oversupply of oil worldwide, Southwest expects more cost savings in the first quarter of 2016 and probably beyond, the CFO said. Specifically, the airline expects to pay $1.70 per gallon in the first quarter, $1.60 a gallon in the second quarter, and $1.80 to $1.85 per gallon in the second half of 2016.
How does that compare to last year?
The $1.70 a gallon the airline is paying now is about 30 cents a gallon lower than this time last year, Romo said.
“We’re still benefiting from lower fuel prices, and are currently estimating over $500 million in fuel savings this year.”
Is there a downside to lower fuel costs for the airline, in terms of travel demand or broader economic concerns?
Not really, Kelly said. Not yet.
“The year is off to a very concerning start when it comes to headlines around the world,” the CEO said. “Living in Texas all of my life — this is an oil and gas state — it is concerning as far as the impact it will have on companies and debt payments and jobs and so on.
There is no question that the United States has benefited from the oil and gas boom that has been occurring since the recession, but as far as seeing manifestations of (cheaper oil) in our business, we’re just not seeing it."
(Bill Hethcock - Dallas Business Journal)

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