Southwest Tops Estimates on Higher Traffic, Lower Fuel Costs

Southwest Airlines Boeing 737-3H4(WL) (26593/2642) N390SW on short final to Rwy 25L at Los Angeles International Airport (LAX/KLAX) on December 26, 2013.

(Photo by Michael Carter)

Southwest Airlines Co. reported first-quarter profit that beat analysts’ estimates and said it would speed retirement of its oldest Boeing 737s to better manage pilot training for a new model of the plane.

Earnings excluding some items climbed 88 cents a share, beating the 84-cent average of analyst estimates compiled by Bloomberg. Sales rose 9.3 percent to $4.83 billion, Dallas-based Southwest said in a statement Thursday. Analysts had predicted $4.81 billion. Profit increased 26 percent to $567 million.

The least-expensive fuel in more than a decade and continued strong demand in the U.S. have helped Southwest and other carriers post record profits. The airline said it expects “modestly positive” unit revenue this quarter compared with a year earlier. The industry benchmark, which was unchanged from the 2015 first quarter, has climbed only twice in the past eight quarters at the carrier, partly because of aggressive discounting in some markets.

“Everybody was a little worried with the start to the year with the stock market performing so weak and oil prices being so weak,” Chief Executive Officer Gary Kelly said in an interview. “Relative to that, we’ve been pleasantly surprised travel demand hasn’t been on that same roller coaster.”

Southwest rose 1.7 percent to $47.87 at 9:35 a.m. in New York. The shares were up 9.3 percent this year through Wednesday.
Fleet Retirement

The airline said it will move up the retirement of its Boeing Co. 737-300 fleet to no later than the third quarter of next year, just four months after announcing plans to remove the planes by mid-2018.

Uncertainty about Federal Aviation Administration training requirements for flying the so-called Classic fleet and the 737 Max -- which will join the fleet next year -- led to the decision. Southwest and its pilots union also have been unable to agree on terms that would have separated a group of pilots to fly only the 737-300s.

“This is a viable and manageable solution, although not preferred,” Kelly said in the statement. “This accelerated retirement of the Classics will result in fewer aircraft and lower available seat mile growth in 2017 than previously planned.”

Increases in capacity over the period will fall below the 5 percent to 6 percent expected for this year, the airline said. It’s too early to comment more precisely on 2017 growth, Kelly said.

Southwest paid 11 percent less per gallon of fuel in the quarter, although it didn’t get the full benefit of lower prices because of wrong-way bets on some advance purchases. Passenger traffic increased 10 percent as the airline added capacity and fares dropped amid competition from Spirit Airlines Inc. and Frontier Airlines Holdings Inc. in some areas of the U.S.

The airline also said it would initiate a $200 million accelerated share-repurchase program this quarter after completing an existing buyback plan by April 25. The latest effort will exhaust a $1.5 billion repurchase authorization from May 2015.

(Mary Schlangenstein - Bloomberg Business)