Southwest Airlines reports huge 1st quarter earnings

Southwest Airlines 737-7H4 (27894/885) N406WN departs John Wayne Orange County Airport (SNA/KSNA) on August 29, 2011.

(Photo by Michael Carter)

Southwest Airlines earned first-quarter net income of $152 million, a significant improvement over a net profit of $59 million in the prior-year period, and expects continued strength throughout 2014.

The Dallas-based airline has long targeted a 15% return on invested capital (ROIC) goal, a mark it routinely hit in previous decades but has struggled to achieve in recent years even as it maintained profitability. CFO Tammy Romo told analysts and reporters that after “a very strong first quarter … we’re close to our 15% ROIC goal and we plan to hit it this year.” CEO Gary Kelly added, “There are no airlines that have hit a 15% return on invested capital over a cycle except for Southwest Airlines. That’s what we did in the 1970s, ‘80s and ‘90s … We’ve worked very hard for a decade to get back to this point.”

Southwest’s ROIC for the 12 months ended March 31 was 14.2%, which compares favorably to ROIC of 8.3% for the 12 months ended March 31, 2013.

Despite the encouraging financial performance, Southwest plans to keep capacity flat for the full-year 2014 as it completes the integration of AirTran Airways, which it acquired in 2011. Kelly said Southwest will contemplate growth opportunities next year. “We want to grow, but we’re cautious,” he said, adding that “our first priority” is hitting the 15% ROIC goal.

Southwest’s fleet stood at 676 aircraft as of March 31, five fewer than it had at the end of 2013. During the first quarter, it took delivery of two new Boeing 737-800s and six pre-owned 737-700s. It retired one 737-300 and removed 12 AirTran 717-200s from service.

“This is a very tactical business, especially when it comes to growth and growth strategies,” Kelly said, adding, “We’ll want to manage our growth very carefully with an eye to keeping our balance sheet strong and hitting our return on invested capital.”

Southwest’s first-quarter revenue increased 2% year-over-year to $4.17 billion while expenses decreased 1.6% to $3.95 billion, producing an operating profit of $215 million, more than tripling operating income of $70 million in the 2013 March quarter. The carrier estimated severe winter weather cost it $45 million in revenue during the first quarter.

Southwest’s traffic grew 1.7% year-over-year in the first quarter to 24.16 billion RPMs on a 1.1% cut in capacity to 30.47 billion ASMs, producing a load factor of 79.3%, up 2.2 points. Yield improved 0.7% to 16.28 cents.

(Aaron Karp - ATWOnline News)