Southwest Airlines Sees 24.5% Y/Y Drop in Q3 Fuel Costs

The Dallas, TX-based low-cost carrier Southwest Airlines announced that it expects its average fuel cost in the third quarter of 2015 to fall 24.5% on a year-over-year basis to $2.22 per gallon.

 

Economic fuel costs are anticipated to decline approximately $1.3 billion in 2015 compared with 2014 levels, thereby resulting in significant savings for Southwest Airlines. The projection is not surprising as weak fuel costs have benefited airline stocks including Southwest Airlines for quite some time.

The company further expects 2015 unit costs (excluding fuel and oil expenses) to drop 2% year over year. Capacity (measured in available seat miles or ASMs) in 2015 is still projected to expand by 7% from 2014 levels.

 

We remind investors that Southwest Airlines’ statement on capacity expansion had triggered a massive sell-off in the airline space in May this year. At that time, the carrier said that it plans to raise its capacity in the band of 7%–8% in 2015 as opposed to the earlier projection of a 7% increase.

 

Southwest Airlines’ projection wreaked havoc among investors who feared that the increased capacity would lead to an oversupplied market despite weak fuel costs. Investors were naturally concerned that oversupply could result in lower fares and hamper profit. Following the investor panic, the low-cost carrier reverted to a 7% capacity growth plan.

 

The carrier still expects operating revenue per ASM to decline approximately 1% in the third quarter of 2015 compared with the year-ago period.

 

Apart from the projections, Southwest Airlines announced that it has shelled out $1.3 billion to its stockholders so far this year through share repurchases and dividend payments.

 

In May, the carrier hiked its quarterly dividend by 25% to 7.5 cents per share apart from approving a new stock repurchase program worth $1.5 billion.

 

We note that the solid financial health of carriers, thanks to low oil prices, has resulted in a surge in buyback activities apart from dividend hikes. Companies like Delta Air Lines  and American Airlines too have authorized new share buyback programs this year.

 

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