Thursday, October 25, 2018

Why Southwest Airlines Is Falling 8% Today

What happened

After the company reported third-quarter financial results that beat industry watchers' top- and bottom-line forecasts, shares in Southwest Airlines are trading 8.2% lower at 2:15 p.m. EDT today.
So what

Southwest Airlines' second-quarter performance was dragged down by promotions to drive passenger volume following an accident in April. Its sales only grew 0.2% to $5.74 billion in Q2 because its average load factor fell 90 basis points to 84.7%, despite average fares declining 4% to $151.94.

The third-quarter performance was better, though. Sales were $5.58 billion, up 5.3% from the same quarter last year, in part because an average fare increase of 2.5% to $153.40 offset a 0.9% decline in its load factor to 83.9%. Net income was $614 million and earnings per share were $1.08 in the quarter, up from $528 million, or $0.88 per share one year ago.

Revenue was $10 million better than analysts were looking for, and earnings per share clocked in $0.02 ahead of estimates, so investors' disappointment may be related to the declining load factor, which may suggest Southwest's capacity isn't in line with demand. As a reminder, load factor is calculated by dividing revenue passenger miles by available seat miles.

Investors may also be nervous about headwinds due to higher jet fuel prices, and guidance that costs excluding fuel and oil expense and profit-sharing will increase by at least 3% in 2019 because of investments to support future growth.

Now what

The airline industry is capital-intensive, and demand tends to track the economic cycle. In recent years, Southwest Airlines and its peers have done better at controlling capacity and costs to avoid steep price cuts, but risks could emerge if inflation continues to negatively impact the bottom line and demand slows because of slowing economic growth due to higher interest rates.

Nevertheless, Southwest Airlines has historically been among the most profitable airlines, and next year, its first-half results will go up against easier year-over-year comparisons. As a result, this decline in share price may offer airline investors a buying opportunity.

One big investor whose buying and selling ought to be watched closely following these results, though, is Warren Buffett. In Q2, he increased Berkshire Hathaway's stake in Southwest Airlines by 20% to roughly 57 million shares, making it the airline's second-largest owner. Unquestionably, it will be important to see what Buffett did with his Southwest Airlines shares in the third quarter, but we'll have to wait a few more weeks until Berkshire's 13-F is filed with the SEC to find that out.

(Todd Campbell - The Motley Fool)

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