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Southwest (LUV) Incurs Narrower Than Expected Loss in Q3

Southwest's (LUV) Q3 results reflect a significant year-over-year improvement owing to uptick in air-travel demand. However, its performance is partly hurt by Delta-variant-led softness in bookings.

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This story originally appeared on Zacks

Southwest Airlines LUV incurred a loss (excluding 96 cents from non-recurring items) of 23 cents per share in the third quarter of 2021, narrower than the Zacks Consensus Estimate of a loss of 27 cents. This marks the company’s seventh consecutive quarterly loss as the pandemic continues to dent air-travel demand.



Results were hurt by softness in bookings, induced by the Delta variant. The airline estimates its August and September operating revenues to have been impacted by approximately $100 million and $200 million, respectively.



The airline’s third-quarter loss narrowed significantly from the prior-year quarter’s loss of $1.99 per share owing to improvement in air-travel demand despite the same being below the pre-pandemic levels.



Operating revenues of $4,679 million outperformed the Zacks Consensus Estimate of $4,581.5 million and also jumped more than 100% year over year. However, the same declined 17% from the third-quarter 2019 reading. Passenger revenues, which accounted for 90.3% of the top line, totaled $4,227 million, reflecting an improvement of more than 100% year over year.

- Zacks

Southwest Airlines Co. Price, Consensus and EPS Surprise

Southwest Airlines Co. Price, Consensus and EPS Surprise

Southwest Airlines Co. price-consensus-eps-surprise-chart | Southwest Airlines Co. Quote

Operating Statistics

Airline traffic, measured in revenue passenger miles, skyrocketed more than 100% year over year to 31.28 billion in the quarter under review. Capacity or available seat miles (ASMs) climbed 46.4% year over year to 38.76 billion. Load factor (percentage of seats filled by passengers) came in at 80.7% compared with 44.9% in the third quarter of 2020. The improvement was on the back of traffic increase outweighing capacity expansion.



Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) ascended 98.7% year over year to 10.91 cents. Revenue per available seat mile (RASM) improved 78% to 12.07 cents.

Operating Expenses & Income

In the third quarter, operating income (as reported) totaled $733 million against an operating loss of $1,411 million in the year-ago quarter. The company, however, incurred an operating loss of $59 million on an adjusted basis (excluding special items). Total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expenses) increased 22.9%.



Fuel cost per gallon (inclusive of fuel tax: economic) rose 65.9% to $2.04. However, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and profit-sharing expenses, and special items decreased 16.1% year over year.

Liquidity

Southwest, currently carrying a Zacks Rank #4 (Sell), ended the third quarter with cash and cash equivalents of $12,980 million compared with $11,063 million at the end of December 2020.  As of Sep 30, 2021, the company had long-term debt (less current maturities) of $11,013 million compared with $10,111 million at the end of December 2020.

Outlook

Southwest estimates lingering effects from the deceleration in bookings witnessed in the third quarter to impact the fourth-quarter operating revenues by approximately $100 million. The company expects fourth-quarter operating revenues to decline 15-25% from the comparable period’s figure in 2019. This includes an estimated $40-million negative impact from the lingering effects of the Delta variant and another $75 million from the flight cancellations due to operational challenges.



Economic fuel costs per gallon are anticipated between $2.25 and $2.35 in the fourth quarter. In the year-ago period, the company reported economic fuel costs per gallon of $1.25. Southwest expects capacity to decline around 8% in the fourth quarter from the 2019 level.

 

Having realized cost savings of approximately $185 million in the third quarter from voluntary separation and extended leave programs, the carrier expects cost savings worth $1-$1.1 billion from these programs.



However, the airline estimates fourth-quarter unit costs excluding fuel and oil expense, special items and profitsharing to increase 8-12% from the 2019 level due to inflation in labor rates and airport costs. Due to rising costs, the company does not expect to be profitable in the fourth quarter of 2021.

Sectorial Snapshots

Within the broader Transportation sector, Delta Air Lines DAL, J.B. Hunt Transport Services JBHT and Kansas City Southern KSU recently reported third-quarter 2021 results.



Delta, currently carrying a Zacks Rank #4 (Sell), reported third-quarter earnings (excluding $1.59 from non-recurring items) of 30 cents per share, outpacing the Zacks Consensus Estimate of 15 cents. Revenues of $9,154 million also beat the Zacks Consensus Estimate of $8,370.6 million.



J.B. Hunt, presently carrying a Zacks Rank #2 (Buy), reported third-quarter earnings of $1.88 per share, surpassing the Zacks Consensus Estimate of $1.77. Total operating revenues of $3144.8 million outperformed the Zacks Consensus Estimate of $3002.1 million. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Kansas City Southern, carrying a Zacks Rank #5 (Strong Sell) at present, reported third-quarter earnings (excluding 31 cents from non-recurring items) of $2.02 per share, missing the Zacks Consensus Estimate of $2.07. Quarterly revenues of $744 million, however, surpassed the Zacks Consensus Estimate of $725.9 million.



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