Southwest Airlines is waiting for a prime season
Southwest Airlines Co. (LUV) revenue slightly exceeded the consensus forecast, amounting to $6.694 billion, and a loss per share reached $0.32, which turned out to be slightly worse than expected. According to the management’s preliminary assessment, the capacity is 10% behind the figure for the first quarter of 2019 and is equal to 34,384 million available passenger miles.
Because of the low season and an unsuccessful start to the year, accompanied by an aggravation of the epidemiological situation and non-flying weather (which led to massive flight cancellations in the industry), the volume of traffic decreased by 7%. Actual passenger traffic fell 3% short of consensus and is 14.3% behind the metrics of the pre-pandemic period, which is why passenger load was below the expected level, amounting to only 77%. 32 million people transported (84.6% of the level of the first quarter of 2019).
Despite the deterioration of market conditions, the average revenue per passenger for the reporting period slightly exceeded the value of the first quarter of 2019, amounting to 15.62 cents (+35.7%). The average ticket price for the year increased by 32%, exceeding the pre-pandemic level by 4.8%.The specific indicator of expenses excluding fuel increased by 16.6% relative to the corresponding period of 2019, which is primarily because of an increase in employee salary costs, which in absolute terms increased by 20.2% relative to pre-pandemic indicators, although the staff has decreased by 2.7% over three years.
In the conditions of the current high inflation, it airlines significantly index salaries in order to keep employees. In order to optimize operating costs, LUV hedges fuel risks: 63% by the end of the current year and about 37% of the volume of the next year, which makes the company one of the least sensitive to changes in oil prices during their high volatility.According to the results of the reporting quarter, the average price of a gallon of fuel was $2.3 compared to $1.9 three years earlier. Thus, the increase in the price of fuel consumed over the same period is significantly lower for LUV than for American Airlines (AAL) and United Airlines (UAL), which do not hedge these risks.
The management guidance for the second quarter of 2022 implies an increase in operating revenue by 108-112% from the indicator of 2019, the average flight load will increase to 85%, while the throughput will increase by 3.5%. The specific indicator of expenses excluding fuel in implementing a negative scenario may increase by 2.5%. Considering current market trends, the company expects a recovery in profit and operating margin in the next quarter.
By the end of the year, the throughput may approach the level of 2019 (96%), the income from hedging fuel risks will be $0.54 per gallon. Industry experts say that the increased prices for air tickets do not put pressure on demand: in an industry-wide context, online spending on domestic orders increased by 28% in March compared to the level of 2019, while actual orders increased by 12% (Adobe Digital Insight (WSJ) data). This may indirectly show that the company expects a prime season and will confidently move towards profitability.
