Southwest Airlines' Profit Tops Estimate

Prominent U.S. airline Southwest Airlines (NYSE:LUV) reported mixed fourth-quarter earnings on Thursday, Jan. 30. Adjusted EPS of $0.56 surpassed analyst consensus expectations of $0.46, showing a robust 21.7% outperformance. Operating revenue of $6.93 billion slightly missed the forecasted $6.96 billion.

The quarter was highlighted by record revenue, though persistent cost challenges, particularly from labor and fuel, weighed on the financial results.

Source: Southwest Airlines. Note: Analyst consensus estimates for the quarter provided by FactSet. YOY = Year over year. RASM = Revenue per available seat mile (excluding special items). CASM-X = Cost per available seat mile excluding fuel, special items, and profit sharing.

About Southwest Airlines

Southwest Airlines is a prominent U.S. airline that pioneered the low-cost carrier model with its focus on operational simplicity, cost discipline, and customer service. Utilizing a single aircraft type, Boeing 737s, the airline minimizes operational complexities and costs related to scheduling, maintenance, and training.

Recently, Southwest has been focused on optimizing its fleet and route network, enhancing cost control measures, and implementing strategic initiatives to drive growth and profitability. Key success factors include maintaining low costs, efficient fleet usage, and capturing travel demand through effective route planning.

Quarter in Review

Southwest's adjusted EPS beat was largely attributed to strong tactical revenue strategies and an 8% year-over-year increase in revenue per available seat mile (RASM), which is a proxy for pricing power. The revenue for the quarter rose 1.6% thanks to improved revenue management and high travel demand during the holiday season.

Operating expenses dropped 7.9% year over year to $6.65 billion, primarily due to reduced fuel costs. However, CASM-X, a measure of cost per available seat mile excluding certain items, rose by 11.1%, reflecting pressures from new labor agreements and a decrease in capacity.

Fleet and route optimization activities showed progress, with a modernization program introducing fuel-efficient Boeing 737-8s and 51 aircraft retirements. This effort is part of a broader strategy to improve fuel efficiency by 1.9% and align capacity with demand patterns. Southwest's economic fuel cost remained stable at $2.42 per gallon, with fuel hedges covering 51% of Q1 2025 needs.

The airline returned $680 million to shareholders through dividends and share buybacks, underscoring its commitment to enhancing shareholder value.

Despite positive metrics, Southwest faced challenges with elevated labor costs due to new contracts and potential operational disruptions from supply chain uncertainties affecting aircraft deliveries. Competitive pressures and fuel price volatility also posed ongoing risks.

Looking Ahead

Southwest Airlines projects a positive outlook with initiatives like the "Southwest Even Better" plan designed to navigate challenges better and optimize customer experience and shareholder returns. The company sees CASM-X to be up 7% to 9% in Q1 2025 as it bears the brunt of expensive labor contracts. It is targeting a low-single-digit CASM-X by late 2025 and continues to emphasize modernizing its operations.

Management foresees a 5% to 7% increase in RASM for the first quarter of 2025, indicating sustained demand and a strategic focus on capacity management. The recently announced $750 million accelerated share repurchase program for 2025 reflects confidence in ongoing financial health and the ability to offer value to shareholders, despite the headwinds.

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JesterAI is a Foolish AI, based on a variety of Large Language Models (LLMs) and proprietary Motley Fool systems. All articles published by JesterAI are reviewed by our editorial team, and The Motley Fool takes ultimate responsibility for the content of this article. JesterAI cannot own stocks and so it has no positions in any stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.