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Southwest: When Airlines' Boom Busts You Need Some LUV
- The present boom in airline stocks will bust when jet fuel prices rise again.
- Over the long run Southwest has proven the best operator in the group.
- Its domestic focus is likely to keep it flying while rivals crash.
Update: Southwest Airlines Beats Earnings Through Lower Fuel Costs
- Revenue rose to $4.63 billion from $4.43 billion a year ago.
- EPS rose to $0.59/share, excluding special items, from $0.33/share a year ago.
- Fuel costs fell over 14% to $2.62 per gallon, inclusive of hedges.
Update: Aggressive Accounting Leads To Southwest Soaring On EPS Beat
- The company delivered strong fourth quarter performance when excluding special items.
- EPS excluding special items and EPS on a GAAP basis materially increased by a gain that I believe was transitory.
- The change in estimates inflated revenue resulting in better margins and higher EPS.
- I predicted strong performance for Southwest, but I'm pulling my bullish thesis.
- Southwest Airlines was one of the top performing stocks of 2014.
- With strong financials and a favorable economic climate, the company should be able to continue growing in 2015.
- A capable and shareholder-friendly management team makes this company a good long-term buy and hold.
- Southwest Airlines hopes that it will be able to hedge roughly 20% of its fuel requirement this quarter.
- Oil prices are expected to begin to rise in the latter half of 2015 which would deem the company better off than its peers given the employment of its hedging.
- The company’s discount deals, travel packages and “bags fly free” program enable consumers to cut their traveling expenses.
- Early in the previous month, Southwest launched two international flights with its own brand and also completed the integration of bookings and frequent flyer functions into its website.
- Southwest’s acquisition of AirTran has generated considerable positive synergies for Southwest which can be glimpsed in the company’s impressive financial performances after the acquisition.
- The deal has given Southwest access to a total of 37 new locations, 9 of which are outside the U.S.
- The acquisition of AirTran has allowed Southwest’s customers access to low cost international travel to locations such as Mexico, South America and popular holiday destination, the Caribbean.
- Southwest presents a highly attractive investment prospect with considerable gains to be made. Both long term and short term investors will benefit.
Look For Shares Of Southwest Airlines To Continue To Gain Altitude
- Southwest Airlines has rewarded investors significantly over the past year, gaining more than 120% during this time.
- Southwest has a conservative balance sheet relative to its competitors and has been aggressively reducing its debt level in recent years.
- Analysts project that the firm's earnings per share will grow at an annual clip of approximately 25% more going forward thanks to an improving U.S. economy and lower oil prices.
- Based on these impressive growth projections, the DRAG model predicts Southwest's share price could continue to gain altitude over the coming year.
Southwest Airlines Undervalued On Low Oil Prices, Acquisition Synergies, Expansion Opportunities
- An efficient business model improves operating margins and profitability.
- Big growth opportunities exist with international expansion, US economic growth, and AirTran acquisition synergies.
- A strong Q3 earnings report demonstrates the financial strength and growth strategies of LUV.
- Airlines used to be a pariah sector. Too much debt weighed down the airlines.
- Bankruptcies and mergers have put them all in better shape.
- I can't believe I'm actually suggesting that airline stocks are a BUY.
- There aren't any bad choices, but two stand out above the rest.
FAA Sues Southwest Airlines Over Maintenance Violations: No Reason To Change Valuations
- The FAA has filed a lawsuit against Southwest Airlines for improper aircraft repairs made by a contractor in Washington State between 2006 and 2009.
- All of the aircraft involved in the litigation have already been repaired and returned to service. The FAA action should have no bearing on future revenue.
- The FAA proposed fine is only $12M. That is pocket change for an airline that generated $17.7B in revenue and $754M in net profit last year.
- Passengers are unlikely to be concerned with the issue. Neither the FAA action nor the original aircraft issues are news at this point. The only news here is the litigation.
Update: Southwest Airlines Company Q3 2014 Earnings
- LUV beats analyst estimates on EPS and by $.02 and revenue by $10 million.
- Excluding special items EPS was up by about 62% year over year.
- The revenue and EPS beat supports my opinion about LUV being the best company in the industry.
- Strong performance was predicted in my original article.
- Jet fuel is an important expense in any airline's financial statement. Southwest’s hedging team is an industry best.
- Southwest is expanding its continental US flights and implementing International flights with the acquisition of AirTran Airways.
- Southwest will begin implementing baggage fees, a move that would increase revenue.
Southwest Airlines Is Perfectly Set Up For A Long Flight
- Airlines are in a good position to benefit from the recent drop in oil prices.
- The decline in the overall market provides an excellent point of entry.
- Good balance sheets and expanding territory give Southwest the edge for growth.
- By following a simple strategy to be the low-cost airline, Southwest has been able to reliably produce profits when other airlines have hemorrhaged money.
- Southwest Airlines has by far the cleanest balance sheet in the industry.
- Free cash flow and net income are both rapidly improving over 2013.
- Southwest, Delta, American Airlines and United Continental Holdings have all increased in price.
- The operational performance for Southwest has been the best, but Delta is close.
- American Airlines and United Continental Holdings have had to choose between sales growth and positive operating margins.
- Although LUV's stock has already surged 80% year-to-date, it still has room to move higher.
- LUV's PEG ratio is exceptionally low at 0.53, the seventh lowest among all S&P 500 stocks.
- Southwest Airlines has been able to show earnings per share surprise in each one of the last three-quarters, and the company demonstrated significant improvement in its profitability.
Southwest Airlines: International Expansion To Fuel Growth
- Southwest began offering international flights this summer which provides a new avenue for sales growth.
- Over the last few quarters, Southwest has surpassed its internal goal of pre-tax return on invested capital of 15%.
- Southwest has maintained fares that are on average over 25% lower than its three largest competitors on a per mile basis.
Is It Time For Southwest Airlines To Charge For Luggage?
- After years of trying not to upset customers, it is finally time for Southwest Airlines to take baggage revenue more seriously. Other low-cost carriers have been ahead for years.
- Southwest is slowly adding international destinations, and rumors suggest Canada is next. Other international carriers have substantial baggage restrictions and fees.
- Flying extra luggage actually costs airlines money in fuel, handling, and occasional damage claims; why shouldn’t revenue be aligned with expenses?
Mon, Jan. 26, 8:23 AM
- Winter Storm Juno is expected to cause widespread flight cancellations on the East Coast this week.
- JetBlue (NASDAQ:JBLU) has the highest number of cancellations today per FlightAware.com.
- United Continental (NYSE:UAL), Southwest (NYSE:LUV), SkyWest (NASDAQ:SKYW) through ExpressJet, Delta Air Line (NYSE:DAL), and American Airlines Group (NASDAQ:AAL) will also be affected.
- What to watch: The impact of major weather events on the bottom line of airlines can be complicated. Losses can be minimal in some cases as load factors actually improve, but if business travelers don't rebook trips, the loss of revenue can be a negative factor.
Thu, Jan. 22, 9:31 AM
- Airline stocks are set to rally as news from the sector continues to be favorable.
- Double-digit fuel cost declines. Check.
- Fares holding. Check.
- Passenger revenue miles outpacing capacity gains. Check.
- Analyst ratings and EPS upgrades. Check.
- Related stocks: LUV, UAL, DAL, AAL, JBLU, ALK, HA, SAVE, ALGT, RJET, VA.
Thu, Jan. 22, 9:08 AM
- Southwest Airlines (NYSE:LUV) reports passenger revenue rose 2.6% on a unit basis to 44.4B in Q4.
- The company's load factor improved 160 bps Y/Y to 82.0% as revenue passenger miles outpaced capacity gains.
- Average stage length +2.6% to 722 miles.
- Average airfare +1.3% to $158.06.
- Freight revenue +12.2% to $46M.
- Economic fuel costs fell 14.1% Y/Y to $2.62 per gallon inclusive of settled hedges.
- LUV +4.61% premarket to $43.76.
Thu, Jan. 22, 8:32 AM| 1 Comment
Wed, Jan. 21, 5:30 PM
Tue, Jan. 20, 7:41 AM
- U.S. airlines are expected to return more cash to shareholders this year and pay down debt with the money saved from lower fuel expenses.
- The carriers may also use the improvement on their balance sheet to push for better financing terms on new aircraft purchases.
- A significant drop in airfares is lower on the list with demand in the U.S. at a strong level.
- Related stocks: VA, LUV, UAL, DAL, AAL, JBLU, ALK, HA, SAVE, ALGT, RJET.
- Previously: Airline math: Jet fuel down 30%, fares down 5% (Jan. 16 2015)
Sat, Jan. 17, 8:25 AM
- Cowen analysts this week offered a how-to guide for playing the oil price fluctuation, identifying more than 60 stocks that could benefit in a declining oil price environment.
- Among the various nuggets of wisdom, the report notes that given the minimal contribution of petroleum to U.S. electricity generation, there is little, if any, displacement of coal burn; within the coal sector, lower crude prices mean lower diesel fuel prices, which Cowen thinks favors the operating cost structure of surface mining producers in the Powder River Basin, particularly Arch Coal (NYSE:ACI) given its diesel hedge strategy which protects it from elevated diesel levels and enables it to benefit fully in the downside of fuel costs.
- Also best able to cope with falling oil prices: ARLP, CLD, CNX, FELP, HNRG, JEC.
- Among airlines, American (NASDAQ:AAL) should not suffer the cost headwinds related to mark-to-market hedge losses, unlike peers that hedge jet fuel; Delta (NYSE:DAL) can expect a $2B hedge-related loss, Southwest (NYSE:LUV) should see a $500M loss and United (NYSE:UAL) a $200M loss.
- Cowen thinks consumers are on pace for 2015 gas savings of $100B-$150B, but the upside will not be distributed equally among retailers; the firm sees broadline retailers, namely Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), as best positioned to benefit from gas deflation.
Fri, Jan. 16, 9:43 AM
- The airline fares component of CPI fell 4.7% Y/Y in December after increasing in both October and November.
- The spot price for jet fuel has dropped by more than 30% over the same time period (chart).
- Hedging strategies vary widely by airline and come into play when estimating profits in the sector.
- Previously: Hedge your bets on airliners (Dec. 23 2014)
- Related stocks: VA, LUV, UAL, DAL, AAL, JBLU, ALK, HA, SAVE, ALGT, RJET.
Fri, Jan. 16, 3:15 AM
- As of today, Americans will be able to visit Cuba without first seeking a license from the Treasury Department, so long as the travel meets certain criteria.
- Reacting to the news yesterday, United Airlines (NYSE:UAL) announced that it planned to seek approval to begin regular service to Cuba from Newark and Houston. Other airlines expressed similar interest.
- What remains unclear is how such an agreement might comply with the 54-year-old U.S. trade embargo, which can only be lifted by Congress and generally prohibits American companies from doing business in Cuba.
- The closed-end Caribbean Basin Fund CUBA is up 0.9% in after-hours trade.
- Related tickers: LUV, AAL, SAVE, RCL, NCLH, CCL,
Thu, Jan. 15, 2:55 PM| 3 Comments
Tue, Jan. 13, 7:58 AM
- Cowen Research's Helane Becker takes a positive view on pricing in the airline sector for 2015 on her view domestic demand will stay strong enough to keep the pressure off of airlines to drop fares.
- A gauge of recent comments by airline execs seems to indicate the analyst is correct and airfares will be held largely level - despite the sharp drop in oil prices.
- Delta Air Lines CEO: "It’s wonderful that fuel has run down–we love it. There’s a $2 billion opportunity out there if we hold fare levels constant."
- American Airlines Group CEO: "...we don’t have plans to go off and just proactively cut fares."
- Southwest Airlines CEO: "What I would not want to do to customers is take them through the same volatile ride with fares [as 2008], lowered in one day, raised in the next day."
- U.S. carriers: LUV, UAL, DAL, AAL, JBLU, ALK, HA, SAVE, ALGT, RJET, VA.
Mon, Jan. 12, 9:15 AM
Wed, Jan. 7, 2:25 PM
- Despite the brisk rally in airline stocks, Credit Suisse thinks there is plenty of upside still left.
- "The market has been hesitant to fully price in benefits from the rapid fuel decline and consensus has yet to fully adjust for lower fuel," reads the optimistic CS note.
- Analysts with the firm tap United Continental (NYSE:UAL) as their top sector pick.
- Airline stocks: LUV, DAL, AAL, JBLU, ALK, HA, SAVE, ALGT, RJET, VA.
Mon, Jan. 5, 3:18 PM
- ETF Series Solutions is planning a new ETF based on the airliner sector.
- The fund will hold 25 to 40 airline stocks and attempt to mirror the U.S. Global Jets Index.
- The development comes with airline stocks on a tear after jet fuel prices dropped sharply.
- Two former airline ETFs (FLYX and FAA) didn't survive long enough to cruise through the rally.
- Airline stocks: RYAAY, OTCPK:CPCAY, OTCPK:SINGY, CEA, ZNH, CPA, GOL, LFL, LUV, UAL, DAL, AAL, JBLU, ALK, HA, SAVE, ALGT, RJET, RYAAY, CPA, GOL, LFL, AVH, SAVE, VLRS.
- SEC Form N-1A
Thu, Jan. 1, 2:19 AM
- Dow: INTC +41%; UNH +35%; HD +28%; CSCO +25%; MSFT +25%.
- S&P 500: LUV +125%; EA +106%; EW +95%; AGN +92%; AVGO +91%.
- Nasdaq: AAL +112%; EA +106%; AVGO +91%; GMCR +78%; ILMN +68%.
Dec. 31, 2014, 10:07 AM
- Airline stocks are in rally mode again off of momentum driven by the latest slide in oil prices.
- Southwest Airlines (LUV +2.2%) is poised to end the year as the top performing stock of the S&P 500 Index with a +125% rip.
- Though jet fuel hedging strategies vary widely throughout the sector, a prolonged period of lower oil prices will allow all carriers to realize a benefit.
- Gainers: Republic Airways (NASDAQ:RJET) +4.4%, United Continental (NYSE:UAL) +2.4%, Virgin America (NASDAQ:VA) +1.9%, JetBlue (NASDAQ:JBLU) +1.8%, Alaska Air Group (NYSE:ALK) +1.7%, Allegiant Travel (NASDAQ:ALGT) +1.6%, Delta Air Lines (NYSE:DAL) +1.6%, SkyWest (NASDAQ:SKYW) +1.4%.
- Previous: Hedging strategies by airline
LUV vs. ETF Alternatives
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