Southwest reports second quarter profit

Eleanor Steed
By Eleanor Steed August 1, 2017 15:15

Southwest reports second quarter profit

Southwest Airlines has reported net income of $746 million for the second quarter of 2017, diluted earnings per share of $1.23, operating income of $1.25 billion, and operating margin 1 of 21.8 percent. Second quarter operating cash flow of $746 million and second quarter free cash flow of $195 million. The airline returned $476 million to Shareholders through a combination of dividends and share repurchases.

Gary C. Kelly, Chairman of the Board and Chief Executive Officer, expressed his delight on the positive unit revenues compared with the year-ago performance but he singled out the successful deployment of its new reservation system on May 9, which he says was “virtually flawless”.

Southwest’s total operating revenues increased 6.7 percent, year-over-year, to a quarterly record $ 5.7 billion, driven largely by quarterly record passenger revenues of $ 5.2 billion. Demand for Southwest’s low fares remained strong, and the fare environment improved. The airline reported a second quarter load factor of 85.6 percent, with passenger revenue yield increasing 1.5 percent, year-over-year. Operating unit revenues (RASM) also increased 1.5 percent year-over-year. This included less than one point of temporary pressure attributable to the transition to the new reservation system. While the impact from the reservation system cutover is slightly greater than anticipated, Southwest warned that adjustments are underway and expected to largely be implemented by the end of 2017.

Based on these trends and current bookings, Southwest expects its third quarter 2017 year-over-year RASM growth to be approximately one percent, which includes an estimated year-over-year unfavorable impact from the transition to the new reservation system of approximately one point. It currently does not expect a significant unfavorable impact from the transition to the new reservation system beyond third quarter 2017. Third quarter 2017 year-over-year RASM comparisons also will be impacted by last July’s technology outage and the timing of the July 4th holiday in 2017, which roughly offset on a unit basis.

Kelly said: “Considering the complexities of implementing a new reservation system for a company of our size, as well as our significant industry outperformance last year, we are very pleased with our revenue performance, and our goal to grow annual 2017 unit revenues remains intact. We continue to expect the annual incremental benefits from the new reservation system capabilities to ramp up to an estimated $200 million in pretax profits in 2018.”

Second quarter 2017 total operating expenses increased 9.4 percent to $ 4.5 billion, or 4.1 percent on a unit basis, as compared with second quarter 2016. During second quarter 2017, the Company recorded lease termination costs of $8 million (before profit sharing and taxes) as a result of the acquisition of two of its Boeing 737-300 (Classic) aircraft previously under operating leases. Second quarter 2016 operating expenses included a $21 million impairment charge (before profit sharing and taxes) for the intangible assets associated with the Company’s Newark Liberty International Airport slots 4 as a result of the Federal Aviation Administration (FAA) announcement in April 2016 that Newark would be designated as a Level 2 schedule-facilitated airport.

Excluding fuel and oil expense and special items in both periods, second quarter 2017 operating expenses increased 9.8 percent compared with second quarter 2016. Based on current cost trends, Southwest estimates third quarter 2017 unit costs, excluding fuel and oil expense, special items, and profit sharing expense, will increase in the two to three percent range, year-over-year.

As of July 25, 2017, the scheduled grounding of Southwest’s remaining Classic aircraft in third quarter 2017 included 21 leases that are being retired prior to the end of their lease terms. Therefore, Southwest expects to record a charge of approximately $60 million, primarily related to the remaining lease payments due as of the cease-use date. Additional charges could be recorded in third quarter 2017 associated with certain lease return requirements that may have to be performed on such aircraft prior to their return to the lessor; however, the airline does not expect the charges to be significant.

Eleanor Steed
By Eleanor Steed August 1, 2017 15:15