Monday, January 19, 2015

Keeping an Eye on Southwest Airlines

Southwest Airlines (NYSE: LUV) reports earnings at 6:30 AM EST this Thursday.  The conditions are ripe for this low-budget airline to continue to their steady upward climb.  In their October announcement, they talked a bit about their entry into the international market, and with fuel costs driving downward and the strength of the US Dollar driving upward, there couldn't be a better time for them to branch out beyond our borders.

They plan to offer flights to Costa Rica starting in March, which is a perfect time weather-wise to vacation in that beautiful Central American tourist spot.  It will be interesting to see if there's any mention of ticket sales to that destination in Thursday's conference call.  International travel currently accounts for only 1% of Southwest's business, so the potential global upside is tremendous.  They describe their international plans for 2015 as "modest" and that suits me just fine.  Slow and steady, gaining reputation and market share, provides opportunity for long-term continuous growth.

Throughout the last quarter, Southwest continued to add destinations.  They added seven new non-stop destinations in October, and eight more in November.  As a reminder, they acquired a number of slots at Ronald Reagan National Airport (DCA) from American Airlines, and that has allowed them to add 44 new daily departures to seven new destinations. 

International flights from Houston won't be coming online until later in 2015, so you won't see that reflected in Thursdays numbers, but it's something to consider as you look at LUV's growth potential in the out-years.  The cities they are targeting, though, are impressive.  They already fly to Cancun, Mexico City, and Los Cabos from other cities in the US.  Add Puerto Vallarta and San Jose, Costa Rica and Belize City, Belize to the list for 2015, along with a major US tourist spot: Aruba.

Their expansion in Love Field, Dallas has been highly successful, where they added 16 new destinations.  Load capacity as of October was topping 90%, and as tourist travel increases in the US, demand for seats will be highly competitive.  What makes Southwest even more attractive in this regard is that, in addition to very competitive ticket prices, they still permit travelers to carry two bags free on international flights.  That's a sure-fire market share winner on competitive routes, although it will be interesting to see where they pick up that revenue stream that other airlines are currently grabbing.

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Thursday's earnings announcement will be interesting.  I believe Southwest has excellent growth potential, especially with their low-cost international travel, but some strong numbers and strong forward guidance will be necessary this week for Southwest to overcome their currently high valuation compared to earnings.  In the meantime, stay tuned to Delta Airlines' earnings announcement tomorrow for some clues as to where this industry is headed in 2015.

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