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As Southwest announces its fourth quarter earnings on Thursday, it’s good news, but with some caveats — largely related to the shutdown and the impact on operations. The budget carrier proudly relayed news of its 46th consecutive year of profitability (even after the 2018 tragedy of Flight 1380) — helped along with strong margins and record cash flow — and that last quarter beat expectations with $5.7 billion in posted revenue. Coming in a little above expectations, that resulted in LUV stock shares nudging up about 5.6% in premarket trading this morning.
The other side of the coin are the inevitable repercussions of the partial government shutdown. Southwest states the shutdown has cost the airline between $10 and $15 million during the month of January 2019. Without all hands on deck at the FAA, the shuttered government has delayed Southwest’s plans to launch service to several gateways in the Hawaiian Islands. The airline had originally planned to begin selling tickets to the islands in 2018.
“Hawaii remains our expansion focus for 2019, and we are in the final phase of obtaining authorization from the Federal Aviation Administration (FAA) for Extended Operations (ETOPS) to operate between California and the Hawaiian Islands,” Gary C. Kelly, Southwest chairman and CEO, said. “Our remaining work is currently suspended until the government reopens and the FAA is allowed to resume normal certification activities. We are well-prepared to perform the next steps in the ETOPS application process. We are anxious for the government to resolve this shutdown so we can bring low fares and a boost to Hawaii’s travel and tourism industry.”
More Growth Expected in 2019
Speaking of the Rapid Rewards program, it appears to be a key component of Southwest’s 2019 plans. Kelly said that he expects year-over-year revenue growth in 2019, “particularly during the first half of the year. Our Rapid Rewards program revenues continued to grow, as did revenues from our ancillary products. Tax savings from the 2017 tax reform legislation contributed hundreds of millions toward our earnings and record operating cash flow in 2018, and we continued to invest in our People and our Company, while providing $2.3 billion in returns to our Shareholders during 2018.”
On the horizon, the company expects increased profits and earnings per share, expanded margins and improved returns on invested capital. In fact, Kelly believes Southwest is “… well-positioned to generate stellar annual after-tax returns on capital in 2019, barring any unforeseen events.”
Bookings have been strong into 2019, especially corporate travel and close-in bookings, and the airline foresees that trend to continue.
The airline also looks forward to welcoming 25 new aircraft to its fleet in 2019, for a total of 775 airplanes by year-end. This is part of its program to modernize its fleet with scheduled aircraft deliveries from Boeing.
Additionally, the airline is looking at its resources to be sure allocation is optimized. For example, Kelly announced that Southwest will cease operations at Benito Juarez Mexico City International Airport as of March 30, 2019, and will transition those resources “to better opportunities within our existing route network.”
Saying Goodbye to Its Founder
Finally, despite all the good news at Southwest, the airline and its employees are mourning the loss of airline founder and airline industry maven, Herb Kelleher. According to Kelly, “He instilled in us the esprit de corps of our company, and he fought for Southwest for more than 50 years, transforming our industry and ultimately providing the nation with the freedom to fly. Herb is well-known around the world as a legendary businessman, but his legacy is People, including his beloved Southwest Family. We will continue to honor Herb by protecting, preserving, nurturing and growing his beloved Southwest Airlines.”
Southwest continues to be a strong player in the airline industry and remains a favorite with family travelers. With the current Companion Pass bonus offer from all three of the airline’s cobranded personal credit cards, TPG expects increased interest in the airline from travelers across many segments.
Featured image by Stephen M. Keller
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