Southwest Airlines Co. :LUV-US: Earnings Analysis: Q4, 2016 By the Numbers : March 13, 2017

Southwest Airlines Co. reports financial results for the quarter ended December 31, 2016.

We analyze the earnings along side the following peers of Southwest Airlines Co. – JetBlue Airways Corporation, Delta Air Lines, Inc., United Continental Holdings, Inc., Alaska Air Group, Inc., SkyWest, Inc, Allegiant Travel Company, Spirit Airlines, Inc., American Airlines Group, Inc. and Hawaiian Holdings, Inc. (JBLU-US, DAL-US, UAL-US, ALK-US, SKYW-US, ALGT-US, SAVE-US, AAL-US and HA-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 5076 million, Net Earnings of USD 522 million.
  • Gross margins narrowed from 33.01% to 29.65% compared to the same period last year, operating (EBITDA) margins now 22.93% from 26.02%.
  • Year-on-year change in operating cash flow of 118.83% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-12-31 2016-09-30 2016-06-30 2016-03-31 2015-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 5076 5139 5384 4826 4977
Revenue Growth (%YOY) 1.99 -3.37 5.34 9.33 7.54
Earnings (mil) 522 388 821 512 537
Earnings Growth (%YOY) -2.79 -33.68 34.81 12.78 182.63
Net Margin (%) 10.28 7.55 15.25 10.61 10.79
EPS 0.84 0.62 1.28 0.79 0.82
Return on Equity (%) 25.33 19.56 42.88 27.58 29.99
Return on Assets (%) 8.73 6.82 14.7 8.99 9.66

Access our Ratings and Scores for Southwest Airlines Co.

Market Share Versus Profits

Revenues History
Earnings History

LUV-US‘s change in revenue this period compared to the same period last year of 1.99% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that LUV-US is holding onto its market share. Also, for comparison purposes, revenues changed by -1.23% and earnings by 34.54% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 33.01% to 29.65%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 26.02% to 22.93% in this time frame. For comparison, gross margins were 30.69% and EBITDA margins were 24.01% in the previous period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

LUV-US‘s change in operating cash flow of 118.83% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 20.74% to 16.67% and (2) one-time items that contributed to a decrease in pretax margins from 17.02% to 15.94%

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Southwest Airlines Co.

Company Profile

Southwest Airlines Co. provides scheduled air transportation services in the United States and near international markets. The company operates Southwest Airlines and AirTran Airways that provide scheduled air transportation services. AirTran Airways operates fleet of airline services using Boeing 717-200 aircraft and Boeing 737-700 aircraft throughout the United States and to select international locations. Southwest Airlines was founded by Rollin W. King and Herbert D. Kelleher on March 15, 1967 and is headquartered in Dallas, TX.

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