Southwest Airlines' 1Q16 Results: What the Analysts Are Saying
1Q16 estimates
Analyst estimates serve as an effective proxy for gauging what is priced into the market. For 1Q16, analysts are estimating that Southwest Airlines’ (LUV) revenue will grow by 8.8% to $5.0 billion. The growth rate is then expected to moderate for the rest of the year.
However, for the next three quarters, sales are expected to grow. The growth rate is expected to slow from 8.8% in 1Q16 to 5.9% in 2Q16, 1.3% in 3Q16, and 5.3% in 4Q16.
For 2016, analysts expect growth of 5.2%, albeit at a slower pace than 2015’s 6.5% revenue growth. Revenue growth is expected to decline further in 2017 and 2018.
Declining yields are expected to act as a speed bump for the company. The growth in global travel demand, backed by positive economic growth, should help offset some of these pressures.
Unit revenues may decline
Most airlines, including United Continental (UAL), Spirit Airlines (SAVE), and Allegiant Travel (ALGT), expect their unit revenues to decline in 1Q16.
Unlike other airlines in its peer group, Southwest Airlines (LUV) predicts its passenger revenue per available seat miles (or PRASM) to be approximately flat in the first quarter of 2016. One of the reasons is unit revenue gains from Southwest’s new credit card facility.
Analysts are expecting Southwest’s unit revenues to decline for the next couple of quarters, stabilizing only toward the end of 2016. Its PRASM is expected to fall by 3% in both 1Q16 and 2Q16 and by 1% in 3Q16. Its PRASM should finally rise by 2% in 4Q16.
The primary reason behind the lower unit revenues appears to be the increased pressure on airfares, especially in Southwest Airlines’ major markets. Also, Southwest will complete the implementation of the new credit card agreement in mid-2016.
Demand growth to slow
Southwest Airlines’ (LUV) 2016 demand growth, which is measured by revenue passenger miles (or RPM), is expected to be 6%, significantly lower than 2015’s 9%.
Slower demand growth than in previous years and lower yields are the major factors contributing to a slowdown in Southwest’s revenue growth. In the next part, we’ll discuss how these assumptions are expected to impact Southwest’s bottom line.
Southwest Airlines forms 4.8% of the Dynamic Leisure & Entertainment Portfolio ETF (PEJ).
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