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Investment idea - Southwest Airlines
12 march 2015

Southwest Airlines (LUV), a US low-cost airline, released a strong report for February 2015. Traffic increased 6.0% y-o-y to 7.6 bn passenger miles, and the passenger load factor 1.8 pps to 80.1%. Total traffic amounted to 15.6 bn passenger miles in 2M2015, up 7.3% compared to the same period last year, while the passenger load factor rose 0.2 pp to 77.4%.

Notably, the company generates a significant cash flow, allowing Southwest to pay generous dividends. The company spent USD 41 mn on dividends in Q4 as quarterly dividend amounted to USD 0.06 (+50% y-o-y), matching a 0.6% dividend yield. The company’s buyback program totaled USD 200 mn in the reporting quarter.

I believe that the future prospects of Southwest remain upbeat as improved performance of the US economy will maintain high demand for air travel. In addition, the company is expanding its international route network, renewing its fleet, and buying additional slots in the most important airports. The company plans to lift its capacity by 6% in 2015. All of these factors, coupled with higher dividends and buyback program, will boost the company’s shares in the mid-term.

I leave our target price of Southwest shares unchanged at USD 50 and confirm a Buy recommendation in the mid-term. The short-term technical target is USD 47.

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Investment idea - Southwest Airlines

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