There’s still a lot to love about Southwest (NYSE:LUV), even though the carrier reported a huge drop in Q4 earnings, to $78 million (11 cents per share) from $152 million (20 cents) a year earlier. LUV faced challenges with higher expenses: Maintenance costs soared 13% as the carrier refurbished aircraft, while labor costs increased by 4.5%.
Full-year earnings looked better, though: LUV earned $421 million in 2012 on more than $17 billion in revenue.
Southwest’s integration with AirTran has been less turbulent than UAL’s so far, but we’re still relatively early in the process and the carriers are smaller. Still, once the carriers have been completely integrated — which is expected by the end of 2013 — LUV anticipates to gain $400 million in synergies.
LUV has gained roughly 30% in the past three months (notice a pattern?), though that run is showing in its forward P/E, which at nearly 10 is double that of its legacy competitors.
Southwest continues to do a lot of things right from an operational perspective, too. Leasing AirTran’s Boeing 717s to Delta was done to preserve the substantial cost and maintenance advantages of operating a single aircraft type: the Boeing 737. It has continued to realize moderate capacity growth, but not at the expense of passenger revenue yield.
That said, I’d be surprised if Southwest did not experience some merger-related systems challenges in 2013.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.