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Southwest Air 'Highly Leveraged' to Fluctuations: Analyst

Southwest Airlines posted a quarterly profit on Tuesday — after three straight quarters of losses — as lower costs boosted its bottom line. Senior airline analyst Jamie Baker at JPMorgan discussed the company’s earnings and his outlook.

“It’s not that unusual that they were able to post a profit in the second quarter,” Baker told CNBC.

“This is the seasonally strongest period for air-travel demand going into the summer months...It’s a good thing right now to not have a large international network that’s dependent on lie-back seats and business class. The domestic environment is a little bit stronger than international.”

Baker said he is worried about the company’s guidance in relation to the third quarter, saying “their failure to endorse a profit expectation stands in sharp contrast with what we’re looking for.”

However, Baker said Southwest is highly leveraged to fluctuations in demand for air travel, as the company has the luxury of a strong liquidity and balance sheet.

“They don’t need to cut prices further—they need to convey a sense of value,” he said. “Consumers need to be cajoled into believing that they are getting a good deal.”

Disclosure:

Baker has an investment-banking client who owns shares of Southwest.

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Southwest's Competitors:

AMR (American)

Continental Airlines

JetBlue Airways

Delta Air Lines

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