UBS Maintains a 'Buy' on Southwest (LUV); Disappointing Cost Guidance

UBS maintains a 'Buy' on Southwest (NYSE: LUV) price target of $9.50.

Yesterday, Southwest reported Q2 earnings of $0.36, 4 cents better than estimates. Revenues were $4.62 billion vs. $4.58 billion consensus.

Q1 2012 economic fuel costs were $3.22 per gallon, including $.04 per gallon in unfavorable cash settlements for fuel derivative contracts, compared to $3.28 per gallon in Q2 2011, including $.03 per gallon in favorable cash settlements. Based on market prices as of July 17, 2012, the Company expects Q3 2012 economic fuel costs to be in the $3.05 to $3.10 per gallon range, including fuel taxes and $.03 per gallon in unfavorable cash settlements for fuel derivative contracts.

Q3 2012 premium costs, recorded in Other (gains) losses, are currently estimated to be approximately $17 million, compared to premium costs of $36 million in Q3 2011.

Excluding fuel and special items in both periods, second quarter 2012 unit costs increased 4.3% from Q2 2011's combined 7.41 cents. Based on current cost trends, the Company expects another year-over-year increase in its Q3 2012 unit costs, compared to Q3 2011's unit costs of 7.38 cents, excluding fuel and special items in both periods.

For an analyst ratings summary and ratings history on Southwest click here. For more ratings news on Southwest click here.

Shares of Southwest closed at $9.15 yesterday.

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