Southwest’s costs guidance looking ‘a little concerning’
Southwest Airlines Co.’s stock tumbled more than 8% Thursday after the airline reported quarterly earnings and said it is adjusting its flight schedule to adjust to changes the pandemic wrought and revenue has not yet recovered.
“Although our network is largely restored, it is not yet optimized. We are working to align our network, fleet plans, and staffing to better reflect the current business environment,” Chief Executive Bob Jordan said.
Southwest LUV, -8.94% was among the last major U.S. airline to report quarterly results, with air carriers such as Delta Air Lines Inc. DAL, -1.46% and United Airlines Holdings Inc. UAL, -2.40% reporting upbeat results and expecting strong demand for the second half of the year beyond peak summer, with business travel returning and some leisure-travel demand into September and October.
“In contrast to beats so far this earnings season, Southwest reported a largely in-line [second quarter],” with third-quarter outlook “well short of expectations on lower revenue and higher cost,” Raymond James analyst Savanthi Syth said in a note.
Southwest earned $683 million, or $1.08 a share, in the second quarter, down from $760 million, or $1.20 a share, in the year-earlier period. Adjusted per-share earnings came to $1.09, matching the FactSet consensus.
Revenue rose to $7.037 billion from $6.728 billion a year ago, ahead of the $6.997 billion FactSet consensus. Revenue was a record driven by strong demand for leisure travel, the company said.
“Based on current revenue and cost trends, we expect record operating revenue and a profitable outlook again for third quarter 2023 and continue to expect year-over-year margin expansion for full year 2023,” CEO Jordan said.
Southwest’s third-quarter guide implies per-share earnings of about 31 cents to 76 cents, which is “well below” Raymond James’ consensus for EPS of around 82 cents to 98 cents.
That’s explained by lower revenue per available seat mile, a measure of efficiency among airlines, and to a lesser extent, higher cost per available seat mile, excluding fuel costs.
“Notably, Southwest increased the 2023 [cost per seat available mile, excluding fuel costs] from (2)-(4)% to (1)-(2)%, which is worse than our/consensus’ (3)% estimate,” the analyst said.
The company is now expecting revenue per available seat mile to fall 3% to 7% in the third quarter and for available seat miles to be up 14% to 15% for the full year.
“Overall, the results and guide look mixed, with solid 2Q revenue performance, balanced against 3Q’ and full-year ex-fuel cost guide that looks a little concerning,” Citi analyst Stephen Trent said . Holding everything else constant, these results and guide could at least modestly pressure Neutral-rated Southwest’s shares on Thursday morning.
Southwest’s stock has gained 7% in the year to date, while the S&P 500 SPX, -0.64% has gained 19%.