Southwest Q2 Earnings: Shares Tumble On Weak Unit Revenue Outlook

Southwest Airlines (NYSE:LUV) reported a rather positive quarter with both earnings and revenues beating the consensus estimates comfortably on robust demand and higher fares. Despite this, the company’s stock price saw a heavy decline on a weak outlook for unit revenue over the remainder of the year. Additionally, ex-fuel costs will continue to weigh on profits in Q3 and Q4, albeit at a diminishing rate. That said, key fundamentals remain strong, and we can hope to see top line increases in the coming quarters.

Key Takeaways:

• As mentioned above, RASM is expected to come in lower over the remainder of the year due to pressure from the reservation system transition. In the current quarter, the impact from the reservation system cutoff was less than a point. However, going into the third quarter, we expect the RASM performance to come in around 1%, which includes a significant one point of unfavorable impact from the transition. Further, Q3 revenue trends are expected to be hurt further by the timing of the July 4 holiday, as well as last year’s outage.
• As mentioned above, costs were up significantly at 5.3% in the quarter on increased labor costs, as well as the aforementioned technological implementation cost associated with the new reservation system. To put this into perspective, last year’s amendments to the labor wage contracts are driving 3.5 points of the year-over-year increases. That said, we can expect the cost pressures to ease sequentially through the remainder of the year. Going forward, ex-fuel CASM is expected to come in the 2-3% range year-over-year. Q4 is expected to see a 1% increase in costs.
• Despite a higher year-over-year increase in oil prices, the company managed to record lower fuel costs in the quarter on the back of its hedging initiatives. Additionally, the company witnessed fuel efficiency gains in the quarter, with the capacity increase outpacing the increase in gallons of fuel used. The fuel efficiency gains were driven primarily by expedited fleet modernization activity and other fuel savings initiatives. The company expects its third quarter fuel price per gallon to lie between $1.95 to $2.00 per gallon, which is lower than the figure recorded last year.

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