What To Expect From Southwest’s Q3 Earnings

Southwest Airlines (NYSE:LUV) is set to report earnings for the third quarter of FY 2017 on October 25. The company reported a rather weak start to the year falling short on the consensus estimates marginally. That said, results in Q2 came in higher-than-expected 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 are expected to weigh on profits in Q3 and Q4 as well, albeit at a diminishing rate. Finally, the impact from adverse weather conditions and natural calamities could have a significant $100 million impact on the top-line.

Points To Note:

• As mentioned above, RASM is expected to come in lower in Q3 and Q4 on the back of pressure from the reservation system transition. In the previous 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. That said, RASM could be positively impacted by unforeseen flight cancellations in the quarter due to the prevailing weather conditions.
• Ex-fuel CASM is expected to continue to rise this quarter as the renewed labor contract with its pilots, technicians, and engineers continues to weigh on the bottom line. However, one must keep in mind that these wage costs are only temporary and that the effect of the additional costs will dissipate sequentially by the end of the year. That said, we can expect costs to see an increase in the quarter on the impact from the hurricanes. We can hope to learn more about this in the upcoming earnings call.
• On the positive side, despite a higher year-over-year increase in oil prices, the company could record lower fuel costs in the quarter on the back of its hedging initiatives. Additionally, the company witnessed fuel efficiency gains in the quarter 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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