Southwest Q3 Results: Shares Fall On Disappointing Earnings
Southwest Airlines (NYSE:LUV) reported, as expected, a pretty disappointing earnings. The company failed to beat the analyst expectations in terms of revenues, while earnings came in marginally higher than expected. The airline lost out in the quarter primarily because of adverse weather conditions that hurt operations significantly. Three hurricanes that impacted operations forced the company to cancel over 5,000 flights in the period. Apart from the disappointing earnings, investors were also concerned about the growing competition among airlines which has led to declining fares (and hence, revenues) across the market. These reasons, consequently, pushed the airline’s stock price down. Currently, we have a price estimate of $56 for Southwest.
Points To Note:
- In the quarter, unit revenues were hurt significantly on adverse impacts from the hurricanes, a new reservation system, and tough pricing conditions. The key metric came in lower by 0.5% in the quarter. The impact from the hurricanes led to a near 0.5% fall in unit revenues, while the new reservation system hurt unit revenues by a further 0.5-1%. That said, the one-time impacts from the hurricanes and reservation system are not expected to carry forward in the next quarter. Unit revenues are expected to return to positive in Q4.
- In terms of capacity, the key metric grew by about 3.1% year-over-year. Hurricane Harvey, which primarily hurt operations at Houston, impacted a significant 15% of the carrier’s capacity. Hurricane Irma, which hit Florida and other Caribbean destinations, affected a further 25% of the total capacity. Going forward, Southwest expects the key metric to grow by close to 1-2% in Q4. Additionally, it hopes to finish the year up 3.5%.
- The company’s CASM ex-fuel came in much better than expected. In the quarter, the metric rose by about 3.3%, of which 2% accounted for the impact from the hurricanes. Additionally, costs were up further due to the pilot contract renewal that was concluded in the fourth quarter last year. That said, the airline expects CASM ex-fuel to increase by about 0-1.5% year-over-year in the fourth quarter of 2017, as the impact of renewed contracts wanes.
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