How Did Southwest Perform In Q2?

Southwest Airlines (NYSE:LUV) was thrown into a world of trouble in April when a tragic accident on one of their flights led to the fatality of a woman. Since then, the airline has been working hard to make sure such incidents are never repeated. However, despite their efforts, earnings in the quarter were adversely affected by the negativity from the incident. That said, discounting the impacts from this, the company managed to post a pretty decent quarter, and announced a rather optimistic guidance for the remainder of the year. Following this news, Southwest’s stock price jumped by nearly 8%, and has been climbing since.

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• As mentioned above, April marked the month in which Southwest recorded its first accident-related fatality. Naturally, the airline witnessed bookings in the quarter shrink post the incident. In fact, the company estimates that nearly $100 million in passenger revenues were lost as bookings took a hit, representing a near 3% decline in revenue per passenger seat mile (RASM), an important key metric. That said, we expect this metric to improve through the remainder of the year, much to shareholders’ relief.
• While the unfortunate incident played a massive role in hurting financials in Q2, going forward, we believe that the company is ready to learn from its mistakes and recover its lost glory. In this respect, the company has employed a number of revenue management tools and techniques to help boost revenues by as early as Q3. Further, the airline hopes to generate incremental improvements in pre-tax results of $200 million in the year as the investment in the new reservation system begins to pay off.
• All in all, Southwest is positive that the remainder of the year will show improved results. For starters, RASM is expected to improve sequentially in the third quarter, with the key metric coming in almost flat. Further, the company believes that the figure has the potential to finally return to positive growth in Q4. On the cost side, the airline now expects its non-fuel costs, which they have been maintaining quite well thus far, to rise by about 2-3% in Q3 and by about 0-1% for the full year. In terms of fuel costs, the company expects to pay about $2.25 per gallon in Q3, up from $2.07 a year ago, representing a much smaller headwind than what other airlines are facing, primarily because it incurred massive fuel hedging losses last year.

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