US Markets
Thursday, July 25th, 2024 11:43 am EDT
Key Points
- Forecasted Revenue Decline and Rising Costs: Southwest Airlines has projected a potential drop in unit revenue by up to 2% for the third quarter due to an oversupplied U.S. market leading to discounted tickets. Additionally, non-fuel costs are expected to rise by as much as 13%, with these higher costs impacting the airline through the end of 2024. As a result, Southwest’s shares fell by 4% in premarket trading.
- Second Quarter Performance: In the second quarter, Southwest reported a revenue increase of 4.5% to $7.35 billion, a record high, but saw a profit drop of over 46% to $367 million. Despite this, adjusted earnings per share of 58 cents surpassed analysts’ expectations of 51 cents. Revenue per available seat mile fell by 3.8%, aligning with the airline’s previous forecast.
- Strategic Overhaul and Investor Pressure: Facing pressure from investors, particularly Elliott Investment Management, Southwest is undergoing significant changes. The airline announced the end of its open seating plan, introducing seats with extra legroom and overnight flights starting next year, to align more closely with its network carrier rivals. The airline is also seeking compensation from Boeing due to delays in aircraft deliveries and is actively working to address near-term revenue challenges while implementing long-term growth initiatives.
Southwest Airlines has forecasted a potential decline in unit revenue for the third quarter of the year due to an oversupplied U.S. market, which has compelled airlines to offer discounted tickets during what is typically the most profitable season. The airline anticipates that unit revenue could decrease by up to 2% compared to the previous year, while non-fuel costs are expected to rise by as much as 13%, with these higher costs continuing to impact the airline through the end of 2024. As a result of this forecast, Southwest’s shares dropped by 4% in premarket trading on Thursday.
For the second quarter, Southwest’s performance exceeded some Wall Street expectations, according to consensus estimates from LSEG. The airline reported earnings per share of 58 cents, adjusted, compared to the expected 51 cents, and revenue of $7.35 billion versus the anticipated $7.32 billion. Despite a 4.5% increase in second-quarter revenue from the previous year, reaching a record $7.35 billion, the company’s profit plummeted by over 46% to $367 million, or 58 cents per share. Revenue per available seat mile, an indicator of airline pricing power, fell by 3.8%, aligning with Southwest’s reduced forecast from the previous month. Adjusted per-share earnings of 58 cents also surpassed analysts’ expectations.
CEO Bob Jordan acknowledged that the second-quarter performance was affected by both external and internal factors, falling short of the company’s potential. Southwest also revealed that it is in discussions with Boeing for compensation as the aircraft manufacturer, its sole supplier, struggles with timely deliveries due to safety and manufacturing issues. Southwest maintains its expectation of receiving only 20 aircraft deliveries from Boeing this year, less than half of its earlier projection.
Amidst investor pressure to boost revenue, particularly from Elliott Investment Management, which recently acquired a nearly $2 billion stake and has called for leadership changes, Southwest is undergoing significant changes. The airline announced that it will discontinue its open seating policy, instead offering some seats with extra legroom on its Boeing aircraft and introducing overnight flights. These changes, set to begin next year, mark the most substantial modifications to its business model in over fifty years, making Southwest more comparable to its network carrier competitors.
Jordan emphasized that the airline is taking urgent and deliberate measures to address immediate revenue challenges and implement long-term transformational initiatives aimed at driving substantial top and bottom-line growth. Executives from Delta Air Lines and United Airlines have also indicated that they expect U.S. capacity to start moderating next month, which could result in higher fares.
This ongoing situation remains dynamic, and further updates are anticipated.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/07/25/southwest-airlines-luv-earnings-q2-2024.html
