Southwest Airlines Posts Record Revenue. Why the Stock Is Tumbling.

Demand remains solid, the company said, and it even expects record fourth-quarter revenue and record passenger numbers.

However, other areas of its outlook may disappoint investors. Revenue per available seat mile, or unit revenue, is expected to fall between 9% and 11% in the current quarter from last year.

Fuel costs per gallon are also set to rise, to a range of $2.90 to $3 in the fourth quarter, up from $2.78 in the third quarter.

The stock pointed 4.8% lower ahead of the open Thursday.

This is breaking news. Read a preview of Southwest’s earnings below and check back for more analysis soon.

It’s the turn of America’s low-cost airlines to report third-quarter earnings. Don’t expect a huge amount of positivity.

Southwest Airlines
(ticker: LUV), the largest U.S. discounter, reports Thursday and investors will be hoping for something unexpected to arrest the stock’s recent slide. The shares have fallen 38% since their July peak, and are 28% down in 2023.
Spirit Airlines
(SAVE) is also expected to release earnings Thursday, along with
Frontier Group
(ULCC).

The risks facing the industry right now are stacking up, particularly for low-cost names. Cost pressures are coming from all quarters, including rising fuel prices and increased labor costs. Throw in softening domestic demand, and the months ahead look challenging.

The days ahead could also be challenging for the stocks, if earnings season so far is anything to go by. The network airlines, more exposed to international travel and therefore expected to outperform, reported strong third-quarter earnings but the stocks have been punished by investors.

That’s because the summer peak travel season is now a distant memory. International travel has surged in 2023 as this summer was the first full peak season in which Americans could travel overseas without any Covid requirements since 2019.

United Airlines
(UAL), for example, broke several records, including revenue as well as profit in both the Atlantic and Pacific regions. Yet, the stock fell 9.7% the day after the earnings were released. Higher fuel costs and the suspension of flights to Israel were among the reasons for the fall.

The domestically-focused low-cost carriers may not be as exposed to Middle East tensions but they are certainly exposed to elevated fuel prices. 

“This is a broken record, but we expect higher labor, fuel and maintenance costs to continue to weigh on and pressure earnings in the current quarter and then into 2024,” TD Cowen analyst Helane Becker said in a preview of this week’s airline earnings.

Last month Southwest cut third-quarter guidance and said close-in, or short notice, leisure demand in August was at the lower end of its expectations. This concerned investors. The carrier also flagged higher fuel costs. It said it does still expect to report record third-quarter operating revenue, but, as we’ve seen with United, that may not be enough to lift the stock.

A lot has happened since that guidance cut but demand and fuel costs will again be two key factors when Southwest reports earnings before the open Thursday. 

Analysts are expecting Southwest to report earnings per share of 38 cents on revenue of $6.6 billion in the third quarter.

In keeping with earnings season so far, though, the fourth quarter and full-year guidance is likely to be more significant for investors. Wall Street sees earnings per share of 35 cents in the current quarter, and $1.64 for the full-year.

Low-cost airline stocks have fallen sharply since July but there’s unlikely to be much this week to significantly ease the turbulence. 

Write to Callum Keown at [email protected]