Southwest Airlines on Thursday forecast a possible drop in third-quarter unit revenue as an oversupplied US market has forced airlines to discount tickets during what is normally the most lucrative time of the year.
Southwest said unit revenue for the current quarter could fall as much as 2 percent from last year and non-fuel costs could rise as much as 13 percent, with higher costs weighing on the airline by the end of 2024.
“There’s just more capacity, on the domestic side, than the demand right now,” Southwest CEO Bob Jordan said during the company’s earnings call. Jordan said capacity grew 6% in the second quarter and that the airline is reducing capacity “aggressively” to moderate to 2% in the third quarter.
See how Southwest performed at second quarter compared to Wall Street expectations, according to consensus estimates from LSEG:
- Earnings per share: 58 cents adjusted vs. an expected 51 cents
- Income: $7.35 billion vs. $7.32 billion expected
The Dallas-based airline said second-quarter revenue rose 4.5 percent from a year earlier to a record $7.35 billion, but profit fell more than 46 percent to $367 million, or 58 cents a share. share. Revenue per available seat mile, a gauge of airlines’ pricing power, fell 3.8 percent, roughly in line with the carrier’s lowered forecast last month.
Southwest reported adjusted earnings per share of 58 cents per share, topping analysts’ expectations.
“There are areas we need to improve, which we own and address as a management team,” CFO Tammy Romo said during the earnings call. “We are actively reviewing our capital return policies and ultimately our goal is to restore shareholder returns to historic levels.”
Southwest said Thursday it is in talks to seek compensation from Boeing as its sole plane supplier struggles to deliver aircraft on time due to safety and manufacturing crises. Southwest said it continues to expect just 20 deliveries from Boeing this year – less than half of what it had previously predicted.
The airline is in the midst of an overhaul as pressure mounts from investors to do more to boost revenue. Elliott Investment Management disclosed a nearly $2 billion stake in the carrier last month and called for a leadership change.
Earlier Thursday, Southwest announced it would scrap its open-seat plan and offer some seats on Boeing planes that have extra legroom and add overnight flights, the biggest changes to its business model in more than five decades of flying. The changes, which begin next year, will make Southwest look more like its competitors on the network.
“We are taking urgent and deliberate steps to mitigate short-term revenue challenges and implement longer-term transformational initiatives designed to drive meaningful top and bottom line growth,” Jordan said in the release.
Jordan added that the company sold “too many seats early for the peak summer season” at a lower cost, leaving the company with fewer seats to sell later in the booking curve in higher booking classes. He said the company has hired third-party experts and is adding more leadership in the area to understand what’s going on.
“We have a strong action plan, and that action plan is being implemented right now,” Jordan said.
Delta Air Lines and united airlines Executives earlier this month said they expected to see US capacity begin to ease in August, which could lead to higher fares.
The Federal Aviation Administration announced Tuesday that it is launching a safety review of Southwest. Jordan said during the earnings call that he spoke with FAA Administrator Michael Whitaker earlier this week to reinforce both Southwest’s and his own commitment to safety.
