Southwest Airlines Confident It Can Return to Positive Unit Revenue Growth -- 2nd Update
October 26 2016 - 5:02PM
Dow Jones News
By Susan Carey and Joshua Jamerson
Southwest Airlines Co.'s disclosure Wednesday that it expects
unit revenue to decline 4% to 5% year-over-year in the fourth
quarter and its unit cost excluding fuel to rise by a similar range
in the same period pounded the discounter's share price, slicing
off $2.2 billion in market capitalization.
Southwest shares fell 10% in premarket trading Wednesday, after
rising 9.6% in the past three months. Once the market opened,
shares fell as far as 11.2% after the company released its
third-quarter results, before rebounding to decline 8.5%, or $38.40
a share.
But executives at the Dallas-based carrier, No. 4 in the U.S. by
traffic, said they were confident they could reach revenue targets
next year despite a raft of capacity increases by rival airlines on
Southwest routes. Gary Kelly, the chief executive, said the carrier
could break into flat or positive unit revenue in the first quarter
even on planned seat growth shy of 3% in the period.
For all of 2017, Southwest expects to grow 3.5% to 4%, much more
than some of its largest competitors. But Mr. Kelly said he
believed that is the right amount, after a capacity boost of 5% to
6% this year.
"It is appropriate for us to slow our growth until unit revenue
turns positive," he said.
Unit revenue is the amount an airline takes in for each seat
flown a mile. In the third quarter, that metric declined by 4.1%
year over year.
Lower fuel prices and strong profits are prompting the airline
industry to add capacity, so more seats are fighting for the same
number of passengers, the CEO said. This is causing prices to wilt.
Southwest's average one-way fare in the third quarter fell 4.8% to
$146.96.
"Either demand needs to improve or supply come into better
alignment," he said.
Making matters worse, fuel prices are increasing. And Southwest
is facing the possibility that its pilots and flight attendants in
the coming days will ratify costly new labor contracts. Preparing
for that, it expensed $356 million pretax in the third quarter to
cover proposed signing bonuses. As a result, the company expects
its unit cost excluding fuel and profit-sharing to rise 4% to 5% in
the final quarter.
In the September quarter, Southwest earned $388 million, or 62
cents a share, down from $584 million, or 88 cents a share a year
ago. But excluding special items, profit in the latest period was
$582 million, or 93 cents a share, beating Wall Street estimates.
Revenue was $5.1 billion, down 3.4% from $5.3 billion a year
earlier.
A computer outage in July, which forced Southwest to cancel some
2,000 flights, dented revenue by $55 million in the third quarter
and added $24 million to costs. end
Write to Susan Carey at susan.carey@wsj.com and Joshua Jamerson
at joshua.jamerson@wsj.com
(END) Dow Jones Newswires
October 26, 2016 16:47 ET (20:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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