Southwest Airlines Q3 Earnings Preview: Can Strategic Changes Propel Growth?

Southwest Airlines Co LUV shares are trading flat at $30.51 during Wednesday’s session. Traders and investors are watching for the company’s third quarter earnings report, confirmed for Thursday’s pre-market session.

What To Know: In the second quarter, Southwest Airlines reported operating revenue of $7.354 billion, a 4.5% increase year-over-year that surpassed analysts' expectations of $7.32 billion.

However, the company's adjusted EPS of $0.58 marked a significant drop from the $1.19 reported in the same quarter last year, yet it still exceeded the consensus estimate of $0.51. This reflects the dual pressures of rising operational costs and a competitive airline market characterized by heightened capacity.

Bob Jordan, the airline’s President and CEO, acknowledged the hurdles faced in the second quarter, attributing the shortfall to a mix of external and internal challenges. Operating income plunged 54.5% to $405 million, while total operating expenses surged 13% to $6.95 billion.

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A notable decline in unit revenue by 3.8% year-over-year was primarily driven by an industry-wide capacity expansion that outpaced demand. Despite these struggles, revenue passenger miles rose by 7.6% and available seat miles increased by 8.6%, though the load factor dipped slightly to 82.6%.

What Else: Looking ahead, Southwest issued guidance for third quarter that suggests continued challenges. The company expects revenue per available seat mile (RASM) to be flat or down by 2% year-over-year, alongside a 2% rise in available seat miles (ASMs).

Cost per available seat mile excluding fuel (CASM-X) is anticipated to increase by 11% to 13%, reflecting ongoing inflationary pressures, particularly in labor and maintenance costs. Economic fuel costs per gallon are forecasted to range between $2.60 and $2.70, presenting a slight decrease from previous estimates.

The outlook for Southwest is also being influenced by significant shareholder activity. Elliott Investment Management, which has amassed an 11% stake in the airline, is pushing for a strategic overhaul, advocating for leadership changes, including the potential replacement of CEO Bob Jordan.

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Elliott has recently initiated a podcast series, "Stronger Southwest," aimed at engaging shareholders and promoting its nominees for board positions. This move comes as Southwest grapples with its stock price, which has plummeted nearly 50% over the last five years, even amidst strong travel demand.

What’s Next: Thursday’s earnings report is set against this backdrop of pressure from Elliott and ongoing transformation initiatives within Southwest. Jordan emphasized the company’s commitment to addressing near-term revenue challenges while implementing long-term strategies aimed at sustainable growth.

As the airline works to refine its revenue management systems and optimize capacity, analysts and investors will be keenly watching the third-quarter results for indications of recovery and strategic progress.

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Is LUV A Good Stock To Buy?

An investor can make a few decisions when deciding whether a stock is a good buy. In addition to valuation metrics and price action which you can find on Benzinga's quote pages – like Southwest Airlines‘s page for example – there are factors like whether or not a company pays a dividend or buys a large portion of its stock each quarter.

These are known as capital allocation programs. Southwest Airlines does pay a dividend, which yields 2.62% per year as of the closing price on Oct. 23, 2024. Feel free to search Benzinga's dividend calendar for the next company that is due to pay a dividend and determine what kind of yield you can earn for holding a share of the company.

For example, if you're looking to earn an annualized return of 14.42%, you'll need to buy a share of ARMOUR Residential REIT by the Nov. 15, 2024. Once done, you can expect to receive a nominal payout of $0.24 on Nov. 27, 2024.

Buyback programs are obviously different and highly variable. A company can approve a buyback program and purchase shares as it sees fit over the course of time in which the buyback was authorized. Looking through the latest news on Southwest Airlines will often yield whether or not the company has approved a buyback program recently. Buyback programs usually serve as a support for share prices, serving as a backstop for demand.

According to data from Benzinga Pro, LUV has a 52-week high of $35.18 and a 52-week low of $21.91.