Why Southwest Airlines Shares Are Falling Today

Southwest Airlines Co LUV reported second-quarter FY23 operating revenue growth of 4.6% year-over-year to $7.04 billion, beating the consensus of $6.98 billion. 

Adjusted EPS was $1.09, compared to $1.30 in 2Q22, missing the consensus of $1.10.

Q2 RASM decreased 8.3% Y/Y, driven largely by a five-point headwind from ~$300 million of additional breakage revenue in 2Q22.

Revenue passenger miles increased 9.2% Y/Y, Available seat miles were up 14.1% Y/Y, and load factor was 83.4% compared to 87.1% in 2Q22.

Fuel costs were $2.60 per gallon (-22.6 % Y/Y), which included $0.06 per gallon in premium expense and $0.09 per gallon in favorable cash settlements. Fuel efficiency improved by 3% Y/Y.

The company had a net cash position of $4.2 billion and adjusted debt to invested capital of 46% as of June 30, 2023

Southwest Airlines' cash provided by operating activities year-to-date was $2.12 billion, compared to $2.98 billion a year ago.

"Although our network is largely restored, it is not yet optimized. We are working to align our network, fleet plans, and staffing to better reflect the current business environment. While business revenues continue to recover, they are not back to pre-pandemic levels—therefore, we are revamping our 2024 flight schedules to reflect post-pandemic changes to Customer travel patterns," commented CEO Bob Jordan.  

"We estimate these meaningful network optimization efforts and the continued maturation of our development markets will contribute roughly $500 million in incremental year-over-year pre-tax profits in 2024, which we believe will support another year of margin expansion," added Jordan.

Based on current booking and revenue trends, LUV anticipates a 3Q23 RASM decline of 3%-7% YoY. 

3Q23 Guidance: Southwest Sees RASM down 3% to 7% YoY; ASMs Up ~12%; CASM-X Up 3.5% to 6.5% and Economic fuel costs per gallon of $2.55-$2.65.

FY23 Guidance: Southwest Sees ASMs Up ~14% -15%; CASM-X down 1% to 2% (prior down 2% to 4%) and Economic fuel costs per gallon of $2.70 to $2.80 (prior $2.60 to $2.70).

Price Action: LUV shares are trading lower by 8.4% at $33.24 on the last check Thursday.