Leisure Demand Propels Southwest Q3 Revenue, Although Challenges Spark Capacity Adjustments In 2024 Plan

Southwest Airlines Co LUV reported a third-quarter FY23 operating revenue increase of 4.9% year-over-year to $6.525 billion, missing the consensus of $6.56 billion.

The airline stated that the revenue strength was driven by solid leisure demand throughout the quarter and by managed business continuing to perform largely as expected.

Adjusted EPS was $0.38, down from $0.50 in 3Q22, in line with the consensus.

The operating income declined by 70.4% Y/Y to $117 million for Q3, and the margin contracted 456 bps to 1.8%.

Q3 RASM decreased 6.8% Y/Y, driven by lower-than-expected close-in bookings.

Revenue passenger miles increased 6.2% Y/Y, Available seat miles were up 12.5% Y/Y, and load factor was 80.7% compared to 85.4% in 3Q22. CASM-X was up 4.4% Y/Y.

Fuel costs were $2.78 per gallon (-16.8 % Y/Y), which included $0.05 per gallon in premium expenses and $0.16 per gallon in favorable cash settlements. Fuel efficiency improved by 3.9% Y/Y.

The company had a net cash position of $43.7 billion and adjusted debt-to-invested capital ratio of 45% as of September 30, 2023.

LUV's liquidity stood at $12.7 billion, in excess of debt outstanding of $8 billion.

Southwest Airlines' cash provided by operating activities year-to-date was $2.74 billion, compared to $3.21 billion a year ago.

The airline reports stable travel demand in 4Q23, especially for holiday periods, with leisure and business travel remaining consistent. 

They expect a record-breaking fourth quarter in terms of operating revenue due to a high number of passengers.

The company stated that unit revenue is also under pressure because of higher-than-usual investments in development markets and schedules that don't align well with current business travel trends. 

To tackle these issues, it is making capacity adjustments and optimizing the network in its 2024 plan.

4Q23 Guidance: Southwest Sees RASM down 9% to 11% YoY; ASMs Up ~21%; CASM-X down 16% to 19% and Economic fuel costs per gallon of $2.90-$3.00.

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 $2.85-$2.95 (prior $2.70 to $2.80)

Price Action: LUV shares are trading lower by 1.08% at $23.35 on the last check Thursday