Southwest Airlines, the biggest airline in the US, saw a drop in its stock value on Thursday. Investors were disappointed with the predictions for the upcoming quarter and year, which raised concerns about how many people will be flying domestically. The airline also did not meet the earnings expectations that were set by financial experts for the last quarter. This caused a drop in the NYSE Arca Airline index, affecting the stock market as a whole.
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Recently, investors have been worried about a possible slowdown in domestic travel after seeing that ticket prices for flights within the country have reached their highest point. This is a concern for airlines, as they have relied on strong demand to offset increasing costs. For example, Southwest has projected that its revenue per available seat mile - which is a measure of pricing power - could decrease by as much as 7% in the September quarter compared to last year. Additionally, the company expects labor expenses to increase, which will also drive up its non-fuel operating costs this year.
Southwest says that the decrease in its revenue per available seat mile is due to a tough comparison to last year when airfares rose significantly after the pandemic and limited flights. The domestic leisure carrier Alaska Air Group has also warned of a decline in pricing power in the current quarter compared to last year, citing an increase in international travel demand that has led to a drop in domestic travel. Analysts are concerned about the potential impact on Southwest's shares and other domestically focused carriers shortly due to the results highlighting the concerns around slowing domestic air travel demand. However, Southwest executives have stated that leisure travel demand remains strong and is expected to generate a record revenue in the September quarter. They also mentioned that the company had a record fare sale last month for travel this autumn. The company is adapting to changing travel patterns by shifting the frequency of its flights from mostly short-haul business travel-heavy routes to more medium and long-haul routes.
Southwest did not provide a profit estimate for the third quarter, but analysts have estimated its earnings to be in the range of 31 cents-76 cents a share, which is lower than the expected earnings estimate of 96 cents per share for the quarter. According to Refinitiv survey data, Southwest's adjusted profit for the second quarter came in at $1.09 per share, slightly below analysts' estimates of $1.10 per share. Some analysts have called Southwest's earnings report "the worst" in the company's history.