Southwest Airlines posts surprise quarterly profit, foresees strong sales

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By Rajesh Kumar Singh

CHICAGO (Reuters) -Southwest Airlines reported an unexpected third-quarter profit on Wednesday, and forecast record sales in the current quarter on the back of improvements in travel demand.

The Texas-based carrier, however, pared its estimates for revenue per available seat mile, or revenue per seat, in the quarter through December, citing delays in retrofitting its fleet with extra legroom seats and the impact from the U.S. government shutdown.

Southwest said travel bookings turned higher in early July, with a quarter-on-quarter improvement in business traffic. It expects travel demand to remain strong through December, leading to a “meaningful” expansion in its fourth-quarter margin.

The company’s shares rose more than 3% in after-hours trading.

REVENUE IMPACT FROM GOVERNMENT SHUTDOWN

Southwest is the latest U.S. airline to report a pickup in travel bookings after corporate and leisure bookings took a hit in the first half of the year due to concerns about the broader economy and growing trade tensions. Last week, United Airlines said it expected to produce the highest quarterly revenue in the company’s history in the quarter through December.

Meanwhile, the industry’s efforts to limit seat supply and fend off discounting pressure have driven up airfares. Southwest’s pricing power has also received a boost as financial troubles forced Spirit Airlines to shrink its operations, reducing competitive capacity in some of its key markets.

Yet Southwest lowered estimates for year-on-year growth in its fourth-quarter revenue per available seat mile to 1% to 3% from about 6% expected earlier.

Southwest said its seat capacity in the December quarter would increase from a year ago, in part due to shifting the extra legroom retrofit of its Boeing 737-700 fleet to January. That will delay the removal of six seats from each of those aircraft.

The airline also estimates a hit to revenue per available seat mile in the current quarter from the government shutdown. Analysts at TD Cowen said the impact amounts to about $1.5 million a day. That’s higher than rival Delta’s estimate of less than a $1 million a day hit to its business.

GROWING DIVIDE IN U.S. AIRLINE EARNINGS

Southwest’s fourth-quarter outlook implies earnings in the range of 65 cents a share to 95 cents a share, according to analysts at Raymond James. The midpoint of the forecast is 80 cents a share, compared with analysts’ average estimate of 75 cents per share, according to LSEG data.

While Southwest defied expectations in the latest quarter, its earnings pale in comparison with those of Delta and United. That underscores a growing bifurcation in the U.S. airline industry, where the two full-service carriers are driving most of the profits.

Before the pandemic, Southwest, the largest domestic carrier, was the most consistently profitable U.S. airline. But it has struggled to find its footing after the global health crisis. Its lackluster earnings have forced it to undergo a major strategic transformation.

The airline has begun charging for checked bags, rolled out a new basic-economy fare, and will switch to a new assigned seat policy in January, replacing its previous open seating model.

It is also trying to keep a lid on operating expenses. Southwest slashed 15% of its corporate workforce earlier this year in the first company-wide layoffs in its history. The airline said it is on track to achieve its $370 million cost reduction target this year, adding the cost discipline aided earnings in the third quarter.

Southwest reported an adjusted third-quarter profit of 11 cents a share, compared with analysts’ average expectations of a loss of 3 cents, according to data compiled by LSEG. Its operating revenue totaled about $6.95 billion, compared with $6.29 billion expected by analysts.

The company will discuss its financial results on a call with analysts and investors on Thursday morning.

(Reporting by Rajesh Kumar Singh; Editing by Richard Chang and Jamie Freed)