Southwest Airlines' stock reverses losses to trade higher after company cuts revenue guidance

By Ciara Linnane

Airline cites 'complexities' in adapting revenue management to current booking patterns 'in this dynamic environment'

Southwest Airlines Co.'s stock reversed early losses to trade slightly higher Wednesday, after the carrier lowered its second-quarter revenue guidance in a dynamic environment.

The Dallas-based company (LUV) said it now expects operating revenue per available seat mile to be down 4% to 4.5% for the quarter, down from prior guidance of down 1.5% to 3.5%.

The change is driven primarily by "complexities in adapting its revenue management to current booking patterns in this dynamic environment," the company said in a regulatory filing. It still expects an all-time quarterly record for operating revenue in the second quarter.

"Anyway you dice it, Southwest continues to struggle in the current environment with more moderate leisure demand after years of strength," said Melius Research analysts Conor Cunningham and Daragh Regan. "The Southwest specific initiatives have yet to take hold and investors will likely further question the validity of them now."

Southwest has been running promotional fares in an effort to fill in off-peak times where business travel has yet to pick up from its pandemic-driven slump.

The carrier is still expecting available seat miles to be up 8% to 9% and for economic fuel costs per gallon to range from $2.70 to $2.80. It still expects cost per available seat mile to be up 6.5% to 7.5%.

"The company's second-quarter 2024 operational performance, thus far, continues to be strong with minimal cancellations," Southwest said in a regulatory filing. "Completion factor quarter-to-date has averaged approximately 99.5 percent despite challenging weather in Texas and Florida."

Southwest is still expecting third-quarter capacity to increase in the low-single digits, fourth-quarter capacity to fall in the low to mid-single-digits and full-year capacity to increase about 4% from a year ago.

Southwest is due to report second-quarter earnings on July 25.

The airline disappointed investors with its first-quarter earnings, which showed a wider-than-expected loss and revenue that fell short of estimates.

Chief Executive Bob Jordan said that the company is committed to a slew of changes, including a potential end to its hallmark open-seating policy, as it seeks to improve its performance.

The Melius analysts said it's clear the U.S. domestic market is still seeing supply exceed record demand.

"It is hard to wrap our heads around an easy fix for Southwest," the analysts wrote.

Changes are expected to be unveiled at a September investor day-or even earlier if hedge fund Elliott Investment Management has its way.

Elliott disclosed earlier in June that it has taken a $1.9 billion stake in Southwest and is seeking to replace Chief Executive Robert Jordan and Gary Kelly, the airline's chairman and former CEO, with executives from outside the company, as the Associated Press reported.

"Even with a change in strategy, this is a multi-year turnaround story, not a 2025 one," said the analysts.

Melius has a sell rating on the stock, given the risk to second-half numbers.

The stock is down 1.3% in the year to date, while the S&P 500 has gained 14.7%.

-Ciara Linnane

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06-26-24 1308ET

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