SAVE - Airline turbulence: Southwest Airlines and peers fall after cost outlook rattles investors

2023-07-27 10:41:08 ET

Airline stocks turned lower in early trading on Thursday after Southwest Airlines ( NYSE: LUV ) warned that the recent trend of lower unit revenue and higher costs could continue.

The Dallas-based carrier reported a 10% drop in net income for the quarter. Revenue per available seat mile decreased 8.3% during the quarter, driven largely by a five point headwind from approximately $300M of additional breakage revenue in the quarter. The higher breakage was driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the July 2022 policy change to eliminate expiration dates on qualifying flight credits. The percentage of breakage revenue normalized to historical levels beginning in Q3.

Following the report, Bank of America downgraded Southwest Airlines ( LUV ) to a Neutral rating from a Buy rating. Analyst Andrew Didora said the higher level of costs for LUV were tough to defend.

"Full year unit costs are now expected to be down -1 to -2% from the prior outlook of -2% to -4%. This is all disappointing to us, particularly as full year capacity growth of +14-15% was reiterated. In addition, LUV is still negotiating with its pilots and plans on adjusting 2024 capacity given the new normal in business travel. Both of these could add further cost pressures, in our view."

Shares of Southwest Airlines ( LUV ) were down 9.00% at 10:31 a.m. to erase gains built up over the last six weeks. Other airline stocks falling in sympathy included Allegiant Travel Company ( ALGT ) -3.35% , Hawaiian Holdings ( HA ) -3.10 %, Spirit Airlines ( SAVE ) -2.78% , and Frontier Group ( ULCC ) -2.30% .

More on Southwest Airlines:

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• Recent option trades on Southwest Airlines
• Seeking Alpha's Quant Rating for Southwest Airlines

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