Southwest Sees Higher Costs, Slowing Revenue After Record Earnings

Southwest Airlines Co on Thursday forecast higher costs and a slowdown in revenue, sending its shares lower after it posted all-time record earnings in the quarter through June.

The Dallas-based carrier said while fuel hedges are offering "significant" protection against higher jet fuel prices, it faces non-fuel cost pressures due to higher rates for labor and airports.

Operating costs have also increased as capacity constraints hurt productivity. Southwest expects non-fuel costs to be up as much as 15% in the current quarter from the same period in 2019. Airlines are using that year, before the COVID-19 pandemic, as the benchmark for their performance.

Stephen Trent, Citigroup's airline analyst, said the cost estimate for the third quarter looks "a little heavy."

The carrier estimates revenue in the third quarter to be up 8% to 12% from 2019, slower than a 13.9% jump in the June quarter. However it expects to be solidly profitable for the remaining two quarters of this year, and in the full year.

Southwest's shares closed down 6.4% at $38.15.

As more people resume flying for vacations and business, U.S. airlines are enjoying their strongest travel season in recent years.

But staffing gaps and aircraft shortages have made it tougher to ramp up capacity and fully tap booming demand. Carriers have been forced to cut flights and make costly staffing adjustments to avoid cancellations and delays, driving up operating costs.

DELAYS IN BOEING DELIVERIES

Southwest was contractually scheduled to receive deliveries of 114 737 MAX jets from Boeing in 2022, but only 66 are expected to be delivered this year due to Boeing's supply chain challenges and regulatory delays in the certification of 737 Max 7.

Boeing's biggest 737 customer, Southwest said it now expects no 737 Max 7 deliveries this year and has converted 48 orders for 737 Max 7 next year to 737 Max 8.

Southwest executives told investors a pilot shortage has put limitations on the airline's capacity, which is now estimated to be down about 4% this year from 2019. Chief Executive Bob Jordan said the company is on track to hire 1,000-1,000 pilots this year and has plans to recruit about 2,200 next year.

Its overall staffing, however, has returned to pre-pandemic levels. While the company plans to add over 10,000 employees net of attrition this year, it intends to slow the pace of hiring in the second half.

Southwest's second-quarter revenue rose 68% to $6.73 billion from last year. Net income more than doubled to $760 million.