Southwest revenue misses estimate on lower fares

26 October 2017: U.S. airline Southwest Airlines Co’s (LUV.N) revenue for the third quarter fell short of analysts’ estimates as it joined other budget carriers in reporting a drop in average fares amid intensifying competition.

Southwest’s shares were marginally down at $56.90 in premarket trading on Thursday.

While Southwest flew more people during the quarter ended Sept. 30, fares on average declined 2.2 percent from a year earlier.

Competition for the business of budget-conscious passengers has increased in recent months, with carriers trimming fares by slashing built-in amenities, a method that has helped low-cost carriers succeed.

Both Southwest and rival Spirit Airlines Inc (SAVE.O) have built reputations on offering threadbare fares at much lower prices than the larger, legacy U.S. carriers.

Bigger rival United Airlines (UAL.N) gave an underwhelming fourth-quarter forecast, while Alaska Air Group Inc (ALK.N) also reported a decline in average fare.

Spirit Airlines Inc (SAVE.O) called the quarter “challenging” and reported a drop in average fares and total unit revenue - a metric that compares ticket sales with flight capacity.

Southwest’s operating revenue, hurt by cancellations of 5,000 flights due to the recent hurricanes and earthquakes, rose 2.6 percent to $5.27 billion, but missed analysts’ estimates of $5.31 billion, according to Thomson Reuters I/B/E/S.

Major U.S. airlines were forced to cancel thousands of flights because of recent hurricanes.

However, Southwest said it was encouraged by the rebound in passenger booking trends in Houston and Florida, which were particularly hit hard by the hurricanes, and added that “travel demand remains solid” overall.

Southwest said it expects fourth-quarter unit revenue to be in the range of “up slightly to up 1.5 percent” compared with last year.

“Given the growing fear since comments about the revenue environment from United and Alaska Airlines, we believe the positive RASM guidance will offset the higher unit cost guidance,” Cowen & Co analyst Helane Becker wrote in a note.

The airline expects costs, excluding fuel and other expenses, to be flat to up 1.5 percent in the current quarter.

Southwest said its unit revenue for the third quarter fell 0.5 percent. Net income rose to $503 million, or 84 cents per share.

Excluding items, the company earned 88 cents a share, edging past analysts’ estimates of 87 cents per share, according to Thomson Reuters I/B/E/S.