Southwest Airlines’ Profits for the Quarter Have Been Clouded by Rising Costs

July 21, 2016, 2:14 PM UTC
Photograph by Joe Amon Denver Post

Southwest Airlines (LUV) reported a lower-than-expected quarterly profit as costs rose and the budget airline forecast a drop in a key profitability metric for the third quarter.

Southwest shares fell 3.6% to $40.50 in light premarket trading on Thursday.

The No. 4 U.S. airline by traffic said it expected revenue per available seat mile (RASM) to fall 3-4% in the quarter ending September.

RASM, a key indicator of an airline’s performance, measures sales against flight capacity.

Southwest’s total expenses rose 2% to $4.11 billion in the second quarter. However, unit cost fell 2.6%, helped by lower fuel costs.

Lower fuel prices have pushed up competition in the U.S. airline industry, enabling large domestic carriers to slash fares to levels offered by budget airlines.

Cheap oil has also forced Southwest, the largest hedger among U.S. airlines, to pay hefty sums to counterparties in hedge contracts that it acquired for protection in case of rising energy prices. As a result, the carrier will not reap the full benefit of cheaper fuel.


The results come a day after Southwest halted all flight departures temporarily as it worked to resolve issues impacting multiple technology systems.

Southwest’s net income jumped 35% to $820 million, or $1.28 per share, in the quarter ended June 30.

Excluding items, Southwest earned $1.19 per share, missing the average analyst estimate of $1.21, according to Thomson Reuters I/B/E/S.

Total operating revenue rose 5.3% to $5.38 billion.