Here’s Why Shares of Southwest Airlines Are Tanking

October 26, 2016, 4:05 PM UTC
DENVER, CO. - February 20, 2015: Southwest Airlines aircraft at Concourse "C" at the Denver International Airport. February 20, 2015 Denver, CO (Photo By Joe Amon/The Denver Post via Getty Images)
Photograph by Joe Amon — Denver Post via Getty Images

Southwest Airlines’ quarterly revenue missed analysts’ estimates, hurt by a computer outage in July, and the company forecast a key profitability measure for the fourth quarter to decline more than what some analysts had expected.

Shares fell as much as 12 percent to $36.91 in morning trading on Wednesday, on track to post their worst day in more than a year.

Southwest (LUV) said it expected unit revenue to decline in the 4-5 percent range in the current quarter.

Unit revenue – a closely watched measure by investors -reflects sales measured against how many seats an airline flies and how far it flies them.

Deutsche Bank Equity Research analyst Michael Linenberg said he had expected unit revenue to fall 2.6 percent, while Evercore ISI analyst Duane Pfennigwerth estimated a 3.4 percent drop.

“[The unit revenue forecast] was below the lowest expectation we had heard from investors,” Wolfe Research analyst Hunter Keay wrote in a client note.

Keay, who had modeled a 2-4 percent decline, said it was unclear what was driving the weakness.

Rival JetBlue Airways (JBLU) on Tuesday forecast unit revenue to fall 3.5-4 percent in October.

Dallas-based Southwest also said it expects unit costs, excluding fuel and other items, to rise 4-5 percent in the fourth quarter.

The forecast does not include the impact of tentative contract agreements the airline has reached with its unionized pilots and flight attendants. Those agreements still need to be voted on for approval.

Across the U.S. airline industry, higher wages and cheap airfares are squeezing profit margins this fall.

Southwest said on Wednesday that “while current trends suggest a stabilization of close-in fares, the overall revenue yield environment remains soft.”

While more people booked travel on Southwest in the third quarter, fares on average were lower than they were a year earlier, especially for last-minute bookings.

A computer outage in July forced Southwest to cancel more than 2,000 flights and offer refunds to passengers. This and bookings trend pushed down the airline’s unit revenue 4.1 percent in the quarter.

Southwest said its net income declined to $388 million, or 62 cents per share, in the quarter, from $584 million, or 88 cent per share, a year earlier.

Total operating revenue declined 3.4 percent to $5.14 billion.

Analysts on average had expected earnings of 88 cents on revenue of $5.17 billion, according to Thomson Reuters I/B/E/S.