DALLAS – Southwest Airlines said second-quarter earnings dropped 10% to $683 million as labor costs soared, offsetting record revenue at the start of the peak summer travel season.
The airline also warned Thursday that a key revenue ratio will drop and non-fuel costs will rise in the third quarter.
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The shares fell nearly 9% to close at $33.02, the stocks' worst one-day percentage decline since June 2020, shortly after the COVID-19 pandemic crippled air travel.
Southwest said that revenue for every seat flown one mile — a closely watched ratio in the airline business — fell 8.3% in the second quarter and will drop by between 3% and 7% in the third quarter, compared with the same periods last year.
That outlook “will amplify concerns around slowing domestic air travel demand,” said Cowen airline analyst Helane Becker.
A report earlier this week from Alaska Airlines fanned worries that demand for air travel — especially within the United States — might finally be cooling after recovering strongly from the pandemic. Southwest and Alaska both operate mostly domestic flights, and they are benefitting less than bigger rivals Delta, United and American from the boom in international flying.
Southwest CEO Robert Jordan sought to assure the market, saying that more than half of the decline in the second-quarter revenue ratio could be explained by additional money that Southwest booked a year ago. Southwest recognized revenue based on the expectation that some pandemic-era vouchers and credits would not be used before they expired. Southwest has since said vouchers won't expire, and that caused a $300 million hit to revenue in this year's second quarter, the CEO said.
Jordan said demand is still strong, and the airline is 70% booked for the third quarter — ahead of where it would normally be in late July.
The average one-way fare on Southwest dropped nearly 3% compared with last summer, to $179.44. Jordan said, however, that fares actually rose 2% after excluding the revenue Southwest recognized last year from unused vouchers.
Southwest and other airlines are trying to adapt to changes in travel habits since the pandemic. Business travel has yet to recover, causing airlines to tweak their schedules to attract more leisure flyers. Southwest is scheduling more long flights, and it is reducing early-morning and late-night flights.
The second-quarter results from Dallas-based Southwest, which were aided by lower fuel prices, beat analyst expectations. The company predicted record revenue and another profit in the third quarter, but warned of higher non-fuel costs.
Southwest is locked in drawn-out negotiations with pilots and flight attendants, who have not received pay raises in several years. Unions are aiming to match higher wages won by counterparts at other major U.S. airlines, including up to 40% more pay over four years at United.
“It's a great time to be negotiating as a pilot,” Jordan told CNBC.
Southwest struggled with a shortage of pilots as travel began recovering last year, but Jordan said it will soon be caught up. He vowed to match industry pay scales.
The Southwest Airlines Pilots Association says more people are quitting. Southwest officials conceded the union's point, but said it's because the hot job market for pilots has led some of them to job-hop.
“It's a record year for our pilot hiring. It's also a record year for pilot attrition,” Chief Operating Officer Andrew Watterson said on a call with analysts and reporters. “We do see some people come and leave right away.”
Southwest said it still expects to hit its target of adding 1,700 net pilot jobs this year.
Southwest's profit fell from $760 million a year earlier. Excluding special items, earnings per share were $1.09, matching the mean forecast in a FactSet survey of analysts.
Revenue rose 5% to a quarterly record of $7.04 billion, topping the $6.98 billion prediction of analysts.
Southwest's labor costs rose 25.5% from a year earlier, an increase of more than $500 million, and the airline said third-quarter non-fuel costs would rise by 3.5% to 6.5% for each seat flown one mile, mostly in anticipation of higher wages.
Southwest Airlines Co. spent 14% less on fuel than a year earlier, a savings of more than $200 million, because of lower prices.
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This story has been corrected to show that analysts in a FactSet survey expected Southwest to earn $1.09 per share, not 99 cents per share.