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Southwest Airlines stock drops 8 percent on revenue forecast


Southwest Airlines stock dropped 8 percent on Wednesday after the carrier told investors unit revenues will decline in the fourth quarter as the airline tries to fill an increased number of seats by offering lower fares to customers.

“We’ve seen significant competitive capacity adds in markets that we serve and it’s increased competition that’s diluting revenue on routes that we serve that accounts for the decline in unit revenue trends especially here in 2016,” said Southwest chief executive Gary Kelly on a conference call with Wall Street analysts on Wednesday.

The Dallas-based carrier estimates that unit revenues in the fourth quarter will decline between four to five percent.

“Southwest is the only airline to report that it is seeing no sequential improvement in unit revenue performance,” said Cowen and Company analyst Helane Becker in an investor research report.

Shares of Southwest [ticker: LUV] were down double-digits, trading down almost 12 percent most of the morning but by the end of the day had improved. The stock closed at $38.40, down $3.55, or 8.46 percent.

Southwest said its third quarter profit declined 33 percent to $388 million, down from $584 million in the third quarter of 2015. Revenues also dipped, down 3.4 percent to $5.13 billion.

The airline said it carried 4 percent more passengers in the quarter, although the average fare declined 4.8 percent to $146.96.

The carrier’s quarterly results included $24 million in expenses related to Southwest’s technology outage in July where the airline canceled hundreds of flights and stranded thousands of passengers. The airline said the outage had cost the carrier $55 million in lost revenues.

Excluding one-time accounting items, Southwest said its net income was $582 million, or 93 cents, beating Wall Street analysts earnings estimates of 88 cents.

The carrier said it planned to slow its network growth in 2017 and expects to increase its capacity by less than 4 percent in 2017.

“We are planning for rising costs in 2017 and that is due to higher jet fuel prices and labor rates,” Kelly said. Salaries and wages at Southwest rose 12.4 percent in the third quarter.

Its pilots and flight attendants are both voting on tentative contract agreements that include significant pay increases and double-digit retroactive pay and bonuses if they are approved. Voting for the flight attendants’ agreement closes on Oct. 31 while the pilots will complete their vote on Nov. 7.

Andrea Ahles: 817-390-7631, @Sky_Talk