Earnings preview: Southwest might have a rough ride in Q2

Southwest Airlines Co. (NYSE: LUV) is scheduled to report second quarter 2019 earnings results on Thursday, July 25, before market open. Analysts expect the airline to report earnings of $1.34 per share on revenue of $5.93 billion. In the trailing four quarters, the company has consistently topped earnings estimates.

Southwest’s top line results are expected to benefit from strong demand and passenger yield trends during the second quarter. The company expects its unit revenues (RASM) to grow 6.5-7.5% in the second quarter versus the previous outlook of 5.5-7.5%. Lower fuel prices could also prove to be an advantage.

However, higher costs are likely to pressure earnings. The
company expects operating costs per available seat mile (CASM), ex-fuel, to increase
11.5-12.5% year-over-year in the second quarter versus its prior range of 10.5-12.5%,
mainly due to lower capacity.  

The grounding of the Boeing 737 Max jets hurt Southwest’s
capacity levels meaningfully during the quarter. The company expects capacity
to decrease around 3.5% year-over-year versus its previous range of 2-3%,
mainly due to a lower-than-expected completion factor.

Southwest also expects fuel efficiency to decrease 1-2% due
to the removal of its most fuel-efficient aircraft from its schedule because of
the Boeing 737 Max grounding.

In the first quarter of 2019, Southwest topped earnings estimates while revenues were in line with expectations. Revenues grew 4% to $5.15 billion while adjusted EPS fell 7% to $0.70. RASM grew 2.7% on a 2.6% passenger revenue yield increase. CASM, ex-fuel, rose 8.1%.

Southwest’s shares have gained 15% so far this year and 4% in the past three months. The company’s rival JetBlue Airways (NASDAQ: JBLU) reported Q2 2019 earnings results, which beat expectations, on Tuesday. Another competitor American Airlines (NASDAQ: AAL) will report results on Thursday, July 25.

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