Southwest Airlines (LUV): Here’s what to expect over the coming months

Shares of Southwest Airlines (NYSE: LUV) were down on Friday, a day after the company delivered better-than-expected results for the second quarter of 2022. Revenue and earnings surpassed expectations and while demand trends have stayed strong, rising costs remain a pain point. Here’s a look at the airline’s expectations for the rest of the year:

Revenue and profitability

Southwest generated revenues of $6.7 billion for the second quarter of 2022, which was up 68% year-over-year and 14% versus Q2 2019. Revenues improved sequentially through each month of the second quarter leading to the company’s strongest monthly revenue performance in June.

The top line growth was fueled by strong demand trends as leisure demand remained robust while business demand witnessed a meaningful improvement. Managed business demand was down 19% in June compared to down 36% in March. This improvement is expected to continue in the third quarter of 2022. Southwest expects operating revenues in Q3 2022 to increase 8-12% versus Q3 2019.

Southwest reported adjusted EPS of $1.30 for the second quarter. This compares to a loss of $0.35 per share in the year-ago period. On its quarterly conference call, the company said this was the most stable revenue environment it has had in over two years and that it remains well-protected with its fuel hedge. Based on these factors, the airline expects to be profitable for the third and fourth quarters as well as the full year of 2022.

Demand and capacity

Southwest witnessed travel demand gain traction in March. Both leisure and business travel saw significant momentum through the second quarter. Looking at the third quarter, demand trends remain strong with strength in passenger bookings yields and load factors. Demand for both leisure and business travel are trending well.

Capacity in Q2 was up nearly 12% year-over-year but down 7% compared to the same period in 2019. For the third quarter of 2022, capacity is expected to be roughly flat compared to Q3 2019. For the fourth quarter, capacity is estimated to be down 1-2% compared to the same quarter in 2019. The company is currently projecting capacity for the first quarter of 2023 to increase 10% from the first quarter of 2022.

Costs

Southwest continues to experience inflationary pressures. In the second quarter of 2022, operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing (CASM-X) increased 13.1% from the same period in 2019.

For the third quarter of 2022, CASM-X is expected to be up 12-15% versus the 2019 levels. More than half of this increase is expected to be driven by higher rates for labor and benefits and the remainder is attributable to headwinds caused by operating at suboptimal productivity levels.

Click here to read the full transcript of Southwest Airlines’ Q2 2022 earnings conference call