Lower fares cut into Southwest’s profit

DALLAS (AP) — Travelers are benefiting from the lowest average airfares in several years, but the discounting is cutting into airline profits and causing some investors to sell.

Shares of Southwest Airlines tumbled 12% at one point Wednesday after the company reported a lower third-quarter profit and gave a weak revenue forecast for the rest of the year.

CEO Gary Kelly said it was easy to see why prices are down: With fuel much cheaper than it was just two years ago, airlines are adding seats faster than the economy is growing.

“It’s not shocking with fuel prices being down where they are,” Kelly said.

The airlines are trying to drive prices higher by growing less slowly. Southwest pointed its finger at discount airlines such as Spirit, Frontier and Allegiant, saying those small but fast-growing operators have increased seats by a whopping 20% in the past year on routes where they compete against Southwest.

“You’re doing it, too,” analyst Hunter Keay of Wolfe Research scolded Kelly on a conference call. Southwest grew more than 4%, or twice as fast as the U.S. economy, in the same period.

Southwest, the nation’s fourth-biggest airline, plans to grow at a slightly slower pace next year — between 3.5% and 4%. Analysts questioned whether that would be enough to help reverse lower fares.

The Department of Transportation said this week that average U.S. airfares in early summer were the lowest in seven years after accounting for inflation. In the third quarter, the average price paid for a Southwest ticket was down 5% in one year, to $147.

Investors were particularly disturbed by Southwest’s forecast that a key figure — revenue for every seat flown one mile — would decline again in the fourth quarter, and likely at a faster pace than in the third quarter.

J.P. Morgan analyst Jamie Baker said that the forecast suggested Southwest’s management was content with lower returns in the face of gently rising fuel costs and sharply higher labor costs.

The weak revenue outlook helped push Southwest shares down sharply at the opening bell, although they recovered partially to close at $38.40, down $3.55 or 8.5%. Other airline stocks sank, too, but by smaller percentages.

Kelly said he hoped that revenue per seat figure would be flat or even positive in 2017. And he said that Southwest would not back away from new flights to Cuba, new routes from Los Angeles to Mexico and expanding its operation in Fort Lauderdale. Nor will it consider fees on checked bags, he said.

Despite lower prices, Kelly said, Southwest continues to earn profits at or near record levels.

Dallas-based Southwest Airlines Co. said that third-quarter profit fell 34%, to $388 million. It earned $584 million in last year’s third quarter, when it benefited from a new credit-card deal.

Excluding the cost of union contract signing bonuses and other one-time items, Southwest said it would have earned 93 cents per share. That was good enough to beat the forecast of 87 cents per share among analysts surveyed by Zacks Investment Research.

Revenue dropped more than 3%, to $5.14 billion.

A massive computer outage that forced Southwest to cancel 2,300 flights in July wound up costing the airline $79 million in lost revenue and extra expense.

Overall spending rose nearly 9%, led by a 12% increase in labor costs. Across the industry, unions have been negotiating for higher pay. Southwest pilots and flight attendants are now voting on new contracts that include raises.

Meanwhile, fuel spending that has been falling was flat in the third quarter, a sign that the benefit of lower oil prices may have run its course.

Sourse: travelweekly.com

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