Key Points
Record operating revenue of $7.4 billion.
Net income of $367 million, below expectations.
RASM fell 3.8%, a slight improvement over estimates.
Southwest Airlines Co. (LUV 0.39%), a major U.S. low-cost airline, released its second-quarter 2024 earnings on July 25. The airline reported record operating revenues of $7.4 billion, meeting management's guidance but faced challenges in profitability. Net income for the quarter was $367 million, or $0.58 per diluted share, below the anticipated range of pre-tax profits for the year, which was $1.0 billion to $1.5 billion. This mixed performance highlights both the strengths and ongoing pressures within the company.
| Metrics | Q2 2024 | Management's Expectation | Q2 2023 | % Change YoY |
|---|---|---|---|---|
| Operating Revenues | $7.4 billion | Record | $7.0 billion | +4.5% |
| Net Income | $367 million | N/A | $683 million | -46.3% |
| RASM | -3.8% | -4.0% to -4.5% | N/A | N/A |
| Operating Expenses | $7.0 billion | N/A | $6.2 billion | +11.4% |
| Economic Fuel Costs per Gallon | $2.76 | $2.70 to $2.80 | $2.60 | +6.2% |
| Source: Expectations based on management's guidance, as provided in 2024-04-25 earnings report. |
Southwest Airlines Co.: Business Overview
Southwest Airlines Co. is a leading U.S. airline known for its low-cost fares and extensive domestic route network. The company's fleet consists mainly of Boeing 737 aircraft, which helps streamline operations and reduce costs. Recently, Southwest has been focused on optimizing its route network and modernizing its fleet to enhance fuel efficiency and reduce operating expenses. Key success factors include effective cost management, revenue optimization, and operational stability.
Southwest's cost management heavily relies on fuel hedging strategies and operational efficiencies. Operational stability is maintained through investments in technology and staff training. The ongoing fleet modernization aims to incorporate newer Boeing 737 models, which are more fuel-efficient. Revenue optimization includes enhancing ancillary services like premium seating and early check-ins.
Quarterly Highlights
The second quarter of 2024 was notable for several reasons. Firstly, Southwest recorded an operating revenue of $7.4 billion, a 4.5% year-over-year increase, meeting the company's guidance for record revenue. The company's net income, however, fell sharply to $367 million, down 46.3% from $683 million in the prior-year quarter. This decline was due to increasing operating expenses, which rose by 11.4% to $7.0 billion, driven by higher fuel and labor costs.
RASM, or Revenue per Available Seat Mile, fell by 3.8%, which was slightly better than management's expectation of a 4.0% to 4.5% decline. CASM-X, or Cost per Available Seat Mile excluding special items, rose by 6.0%, lower than the expected 6.5% to 7.5% increase. This was achieved partly through successful cost mitigation efforts, such as fuel hedging, which kept economic fuel costs within the expected range at $2.76 per gallon.
Operational challenges included weather disruptions, but Southwest managed close-to-expected operational efficiency. The fleet size at the end of Q2 was 817 aircraft, indicating ongoing efforts to modernize the fleet despite Boeing delivery delays.
Ancillary revenues saw a significant boost, driven by initiatives like the maturation of Global Distribution System (GDS) and the introduction of premium seating options. However, the company admitted challenges in its revenue management systems, which affected unit revenues. Moving forward, Southwest plans further optimization to address these issues in the coming quarters.
There were no material one-time events reported. Southwest did not announce any changes to dividends, maintaining a conservative stance amidst operational and economic challenges.
Financial Outlook
Looking ahead, Southwest Airlines management updated its guidance for the third quarter of 2024. RASM is expected to be flat to down 2% year-over-year, while ASMs (Available Seat Miles) are projected to rise by approximately 2%. For the fourth quarter, ASMs are expected to decrease by about 4%. The full-year guidance for ASMs remains an increase of approximately 4% year-over-year.
The economic fuel cost per gallon is expected to remain in the range of $2.60 to $2.70 for Q3 2024. CASM-X is projected to rise between 11% and 13% for the third quarter. The effective tax rate is estimated to be around 24%, within the previously expected range of 24% to 25%. Investors should keep an eye on how Southwest manages these cost pressures while aiming to stabilize revenue in the coming quarters.
