Southwest Airlines (LUV -0.44%), a major U.S. air carrier known for its budget-friendly travel options, recently released its third-quarter earnings for 2024 on October 24. The airline's quarterly performance showed a record in operating revenue, amounting to $6.9 billion, surpassing the analyst expectations of $6.772 billion, a 1.9% margin. Adjusted earnings per share stood at $0.15, well above the estimated $0.06. Yet, despite these strong top-line results, the airline continues to face significant cost pressures, reflected in a year-over-year increase of 11.6% in cost per available seat mile, excluding fuel and other items (CASM-X). Overall, the quarter demonstrated robust revenue growth, tempered by persistent cost challenges.
| Metrics | 3Q 2024 Results | Analyst Estimates | 3Q 2023 Results | % Change YoY |
|---|---|---|---|---|
| Adjusted Earnings Per Share | $0.15 | $0.06 | - | - |
| Total Operating Revenue | $6.9 billion | $6.772 billion | $6.55 billion | 5.3% |
| Net Income | $67 million | - | $193 million | (65.3)% |
| Operating Expenses | $6.8 billion | - | $6.37 billion | 6.6% |
Source: Analyst estimates for the quarter provided by FactSet.
Understanding Southwest Airlines' Business
Founded in 1971, Southwest Airlines operates within a unique route network, offering direct point-to-point and hub-and-spoke services through a fleet of 817 Boeing 737 aircraft. Its network serves 805 city pairs, offering frequent and conveniently timed flights. This model enables Southwest to balance high asset utilization with operational efficiency, maintaining resilience against market fluctuations. However, after the pandemic, the optimization of its routes, especially for short-haul travel, has been a focus area, given shifting travel patterns.
Southwest's core strength lies in its cost-structure efficiency, mainly maintaining low operation costs by operating a single aircraft type. This simplifies maintenance and training, allowing for competitive fare pricing. Nevertheless, ongoing labor negotiations, as 83% of its workforce is unionized, continue to impact expenses. Fuel price volatility remains a significant concern, which Southwest mitigates through hedging strategies and efficiency improvements.
Quarterly Highlights and Challenges
During the third quarter, Southwest Airlines achieved record operating revenues of $6.9 billion, reflecting a 5.3% increase from the previous year. Key contributors to this growth included increased revenue per available seat mile (RASM), which rose by 2.8%. This was coupled with a marginal increase in passengers carried, up 0.5% to reach 35,516, and a minor expansion in available seat miles by 2.4% to 45,219 million. Despite these gains, the company's profit faced pressure from rising operating costs, which totalled $6.8 billion, marking a 6.6% year-over-year increase.
The company's salaries, wages, and benefits were notable cost drivers, alongside expensive maintenance operations. Specifically, Southwest's cost per available seat mile (CASM-X), accounting for fuel and other special charges, surged by 11.6%. Economic fuel costs remained considerable but within projected figures, aided by fuel hedging measures that covered approximately 58% of fuel consumption for the year.
A further highlight was the ongoing implementation of Southwest's financial strategies, such as the $250 million share repurchase initiative, which is part of a broader $2.5 billion authorization. This move signals confidence in improved financial goals and aims to enhance shareholder value. Nonetheless, labor expenses stemming from new contractual agreements continue to tighten the company's operational margins.
Material challenges have also peppered the quarter, particularly regarding pending Boeing aircraft deliveries. Delays have impacted capital planning and operational forecasts. The reduction in fourth-quarter capacity by 4% year-over-year is part of Southwest's strategy to optimize its route structure, addressing overcapacity issues realized during the year.
Looking Ahead
As it steps into the fourth quarter, Southwest anticipates RASM to grow between 3.5% and 5.5%, driven by robust travel demand during the holiday season. Costs remain a concern, with CASM-X likely to increase between 11% to 13%, influenced by labor expenses and strategic capacity reductions. Furthermore, forecasts suggest a restrained capital expenditure for the current year to improve liquidity, enhance cash flow, and meet cost challenges effectively.
Management is particularly focused on long-term profitability goals, aiming for a return on invested capital (ROIC) of at least 15% by 2027. Investors can expect potential enhancements in economic fuel prices through Southwest's continued reliance on hedging strategies. However, ongoing market conditions and the successful management of labor negotiations will be key factors to watch as they substantially influence operating capabilities and cost structures in the quarters ahead.
