Southwest Airlines (NYSE: LUV) reported better-than-expected second-quarter earnings on Thursday, but its guidance for the second half of the year was disappointing. Investors didn’t like the forecast, sending Southwest shares down 8% on Thursday morning.
Southwest Airlines has historically been one of the most stable companies in the airline industry, but no carrier has been able to escape the macroeconomic headwinds that have plagued airlines in recent years. The pandemic sapped demand for air travel for more than a year, and now even as travelers are returning, higher costs and the threat of a recession are weighing on future travel.
On Thursday, Southwest reported second-quarter adjusted earnings of $1.30 per share on revenue of $6.7 billion, besting the consensus profit estimate by $0.12 on revenue that was in line with expectations. CEO Bob Jordan called the results “a significant milestone in our pandemic recovery” as vacationers have returned to the skies this summer.
“Travel demand surged in second quarter, and thus far, strong demand trends continue in third quarter 2022,” Jordan said.
Southwest said it expects capacity in the third quarter to be within range of the same three months of 2019, prior to the pandemic, and forecast third-quarter revenue would be up 8% to 12%, but non-fuel costs would be up between 12% and 15%.
The capacity guidance is within market expectations, but the revenue guide is below what analysts had expected and the cost guidance is higher than analyst expectations.
Put it all together and the picture you get is of an airline that, while healthy, is facing a potential deceleration in demand at the same time costs are on the rise.
To some extent, Southwest is only confirming the market’s worst fears. The narrative coming into 2022 was that strong demand would allow airlines to shift into high gear and report record profits. The demand has materialized, but a combination of labor and fuel costs has prevented a lot of that extra revenue from falling to the bottom line.
For long-term-focused investors, there is nothing in the Southwest report that would indicate a reason to panic. The airline is strong enough to survive these headwinds and has a history of generating great returns when conditions improve. But the next few quarters could be choppy, and on Thursday, at least, investors are headed for the exits.