DALLAS — Southwest Airlines' third-quarter profit fell 30% to $193 million despite record revenue as leisure travel boomed over the summer, and the airline is losing pricing power at the same time that labor costs are rising.
Southwest said Thursday that it will throttle back growth plans next year because of changes in travel, including a disappointingly slow recovery in business travel.
“The whole sector is under pressure obviously," CEO Robert Jordan said on CNBC. "Costs are rising, and a lot of that is labor cost.”
The results, and particularly Southwest’s plans to grow more slowly, are likely to add to concern that demand for affordable domestic travel — the heart of Southwest’s business — is weakening.
Two budget airlines that also target price-conscious travelers reported losses in the third quarter.
Spirit Airlines blamed its $158 million loss on softer demand and discounted fares. CEO Ted Christie said demand and prices have not returned to normal, even for holiday travel, and he said Spirit will scale back its growth plans.
Frontier Airlines lost $32 million. CEO Barry Biffle said higher fuel prices and “uneven demand recovery” were key factors, and he said the airline will focus growth on under-served markets.
Airlines have aggressively added flights this year, which appears to be pushing fares lower. Jordan declined to say that Southwest has added too many flights, but he conceded that lucrative business travel has not recovered as quickly as the airline expected and that demand from leisure flyers is dropping more sharply in off-peak seasons like fall and late winter.
Southwest has fought back by increasing the frequency of fare sales to fill seats. Chief Commercial Officer Ryan Green said on a call with analysts that the sales run “when we have distressed inventory to sell” but aren't available on high-demand flights.
Southwest executives said bookings for Christmas are running ahead of last year's pace.
Still, Southwest forecast that pricing power will weaken in the fourth quarter. Revenue for each seat flown one mile, a closely watched measure of prices, will decline 9% to 11% in the fourth quarter compared with the same period last year. That is a much sharper drop than those anticipated by Southwest's larger rivals.
That underperformance is likely the reason that Southwest will scale back its aggressive growth plans early next year.
The airline expects fourth-quarter passenger-carrying capacity to increase a stunning 21% compared with the same period last year. Southwest said it will cut that growth in half in the first quarter of next year — to between 10% and 12%, four points less than previously planned.
By the second half of next year, Jordan said, Southwest will fly fewer seats than it will in the same period this year.
Raymond James airline analyst Savanthi Syth said the capacity cuts are deeper than investors expected and, along with similar slow-growth plans by other U.S. airlines, “likely bodes well for future pricing trends.”
Southwest's third-quarter profit slipped from $277 million a year ago and, excluding special items, worked out to 38 cents per share. That matched Wall Street expectations, according to a FactSet survey of analysts.
Revenue rose $305 million, or 5%, to $6.52 billion, just short of projections for $6.56 billion. Bookings close to departure were lower than expected in August and September.
Labor costs rose by $406 million, an increase of more than 17%. Southwest has agreed to new contracts with several labor groups including flight attendants this week, but it is the only one of the nation's four biggest airlines that has not yet settled with pilots, the most expensive group.
Pilots at American, Delta and United have received pay raises totaling around 40% over four years. Southwest likely will be forced to accept similar terms for its pilots, who picketed at company headquarters in Dallas on Thursday.
The airline saved $186 million in the third quarter because fuel was cheaper than a year earlier. Fuel prices have been rising recently, however, and Southwest expects to pay more per gallon in the fourth quarter than it did in the third.
Southwest depends heavily on leisure travel within the United States and doesn't offer business class and other high-end perks. That helped the airline last year, as travel rebounded after two pandemic-plagued years, but international travel and premium seats are selling more briskly this year, boosting other carriers more than Southwest.
Delta Air Lines and United Airlines each reported $1.1 billion in profit and double-digit revenue growth, although United’s shares fell after it gave a dour outlook for the fourth quarter. American Airlines lost $545 million, but only after taking $983 million in charges to cover contract-ratification bonuses for pilots.
Shares of Southwest Airlines Co. slid more than 3% after the market opened, but had cut the loss to less than 1% in afternoon trading.
Sourse: abcnews.go.com
