Southwest Airlines (LUV) and Others Brace for Rough Quarter
As third-quarter earnings reports roll in, America’s low-cost airlines are preparing for a potentially bleak outlook. Southwest Airlines (ticker: LUV), the largest U.S. discounter, is set to release its report on Thursday, with investors hoping for a surprise turn of events to reverse the stock’s recent downward trend. Since reaching its peak in July, Southwest’s shares have plummeted by 38%, showing a 28% decline for the year 2023. Spirit Airlines (SAVE) and Frontier Group (ULCC) are also expected to disclose their earnings on the same day.
Multiple Challenges Cripple Low-Cost Airlines
Low-cost carriers are currently facing a host of challenges that threaten their bottom line. Steep costs are mounting from various sources, including soaring fuel prices and rising labor expenses. Combined with weakening domestic demand, the upcoming months pose a challenging landscape for these airlines.
Troubling Precedent Unleashes Concerns
Investors worry that the recent performance of network airlines during this earnings season could foretell a rocky road ahead for low-cost carriers. Despite strong third-quarter earnings from network airlines, which typically fare better due to their international travel exposure, stock prices have suffered significant blows.
The once-thriving summer peak travel season has become a distant memory. Thanks to the absence of Covid-related travel restrictions, international travel experienced a surge in 2023, marking the first full peak season since 2019 when Americans were able to travel abroad freely.
Exemplifying this trend, United Airlines (UAL) achieved record-breaking revenue and profits in both the Atlantic and Pacific regions. However, the stock stumbled by 9.7% immediately following the earnings report. Factors contributing to this decline include higher fuel costs and the suspension of flights to Israel.
Analyzing the Impact of Middle East Tensions and Fuel Prices on Low-Cost Carriers
The volatility in the Middle East has a far-reaching impact on various industries, including the airline sector. While domestically-focused low-cost carriers may not face direct exposure to the geopolitical tensions in the region, they are certainly vulnerable to another significant factor: elevated fuel prices.
According to TD Cowen analyst Helane Becker, the challenges faced by low-cost carriers continue to persist. She points out that higher labor, fuel, and maintenance costs continue to exert pressure on earnings not only in the current quarter but also well into 2024.
An example of these challenges can be seen in the recent guidance cut by Southwest Airlines. The carrier revealed that its third-quarter results were negatively impacted by lower-than-expected short-notice leisure demand in August. This revelation raised concerns among investors, particularly since Southwest also highlighted the impact of increased fuel costs. While the airline still expects to report record third-quarter operating revenue, it remains uncertain whether this will be able to positively influence its stock, as United Airlines’ experience has shown.
As Southwest Airlines prepares to release its earnings report before the open on Thursday, attention will once again turn to the demand for air travel and the prevailing fuel costs. Analysts anticipate earnings per share of 38 cents on revenue of $6.6 billion for the third quarter.
However, looking ahead, investors are likely to place greater significance on the fourth-quarter and full-year guidance. Consequently, Wall Street’s expectations for this period are also crucial. They foresee earnings per share of 35 cents for the current quarter and $1.64 for the entire year.
With low-cost airline stocks experiencing a sharp decline since July, it is unlikely that there will be any significant factors this week to alleviate the turbulence experienced by the industry.
In conclusion, the repercussions of Middle East tensions and fuel prices are evident in the performance of low-cost carriers. These factors continue to cause concern among analysts and investors alike, prompting them to closely monitor the upcoming earnings reports and guidance provided by companies like Southwest Airlines.