Several airlines updated their guidance today, citing the impact of higher-than-expected fuel costs. Among these, Southwest Airlines (LUV, Financial) delivered a particularly concerning update. Similar to American Airlines, which anticipates its Q1 earnings per share (EPS) to be at the lower end of its previous forecast, LUV has adjusted its Q1 fuel cost expectations upwards, affecting its profitability.
Despite these challenges, LUV was on track to achieve record revenue in both Q1 and Q2. However, the situation is complicated by several factors:
- LUV reported a decline in close-in leisure passenger volume, unlike its competitors American Airlines and Delta Air Lines (DAL, Financial), which have maintained their EPS guidance. LUV's lack of strong international travel demand exacerbates the impact of reduced domestic leisure travel.
- LUV's operational efficiency, derived from exclusively using Boeing 737 narrow-body aircraft, is now a liability. Boeing (BA, Financial) is experiencing significant production delays, particularly with the 737-MAX, due to investigations and a criminal probe into its manufacturing processes. This has led to a revised production timeline, with BA now expected to produce 47 737-MAX jets per month by January 2025, a delay from the original August 2024 target.
- As a result of these delays, LUV anticipates receiving fewer aircraft deliveries from Boeing. Specifically, the airline has been advised to expect only 46 737-8 deliveries in 2024, down from 79, and no 737-7 aircraft deliveries for the year.
- These setbacks have prompted LUV to plan for reduced capacity, particularly in the latter half of 2024, and to reevaluate all previous guidance for the fiscal year 2024.
The airline industry as a whole is grappling with the dual challenges of rising fuel costs and a downturn in domestic leisure travel. However, LUV's particular dependence on Boeing for its fleet is causing additional disruptions that are expected to continue affecting the airline's operations throughout the year.
