Shares of Southwest Airlines Co. (NYSE:LUV) experienced a 3.8% decline on December 13, closing at $29.15, following the release of less-than-optimistic fuel price guidance for the fourth quarter. Southwest Airlines adjusted its fourth-quarter economic fuel costs per gallon projection to a range between $3.00 and $3.10, up from the previous estimate of $2.90 to $3.00.
Despite these challenges, Southwest Airlines remains optimistic about certain aspects of its financial outlook. The company anticipates a 16-19% decrease in the cost per available seat mile (CASM), excluding fuel, oil, profit-sharing expenses, and special items, for the fourth quarter compared to the same period in 2022. Interest expenses are projected to remain at $63 million in the fourth quarter.
Southwest Airlines is buoyed by strong air travel demand and favorable yields. The company observed robust leisure demand, achieving record revenues during the Thanksgiving holiday period. Additionally, close-in bookings, including managed business bookings, surpassed expectations in November and December.
Building on this positive momentum, Southwest Airlines now foresees an improvement in fourth-quarter unit revenues, aiming for the higher end of its previous guidance range. The company maintains its expectations for record fourth-quarter operating revenues and passengers.
The revised guidance for the December quarter indicates an expected decline of 9-10% in revenue per available seat mile (RASM), slightly narrower than the previous range of 9-11%. Southwest Airlines anticipates a 21% improvement in fourth-quarter available seat miles (ASMs or capacity) compared to the year-ago period.
It’s noteworthy that the record-breaking traffic during the Thanksgiving period provided a significant boost to the airline stock, countering challenges such as elevated labor and fuel costs, as well as a slowdown in domestic air travel demand experienced in recent months.
Looking ahead to 2023, Southwest Airlines maintains its expectation for a 14-15% improvement in capacity from the 2022 level. Furthermore, the company anticipates year-over-year growth of 10-12% in first-quarter 2024 capacity and a growth rate of 6-8% for the entire year 2024.
Management has adjusted its long-term capacity growth outlook beyond 2024, now expecting it to be in the low to mid-single-digit range in percentage terms. This shift aims to support Southwest Airlines’ overarching financial objective of delivering after-tax return on invested capital well above the weighted average cost of capital.
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