Southwest Airlines warned on Thursday that costs will climb faster than expected as it grapples with heavy labor expenses, undercutting gains from strong demand for leisure travel.
Non-fuel unit costs will rise as much as 9% in the first quarter after an 11% jump in the final months of last year, Southwest said in a statement.
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The forecast was worse than the 6.1% increase Wall Street had anticipated. The carrier blamed a “continuation of inflationary pressures,” including costly labor contracts ratified last year.
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The outlook tarnished an otherwise strong quarter for Southwest, which topped profit estimates on robust holiday travel. Its shares were little changed in early New York trading hours.
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“Overall, the report and guidance look mixed,” Stephen Trent, a Citi analyst, said in a note. While costs will ease later in the year, the first-quarter expectation will likely outpace unit revenue, he said.
The carrier’s cost challenges echoed comments from rival JetBlue Airways Corp., which was punished by investors this week for a disappointing outlook.
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Among US airlines this earnings seasons, the most successful have been the large carriers with robust international operations and business-class offerings, including Delta Air Lines.
Southwest has taken steps to reduce expenses in the wake of a fight last year with activist investor Elliott Investment Management.
It recently announced a pause in hiring for management, headquarters jobs and outside workers. Southwest is shifting 270 pilot positions out of Denver and Atlanta as it continues to adjust flight schedules, and an undisclosed number of airport workers in 18 cities recently accepted voluntary departure packages or extended leaves.
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Southwest also agreed to sell some Boeing Co. 737-800 aircraft and lease them back under efforts to monetize part of its large fleet and aircraft order book.
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Extensive Makeover
Southwest is in the midst of an extensive makeover plan that breaks from a long-held, one-size-fits-all business model that set it apart from rivals for more than five decades. Redeye flights will start in February, followed by introduction of a premium fare option offering more leg room and assigned seats late next year. The changes are intended to win more travelers who increasingly favor premium flying options.
The carrier has said it has no plans to change its “bags fly free” policy that executives believe keeps customers loyal.
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Elliott forced a board restructuring and the exit of the carrier’s chairman, allowing Southwest to avoid a proxy fight that could have led to broader changes. The airline’s chief financial officer and chief administration officer — its highest-ranking female executives — said in January they would retire.
The activist firm has argued the carrier failed for years to adapt to a changing industry. For instance, many competitors have begun offering bare-bones economy fares alongside premium options to appeal to a wider set of customers.
Efforts to turn around the business are beginning to show results. Revenue from each seat flown a mile will increase as much as 7% this quarter, Southwest said, compared with an average 5.5% gain forecast by analysts.
“The improvements from our tactical initiatives are materializing faster than expected,” Chief Executive Officer Bob Jordan said in the statement. Buoyed by the performance, Southwest launched a $750 million accelerated share buyback.
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Adjusted earnings jumped to 56 cents a share last quarter, the carrier said. Analysts were anticipating 47 cents on average in estimates compiled by Bloomberg.
Southwest Airlines gets revenue boost on leisure travel, but labor costs weigh on outlook
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