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Southwest Airlines (LUV) Grapples With Rising Expenses

Southwest Airlines Co. (LUV) continues to grapple with rising expenses. High fuel costs due to an escalation in oil prices are a bane and have hurt Southwest Airlines' third-quarter results. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally hurt LUV’s bottom line in the third quarter. In the third quarter, economic fuel price per gallon was $2.78, up 6.9% from second-quarter 2023 levels. LUV forecasts fourth-quarter economic fuel cost per gallon in the range of $2.90-$3.00. For 2023, economic fuel costs per gallon are now estimated to be between $2.85 and $2.95 (prior view: $2.70 and $2.80).

Apart from the increase in fuel costs, a rise in labor and airport costs is also likely to dent bottom-line growth by resulting in a spike in operating expenses. During the first nine months of 2023, consolidated unit cost or cost per available seat mile excluding fuel, oil and profit-sharing expenses, and special items increased 5.2% year over year.

Partly due to these headwinds, shares of Southwest Airlines have declined 25.4% so far this year against the 0.6% gain of the industry it belongs to.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Despite such headwinds,continued recovery in air-travel demand (mainly on the leisure front) bodes well for Southwest Airlines. In the third quarter of 2023, air traffic, measured in revenue passenger miles, increased 6.2% year over year to 35.62 billion in the quarter under review. Capacity or available seat miles (ASMs) climbed 12.5% year over year to 44.16 billion. Load factor (percentage of seats filled by passengers) came in at 80.7%. Anticipating the trend to continue for the fourth quarter of 2023, ASMs are estimated to improve 21% from the year-ago reported figure. For 2023, Southwest Airlines continues to expect capacity to improve 14-15% from the 2022 level.

Zacks Rank and Stocks to Consider

Currently, Southwest Airlines currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks from the Zacks Transportation sector are Westinghouse Air Brake Technologies Corporation, operating as Wabtec Corporation WAB and SkyWest, Inc. SKYW. Each stock presently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Wabtec has an expected earnings growth rate of 20.99% for the current year. WAB delivered a trailing four-quarter earnings surprise of 7.11%, on average.

The Zacks Consensus Estimate for WAB’s current-year earnings has improved 4.9% over the past 90 days. Shares of WAB have gained 11.6% year to date.

SkyWest's fleet-modernization efforts are commendable. The Zacks Consensus Estimate for WAB’s current-year earnings has improved 18.4% over the past 90 days. Shares of SKYW have surged 160% year to date.

SKYW delivered a trailing four-quarter earnings surprise of 32.57%, on average.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report

SkyWest, Inc. (SKYW) : Free Stock Analysis Report

Westinghouse Air Brake Technologies Corporation (WAB) : Free Stock Analysis Report

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Zacks Investment Research