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Southwest warns of higher full-year costs as quarterly profit falls

Randy Mancini 8 Jul 27

(Reuters) -Southwest Airlines on Thursday warned of higher labor costs for the year and signaled softer pricing for the current quarter, stoking worries that rising operational expenses could add to a potential hit to travel demand from strained household budgets.

The carrier’s shares were down 5% in premarket trading.

The largest domestic U.S. airline expects revenue per available seat mile (RASM) to fall between 3% and 7% in the third quarter, while capacity is expected to be up about 12%.

However, Southwest expects the quarter to be profitable and operating revenue to hit a record.

The airline attributed the fall in RASM, a proxy for pricing power, to tough comparisons from a boom in travel demand last year.

U.S. airlines have reiterated resilience in travel demand, in part due to limited capacity, though concerns remain over the impact of rising interest rates on consumers’ disposable income.

Those worries were amplified by recent U.S. inflation data, which pointed to a third straight monthly drop in airline fares. Surging international travel demand has also grabbed a share from domestic travel, Alaska Air Group said earlier this week.

Expensive labor contracts are set to weigh on the earnings of airlines this year. Southwest, which is yet to strike a new deal with its pilots, said cost per available seat mile, excluding fuel will fall 1% to 2% in 2023, smaller than the 2% to 4% drop it had expected earlier.

Fuel costs were also revised upwards to $2.70 to $2.80 per gallon, compared to its prior expectations of $2.60 to $2.70 per gallon.

Southwest added it was revamping 2024 flight schedules to reflect post-pandemic changes to customer travel patterns.

Meanwhile, higher expenses also weighed on second-quarter profit, which fell to $683 million, or $1.08 per share, from $760 million, or $1.20 per share, a year earlier.

Total operating revenue grew 4.6% to $7.04 billion.

(Reporting by Shivansh Tiwary in Bengaluru; Editing by Anil D’Silva)