Southwest Airlines (LUV) caught Wall Street off guard Wednesday when the air carrier reduced its revenue guidance for the second quarter.
In a filing with the Securities and Exchange Commission (SEC), Southwest said it now expects revenue per available seat mile (RASM) – a key sales metric in the airline industry – to decline 4% to 4.5% in Q2, compared with its previous outlook for a drop of 1.5% to 3.5%.
"The reduction in the Company's RASM expectations was driven primarily by complexities in adapting its revenue management to current booking patterns in this dynamic environment," Southwest said in the filing.
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Southwest also said it expects higher fuel costs of $2.70 to $2.80 vs its prior estimate of no change. Additionally, it raised its Q2 outlook for operating expenses per available seat mile, excluding fuel and oil costs, from flat to an increase of 6.5% to 7.5%.
Despite the lowered revenue outlook and increased expenses guidance, the company "continues to expect an all-time quarterly record for operating revenue in second quarter 2024."
Today's news comes just weeks after activist investor Elliott Investment Management revealed a $2 billion stake in Southwest. Elliott plans to engage with the management team of Southwest to push for changes to reverse the airline's recent underperformance, and it may have more ammunition following the Q2 guidance shift.
Southwest is the second major airline to cut its second-quarter outlook in the last 30 days. On May 28, American Airlines (AAL) said it expects RASM to decline 5% to 6% in the second quarter, compared with its previous outlook for a drop of 1% to 3%, as Kiplinger previously reported.
Is Southwest Airlines stock a buy, sell or hold?
Southwest initially fell out of the gate Wednesday, but was in positive territory by lunchtime. Longer term, the industrial stock has declined nearly 16% over the past 12 months.
It's not unsurprising, then, that Wall Street is on the sidelines when it comes to the LUV. According to S&P Global Market Intelligence, the average analyst target price for LUV stock is $26.36, roughly 8% below current levels. Additionally, the consensus recommendation is Hold.
Financial services firm Argus Research downgraded LUV stock to Hold from Buy back in May, citing several issues facing the airline.
"With employee costs high and aircraft deliveries delayed, the road to recovery is likely to take longer than anticipated," Argus Research analyst John Staszak wrote in a May 24 note. "Southwest will also require time to accelerate revenue growth and improve its network."
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