By Shivansh Tiwary
(Reuters) -Southwest Airlines on Thursday warned of higher labor costs and softer pricing, fueling worries of a potential hit to its profit if strained household budgets slow down travel demand.
The carrier’s shares fell 8.8% in morning trade, dragging down American Airlines, United Airlines and Delta Air between 1.3% and 1.6%.
“We expect shares of Southwest (as well as the other domestically focused carriers) to continue to trade down near term as its results will amplify concerns around slowing domestic air travel demand,” TD Cowen analysts said in a note.
Southwest expects revenue per available seat mile (RASM) to fall between 3% and 7% in the third quarter, and capacity to rise about 12%.
It attributed the fall in RASM, a proxy for pricing power, to tough comparisons from a boom in travel demand last year.
While U.S. airlines have reiterated resilience in travel demand, in part due to limited capacity, many fear that rising interest rates could impact consumers’ disposable income.
Recent U.S. inflation data pointed to a third straight monthly drop in airline fares in a turbulent economy.
Earlier this week, Alaska Air Group said surging international travel demand had also led to a drop in domestic travel.
However, Southwest, the largest domestic U.S. carrier, expects the quarter to be profitable and operating revenue to hit a record.
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 with its prior expectations of $2.60 to $2.70 per gallon.
In the second quarter, Southwest reported adjusted earnings of $1.09 per share, below analysts’ estimates of $1.10 per share, according to Refinitiv data.
Total operating revenue grew 4.6% to $7.04 billion, compared with estimates of $6.98 billion.
(Reporting by Shivansh Tiwary in Bengaluru; Editing by Anil D’Silva, Shounak Dasgupta and Shinjini Ganguli)
