Why Southwest Airlines Co Stock Was Falling Today

Image source: The Motley Fool. 

What happened

Shares of Southwest Airlines Co (LUV -0.17%) were losing altitude today after the discount carrier delivered a disappointing outlook in its third-quarter earnings report. As of 12:15 p.m. EDT, the stock was down 10.7%.

So what

Southwest stock sputtered despite beating earnings estimates as the company posted a per-share profit of $0.93, down a penny from a year ago, but ahead of expectations of $0.88. Revenue, meanwhile, fell 3.4% to $5.14 billion, short of the consensus at $5.16 billion.

Airlines across the board have been reporting a decline in revenue per average seat mile (RASM), a key industry metric and a sign that competition has heated up as fuel costs have come down. 

CEO Gary Kelly sounded optimistic, though, saying, "We are pleased to report another quarter of strong cash flows and healthy margins. We benefited from low fuel prices and record third quarter traffic levels in a competitive fare environment."

While airlines have reported another quarter of strong profits, investors have become more demanding of efficiency, anticipating that fuel prices will eventually rise and squeeze earnings. 

Now what

Investors were particularly disappointed that the company projected a further deceleration in RASM for the fourth quarter, the only major airline to give such guidance. Management forecast a decline of 4%-5% in RASM for the current quarter, noting the shift in holiday timing and bookings thus far.

On the expense side, the company sees costs per average seat mile excluding fuel costs and other special items increasing 4%-5% because of amended union contracts and additional depreciation expense from the accelerated retirement of the company's classic fleet. Those parameters should force analysts to lower their estimates for the current quarter.

Looking to 2017, the company said it would slow available seat mile growth to 4% in order to stabilize RASM and return the figure to growth. That strategy could give the stock a lift next year, but much will depend on where fuel prices go.