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Why Southwest Airlines Co Stock Headed Lower Today

By Jeremy Bowman – Jul 21, 2016 at 5:26PM

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The discount airline got squeezed by a tough pricing environment in its quarterly report.

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What: Shares of Southwest Airlines Co (LUV -0.82%) were losing altitude today, closing down 11.2% on a disappointing earnings report -- and after a tech outage forced the cancellation of hundreds of flights.

So what: Southwest's profit jumped 35% in the quarter to a new record, but such an increase was expected because of low fuel prices. The company also flew fuller planes in the quarter, but earnings per share of $1.19 still missed estimates of $1.21. 

CEO Gary Kelly said he was pleased with the performance, adding that the investments the company had made in the business "are generating significant returns." Competitive fare pricing seemed to push profits below expectations even though the company's load factor set records in each month. 

Separately, a systemwide computer outage forced hundreds of flights to be cancelled yesterday. The company has fixed the glitch, but it's still dealing with fallout from the outage in the form of cancellations and delays. It also said the shutdown cost it $10 million in lost bookings alone; it has not assessed other costs yet.

Now what: Southwest also delivered weak revenue guidance for the current quarter, saying it expected revenue per average seat mile to decline 3%-4% due to the competitive pricing environment. On the cost side, it sees unit costs increasing 2% due to depreciation expense relating to the retirement of Boeing 737 aircraft.

Signs that demand from business customers is flattening may have also spooked investors. If the low-price environment continues, Southwest may have to change its plans to grow capacity next year.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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