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Why Shares of Southwest Airlines Are Up Today

By Lou Whiteman - Oct 24, 2019 at 10:04AM

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The discount king is navigating through the 737 MAX crisis well.

What happened

Shares of Southwest Airlines (LUV -1.89%) climbed more than 7% on Thursday morning after the discounter reported earnings that came in ahead of expectations. The airline is one of the U.S. carriers most affected by the grounding of Boeing's 737 MAX airplanes, but Southwest is showing it can fly through this turbulence.

So what

On Thursday morning, Southwest reported third-quarter earnings of $1.23 per share on revenue of $5.64 billion, beating analyst earnings expectations by $0.15 per share. The airline estimated the 737 MAX grounding reduced operating income by about $210 million, but Southwest was able to manage costs to help offset the reduction.

A Southwest 737 flies over the Midwest.

A Southwest-branded Boeing 737. Image source: Boeing.

Nonfuel unit costs increased by 7.6% in the quarter, better than Southwest's guidance for an 8% to 10% increase. At least some of that was tied to maintenance costs moving into the current quarter.

Southwest said the ongoing 737 MAX issue would take its toll on fourth-quarter results. The airline said its fourth-quarter revenue per available seat mile, a key airline metric, would likely come in below expectations. That's because it is doing more flying at nonpeak times to handle demand despite not having the extra aircraft, but it is forced to discount those flights because they are at times that are less attractive to passengers.

Now what

Southwest has taken the 737 MAX out of its schedule through February 2020, for now ignoring Boeing's commentary that it hopes to see the plane return to service before year's end.

Southwest CEO Gary C. Kelly said in a statement accompanying the earnings release, "we are engaged in ongoing discussions with [Boeing] regarding compensation for damages related to the MAX groundings." Kelly went a step further during a morning appearance on CNBC, saying the famously all-Boeing airline would consider whether to diversify its fleet.

There is no way Southwest and its all-737 fleet could escape damage from the 737 MAX debacle, but the airline's third-quarter release showed it is managing through the crisis.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Southwest Airlines. The Motley Fool has a disclosure policy.

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