What happened

Surging travel demand did not translate into blockbuster earnings at Southwest Airlines (LUV -0.84%), and Wall Street was caught off guard by the airline's guidance for the remainder of the year. Investors are hitting the "eject" button, sending Southwest shares down as much as 10% on Tuesday.

So what

Airlines have reported massive demand for tickets this summer, but there have been some questions about how long the travel surge can continue in the face of rising inflation and economic uncertainty. Southwest's results, released Thursday, did little to ease those fears.

Southwest earned $1.09 per share in the second quarter, just a penny shy of expectations, on revenue that at $7.04 billion beat expectations by about $60 million. Revenue was up 4.6% year over year, but operating income fell by 31% to $795 million despite falling fuel prices.

The culprit was wages and maintenance expenses, and those headwinds are going to continue into the rest of the year. Southwest said it expects non-fuel costs to be up 3.5% to 6.5% in the third quarter compared to a year prior due to "continued inflationary cost pressures, including higher labor rates for all employee workgroups."

The airline said it has experienced strong leisure demand and yields for July travel, but the year-over-year comparisons are a challenge. Based on current booking and revenue trends, Southwest anticipates revenue per-seat mile to decrease by 3% to 7% in Q3 compared to the pent-up travel surge of 2022.

Now what

It is too soon to declare that the massive surge in demand and profitability is behind us, but Southwest's commentary will do little to quell the fear around demand. With costs likely to remain at elevated levels, a fall in demand would crimp margins should it materialize.

Southwest ended the quarter with $12.2 billion in cash on its balance sheet and a net-cash position of $4.2 billion, giving it plenty of wherewithal to survive a potential slowdown. But down cycles historically have provided little reason to hold airline stocks, and investors are voting with their feet on Thursday.