Shares in Southwest Airlines (LUV -0.84%) declined by 18.1% this week through early Friday morning trading. The setback occurred after Southwest management gave a disappointing update at the JPMorgan Industrials Conference.
Southwest disappoints the market
The bad news is arguably as much about Boeing (BA 0.25%) as it is about Southwest. Unfortunately, the quality control issues at the former are causing airplane delivery delays. Southwest now expects to receive just 46 deliveries of the Boeing 737-8 airplane in 2024 compared to a previous expectation for 737 MAX deliveries, which included 58 deliveries of the Boeing 737-8.
If you are wondering where the other deliveries went, the airline said it's assuming no 737-7 "aircraft deliveries and continues to assume no -7 aircraft are placed into service this year based on the current certification status."
The delays mean Southwest now plans to reduce capacity in 2024 and is "reevaluating all prior full-year 2024 guidance," which it intends to update investors on during the first-quarter results presentation on April 25.
Southwest's mixed first-quarter update
It's even more disappointing because the update on first-quarter trading conditions had plenty of positives. For example, management now sees available seat miles (ASM) up 11% in the first quarter, compared to prior guidance for a 10% increase. As such, management continues to expect record first-quarter operating revenue.
Meanwhile, "bookings for second-quarter 2024 are currently ahead of seasonally normal trends, and the Company expects to deliver all-time record operating revenues" for the quarter, according to Southwest's SEC filing.
On a more negative note, non-fuel cost per ASM (CASM) will increase by around 6% in the first quarter, compared to a prior estimate of 5%-6%. However, management believes the change in CASM expectations for the first quarter is neutral to the expectations for full-year operating expenses.
Image source: Getty Images.
Where to next for Southwest Airlines?
The delivery news is especially disappointing, given that Southwest is trying to grow its capacity and take advantage of a recovering commercial air travel market. That said, the stock should be set up to react well to any positive development in Boeing's production plans.
