Southwest Airlines (LUV 1.50%) operates in an industry that's very exposed to a potential economic downturn.
As if to hammer home that point, in April while announcing its quarterly results the company withdrew a crucial guidance item. This made investors already skittish about the stock even more nervous, and they sold out of the carrier aggressively. Across that month, Southwest's stock price dived by nearly 17%.
Hardly a recession-proof business
The overarching worry shared by many market players, not to mention economists, is that the Trump administration's trade war will land the country in a recession.
No one likes a recession, not least a company or sector that depends heavily on discretionary consumer spending -- exhibit A, the airline industry. The typical flight ticket is bought by a person with a bit of disposable income who wants to romp around somewhere distant from home for a while.
Image source: Getty Images.
In a recessionary environment most people tighten up their spending, and nonessential items like travel are usually the first to be sacrificed in order to save money. We can say largely the same for businesses, another important traveler demographic for airlines.
It was in this environment of worry that Southwest published its first quarter results in April. Revenue crept up by less than 2% year over year in the period to just over $6.4 billion, broadly in line with analyst expectations.
Southwest narrowed its bottom-line loss but was still deep in the red at $77 million (first quarter 2024 shortfall: $218 million). Non-GAAP (adjusted) net loss also narrowed, to $0.13 per share from first quarter 2024's $0.36. That $0.13 represented a beat, at least, over the consensus pundit projection of $0.17.
What investors were focused on wasn't the trailing performance, but the company's decision to withdraw its full-year 2025 and 2026 profitability guidance (technically, earnings before interest and taxes, or EBIT).
"Amid the current macroeconomic uncertainty, it is difficult to forecast given recent and short-lived booking trends," it wrote by way of explanation.
That's a shame, as it was forecasting rather healthy EBITs of $1.7 billion for this year, and $3.8 billion next.
Already buffeted by headwinds
It's likely the airline and tourism industries were going to slump anyway.
That's because the post-pandemic surge in travel demand -- following the stay-in-place measures that were widespread in the thick of the COVID era -- seemed to be waning as we strode into 2025. A Bank of America Institute study published in April found that weekly spending by U.S. consumers on lodging was down by 2.5% year over year in the year to date ending March 22.
This slump risks snowballing with a recession, should one crash down on us. And an already-reeling industry will go through some tougher times. Even Southwest, once upon a time one of the more successful carriers, might find it tough to gain altitude in such an environment.
