Southwest Airlines (LUV) Faces Turbulence: Fuel Costs and Boeing Delays

Southwest Airlines Co. (LUV) encountered a significant setback on March 12, with its stock plummeting by 14.8% to $28.76. The downturn stemmed from adverse fuel price guidance provided by Southwest for the first quarter and its announcement of capacity reduction plans for 2024 due to production delays at Boeing (BA).

Fuel Price Guidance and Financial Impact: Southwest revised its first-quarter 2024 economic fuel costs per gallon guidance to $2.95-$3, up from the previous range of $2.70 to $2.80. Elevated fuel costs, driven by rising oil prices, are expected to adversely impact Southwest Airlines’ first-quarter results, potentially leading to a net loss for the period. Additionally, the airline anticipates a 6% increase in cost per available seat mile (CASM, excluding fuel, oil, profit-sharing expenses, and special items) compared to the first quarter of 2022.

Boeing Production Delays and Capacity Reduction: Boeing’s production challenges have resulted in fewer-than-expected aircraft deliveries for Southwest Airlines in 2024. The airline now expects only 46 737-8 jets compared to the earlier projection of 79 737 MAX jets. This includes a reduction in MAX 8 planes from 58 to an unspecified number. Moreover, Southwest Airlines does not anticipate receiving any Boeing 737 MAX 7 planes this year. Consequently, LUV plans to reduce capacity and re-optimize schedules for the second half of 2024, potentially decreasing its 2024 capacity plans by one point year-over-year.

Financial Outlook and Operational Performance: Despite these challenges, Southwest Airlines remains optimistic about the future and is focused on adjusting its operating plan to achieve long-term financial targets. The airline has observed solid operational performance in the first quarter of 2024, with fewer flight cancellations and strengthening managed business trends. Demand remains stable, leading LUV to expect an 11% improvement in available seat miles (ASMs) for the first quarter compared to the previous year.

Conclusion: While Southwest Airlines faces headwinds due to fuel costs and Boeing delays, the company maintains a positive outlook and is proactively managing its operations to navigate through these challenges. Investors await the updated 2024 guidance, which will be unveiled alongside the first-quarter 2024 financial results on April 25, 2024. Despite short-term turbulence, Southwest Airlines remains committed to delivering long-term value to shareholders.