Southwest Airlines Co (LUV) shares are trading flat at $30.51 during Wednesday’s session, as investors await the company’s third-quarter earnings report, scheduled for Thursday’s pre-market. This upcoming report comes at a crucial juncture for the airline, as it grapples with rising costs, intense competition, and pressure from activist investor Elliott Investment Management.
While Southwest’s second quarter saw operating revenue exceeding analysts’ expectations, reaching $7.354 billion, the company’s adjusted EPS of $0.58 marked a significant decline from the previous year. This reflects the dual challenges of rising operational costs and a highly competitive airline market. The airline’s President and CEO, Bob Jordan, acknowledged these hurdles, attributing the shortfall to a mix of external and internal factors. Operating income plummeted by 54.5% to $405 million, while total operating expenses surged by 13% to $6.95 billion.
Southwest’s outlook for the third quarter suggests continued challenges. The company expects revenue per available seat mile (RASM) to be flat or down by 2% year-over-year, alongside a 2% rise in available seat miles (ASMs). Cost per available seat mile excluding fuel (CASM-X) is anticipated to increase by 11% to 13%, reflecting ongoing inflationary pressures, particularly in labor and maintenance costs.
Adding to the pressure, Elliott Investment Management, which holds an 11% stake in Southwest, is calling for a strategic overhaul. The activist investor is advocating for leadership changes, including the potential replacement of CEO Bob Jordan. Elliott has launched a podcast series, “Stronger Southwest,” aimed at engaging shareholders and promoting its nominees for board positions. This aggressive stance comes as Southwest’s stock price has plummeted nearly 50% over the last five years, despite strong travel demand.
Thursday’s earnings report will be closely watched by investors for any signs of recovery and strategic progress. Jordan has emphasized the company’s commitment to addressing near-term revenue challenges while implementing long-term strategies aimed at sustainable growth. The airline is working to refine its revenue management systems and optimize capacity, but analysts and investors will be looking for concrete evidence of improvement.
In addition to the upcoming earnings report, investors are also considering Southwest’s dividend, which yields 2.62% per year. The airline’s stock has a 52-week high of $35.18 and a 52-week low of $21.91. Ultimately, the decision of whether or not to invest in Southwest Airlines is a personal one, taking into account various factors including valuation metrics, price action, and the company’s capital allocation programs.
