Friday, July 28, 2017

Southwest 2Q net profit down 9%; ready to add 737 MAX 8

Southwest Airlines reported a $746 million net profit in the second quarter, down 9% from net income of $820 million in the 2016 June quarter, as it prepares for big fleet changes in the third quarter.

The Dallas-based carrier still has 67 Boeing 737 Classics in its fleet after retiring 10 in the second quarter, but all 67 are scheduled to be retired by the end of the third quarter, marking the largest number of aircraft retirements in a single quarter in Southwest’s history. It is also taking delivery of its first 737 MAX 8 next month, and will receive 10 737 MAX 8s by the end of September and 14 by the end of 2017. Southwest will place the MAX 8 into revenue service Oct. 1.

The airline plans to have a fleet of 707 aircraft by the end of 2017 comprised entirely of 737-700s, 737-800s and 737 MAX 8s.

Company executives said the gains in aircraft fuel efficiency from retiring older 737 Classics and adding MAX 8s will help Southwest improve its cost performance, which was a negative mark in the second quarter as both labor costs and fuel expenses increased year-over-year (YOY). Southwest’s unit cost pressure will “begin to ease in the third quarter,” CEO Gary Kelly told analysts and reporters.

Southwest will also fix some minor “design issues” in the Amadeus reservation system it transitioned to in May, Kelly said. He praised the “flawless deployment” of the new reservation system and said the few quirks will be “remedied quickly.” The issues have “nothing to do with the elegance of the system” and are “a couple of one-off items that we’ve found and we’ll fix and get behind us,” Kelly said.

Rising costs and reservation system cutover issues are largely being overcome by a strong revenue performance, evidenced by Southwest’s average fare rising 1.5% YOY in the second quarter, the first average fare increase for Southwest in two years.
“The second quarter was a very strong revenue performance and the third quarter outlook is more of the same,” Kelly said, adding, “The majority of our markets are showing unit revenue gains year-over-year. For a while, it had been the minority.” The carrier’s YOY RASM growth turned positive in the second quarter, rising 1.5%.

Southwest’s second-quarter revenue rose 6.7% YOY to $5.7 billion while expenses increased 9.4% to $4.5 billion, producing operating income of $1.25 billion, down 2% from an operating profit of $1.27 billion in the 2016 June quarter. Labor costs rose 13.9% YOY and fuel costs heightened 9.6% YOY in the second quarter.

Southwest’s second-quarter traffic rose 5.1% YOY to 34.4 billion RPMs on a 5.1% increase in capacity to 40.2 billion ASMs, producing a load factor of 85.6%, flat YOY. Yield rose 1.5% to 15.2 cents.


(Aaron Karp - ATWOnline News)

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