October 24, 2019 / 10:43 AM / a month ago

Southwest profit jumps 7.2% as demand, MAX cancellations push up fares

(Reuters) - Southwest Airlines Co (LUV.N) reported a 7.2% rise in third-quarter profit on Thursday, driven by strong travel demand and higher fares following flight cancellations due to the grounding of its Boeing 737 MAX jets.

FILE PHOTO: Southwest Airlines jets wait on the tarmac at Denver International Airport in Denver January 22, 2014. REUTERS/Rick Wilking/File Photo

Shares rose 2% TO $54.25 in premarket trading.

Southwest, the world’s largest 737 MAX operator, said it took a $210-million hit to operating income in the quarter from the ongoing MAX safety ban, which followed two deadly crashes on Lion Air and Ethiopian Airlines within five months.

Without the MAX, Southwest has fewer seats to sell, pushing up fares when planes are flying near capacity and driving the closely-watched metric of revenues per available seat mile, or unit revenues.

Unit revenue grew 4.2% in the quarter ended Sept. 30, with average fares up 1.7%.

Chief Executive Officer Gary Kelly said he expects unit revenue growth in the fourth quarter as well, based on current bookings and trends in customer demand, but warned that damages from the MAX groundings would continue to rise into 2020.

Airlines have been negotiating compensation with Boeing but Southwest said no settlement has yet been reached and the company did not include any settlement amounts in quarterly results.

Southwest said it would save some money on the delay in deliveries of more MAX jets, which remain frozen during the grounding, cutting its projected 2019 capital expenditure to between $1.1 billion and $1.2 billion from a prior range of $1.2 billion to $1.3 billion.

That was based on the assumption that Boeing will meet its target of gaining regulatory approval for a MAX return to service in the fourth quarter.

Unit costs excluding fuel and profit-sharing expenses rose 7.6 percent and are expected to grow between 4 percent and 6 percent in the fourth quarter, primarily due to the MAX.

“The non-fuel unit cost outlook is better than previously forecast as the company is executing well despite the MAX grounding,” Cowen analyst Helane Becker said in a note.

Southwest has said it will need one to two months after 737 MAX regulatory approval to ready its 34 jets for flight and retrain its pilots. As of now it is scheduling without the MAX until Feb. 8.

Net income rose to $659 million, or $1.23 per share from $615 million, or $1.08 per share, a year earlier. Analysts’ on average had expected the company to post a profit of $1.08 per share, according to IBES data from Refinitiv.

Total operating revenue rose 1.1% to $5.64 billion.

Reporting by Sanjana Shivdas in Bengaluru and Tracy Rucinski in Chicago; editing by Shinjini Ganguli and Nick Zieminski

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