Southwest Airlines (LUV, Financial) reported better-than-expected Q3 results, attributing success to industry-wide capacity moderation and rising travel demand. This aligns with the recent earnings reports from Delta Air Lines (DAL, Financial) and United Airlines (UAL, Financial) on October 10 and October 15, respectively. However, a significant development for LUV is the resolution of a proxy fight with Elliott Investment Management, which demanded leadership changes.
As part of the agreement, CEO Bob Jordan will remain in his position, while Chairman Gary Kelly will leave the Board. Elliott's influence will grow, with six of its Board recommendations approved, including David Cush, former CEO of Virgin America, and Pierre Breber, former CEO of Chevron (CVX, Financial).
This agreement reduces uncertainty and should aid LUV's turnaround efforts, yet the stock remains under pressure despite positive news.
- LUV's stock weakness is partly due to a 30% rally since August. Investors expected strong results following UAL's performance, but LUV's guidance may have caused concerns.
- While LUV's Q4 RASM guidance of +3.5-5.5% is promising, reflecting strong holiday demand, its cost guidance is disappointing. LUV expects Q4 CASM-X to rise by 11-13%, driven by cost pressures, especially from new labor contracts and a 4% capacity reduction.
- In Q3, CASM-X was +11.6%, compared to UAL's 6.5% and DAL's 5.7% increases in non-fuel CASM. Elliott criticized LUV's inefficiency, suggesting further cost-control measures are likely.
- LUV is removing unprofitable flights and reducing capacity to boost profitability. ASMs rose by 2.4% in Q3, but a 4% capacity cut in Q4 is planned to support higher ticket prices.
- LUV announced a $250 million accelerated share repurchase program under its $2.5 billion authorization, which should help offset EPS impact from higher costs.
Overall, LUV's earnings report was solid but lags behind UAL and DAL. With Elliott's involvement, operational changes are expected soon, potentially enhancing LUV's profitability.
