Southwest Airlines (LUV, Financial) announced third-quarter earnings, revealing a revenue of $6.87 billion, surpassing market expectations of $6.81 billion. Adjusted earnings per share came in at 15 cents, exceeding forecasts of 7 cents. The company has made progress in cutting operational costs by eliminating unprofitable routes and limiting hiring. Southwest is implementing "urgent measures" to manage expenses, including voluntary leave programs.
CEO Bob Jordan is focused on improving performance, a priority highlighted by activist investor Elliott Investment Management, which had called for leadership changes. An agreement with Elliott has led to new board appointments and avoidance of a proxy battle, with Chairman Gary Kelly set to retire early. Meanwhile, Jordan will continue as CEO.
Southwest began reducing capacity in September to counter fare pressures from excess summer travel capacity. Industry adjustments have increased yield by 2.5% over last year. The airline projects Q4 metrics showing a 4% year-over-year decrease in capacity and a 5.5% rise in revenue per available seat mile, against the anticipated 3.5%. Non-fuel operating costs are expected to rise by 13%, impacted partly by Hurricane Milton.
The airline reports strong winter holiday bookings, indicating resilient leisure travel demand. Southwest plans to repurchase $250 million in shares under a $2.5 billion authorization announced in September.
New board members, including Pierre Breber and David Cush, will join on November 1, with Kelly retiring early to become Honorary Chairman. Elliott, owning over 10% of Southwest, has agreed to a standstill and information-sharing deal, withdrawing a request for a special shareholder meeting.
In policy changes, Southwest will switch from open seating to assigned seating. It has ceased operations at unprofitable airports following overexpansion in 2023 and is reorganizing services at others. The airline has paused a third of its flights through Atlanta from April, affecting up to 200 flight attendants and 140 pilots, though this will be somewhat offset by new routes.
Southwest's order for hundreds of Boeing aircraft remains active, with potential sales and lease-back options under consideration. Pre-market trading shows a decline of over 1%, though the stock is up 8% this year, underperforming the S&P 500.
