Southwest Air Says Pop in Business Travel to Help Fuel 2022 Profit

(Bloomberg) -- Southwest Airlines Co. expects a rebound in domestic travel to carry into the summer, joining rivals predicting that consumers will shrug off worries about coronavirus variants, fork over higher fares and fill planes in the coming months.

Southwest maintained a plan to restore 93% of its pre-pandemic flight capacity this quarter as robust leisure demand is joined by improving corporate travel, the Dallas-based airline said Thursday as it reported financial results. Revenue will be as much as 12% higher than three years ago.

An uptick in business and international trips driven by the return to offices and lifting of travel restrictions is giving carriers new reason for optimism after a nascent recovery in domestic flying. That demand, coupled with a tightening of available seats, has enabled the industry to boost fares enough to cover jet fuel prices that are more than double the prior year in some regions.

“While it’s a long ways off and it’s hard to predict, we have a shot of ending 2022 with managed business demand fully recovered to 2019 levels,” Chief Executive Officer Bob Jordan said in an interview. “We don’t see anything on the horizon that worries me about demand falling off” more broadly.

The carrier expects to be “solidly profitable” for the remaining three quarters and the full year, he said. The outlook, which matched similarly upbeat projections from United Airlines Holdings Inc. and Delta Air Lines Inc., is based on strong spring and summer leisure bookings and improved corporate revenue each month this quarter. 

Southwest is adding more short-haul trips to business markets this quarter because of that expected boost in demand, which Jordan said is continuing “into all the forward months that we can see.”

The airline’s shares climbed 2.8% at 9:37 a.m. in New York. The stock rose 7.2% this year through Wednesday.

Converted Orders

Southwest, frustrated with ongoing delays in federal certification of the Boeing Co. 737 Max 7 aircraft, this month converted orders for 40 of those planes to the Max 8 model. Since the start of the year, the carrier has also exercised 31 existing Max 8 options into firm orders for delivery in 2022 and 14 Max 7s for next year. Boeing has said it could start Max 7 deliveries by the end of this year, Jordan said.

“We want to stay ahead of this, and it made sense to take care of those conversions now,” he said. “We needed more certainty for our planning purposes.”

The company reported a first-quarter adjusted loss of 32 cents a share, compared with analysts’ prediction of a 27-cent loss. Revenue was $4.69 billion, matching analysts’ average expectation, according to estimates compiled by Bloomberg.

Southwest continues to battle persistently high operating costs as manpower shortages -- particularly for pilots and flight instructors -- stymie the airline’s progress toward restoring pre-pandemic flying levels. It’s also facing a jump in labor spending across all work groups and increased airport expenses. The carrier added 3,300 workers in the first quarter, net of attrition, toward its goal of hiring 8,000 this year.

Unit costs, excluding fuel and special items, are expected to be as much as 18% higher this quarter than in 2019, following a 17.9% jump in the first three months of the year. The measure of costs for each seat flown a mile is an indication of efficiency, and controlling such costs is critical for Southwest to be profitable at lower fares. The carrier is projecting that the gauge will be 12% to 16% higher than pre-pandemic levels for the full year.

The airline’s policy of using advance purchase contracts to limit spikes in jet fuel prices held its first-quarter cost to $2.30 a gallon, compared with an average $3.04 in New York harbor, where costs surged following the Russian invasion of Ukraine. Southwest expects to pay as much as $3.15 a gallon this quarter.

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