Southwest Air Sinks as Higher Cost Outlook Extends Into 2019

(Bloomberg) -- Southwest Airlines Co. tumbled the most in two years after saying that pressure from rising expenses will spill into next year, signaling a threat to profits.

Costs for each seat flown a mile will climb at least 3 percent in 2019 excluding fuel and profit sharing, the carrier said in a statement Thursday. That was higher than the 1 percent increase expected by Evercore ISI.

Southwest Air Sinks as Higher Cost Outlook Extends Into 2019

The outlook suggests a challenging year for Southwest, in contrast to the improving forecasts at rivals such as Delta Air Lines Inc. and United Continental Holdings Inc. Expenses are rising at Southwest as it invests in a new revenue-management system and airport infrastructure. Chief Executive Officer Gary Kelly said he wasn’t satisfied with the outlook and vowed to step up efforts to squeeze costs.

“Driving efficiency will become a No. 1 priority,” he said in an interview. “We’ve gone through an investment phase where we were transforming Southwest, made significant investments to transform Southwest, with new airplanes, new reservation system, new frequent flier program. The next three to five years will be more focused on driving efficiency and maintaining our low cost position.”

Southwest plunged 8.9 percent to $49.73 at 9:46 a.m. in New York after sliding as much as 9.7 percent for the biggest intraday decline since October 2016. The shares dropped 17 percent this year through Wednesday, worse than Delta and United but better than American Airlines Group Inc.

‘Investor Skepticism’

The cost forecast “likely drives ’19 consensus lower,” Evercore analyst Duane Pfennigwerth said in a note to clients.

Revenue trends are healthy at Southwest, Kelly said, and the Dallas-based company set a goal of expanding profit margins next year. But the company’s ability to do that “is likely to be met with investor skepticism,” said Savanthi Syth, an analyst at Raymond James Financial Inc.

Southwest said revenue for each seat flown a mile, a gauge of pricing power, will rise 1 percent to 2 percent in the current quarter. That’s less than the forecasts at Delta, United and American.

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