Southwest Drops As Fatal Plane Accident Slows Ticket Sales

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Southwest Airlines dropped to a seven-month low after warning that its first passenger fatality has reduced customer bookings.

Revenue from each seat flown a mile, a gauge of pricing power, will decline 1 percent to 3 percent in the current quarter, the discount carrier said in a statement Thursday. Southwest blamed as much as two percentage points of the decline on weak sales after an accident in which an engine exploded in flight this month, piercing the plane and killing a passenger.

The sober outlook contrasted with those of rival airlines, which have predicted increases in the revenue gauge of as much as 5 percent. Southwest also faces pressures from aircraft retirements and fare battles with competitors. United Continental Holdings Inc. has been boosting seating capacity in some domestic markets where it faces off against Southwest.

The shares fell 3.1 percent to $52.17 at 10:07 a.m. in New York after dropping to $51, its lowest intraday since Sept. 6. Southwest tumbled 18 percent this year through Wednesday, the biggest decline on a Standard & Poor’s index of major U.S. airlines.

Southwest Chief Executive Officer Gary Kelly said the weak bookings were expected, partly because the airline halted marketing efforts after the accident.

“I don’t expect the softness to last very long,” he said in an interview. “We will be getting back to the market this week and we’ll be preparing for our normal booking campaigns.”

Logan Purk, an analyst at Edward D. Jones, said weak pricing is a bigger concern.

“There is a bit of undercutting,” he said in an interview. “Now you’re starting to get the impact of rising fuel. The natural offset is you have to increase your price, but the question remains will the market bear that?”

Southwest’s new guidance implies a second-quarter profit of about $1.30 a share, Jamie Baker, an analyst at JPMorgan Chase & Co., said in a note. That compares with the $1.52 average of analyst estimates compiled by Bloomberg.

The carrier has moved to quickly shore up its fleet following the mass retirement of its oldest airplanes last year. But the gap in the interim has forced the airline to fly earlier and later each day — unpopular times with customers. That contributed to the decline in fares, a pressure that is continuing this quarter.

Southwest said it has exercised options to acquire 40 more Boeing Co. 737 Max 8 aircraft, adding 10 planes to those the airline has already scheduled to take each year 2019 through 2022. Deliveries of five Max 8s will be accelerated to this year’s final quarter from 2019. Southwest expects to have 752 aircraft in its fleet by year-end, up from 717 at the end of March.

First-quarter profit rose to 75 cents a share, a penny more than the average of analysts’ estimates. A reduction in its federal income tax rate “significantly” increased net income, Southwest said. Revenue increased 1.9 percent from a year earlier to $4.9 billion, while analysts expected $5 billion.

“The revenue environment remains a challenge for Southwest as the company has seen competitive growth in their West Coast markets,” Helane Becker, an analyst at Cowen & Co., said in a note to investors. Meanwhile, the suboptimal flight schedule “continues to put pressure on yield.”

The Dallas-based carrier is still working through the aftermath of the first passenger fatality in its 47-year history.

U.S. regulators ordered emergency inspections of certain CFM International Inc. engines after a fan blade broke loose during an April 17 flight from New York to Dallas. The engine explosion hurled shrapnel against the fuselage of the Boeing 737-700 and destroyed a window. A woman was partially sucked through opening and killed.

Southwest has completed inspections of all 265 engines in its fleet covered by a Federal Aviation Administration emergency order. “I’m pleased with the results we’re seeing so far,” Kelly said.

The National Transportation Safety Board continues to investigate the incident, the first fatal accident involving a U.S. passenger airline since 2009.

(c) 2018, Bloomberg · Mary Schlangenstein 

{Matzav.com}

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