Southwest posts record revenue but warns of rising costs

DALLAS (AP) — Southwest Airlines’ second-quarter profit doubled to $760 million on record revenue, but the carrier warned that rising costs and lower productivity are likely to continue in the second half of the year.

Southwest shares fell 7% in afternoon trading Thursday.

Air travel has bounced back this year from pandemic depths, and that is particularly true for Southwest’s strength in leisure travel within the United States. The Dallas carrier said ticket demand has continued in the third quarter.

But costs are rising sharply, too.

Southwest’s fuel spending more than doubled, an increase of more than $800 million from a year ago, even though the airline hedges, or makes investments to offset rising energy prices. Spending on wages and benefits rose 21%, or about $400 million in a year.

Southwest and other airlines are also dealing with high numbers of canceled and delayed flights this summer, which adds to costs.

CEO Robert Jordan said that in the second quarter Southwest had to cope with “inflationary pressures and headwinds from operating at suboptimal productivity levels in second quarter, which we expect will continue in second half” of this year.

Still, Jordan said, the airline continues to expect it will be “solidly profitable” for the rest of the year barring any major surprises.

Airlines are recovering from the worst of the pandemic. American and United just reported their first profitable quarter not counting government aid. The industry is not in the clear, however. Business and international travel have not fully recovered, and consumers are paying more for staples like food and gasoline, leaving less for other spending.

During a call with analysts, Jordan was asked about the biggest single risk to Southwest’s recovery.

“The biggest thing is just not one thing, but it’s all the uncertainty on the horizon,” he said. “You’ve got recession potential. You’ve got a lot of variability in fuel prices … you have potential variability in (travel) demand because of all those things.”

Southwest has been hiring pilots and other workers to stabilize its operation after a bad summer in 2021 and another stretch of mass flight cancellations last fall. Two months ago, it hit staffing levels that it had not reached since the pandemic led it and other carriers to convince thousands of workers to quit or take long-term leave.

The airline said it expects to add 10,000 jobs this year but will begin “moderating” hiring in the second half of the year. Even with less hiring, Southwest expects non-fuel costs to rise by 12% to 15% per mile in the third quarter.

Southwest pared flights from its summer schedule after widespread disruptions this spring. It said it has added back some short routes that are popular with business travelers. Southwest said customers from small businesses, government and education are flying at pre-pandemic rates, but corporate travel including by banking and technology companies remains depressed.

Southwest’s second-quarter profit compared with $338 million a year ago and also topped the $741 million it earned in the same period of 2019, before the pandemic.

The airline reported that adjusted earnings were $1.30 per share. Revenue jumped 68% to $6.73 billion.

Analysts expected earnings of $1.17 per share on revenue of $6.69 billion, according to FactSet.

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