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Why Southwest Airlines Stock Fell 9% despite Earnings Beat

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Southwest Airlines’ Q3 2018 results

Southwest Airlines (LUV) reported its third-quarter results before the markets opened on October 25. Its revenues rose 5.1% YoY (year-over-year) to $5.6 billion. Its profits increased by a significant 16.5% to $615.0 million, resulting in EPS of $1.08 and 22.7% growth.

Southwest Airlines’ (LUV) revenues and earnings beat analysts’ estimates. According to CEO Gary Kelly, “The significant increase in our third quarter 2018 earnings per diluted share was driven by record third quarter operating revenues, lower federal income taxes, and a 4.8 percent year-over-year reduction in share count. Despite higher jet fuel prices and other cost pressures, we grew our third quarter 2018 net margin.”

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Key operational highlights

Southwest Airlines’ RASM (revenue per available seat mile) rose 1.2% YoY to 13.74 cents. Its passenger yield rose 2.3% YoY to 15.27 cents. The average fare paid rose to $153.40, a 2.5% increase.

However, the company’s load factor fell 0.9% to 83.9%, as its capacity growth of 3.9% outpaced its traffic growth of 2.7%. Its third-quarter operating expenses increased by 7.2% to $4.8 billion. Its total operating expenses per available seat mile, or unit costs, rose 3.1%, as fuel hedges helped offset higher oil prices.

Higher costs send LUV stock tumbling

Despite these stellar third-quarter numbers, Southwest Airlines (LUV) stock was down almost 8.0% in the pre-market session. LUV stock was trading down 9.0% at 10:05 AM EDT.

Southwest Airlines stock fell following Kelly’s warning on unit cost inflation, which he expects to rise 3.0% YoY, excluding fuel expenses. This decrease is due to the airline’s expected fleet expansion. Rising fuel costs are expected to be another headwind for the airline. Fuel expenses are expected to rise 6.5%–8.8% to $2.30–$2.35, compared to $2.16 in the fourth quarter.

Despite rising costs, Southwest Airlines expects its fourth-quarter unit revenues to rise 1.0%–2.0% YoY compared to its RASM of 13.88 cents in the fourth quarter of 2017.

American Airlines (AAL) and Alaska Air Group (ALK) also reported their results today. AAL stock was up 7.4% at 10:00 AM EDT, and ALK stock was up 2.8%. JetBlue (JBLU), which reported its earnings yesterday, was up 3.6%. The SPDR S&P 500 ETF Trust (SPY) rose 1.1%.

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