Southwest Airlines Notched Record Revenue. Why the Stock Is Falling.

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Southwest Airlines

stock tumbled after the low-cost carrier said it expected revenue per available seat mile to fall in the third quarter.

The warning suggests travel demand is softening, at least domestically. Southwest stock (ticker: LUV) fell 6% in premarket trading, and shares of a few other airlines traded lower with it.

JetBlue Airways

(JBLU) was 2.6% down,

Frontier Group

(ULCC) slipped 2.8%, and

American Airlines

(AAL) was 1.6% lower.

Stepping back, the airline reported adjusted earnings of $1.09 per share, in-line with forecasts from analysts surveyed by FactSet, but lower than earnings of $1.30 per share it saw a year ago. Southwest’s revenue set a quarterly record at $7.04 billion, beating estimates of $6.98 billion.

Investors are concerned about the impact of a potential domestic slowdown into the third quarter, an issue flagged by

Alaska Air

(ALK) on its earnings earlier this week.

Southwest’s guidance shows Alaska Air’s problems might be a bigger issue for the industry. Southwest is the largest U.S. domestic airline, and it said it expects revenue per available seat mile to fall between 3% and 7% in the September quarter. The metric can be used to infer the strength of pricing in the industry.

Southwest expects available seat miles, or capacity, to rise 12% year over year in the quarter. In other words, it won’t make nearly as much money from each passenger—a sign that both demand and fares are falling.

Southwest noted the fall was due to “challenging comparisons from the pent-up travel demand surge in 2022.”

The airline also mentioned higher costs for the full year, driven by higher labor costs. Southwest hasn’t reached an agreement with its pilots union over a new pay contract, and its pilots are moving closer to a strike.

The airline faces pressure to increase its offer, particularly after United Airlines tentatively agreed to increase pay for its pilots up to 40% earlier this month.

But Southwest’s earnings print isn’t the disaster that Thursday’s stock move might suggest. The airline still expects record operating revenue and another profitable quarter in the third quarter. The slowdown of domestic demand is likely to grab the attention of investors—and not in a good way for the sector’s stocks.

Southwest expects its full-year costs per available seat mile, excluding fuel, to fall between 1% and 2%. It had previously forecast a 2% to 4% drop. The change reflects inflationary pressures and increased wage rate accruals.

Write to Callum Keown at callum.keown@barrons.com