As maintenance teams continue to check for flaws in engine fan blades, Southwest Airlines admitted Thursday it expects revenue from ticket sales to fall between $50 and $100 million this quarter as passengers book fewer itineraries after one of its jet’s engines failed on April 17, causing a passenger’s death.
While most of its competitors say unit revenue is improving, Southwest told investors it expects passenger revenue per available seat mile — a rough measure of pricing power — will decrease 1-3 percent, year-over-year for the second quarter. It said it can attribute 1 to 2 points of that drop to Flight 1380, when a fan blade on a CFM56-7B engine failed because of fatigue, causing an uncontained engine failure, according to the National Transportation Safety Board. Pieces of the engine hit the fuselage, and broke a window, leading to a rapid decompression in the cabin.
This incident was the second one for Southwest in two years, and it has led safety regulators to ask all airlines to inspect engine fan blades more frequently. Southwest executives said Thursday during their first quarter earnings call that their fleet has roughly 35,500 engine blades, and that 17,000 had been inspected before last week’s incident. Since then, Southwest has inspected 8,500 more, and has found “no cracks or fatigue” CEO Gary Kelly said. The airline expects to compete the remaining inspections within 30 days, with most of them slated for Southwest’s newer aircraft.
Lower Revenue Not a Major Concern
Southwest’s lower-than-expected revenue is normal after a tragedy, and it’s unlikely it will be a long-term issue. While some passengers may be avoiding the airline, executives said it’s also possible business has suffered because Southwest had markedly reduced its advertising and marketing campaigns. After the incident, Southwest turned off all marketing channels, including social media, television advertising, digital advertising and even emails.
Some of Southwest’s marketing campaigns returned over the weekend, but not everything and web traffic is still down. That’s especially important to an airline that sells just about all of its tickets directly to passengers — not through online travel agencies like Orbitz or Priceline.
“We’re not running any TV or any social right now,” said Southwest President Tom Nealon. “The reason we’re not doing that is because our TV and our social has a lot of personality. … We just don’t think it’s appropriate yet to bring that back up online.”
Southwest expects normal bookings to resume soon, but not fast enough to reverse the affect on second quarter results, CFO Tammy Romo said. “It would be tough to recover the loss in our close-in bookings,” she said. “But we are hopeful that once marketing comes back online, that we’ll see those trends rebound.”
Discussions about the engine inspections and lower-than-normal bookings overshadowed what likely would have been the big news of Thursday’s earnings call — Southwest’s first Hawaiian destinations. The airline said it would begin service with flights to Honolulu, Lihue Airport on Kauai, Kona International Airport on the Island of Hawaii, and Kahului Airport on Maui.
Kelly said the airline will start “modestly” but noted it’s too soon to say from where it will fly or when flights would start. Southwest still must receive certification from federal authorities to fly long distances over water, and it hopes to have clearance by late this year.
Often, new routes like Hawaii take as long as three years to ramp up, but Nealon told analysts Southwest is in a strong position because of its customer base on the West Coast, saying the airline should generate “a lot of traffic very, very quickly.”
For the first quarter, Southwest reported net income of $463 million, with a net margin of 9.4 percent. Its passenger revenue per available seat mile, or PRASM, fell 1 percent, year-over-year.
Analysts closely watch that metric, and many have asked executives if year-over-year revenue trends might turn positive by year-end. Kelly said it’s possible, but added that’s he’s not sure because of last week’s incident. “What is obvious is that we are off plan now that we’ve had an event,” he said. “We’re going to have to regain our momentum.”