Southwest Cuts Financial Outlook, Blames Revenue Management ‘Complexities’

Southwest Airlines has cut its revenue guidance for the current quarter. On Wednesday morning, the low-cost carrier said it now expects operating revenue per available seat mile (RASM) to be down 4% to 4.5% for the quarter. Its prior guidance forecast a drop of 1.5% to 3.5%.

The company cited difficulties in keeping pace with changing consumer preferences and travel patterns as a key reason for the reduction.

RASM is calculated by dividing an airline’s total operating revenues by its available seat miles. It is an important industry indicator for the financial and operational health of an airline. 

In a regulatory filing, Southwest said the reduction was driven primarily by “complexities in adapting its revenue management to current booking patterns in this dynamic environment.” This suggests the airline could be having problems reacting to wider industry trends.

The company added that it still expects an all-time quarterly record operating revenue for the current quarter. The statement concluded that Southwest “remains intensely focused on improving its financial results and creating value for its shareholders.”

Internal Challenges at Southwest

Commenting on the results, Airline Weekly analyst Jay Shabat said: “Based on the airline’s statement, the surprisingly poor revenue performance seems to be less about weakening demand than revenue mismanagement.

“The unit revenue figures were stunningly worse than previously expected. This will surely put further pressure on a management team already under intense scrutiny,” Shabat added.

The developments come at a sensitive time for Southwest. Earlier this month, Elliott Investment Management, an activist fund, took a $2 billion stake in the airline. This makes the firm one of the airline’s largest investors.

Elliott is pushing for major leadership changes, including replacements for CEO Bob Jordan and Chairman Gary Kelly. Southwest said the board and its executive team are reviewing Elliott’s proposal. 

A Choppy 2024 so Far

Southwest underperformed in the first quarter of 2024, with executives at the time citing delivery delays for the Boeing 737 Max 7, and sustained demand for premium and international products – weak areas for the budget operator. 

Other U.S. low-cost airlines including Frontier and Spirit are also facing well-documented challenges.

Despite the headwinds, Southwest said its operational performance in the second quarter “continues to be strong with minimal cancellations.” It cited an average ‘completion factor’, for the current period of 99.5%, even with “challenging weather” in all-important Texas and Florida markets. 

Southwest said it will provide further information at its second-quarter financial results on July 25. The company has also confirmed a review of its full plan will be on the agenda at an investor day to be held in September.