After Summer 'Softness,' Southwest Corp. Revenue Rallies

Southwest Airlines saw “both some volume and yield softness in managed business” in July and August compared with June 2022 levels, but the segment “turned around in September and October,” Southwest COO Andrew Watterson said during a Thursday earnings call.

Leisure demand remained stronger than anticipated, and third-quarter managed business revenue was down 28 percent compared with the same period in 2019, according to the company. 

“September managed business revenues finished down 25 percent versus Q3 2019,” Watterson said. “While Q3 took a bit of a step back on business trends, we finished the quarter on a strong note, and revenue momentum is picking up steam.”

Southwest expects managed business revenue for the fourth quarter to be down between 20 percent and 25 percent compared with Q4 2019.

In addition, the company had a five-point sequential headwind from the second quarter into the third from its travel credit expiration policy change in July, “which resulted in lower breakage revenue in Q3,” Watterson said.

Further, as previously announced, Southwest increased its short-haul flying in the third quarter to “help with operational stability” and as a “little bit of a bet on business recovery.” As business demand rebounded in September, “the additional short-haul flying helped overall revenues, and our revenue trends in the medium and long-haul segments were very strong throughout Q3,” Watterson said.

Still, Southwest CEO Bob Jordan noted that the increase in the company’s short-haul flights may have happened “a little early” and at the expense of revenue “without knowing where business demand has ended up.” Further, that increase “created a roughly two-point drag to Q3 operating revenue,” Watterson added. 

Q3 Metrics and Guidance

Total third-quarter operating revenue was $6.22 billion, with passenger revenue at $5.61 billion. Each was up 33 percent compared with Q3 2021. Net income was $277 million, down about 38 percent from $446 million a year prior. 

Capacity for the quarter was down 0.3 percent compared with 2019 levels, Watterson said. Capacity guidance for the fourth quarter is down about 2 percent from 2019, and down about 4.5 percent for the full year 2022. Southwest projects a first-quarter 2023 capacity increase of 10 percent year over year, and for second-quarter capacity to increase approximately 14 percent versus Q2 2023, Watterson said. The company has not yet finalized capacity plans for the second half of next year. 

Southwest expects its network to be about 85 percent restored by December, 90 percent restored by summer 2023, and fully restored by the end of next year compared with 2019 flight levels in pre-pandemic markets.

Based on the strong leisure and business demand trends and bookings into the fourth quarter, the company expects fourth-quarter 2022 operating revenue to accelerate compared with the third quarter and increase 13 percent to 17 percent versus Q4 2019. 

Southwest’s fuel costs were $3.34 per gallon for the third quarter and are expected to be between $3.15 and $3.25 per gallon in the fourth.

During the third quarter, Southwest launched a new corporate travel portal. It also announced that president Mike Van de Ven would step down from his role and become an executive advisor for the company. Watterson was promoted to COO. Earlier in October, the company partnered with 4Air to validate corporate emissions reductions and launched a corporate referral program.

 Southwest Q2 results