Recent earnings reports from Southwest Airlines (LUV) and Spirit Airlines have added further strain to low-cost airline stocks.
Southwest Airlines reported third-quarter revenue of $6.5 billion, which fell short of analysts’ estimates. Despite adjusted earnings per share meeting expectations at 38 cents, Southwest’s stock is plummeting to its lowest level in over nine years.
While demand remains solid and the company anticipates record fourth-quarter revenue and passenger numbers, Southwest mentioned that the strong summer trends in leisure travel have begun to return to normal seasonal patterns. As a result, the carrier expects a steeper decline in unit revenue, projecting a drop between 9% and 11% in the current quarter compared to last year’s 6.8% decrease.
All airlines are grappling with mounting cost pressures, especially low-cost carriers who cannot easily increase airfares in response. Southwest disclosed that fuel costs per gallon are expected to rise to a range of $2.90 to $3 in the fourth quarter, up from $2.78 in the previous quarter.
To mitigate escalating costs, discount airlines like Southwest rely on filling their planes to capacity. However, Southwest’s load factor, which represents the percentage of seats sold on flights, decreased to 80.7% in the third quarter compared to 85.4% the previous year.
The turbulence facing low-cost airline stocks continues as Southwest Airlines and Spirit Airlines contribute to the challenges faced by the industry. Despite reporting some positive elements, Southwest’s lower-than-expected revenue and anticipated drop in unit revenue for the current quarter have deterred investors. The increasing costs of fuel and a decrease in load factor further compound the issues faced by low-cost carriers.
Stock Points Lower Ahead of Earnings
The stock had a rough start on Thursday, dropping 4.7% before market open. This decline adds to the company’s struggles, as the shares have already fallen 38% since their peak in July. Year-to-date, the stock is down 28% as well.
Spirit Airlines Faces Challenges in Third Quarter
Spirit Airlines (SAVE) also experienced a decline in its stock price early on Thursday following its third-quarter earnings announcement. The airline had a challenging quarter, reporting an adjusted loss of $1.37 per share. Although the loss was narrower than expected, the company cited softer demand and discounted fares as contributing factors to the disappointing outcome.
Additionally, Spirit Airlines’ load factor decreased to 81.4% in the third quarter of 2023, compared to 83.3% in the same quarter last year.
Concerns Mount for Spirit Airlines in Fourth Quarter
Investors are particularly concerned about Spirit Airlines’ guidance and commentary regarding the fourth quarter. The company stated that it has not seen the expected rebound in demand and pricing for the upcoming peak holiday season. This news has raised worries among investors.
Furthermore, Spirit Airlines forecasted revenue between $1.28 billion and $1.32 billion, falling short of the analysts’ consensus estimate of $1.39 billion. Additionally, the company anticipates higher fuel costs of $3.15 per gallon in the current quarter.
As a result of these concerns, Spirit stock fell 4.6% during premarket trading on Thursday.
Uncertainty Looms for Low-Cost Airlines
With the summer peak travel season now behind us, investors are feeling uncertain about the future performance of low-cost airlines. The challenges faced by Spirit Airlines and other similar companies have dampened optimism in the market.