Southwest Airlines reported record quarterly net income today. Second-quarter earnings exceeded analyst consensus. However, second-half guidance was a disappointment to investors due to rising cost expectations, sending shares down 8%.
Southwest Q2 2022 Earnings at a Glance
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- Record quarterly net income (excluding special items) of $825 million
- Record quarterly operating revenue of $6.7 billion
- Q2 2022 adjusted earnings of $1.30 per share
- Capacity for Q3 is expected to be in a similar range as pre-pandemic levels reported in Q3 2019
- Forecast for Q3 revenue is up 8% to 12%
- Non-fuel costs are expected to increase by 12% to 15% amidst unstable fuel costs
CEO Bob Jordan said the record results are a significant milestone for Southwest in the airline’s pandemic recovery. Southwest has historically been very stable and has been resilient throughout the pandemic. But, like other airlines, it faces headwinds because of the macroeconomic environment which led to today’s downward tick.
For more than a year, air travel was drastically down and although the summer travel season was robust, the possibility of an economic recession and higher costs are expected to take a toll on profitability heading into the third quarter. The main factors affecting profitability include:
- Higher Fuel Costs—Even though they’ve moderated somewhat recently, higher jet fuel prices have plagued the entire industry. But to counter this, Southwest has a massive fuel hedge that provides protection against unstable prices.
- Aircraft Delivery Delays—Sixty-six deliveries are expected in 2022 versus the 114 that were previously expected. The delays are due to Boeing’s supply chain shortages. During today’s earnings conference call, Jordan said the aircraft will be delivered in 2023 and despite the delays, he’s confident that Southwest will keep flight schedules on plan.
- Hiring—The airline plans to continue to hire pilots and will hire about 2,200 pilots next year, according to Jordan. In other departments, staffing levels were intentionally ramped up ahead of demand but hiring will moderate in those departments for the foreseeable future to tamp down costs and return to historical efficiency.
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Southwest Recovery Plans Continue
Southwest’s recovery strategy includes more investment into the Southwest Customer Experience. A new program, ‘flight credits don’t expire,’ has been launched. Customers are looking for more flexibility and the program is expected to increase customer loyalty, according to Southwest Chief Marketing Officer Ryan Green. The program is expected to have a one-time negative financial impact on earnings in Q3.
Southwest has also been expanding routes. In 2021, a major expansion in Hawaii with three new gateways and 15 new routes has proven to be a successful strategy. More route expansions are planned as a way to boost revenue.
At the end of the day, most industry watchers say long-term shareholders shouldn’t panic even though the short-term horizon could get somewhat choppy, depending on macro conditions.