It’s a big day for Southwest Airlines. The airline has announced plans to introduce assigned and premium seating, and also intends to fly redeye flights as of early 2025. On top of that, Southwest has today reported its Q2 2024 financial results, which I wanted to take a look at.
I don’t usually cover Southwest’s financial results, but I think it’s an interesting thing to briefly talk about, given that the airline is currently evolving its business model. Separately, I’ve covered Delta’s lackluster financial results, United’s fairly impressive financial results, and American’s awful financial results.
In this post:
Southwest profits decline nearly 50%, guidance lowered
Southwest has reported its Q2 2024 financial results. Like most airlines, the Dallas-based carrier reported record revenue of $7.35 billion, compared to $7.0 billion in Q2 2023, representing a 4.5% increase. Unfortunately the airline also reported a 46% drop in profits, as net income was $367 million, compared to $683 million in Q2 2023.
Southwest has the same problem as all other carriers, as costs have gone up, while unit revenue has gone down due to more competition (or industry overcapacity, as airline executives like to call it). The airline saw revenue per available seat mile of 15.9 cents, compared to 16.53 cents in Q2 2023, representing a 3.8% decrease.
Southwest has just lowered its outlook for Q3 2024 as well. Compared to Q3 2023, the airline sees revenue per available seat mile decreasing by up to 2%, and sees cost per available seat mile excluding fuel increasing by 11-13%. Obviously higher costs and lower revenue aren’t good, but this is the same exact situation that just about every airline is facing.
Why I see some upside for Southwest
To Southwest’s credit, it’s one of only two major, primarily domestic US airline that’s making any money, even if the margins aren’t as good as they used to be (with the other being Alaska). Why is Southwest doing better than other primarily domestic airlines? I think it comes down to two factors, primarily:
- Southwest has managed to scale its network to a level that other carriers haven’t been able to, and that’s powerful (it’s one of the reasons I was in favor of JetBlue’s takeover of Spirit, since there’s power in scale)
- Southwest has a very robust loyalty program that generates lots of revenue for the airline, thanks to the carrier’s network, plus it being an airline that people generally like to fly
Now, while the rest of 2024 probably won’t be great for Southwest, I honestly think Southwest has the most potential upside of any US airline for 2025 and beyond.
Look, when you hear American showing awful results, and the CEO then suggesting that things will somehow get better, you can’t help but be skeptical. American just doesn’t have many “levers” to pull to improve its profitability, because the airline has squarely cornered itself into the third place spot among global US carriers.
However, Southwest has been profitable in spite of its lack of evolution, and now we’re finally starting to see the airline evolve:
- Southwest will start assigning seats and will introduce premium seating, which could generate billions of dollars in incremental revenue annually (early estimates I see suggest that this could lead to a $1.1-3 billion annual increase in revenue)
- Southwest will start flying redeye flights, leading to much better aircraft utilization
And those are only the start of the changes. Unlike American, Southwest does have “levels” to pull to improve its profitability, and I think we’re going to start to see those soon.
Bottom line
Southwest has reported its Q2 2024 financial results. Like most of the industry, the airline has reported record revenue, but profits have declined sharply compared to last year, and Q3 2024 isn’t looking great either.
However, Southwest has huge potential to generate more revenue by updating its business model, and plans to do so with assigned seating, redeye flights, and more. I’m curious to see what the company’s situation looks like a bit over a year from now.
What do you make of Southwest’s financial results?
While I agree that premium seating will grow the revenue I'm not sure it'll be as large as predicted. Those who currently want person seating already are buying early bird or business select add-ons, are there really that many more, who currently are happy with a B or C boarding group, who will pay more? Now the one thing that could happen is that seat assignments might pull business from other airlines. WN has a...
While I agree that premium seating will grow the revenue I'm not sure it'll be as large as predicted. Those who currently want person seating already are buying early bird or business select add-ons, are there really that many more, who currently are happy with a B or C boarding group, who will pay more? Now the one thing that could happen is that seat assignments might pull business from other airlines. WN has a good product and things like open seating might be pushing travelers away.
I said this on FT, but I truly want to see some "activist investor" be met with a point-blank statement from a company inviting them to find better returns elsewhere and/or meeting complaints about lousy returns with the level of sympathy usually reserved for those moving in next to an airbase complaining about the jet noise. Or perhaps how much sympathy I felt for residents complaining about a cricket club in the UK - said...
I said this on FT, but I truly want to see some "activist investor" be met with a point-blank statement from a company inviting them to find better returns elsewhere and/or meeting complaints about lousy returns with the level of sympathy usually reserved for those moving in next to an airbase complaining about the jet noise. Or perhaps how much sympathy I felt for residents complaining about a cricket club in the UK - said club having, I believe, been in that location since 1790. You moved in knowing what was there. Deal with it.
[To be fair, I think Disney did this. We'll see how all of that plays out in the long run, however.]
That is a very defeatist approach. Why are the shareholders paying the CEO & mgmt team millions of dollars if nothing can be done to improve returns? Maybe, they should hire Elmo & his friends as the mgmt team & the same returns will be produced. The activist is the owner of the business and thinks he can do better by picking different managers. Based on the track record of the current mgmt, he is...
That is a very defeatist approach. Why are the shareholders paying the CEO & mgmt team millions of dollars if nothing can be done to improve returns? Maybe, they should hire Elmo & his friends as the mgmt team & the same returns will be produced. The activist is the owner of the business and thinks he can do better by picking different managers. Based on the track record of the current mgmt, he is highly likely to be right. Did you notice how WN went from pondering changes to announcing them...
Rarely ever fly them but with seat assignments I would absolutely
I wouldn’t likely look at Delta or United again for the short haul stuff again
More concerning is their buying too many Boeing Max planes and close call pilot catastrophes be it pilots the titanic max or both
Their seats are uncomfortable so long haul not likely.Seat width horrible and inadequate seat padding
Their pricing would still have to make...
Rarely ever fly them but with seat assignments I would absolutely
I wouldn’t likely look at Delta or United again for the short haul stuff again
More concerning is their buying too many Boeing Max planes and close call pilot catastrophes be it pilots the titanic max or both
Their seats are uncomfortable so long haul not likely.Seat width horrible and inadequate seat padding
Their pricing would still have to make sense
And best of all the loss of ghetto wheel chair abusers clogging the aisles.Hopefully off to Spirit and Frontier
Now folks who legitimately need wheelchairs can board with assistance dignity and less stress
Southwest doesn’t have business class, meals, tv screens, and has a limited network/fleet that can’t really get you too many places internationally.
When people pay for an upgrade they are mainly looking for a business class seat especially internationally. Just a little bit of leg room isn’t noteworthy imo that is essentially what Spirit is already offering.
They will probably have to merge with another airline long term.
This might be the most poorly-informed, non-Tim Dunn, post I've seen in years. WTF are you even talking about right now? I'm guessing you have absolutely no idea what kind of ship Southwest is running.
If you read the deck from Elliott Capital, there are only three words in the whole thing that matter: "Unlevered balance sheet." Elliott's objective is a typical private equity play, load Southwest up with debt and then use the money to do share buybacks, temporarily boosting the stock price. Elliott will move on, pocketing large gains, leaving a debt-hobbled Southwest to try to recover if it can.
This is just corporate strip mining. I'm astonished...
If you read the deck from Elliott Capital, there are only three words in the whole thing that matter: "Unlevered balance sheet." Elliott's objective is a typical private equity play, load Southwest up with debt and then use the money to do share buybacks, temporarily boosting the stock price. Elliott will move on, pocketing large gains, leaving a debt-hobbled Southwest to try to recover if it can.
This is just corporate strip mining. I'm astonished that it's legal, but then again, laws are for sale in the US and private equity is in a position to buy them.
Ben, "Unlike American, Southwest does have “levels” to pull..." I think you mean "levers".
Are you going to talk about JetBlue's route cuts? Some of them are pretty big.
This is not looking good for them at all.
The US airline industry is at a worse inflection point than it has been in decades.
AA leads a group of airlines that are barely profitable if not unprofitable on a year round basis including Spirit, JetBlue and Hawaiian
WN needed to change its business model but has changed multiple times before. They have a strong balance sheet and will be fine.
AS, DL and UA ALL have taken hits in one form or another but those 3 are the financial leaders of the industry.
Alaska is also a primarily domestic airline - a bit more south of the border -but had better margins
@ Tim Dunn -- Whoops, left out Alaska, thanks. Post updated.
@Ben since you wrote about WN’s quarterly earnings and mentioned B6 & AS. It would be an interesting read to get your take on their results.
Checked bag fees are coming :(
Herb probably rolling in his grave at a bunch of of egotistical activist investors who believe with their big egos that they know better in how to run SWA (even though they really don't). I honestly believe all these changes these activist investors keep pushing SWA to fo are going to blow up in their face in due time because it's not going to work and honestly be detrimental to boarding efficency and on time performance.