Southwest Airlines (LUV - Free Report) reported its second quarter earnings before market open Thursday, and the results were not taken well by investors, causing a major sell off of the stock. The airline posted EPS (on an adjusted basis) of $1.19, falling short of the Zacks Consensus Estimate of $1.22. Earnings did, however, increase 15.5% on a year-over-year basis.
LUV reported savings on fuel of 10% during the quarter, and returned an operating margin in excess of 18%. What really worried investors was the company’s warning that it is expecting unit revenue to fall as much as 4% next quarter due to lower ticket prices and greater level of competition. Its most recent quarter saw ticket prices fall 3.7%.
LUV’s unfavorable earnings report came just a day after computer failures caused the company to cancel 400 flights, and delay nearly 2,000. The airline had temporarily halted all flight departures at one point yesterday as it worked to resolve issues that impacted several technology systems. This isn’t the first occurrence of something like this either for Southwest, as last October a similar outage caused about 800 flight delays when employees had to issue tickets and boarding passes by hand.
Southwest is down around 11% today in afternoon trade, and is down more than 13% year-to-date, but the stock has been one of the best investments in the airline space for some time. Since the beginning of 2014, LUV gained more than 100%, as its low cost structure sparked growth that excited investors.
A current Zacks Rank #5 (Strong Sell), LUV has seen negative earnings estimate revision activity from analysts, as they seem to be losing faith in the company. Southwest has seen great results over the last two years, but it is possible its run is coming to an end. Competition in the space continues to increase, and the company is facing more pressure than ever. Only time will tell, but for now it seems as though LUV is a stock investors may want to stay away from.
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