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Southwest Airlines (LUV) Grapples With Rising Expenses

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Southwest Airlines Co. (LUV - Free Report) continues to grapple with rising expenses. The current scenario of rising fuel costs does not bode well for the airline and is hurting its bottom line. High fuel costs due to an escalation in oil prices are a bane and are likely to hurt Southwest Airlines' bottom line. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well.

The northward movement in crude prices is primarily due to the ongoing production cut by major oil-producing nations and geopolitical tensions. For second-quarter 2024, economic fuel costs per gallon are expected to be between $2.70 and $2.80. For 2024, LUV raises economic fuel costs per gallon guidance to the range of $2.70 to $2.80 from $2.55 to $2.65.

Apart from the increase in fuel costs, a rise in labor and airport costs is also likely to dent bottom-line growth by resulting in a spike in operating expenses. During the first quarter of 2024, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and profit-sharing expenses, and special items grew 5% year over year. For second-quarter 2024, LUV expects CASM, excluding fuel, oil and profit-sharing expenses, and special items, to increase 6.5-7.5% in the second quarter from the comparable period in 2023. For 2024, CASM, excluding fuel, oil and profit-sharing expenses, and special items, is anticipated to increase 7-8% (prior view: up 5.5% to 7%) from 2023.

The negative sentiment surrounding the stock is evident from the fact that the Zacks Consensus Estimate for current-year earnings has decreased over the past 60 days.

Partly due to these headwinds, shares of Southwest Airlines have plunged 3.1% so far this year against 16.2% growth of the industry it belongs to.

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Despite such tailwinds,continued recovery in air-travel demand bodes well for Southwest Airlines’ top line. In the first quarter of 2024, air traffic, measured in revenue passenger miles, surged 12% year over year to 33.08 billion. Capacity or available seat miles (ASMs) climbed 11% year over year to 42.24 billion. With traffic growth outpacing capacity expansion, the load factor (percentage of seats filled by passengers) rose to 78.3% from 77.6% in the year-ago quarter. Anticipating the trend to continue, for second-quarter 2024, ASMs are estimated to improve 8-9% from the year-ago reported figure. For 2024, LUV expects capacity to improve 4% from the 2023 level.

Zacks Rank and Stocks to Consider

Currently, Southwest Airlines carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks for investors’ consideration in the Zacks Transportation sector include GATX Corporation (GATX - Free Report) and Trinity Industries, Inc. (TRN - Free Report) . Each stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GATX has an encouraging earnings surprise history. The company has surpassed the Zacks Consensus Estimate in three of the last four quarters (missing the mark in the other). The average beat is 7.49%.

The Zacks Consensus Estimate for 2024 earnings has been revised 3% upward over the past 90 days. GATX has an expected earnings growth rate of 6.79% for 2024. Shares of the company have risen 18.4% in the past year.

Trinity raised 2024 earnings per share guidance to the range of $1.35 to $1.55 (which excludes items outside of the company’s core business operations) from $1.30 to $1.50 guided previously.

Over the past 30 days, the Zacks Consensus Estimate for TRN’s 2024 earnings has been revised 2.7% upward. For 2024, TRN’s earnings are expected to grow 8.70% year over year.

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