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Southwest Posts Drop in August Load Factor, Tweaks Q3 View

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Southwest Airlines Co. (LUV - Free Report) reported a rise in traffic for August. Traffic (measured in revenue passenger miles or RPMs) inched up 1.3% to around 11.42 billion.

On a year-over-year basis, capacity or available seat miles (ASMs) expanded 2% to 13.55 billion.  With capacity expansion exceeding traffic growth, load factor (percentage of seats filled by passengers) in the month contracted 60 basis points to 84.3%.

In the first eight months of 2018, the carrier witnessed a 2.6% increase in both RPMs and ASMs. As a result, load factor remained flat at 83.7% in the period. Additionally, passenger count climbed 2.3% to 13.97 million in August.

Southwest Airlines Co. Price and Consensus

Revised Q3 Guidance

Weather-related disruptions mainly affecting Denver, Baltimore and Washington, D.C. regions,prompted Southwest to cancel approximately 2000 flights in July and August. The emerging hurricane Florence might have a further impact on the operations of the carrier.

In the wake of flight cancellations, the airline now anticipates third-quarter 2018 ASM to increase in the range of 3.5-4% compared with the previous guidance of a rise in the band of 4.5-5%. Additionally, third-quarter unit costs (CASM) excluding fuel and oil expense and profit-sharing expense (including 0.5 to 1 point year-over-year adversity from the cancellations) are estimated to augment between 3% and 3.5%, higher than the prior prediction of an expansion between 2% and 3%.

The increased cost guidance combined with the drop in August load factor seems to have displeased investors. Consequently, shares of the company declined 2.6% at the close of business on Sep 12.

However, the company expects a 0.5 to 1 point year-over-year benefit on its unit revenues (RASM) on account of the cancellations. During the third quarter, passenger revenues continued to be strong besides impressive bookings and close-in yield trends. Combing all these factors, the low-cost carrier now envisions RASM to increase 1-1.5% year over year. Earlier view was a year-over-year change between -1% and 1%.

Further, the company continues to expect a pretax benefit of $70-$80 million in the quarter, following the implementation of a variable fee structure for its EarlyBird CheckIn product on Aug 29. Also, the carrier’s forecast for fuel costs remains unchanged at $2.25 per gallon.

Zacks Rank & Key Picks

Southwest carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are SkyWest, Inc. (SKYW - Free Report) , Trinity Industries, Inc. (TRN - Free Report) and Old Dominion Freight Line, Inc. (ODFL - Free Report) . While SkyWest and Trinity sport a Zacks Rank #1 (Strong Buy), Old Dominion holds a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of SkyWest, Trinity and Old Dominion have rallied more than 65%, 21% and 51%, respectively, in a year.

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