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Southwest (LUV) Buoys Hope With Q3 Unit Cost Guidance Cut

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Southwest Airlines Co. (LUV - Free Report) has provided a guidance update on its third-quarter 2019 performance. Despite Boeing 737 MAX aircraft’s grounding issues (the carrier has removed the aircraft from its fleet through Jan 5, 2020) and 600 flights being cancelled in September due to Hurricane Dorian, the company seems optimistic about its upcoming quarterly results. In fact, the airline does not see much of an impact on its third-quarter results from the flight cancellations.

Courtesy of strong demand and higher passenger yields in the third quarter, the carrier reiterates its operating revenue per available seat mile (RASM) view with the metric expected to increase in the 3-5% range year over year.

Moreover, operating costs per available seat mile (CASM or unit costs) excluding fuel and oil expense plus profit-sharing expense are now estimated to ascend between 8% and 10% compared with an increase of 9-11% anticipated previously. The upside is owing to the airline’s efficient cost management and the shift of certain expenses from the third to the fourth quarter. Southwest stated that most of the rise in unit costs during the current quarter is due to lower capacity from the MAX groundings.


Additionally, fuel costs are still projected in the band of $2.05-$2.15 per gallon for the third quarter. With Southwest’s most fuel-efficient aircraft being grounded, the company continues to anticipate a 1-2% dip year over year in third-quarter fuel efficiency.
 
However, the Dallas, TX based low-cost carrier now estimates capacity to slide nearly 3% year over year compared with a decrease of 2-3% forecast earlier.

Zacks Rank & Key Picks

Southwest carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same space are Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (VLRS - Free Report) , Copa Holdings, S.A. (CPA - Free Report) and Allegiant Travel Company (ALGT - Free Report) . While Controladora Vuela and Copa Holdings sport a Zacks Rank #1 (Strong Buy), Allegiant Travel carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Controladora Vuela, Copa Holdings and Allegiant Travel have rallied more than 89%, 21% and 51%, respectively, so far this year.

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