Southwest Q2 RASM View Up, Cost View Bleak On MAX Groundings

Southwest Airlines Co. (NYSE:LUV) has revised its guidance for the second quarter of 2019 to take into account strong demand and the extended Boeing (NYSE:BA) 737 MAX groundings.

With robust demand and solid passenger yields, the carrier anticipates operating revenue per available seat mile (RASM) to increase 6.5-7.5% year over year compared with 5.5-7.5%, expected earlier.

However, operating costs per available seat mile (CASM), excluding fuel and oil expense and profit-sharing expense, are now projected to rise 11.5-12.5% year over year. Previous view for the metric was an increase in the range of 10.5-12.5%. This escalation in costs is due to reduced capacity during the second quarter as a result of the 737 MAX 8 groundings.

Southwest Airlines Co. Price

Southwest Airlines Co. price | Southwest Airlines Co. Quote

Capacity for the second quarter is estimated to decline approximately 3.5% year over year compared with the previous expectation of a 2-3% decrease dip. While this forecast indicates the grounding of its 34 737 MAX 8 aircraft through Aug 5, the company, however, has extended the grounding period until Sep 2 due to uncertainty hovering over the aircraft’s return to service.

Meanwhile, with oil price coming in at modest levels, the estimate for fuel costs remains intact in the band of $2.10-$2.20 per gallon. However, fuel efficiency is predicted to slide 1-2% in the second quarter. Past guidance reflected a year-over-year change of flat to down 1%. This downside is primarily due to the grounding of the 737 MAX 8 aircraft, the most fuel-efficient plane in the airline’s fleet.

Zacks Rank & Key Picks

Southwest carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Air China Ltd. (OTC:AIRYY) , SkyWest, Inc. (NASDAQ:SKYW) and GATX Corporation (NYSE:GATX) . While Air China sports a Zacks Rank #1 (Strong Buy), SkyWest and GATX carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Air China and SkyWest have rallied more than 17% and 34%, respectively, so far this year. Meanwhile, GATX boasts an encouraging earnings history, having trumped the Zacks Consensus Estimate in each of the trailing four quarters, the average being 16%.

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