Southwest Airlines' passenger revenue took a $100 million
hit in the second quarter, following its fatal accident in April, but the
carrier is forecasting recovery in the months ahead.
Passenger revenue declined 0.4 percent year over year during
the quarter to $5.26 billion. Traffic rose 2.2 percent. Southwest introduced a
fare sale on summer travel during the quarter—president Tom Nealon said that's
"very, very unusual for us"—to stimulate bookings after the
accident. The average passenger fare during the quarter declined 4
percent year over year to $151.94.
Executives said the strategy paid off. "It feels like
the business effects of the April accident are behind us," chairman and
CEO Gary Kelly said in Southwest's earnings call. "We're recovering
strongly in the third quarter relative to the second quarter, and … fourth-quarter
bookings also are strong, although it's still a good ways out."
Ancillary revenue, meanwhile, rose 10.4 percent year over
year during the quarter, which Nealon attributed in part to strong demand for
Southwest's EarlyBird Check-In and upgraded boarding products, as well as its
growing Rapid Rewards program. Kelly said the carrier is looking for further
ways to diversify its revenue streams but reiterated that bag fees and change
fees are not on the table.
In a research note issued after the carrier's earnings call,
Cowen and Co. analyst Helane Becker speculated on the possibilities: "Southwest
will begin flying to Hawaii, and we suspect management will need to introduce
an onboard food service given the length of the flight. Southwest could also
look to take more control of other travel products by attempting to cross-sell
more rental cars, hotels, etc. Southwest could look to license their Wi-Fi to
retailers, providing free internet access to customers on board."
Southwest reported a net income of $733 million for the
quarter, down slightly from $743 million in the second quarter of 2017. The
carrier's fuel hedging strategy somewhat mitigated rising fuel prices in the
quarter, which rose 17.4 percent year over year. "While we're never happy
about higher fuel prices, the successful implementation of our strategic
initiatives over the past few years has prepared us well for the 40 percent
year-over-year increase in market prices," CFO and EVP Tammy Romo said.
"With hedging losses well behind us and a strong hedge in place for this
year, as well as next, we are well-positioned to manage through fuel price
headwinds."
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