Although the concept of “revenge travel” has bolstered discount carriers like Southwest Airlines (NYSE:LUV), this framework only tells one side of the story. The other side contains difficult economic circumstances which Southwest’s second-quarter earnings report reflected. Despite posting record revenue, management disclosed higher costs and mixed forward guidance. On the announcement, LUV stock dropped around 8% before paring back some of the red ink heading into the afternoon session.
On the headline print, the key numbers and comparisons would indicate a very positive backdrop for Southwest Airlines. The budget-friendly carrier delivered adjusted earnings per share of $1.30 on record revenue of $6.7 billion. Heading into the Q2 disclosure, analysts targeted $1.17 for adjusted EPS and $6.69 billion in sales.
Southwest CEO Bob Jordan stated, “We are very pleased to report all-time record quarterly revenues and net income, excluding special items, representing a significant milestone in our pandemic recovery. Travel demand surged in second quarter, and thus far, strong demand trends continue in third quarter 2022.”
Also, Jordan added a meaningful insight regarding travel disruptions. “Since April, we have been delivering a more reliable product for our Customers with cancellations representing less than one percent of scheduled flights in May and June 2022, which is a completion factor of more than 99 percent.”
Unfortunately, inflationary pressures weighed on LUV stock, with management seeing continued challenges in the months ahead.
Inflation Imposes a Drag on LUV Stock
Looking ahead, Jordan emphasized that excluding significant unforeseen events, he expects Southwest to be “solidly profitable for the remaining two quarters of this year, and for full year 2022.” As well, the company’s “fuel hedge continues to provide significant protection against higher jet fuel prices.” Those are positives for LUV stock. However, investors were also concerned about problematic cost structures.
The Southwest CEO acknowledged that the company “experienced inflationary pressures and headwinds from operating at suboptimal productivity levels in second quarter, which we expect will continue in second half 2022.”
Per Barron’s, “Southwest’s operating expenses increased 12.7% to $5.6 billion from the same quarter in 2019. One of the biggest drivers was fuel costs, which clocked in at $3.36 per gallon, in line with previous guidance. Cost per available seat mile, or CASM, rose 13.1%, due to cost headwinds such as surging labor rates and airport costs.”
Interestingly, Southwest plans to begin “moderating overall hiring in second half 2022 as our focus shifts to 2023 planning and executing on our goals to better optimize staffing to flight schedules, reduce cost inefficiencies, and return to historic efficiency levels.”
With consumer prices increasing 9.1% over the trailing year ended June 2022, investors likely grew concerned about Southwest’s ability to maintain its financial performance, thus exiting out of LUV stock.
Not Just the State but the Rate
While many market observers have focused on the state of inflation, it’s also important to recognize the rate of soaring costs, specifically against units of time. Data from the U.S. Bureau of Labor Statistics indicates that the loss of purchasing power was 6% in 2021. But just in the first half of this year, the loss is 5.3%.
In other words, inflation is marching into double time, which implies that airliners and many other consumer-facing sectors may face steeper challenges than before. Given this potential paradigm shift, it’s not terribly surprising why many investors exited LUV stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.