Flight cancellations and poor results hit Southwest Airlines shares

Southwest Airlines forecast a drop in a key profitability metric for the third quarter and said operations were yet to return to normal a day after it cancelled hundreds of flights due to a major outage.

Shares of the budget airline, which also reported a lower-than-expected quarterly profit, fell as much as 11.3 per cent, their biggest intraday percentage drop in a year.

Chief executive Gary Kelly, in an interview to CNBC, termed the glitch "unusual".

“The technology is restored as of about 1am or 2am this morning and now the operation just needs some time today to catch up,” he said. “So, it will be another tough day today but not nearly as bad as yesterday.”

As of 7.30am eastern time in the US (12.3pm Irish time), Southwest had cancelled more than 220 flights on Thursday, a spokeswoman said in an email.

“We cancelled nearly 700 flights Wednesday and hundreds more were delayed,” she said.

Computer failure

The outage was caused by the failure of computer equipment supporting the carrier’s network.

The fourth largest US airline by traffic said it expected revenue per available seat mile (RASM) to fall 3-4 per cent in the current quarter.

“While solid traffic demand has continued into July thus far, the fare environment remains challenging,” Kelly said in a statement.

RASM, a key indicator of an airline’s performance, measures sales against flight capacity.

Total costs

Southwest’s total costs rose 2 per cent to $4.11 billion in the second quarter. However, unit cost fell 2.6 per cent, helped by lower fuel costs.

Cheap fuel has increased competition in the US airline industry by allowing large carriers to slash fares to levels offered by budget airlines.

It has also forced Southwest, the largest hedger among US airlines, to pay hefty sums to counterparties in hedge contracts acquired for protection against a rise in energy prices, limiting its ability to benefit from cheaper fuel.

Southwest’s net income jumped 35 per cent to $820 million in the quarter ended June 30th.

Operating revenue rose 5.3 per cent to $5.38 billion.

Southwest said it expected to buy back $250 million in shares as part of an accelerated repurchase program. – (Reuters)