Southwest Air drops on $60mn hit from US shutdown

Bloomberg

Southwest Airlines Co. slid after warning that the US government shutdown hit sales harder than previously estimated.
The political stalemate that ended last month will reduce first-quarter revenue by $60 million as the aftereffects lingered on, Southwest said in a regulatory filing. When the discounter reported earnings late last month, it estimated the impact would be $10 million to $15 million for January 1 through January 23. Uncertainty over whether there would be a second shutdown hurt demand.
“With more of first quarter under our belt now, and a higher percentage of March bookings in place, we feel like we are at the point where we can reasonably quantify the total impact from the shutdown,” Southwest said by email. Fares for bookings close to travel dates have been strong compared with last year, however, “so we are hopeful that the softness in demand is a temporary issue.” Revenue for each seat flown a mile will rise 3 percent to 4 percent this quarter, the carrier said. It previously projected that the measure of pricing power would increase
4 percent to 5 percent.
The 35-day shutdown, which ended January 25, caused security delays at airports and put some government travel on hold. But since Southwest’s service is largely domestic, it doesn’t have the same buffer from international flights as American Airlines Group Inc., Delta Air Lines Inc. and United Continental Holdings Inc.
“While this is a material increase in the hit to revenues, we think the impact on earnings is likely to be muted,” said CFRA analyst Jim Corridore. “We also do not see this an issue with fundamental air-travel demand, but a temporary first-quarter impact.” Nevertheless, he said other airlines may also lower their revenue guidance in coming weeks. Southwest dropped 5.7 percent to $54.41 at the close in New York, the biggest one-day decline since October 25. American fell 1.2 percent, while Delta slipped 1.1 percent and United, less than 1 percent. Southwest had climbed 24 percent this year, the most on a Standard & Poor’s index of the five biggest US airlines.

‘MADDENING’ SHUTDOWN
The standoff in Washington was “maddening,” Southwest Chief Executive Officer Gary Kelly said last month. “Everyone needs to be on notice and on guard that this shutdown could harm the economy and it could harm air travel.” He said that government bookings were clearly hurt by the shutdown.
At the same time, Kelly said a “relatively small part” of the airline’s business travel is tied to government contracts. “Our exposure is relatively low compared to others perhaps, but it’s still meaningful.”
The US shutdown also delayed approval of the airline’s planned flights to Hawaii. Goldman Sachs downgraded Southwest’s stock to sell from neutral while slashing its price target to $54 from $66. The new service, which is expected to begin next month, will pressure profit margins by forcing the airline to discount early flights more than it had
expected, analyst Catherine O’Brien said in a note to clients.
“We now expect initial flights to have a one to one-and-a-half month selling window, putting more pressure on management to fill planes in a shorter time frame,” she said.