Southwest Airlines Downgraded By Argus Following Earnings Miss

Southwest Airlines Co. LUV reported its Q2 results, with the earnings per share missing the consensus. David Coleman of Argus Research in a report expressed concern that the miss was driven by a rise in fuel costs.

Coleman downgraded the rating on the company from Buy to Hold.

Concerns

The analyst mentioned that Southwest Airlines experienced a huge technology failure on July 20, leading to the cancellation of almost 1,500 flights and a delay in 4,500 flights over a two-day period.

“The company was still working to resolve the problem on July 22, when about 300 flights were canceled and 1,200 were delayed. Management said that the problem was caused by the failure of a computer router that caused other technology systems to break down,” according to the Argus report.

Positives

On the positive side, Coleman pointed out that management has been taking steps to bring down non-fuel operating costs, while being “creative” in generating additional revenue sources.

In addition, the balance sheet is clean and the company has an impressive record of returning capital to shareholders.

“Based on current bookings and yields, management expects revenue per available seat mile to decline 3 to 4 percent in the third quarter. Excluding fuel expense, profit-sharing costs and special items, it expects unit costs to increase 2 percent in the third quarter and 1 percent for the full year,” Coleman added.

The 2016 and 2017 EPS estimates have been lowered.

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