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Southwest Air Sees Cost Turbulence -- but Clearing Skies in Q2-Q4

Southwest Air expects a loss in the current quarter - reflecting lower revenue and higher fuel and other costs - but a profitable 2022.
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Southwest Airlines  (LUV) - Get Southwest Airlines Co. Report expects a turbulent start to the year, with lower operating revenue and higher fuel costs, but clearing and profitable skies in the second through fourth quarters.

The Dallas airline's guidance comes after company's stronger-than-expected fourth quarter was its first profitable period in two years. 

Fourth-quarter net income was $85 million, or 14 cents a share, on revenue of $5.05 billion. Analysts surveyed by FactSet were expecting earnings of 7 cents a share on revenue of $4.97 billion. 

"While we made significant progress in 2021, the omicron variant has delayed the demand improvement we were previously expecting in early 2022," said Bob Jordan, who will Gary Kelly as chief executive on Feb. 1, in a statement

"With Covid-19 cases trending downward, the worst appears to be behind us, and we are optimistic about current bookings and revenue trends for March 2022."

The company said it no longer expects to be profitable in Q1 but expects profitability in the second, third and fourth quarters and for the full year.

Southwest expects fuel costs per gallon at $2.25 and $2.35 a gallon, up from its previous estimate of $2.05 to $2.15. 

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For the first quarter, the company said revenue is hindered by softness in bookings and more trip cancellations associated with the Covid omicron variant. Demand during the holiday season had been strong.

First-quarter managed business revenue is expected to be down between 45% and 55% vs. the prepandemic first-quarter 2019. But Southwest expects business-travel demand to return this year, based on momentum from the just-concluded quarter. 

The company says booking trends for March have been strong and current revenue trends for spring-break travel are in line with typical seasonal expectations. 

Southwest is still hurt by higher unit-cost inflation in 2022, with pandemic-related staffing issues persisting. The company has been forced to temporarily extend incentive pay for operations employees through early February. 

That extension will result in an additional $150 million of salaries, wages and benefits expense in the first quarter. 

"Additionally, we are further moderating our first-half 2022 capacity plans to provide additional buffer to the operation," Southwest Air said.

Industrywide staffing shortages wreaked havoc on the airline industry throughout the fourth quarter, causing thousands of flight cancellations.