Southwest Airlines (LUV - Get Report) shares edged higher Wednesday after the carrier boosted the lower end of its second-quarter profit forecast but noted that all 34 of its Boeing 737 MAX jets will remain grounded until at least September.
Southwest said it sees operating revenue per available seat mile, a key industry metric for profitability, rising between 6.5% and 7.5% in the three months ending in June, up from a prior forecast of 5.5% to 7.5%. Costs, however, are likely to edge higher for each seat mile, owing to a 3.5% reduction in capacity linked to the grounding of Boeing Co.'s (BA - Get Report) 737 MAX jet, which Southwest said it doesn't expected to return to scheduled flights until at least September.
"The Company's second quarter 2019 capacity guidance reflects the impact of the grounding of all 34 737 MAX 8 aircraft in its fleet through August 5, 2019, as previously disclosed, resulting from a Federal Aviation Administration emergency order issued on March 13, 2019 for all U.S. airlines to ground all Boeing 737 MAX aircraft," Southwest said in a filing with the SEC. "As the timeline remains uncertain for the MAX aircraft to return to service, the Company is revising its flight schedule to remove all MAX flights through September 2, 2019."
"The Company continues to be focused on proactively managing cancellations, minimizing operational disruptions, re accommodating Customers, and minimizing the impact on its on time performance," Southwest added.
Southwest shares were marked 0.2% higher at the start of trading Wednesday following the improved forecast report to change hands at $51.83 each.
Last week, JPMorgan sector analyst Jamie Baker noted that American Airlines AAL had increased some fares by around $5 each way, noting that others such as Southwest joined the industry trend, which followed a similar price hike just five weeks ago, sending airline shares soaring to multi-month highs.
"To our surprise, domestic fares are rising again, after successfully doing so just five
weeks ago, with increasing Southwest participation coming overnight," Baker wrote. "Granted, airline stocks are already off to a reasonable start this morning, but given the crescendo of inquiries as to why, and nary a question on fares, we are confident that knowledge of increased domestic fare resilience is not yet priced into the market."
The fare increases come as global jet fuel prices, alongside crude oil costs, have continued to decline over the past three months. The International Air Transport Association, a business lobby, indicated that jet fuel prices have fallen more than 11.4% from a month ago, and are down 14.6% from the same period last year.
Southwest said Wednesday it expects second quarter fuel costs to be in the region of $2.00 to $2.20 per gallon, "including $.05 per gallon in premium expense and an estimated $.05 per gallon in favorable cash settlements from fuel derivative contracts." That compares to a $2.21 per gallon cost reported in the second quarter of last year.
The U.S. Energy Information Administration said earlier this week that it expects jet fuel costs to rise by around 10 cents per gallon next year, while International Maritime Organization rules, which require air carriers -- as well as maritime vessels -- to use fuels with a lower sulfur content, are expected to add upward pressure on the airlines sector's key cost base.