Southwest Airlines (LUV - Get Report) shares fell Tuesday morning after the carrier lowered fourth-quarter traffic guidance.

In a November traffic report, released before the market opened, Southwest said fourth-quarter revenue per available seat mile "will be approximately flat to down 1%." Prior guidance was that RASM would be up 1%.

Southwest shares were down 7.5% to $3.89 to $45.76. The decline in Southwest shares was the highest among airline shares, all of which declined.

Year to date, Southwest shares have risen 8%.

Speaking on Fox Business News, Southwest CEO Gary Kelley said, "It's still a very competitive environment out there {and} fares are a little soften than what we thought they would be for the quarter ...we're having to work a little bit harder to attract customers."

The impact of the bad RASM news outweighed the positive impact of Southwest's record November load factor of 83.2%, up from 80.1% in the same month a year earlier, and of lower oil prices. The benefit of lower oil prices "drops straight to the bottom line," Kelley said.

Asked where the U.S. is in the business cycle, Kelley responded: "It doesn't feel late. It's been such a sluggish recovery. It feels like we are in for more of the same, as far as we can tell, for next year. It doesn't feel like things are going to fall apart."

In a note issued Tuesday morning, Cowen & Co. analyst Helane Becker said some positive factors may not be fully reflected in Southwest's earnings expectations. Analysts surveyed by Thomson Reuters expect current quarter earnings of 92 cents a share.

One positive is that Southwest's initial cost guidance assumed pilots would ratify their contract, which was in fact rejected.

"We assume without the pilot contract 4Q15 non-fuel unit costs will be down 1% to 2% y/y," Becker wrote. Additionally, management's fourth-quarter jet fuel cost guidance is $2.05 to $2.10 a gallon based on a Brent Crude price of $49 a barrel, but the average price so far this quarter is $47.65 and the current price is $40, Becker noted. She has an outperform rating and a $50 price target.

Credit Suisse analyst Julie Yates wrote Tuesday morning that Southwest's new guidance "means Q4 results will look similar to Q3 in terms of Y/Y decline, which is surprising given a number of positive data points and commentary from other carriers.

"So far, the only carrier reporting weaker than expected results has been Allegiant (ALGT - Get Report) which we interpreted as self-inflicted weakness from aggressive off-peak flying capacity additions," Yates said.

 

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.