DAL Delta Air Lines Inc

By Susan Carey and Joshua Jamerson 

Southwest Airlines Co.'s disclosure Wednesday that it expects unit revenue to decline 4% to 5% year-over-year in the fourth quarter and its unit cost excluding fuel to rise by a similar range in the same period pounded the discounter's share price, slicing off $2.2 billion in market capitalization.

Southwest shares fell 10% in premarket trading Wednesday, after rising 9.6% in the past three months. Once the market opened, shares fell as far as 11.2% after the company released its third-quarter results, before rebounding to decline 8.5%, or $38.40 a share.

But executives at the Dallas-based carrier, No. 4 in the U.S. by traffic, said they were confident they could reach revenue targets next year despite a raft of capacity increases by rival airlines on Southwest routes. Gary Kelly, the chief executive, said the carrier could break into flat or positive unit revenue in the first quarter even on planned seat growth shy of 3% in the period.

For all of 2017, Southwest expects to grow 3.5% to 4%, much more than some of its largest competitors. But Mr. Kelly said he believed that is the right amount, after a capacity boost of 5% to 6% this year.

"It is appropriate for us to slow our growth until unit revenue turns positive," he said.

Unit revenue is the amount an airline takes in for each seat flown a mile. In the third quarter, that metric declined by 4.1% year over year.

Lower fuel prices and strong profits are prompting the airline industry to add capacity, so more seats are fighting for the same number of passengers, the CEO said. This is causing prices to wilt. Southwest's average one-way fare in the third quarter fell 4.8% to $146.96.

"Either demand needs to improve or supply come into better alignment," he said.

Making matters worse, fuel prices are increasing. And Southwest is facing the possibility that its pilots and flight attendants in the coming days will ratify costly new labor contracts. Preparing for that, it expensed $356 million pretax in the third quarter to cover proposed signing bonuses. As a result, the company expects its unit cost excluding fuel and profit-sharing to rise 4% to 5% in the final quarter.

In the September quarter, Southwest earned $388 million, or 62 cents a share, down from $584 million, or 88 cents a share a year ago. But excluding special items, profit in the latest period was $582 million, or 93 cents a share, beating Wall Street estimates. Revenue was $5.1 billion, down 3.4% from $5.3 billion a year earlier.

A computer outage in July, which forced Southwest to cancel some 2,000 flights, dented revenue by $55 million in the third quarter and added $24 million to costs. end

Write to Susan Carey at susan.carey@wsj.com and Joshua Jamerson at joshua.jamerson@wsj.com

(END) Dow Jones Newswires

October 26, 2016 16:47 ET (20:47 GMT)

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