Last week, Southwest Airlines signaled minor changes to its financial guidance for the third quarter of 2022. In its Form 8-K Filing to the US Securities and Exchange Commission (SEC), the airline said its estimated third quarter 2002 (3Q 22) operating revenue to be up by 9% to 11% on 2019 levels for the same period. It had previously estimated it would increase by 8% to 12%.

In its SEC filing, Southwest Airlines (Southwest) said its updated projections are based on current booking trends and the Company's current outlook, and actual results could differ materially. For this purpose, it believes that a comparison with 2019 is a more relevant measure of performance due to the pandemic's significant impacts in 2020 and 2021.

Leisure travel is up, but business is falling short

As measured by Available Seat Miles (ASMs), capacity is expected to remain flat compared to 3Q 2019, which is unchanged from the previous guidance. The Labor Day weekend showed strong demand, and Southwest expects that to continue in the third quarter of 2022. Despite that confident note, Southwest also said, "The company continues to estimate full-year 2022 capacity to decrease approximately 4%, compared with 2019 levels."

Leisure revenue trends "remain elevated" compared with 2019 levels and are currently exceeding the airline's expectations for Q3 22. The strength in advanced booking somewhat offset the softer close-in booking trends for business travel from late July through August, "relative to expectations."

Business travel is proving problematic, with July and August 2022 managed business revenues down approximately 26% and 32%, respectively, compared to 2019 levels. The current trend is looking more promising thus far, in September 2022, relative to August 2022, with an estimated eight to ten-point sequential improvement compared with their respective 2019 levels. For 3Q, Southwest expects managed business revenues to be down in the range of 26% to 28%, compared to 2019 levels, while it previously estimated 17% to 21%. The airline adds:

"Although early in the booking curve, the Company continues to experience strong revenue trends in fourth quarter 2022."

Southwest has really hedged its fuel bet

Southwest's cost guidance, as measured by the cost per available seat mile excluding fuel (CASM-X), remains unchanged and is expected to be up from 3Q 2019 by 12% to 15%. In a point of difference from many airlines, Southwest has a multi-year fuel hedging program as insurance against spikes in fuel prices. The filing says that as of September 8, the fair market value of its fuel derivative contracts settling in the fourth quarter of 2022 was an asset of approximately $163 million. This brings the 2022 full-year benefit to approximately $945 million, with contracts settling in 2023 and 2024 valued at approximately $381 million and $104 million, respectively.

Overall figures

Southwest is traveling well on the liquidity front, with cash and short-term investments of around $14.4 billion, which it says is "well in excess of debt outstanding." Its adjusted debt to invested capital (leverage) is currently 48%, and it remains the only US airline with an investment grade rating by all three rating agencies. Airlines, like most corporations these days, are reluctant to make financial forecasts of what lies ahead, although Southwest has been relatively straightforward in its SEC Filing. It said:

“Barring significant unforeseen events and based on current trends, the Company continues to expect solid profits, excluding special items, in third quarter 2022, fourth quarter 2022, and for the full year 2022.”