Southwest Airlines has updated its first-quarter outlook for a pivotal revenue metric, signaling challenges ahead for the airline industry. The company now anticipates revenue per available seat mile (RASM) to grow between 2% and 4% year-over-year for the current three-month period. This projection has been revised downward from an earlier growth expectation of 5% to 7%.
Furthermore, the airline expects a 2% decline in capacity, as measured by available seat miles (ASMs), compared to previous forecasts that indicated a drop of 2% to 3%. The downward adjustment in revenue guidance is largely due to unexpected factors such as a higher completion factor, a reduction in government travel, and more significant repercussions from the California wildfires than originally estimated.
The company also noted a softness in bookings and demand trends as the macroeconomic environment continues to weaken. Despite the less optimistic outlook, shares of Southwest Airlines experienced a 6% uptick during Tuesday's trading session. In addition to the revenue outlook, Southwest Airlines has revised its fuel cost estimate for the quarter, lowering it to a range between $2.35 and $2.45 per gallon, down from a previous estimate of $2.50 to $2.60.
Additionally, the growth estimate for operating expenses per available seat mile, excluding certain costs, known as CASM-X, has been adjusted to 6% from an earlier range of 7% to 9%. In a significant shift in policy, Southwest has announced that it will charge non-royalty members for checked baggage, deviating from its long-standing practice of allowing two free checked bags.
Rapid Rewards A-list preferred members and customers opting for business select fares will still enjoy the benefit of two free checked bags, while other A-list members and select customers can check one bag at no cost. This new policy is set to take effect for flights booked on or after May 28. Revisiting its prior stance, Southwest previously indicated in September 2024 that any alterations to its free bag policy could potentially reduce demand significantly, overshadowing any revenue benefits gained from implementing bag fees. Commenting on the company's future, Chief Executive Bob Jordan emphasized that Southwest has a "tremendous opportunity" to meet both current and future customer needs, attract new customer segments that the airline does not currently serve, and return to levels of profitability that are expected by shareholders. Meanwhile, Delta Air Lines has also revised its first-quarter revenue growth forecast downward, now projecting a year-over-year increase of 3% to 4%, down from an earlier estimate of 7% to 9%.
Delta has furthermore cut its earnings per share target to a range of $0.30 to $0.50, a reduction from the previous range of $0.70 to $1. The market reacted negatively to this news, with Delta's shares falling by 6.5% during Tuesday's trading session. According to a regulatory filing from Delta, the adjusted outlook is a result of recent declines in consumer and corporate confidence, which have been affected by increased macroeconomic uncertainty, leading to softer domestic demand..