Southwest Airlines and American Airlines reported better-than-expected third-quarter results while Southwest announced a cooperation agreement with activist investor Elliott Investment Management. Despite a decline in adjusted earnings to $0.15 a share for the September quarter from $0.38 the previous year, Southwest exceeded the Capital IQ-polled consensus of $0.04.
Their total operating revenue improved 5.3% to reach $6.87 billion, surpassing the Street's view of $6.79 billion. Notably, passenger revenue rose by 5.7% to $6.25 billion, despite freight revenue declining slightly by 2.3% to $43 million. The airline has benefitted from yield improvements that stemmed from capacity moderation across the industry, which helped drive both operating and passenger sales.
The carrier's revenue per available seat mile increased by 2.8% year-over-year, while operating expenses per available seat mile—excluding fuel and oil costs—rose by approximately 12%. In terms of forward guidance, Southwest anticipates unit revenue to be up between 3.5% and 5.5% compared to the same quarter last year, forecasting a capacity reduction of about 4%.
This outlook accounts for a slight headwind of 'just under one-half point' attributed to Hurricane Milton and subsequent cancellations. The airline noted that demand for travel 'remains healthy,' with strong booking trends for the holiday season. In governance-related news, Southwest announced that Executive Chairman Gary Kelly will retire on November 1 as part of an agreement with Elliot.
A reconstituted board is expected to appoint a new independent chairman soon. New board members David Cush, Sarah Feinberg, Dave Grissen, Gregg Saretsky, Patricia Watson, and Pierre Breber will assume their roles effective November 1. Southwest's strategic shift includes sharing confidential information with Elliott related to 'upcoming company announcements and other matters.' As a significant development, Eliott has withdrawn its call for a special shareholder meeting and dropped its plan to nominate directors to the airline's board. On a parallel note, American Airlines reported a decrease in adjusted EPS to $0.30 in the third quarter from $0.38 last year, yet it still surpassed Wall Street's estimated EPS of $0.17.
Revenue for American Airlines also rose to $13.65 billion for the three months ending September 30, an increase from $13.48 billion year-over-year and ahead of the average analyst estimate of $13.57 billion. The carrier noted a slight increase in passenger revenue by 0.8% to $12.52 billion, while cargo revenue jumped 5% to $202 million. CEO Robert Isom emphasized that 'the American Airlines team continues to focus on running a reliable operation and managing costs across the airline.' The airline is taking aggressive measures to reset its sales and distribution strategy and to reengage with the business travel segment, which they believe will positively influence their revenue performance over time. For the complete fiscal year, American Airlines is now projecting adjusted EPS between $1.35 and $1.60, an increase from their prior guidance of $0.70 to $1.30.
The market consensus anticipates normalized EPS of $1.31 for 2024. Furthermore, the airline foresees fourth-quarter adjusted EPS in the range of $0.25 to $0.50, compared to analysts' estimate of $0.36..