02/20/2019

Southwest Airlines Co added a $60 million hit from the recent U.S. government shutdown to its list of headaches on Wednesday as it investigated whether a conflict with its mechanics union was adding to a rise in flight cancellations.

The United States’ fourth-largest airline also cut its forecast for first-quarter revenue per seat mile on Wednesday, citing weak passenger demand and the impact of the shutdown.

Shares of the company, which has been cancelling flights in recent days due to bad weather and a large number of unscheduled maintenance issues, fell more than 6 percent, dragging down other airlines.

Goldman Sachs issued a “sell” recommendation on the stock, saying that the airline may have to slash fares on its new Hawaii route because of a delay in launching the service caused by the December and January shutdown.

The delay means the airline will have less time to sell tickets, forcing it to discount heavily at a time when most rivals expect an improvement in ticket prices, Goldman analyst Catherine O’Brien said.

“Most of (Southwest’s) schedule is published eight months in advance and we would have expected a three- to six-month selling window for its Hawaii flights,” O’Brien wrote in a note, downgrading the stock to “sell” from “neutral”.

“We now expect initial flights to have a one- to one-and-a-half month selling window, putting more pressure on management to fill planes in a shorter time frame,” she added, cutting her price target on the stock to $54 from $66.

Southwest shares were last down 4.9 percent at $54.90.

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Flight cancellations by Southwest accounted for roughly 24 percent of nearly 800 total flights canceled across the United States on Tuesday, according to flight-tracking service FlightAware.com.

Southwest said about half of its cancellations had been related to unscheduled maintenance issues, and the remainder due to winter storms forecast to hit the Midwest and Northeast over Tuesday and Wednesday.

The low-cost carrier, which has been in talks with its mechanics union on a new contract since 2012, said last week it was requiring “all hands on deck” to address maintenance items and said all employees would have to provide a doctor’s note if they failed to show up for work.

Chief Operating Officer Mike Van de Ven said on Tuesday the company would be investigating the current disruption and exploring all possible remedies.

The more than month-long hiatus in U.S. government decision-making prevented regulators from approving Southwest’s new service and led to widespread delays at airports.

Southwest had said previously that it expected a $10 million to $15 million impact from the shutdown in the first three weeks of January.

On Wednesday, it quadrupled that for the full quarter and cut its growth estimate for unit revenue to a range of 3 percent to 4 percent from an earlier range of 4 percent to 5 percent.

Reuters (Reporting by Ankit Ajmera and Rama Venkat in Bengaluru; Editing by Anil D'Silva and Patrick Graham)