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Southwest expects improved results in second half of 2018

Executives at Southwest Airlines spent much of the company's second quarter earnings call stressing that Southwest is poised for financial improvement in the second half of the year.

They insist Southwest has largely moved beyond the negative impact of several issues that struck in the second quarter, including the April inflight engine failure on Southwest flight 1380, which killed one passenger.

"The good news here is that we don't see any material revenue impact from [flight] 1380 beyond Q3. We're continuing to see very positive signs of our recovery and a continued strength of the Southwest brand," says Southwest president Thomas Nealon.

"The momentum we are feeling is real and tangible, and it is growing," he adds.

The accident cost Southwest about $100 million in second quarter revenue and spurred inspections of 17,000 fan blades on the company's CFM International CFM56-7B engines.

Those inspections and a hail storm that grounded 17 aircraft caused fleet problems in the second quarter. In addition, Southwest held a fare sale that pushed down yields.

Due partly to those factors, the company's operating profit slipped 20% year over-year to $972 million in the second quarter. Revenue per available seat mile (RASM) declined 3% to 13.84 cents.

But Southwest may have turned a corner.

Nealon says Southwest's yields "strengthened considerably" in the last two months, and the company expects third quarter RASM will be roughly flat year-over-year – a big improvement.

Better revenue management will also boost third quarter revenue by up to $80 million year-over-year, Nealon says.

The April accident will have nearly no impact on fourth quarter RASM, Southwest says.

Southwest predicts its third quarter cost per available seat mile (CASM), adjusted to exclude fuel and profit sharing expenses, will increase 2-3% year-over-year.

It anticipates full year 2018 adjusted CASM will be flat to up 1% year-over-year.

During the second quarter Southwest received 12 Boeing 737-800s and two 737 Max 8s, bringing the company's total fleet to 751 aircraft.

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