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Southwest Airlines expects bookings to drop after deadly explosion

By Alana Wise
Southwest Arlines employees check in travelers at the Philadelphia International Airport in Philadelphia, Pennsylvania U.S. April 17, 2018. REUTERS/Mark Makela/Files

By Alana Wise

(Reuters) - Southwest Airlines Co <LUV.N> on Thursday warned the consequences of a mid-air engine explosion last week will weigh on second-quarter bookings, as investigators continued to probe the events that led to the first passenger death in the airline's history.

Second-quarter unit revenue will drop by 1 percent to 3 percent, the carrier said in its quarterly earnings report, with 1 to 2 percentage points attributed to a decrease in bookings following the engine explosion. The loss in bookings will shave between $50 million and $100 million, Southwest said.

The airline attributed some of the ticket sales slump to the advertising it had pulled immediately following the incident, but said it expects to reintroduce advertising and promotions this week as it gears up to battle a price war with rivals.

Shares of the Dallas-based carrier recouped some of their earlier steep losses and were last down 1.18 percent. They have fallen 18.52 percent so far this year.

Southwest posted first-quarter profit of $438 million, excluding special items, up from $372 million a year earlier. It earned 75 cents per share, topping the Wall Street consensus projection of 74 cents, according to Thomson Reuters I/B/E/S.

Unit costs rose modestly by 0.1 percent year over year. In the current quarter, Southwest expects a 1 percent to 2 percent increase in unit costs, excluding fuel and some items.


'SOMBRE TIME'

Southwest has been under intense scrutiny in the days since an engine on one of its Boeing 737 jets blew apart during a flight last Tuesday, killing one of 149 people aboard and raising concerns about the safety of similar engines.

"It remains a sombre time for the Southwest Family following the Flight 1380 accident," Chief Executive Officer Gary Kelly said in a statement. "We continue to cooperate with the National Transportation Safety Board's thorough investigation to understand the cause of the accident."

The incident marked the first fatality on a U.S. commercial passenger airline since 2009.

Over the next month Southwest will be inspecting other CFM56-7B engines, the model involved in last week's accident. The engine is manufactured by CFM International, a joint venture of General Electric and France's Safran.

It was not immediately known how much Southwest will record in expenses related to the engine blowout over the next several months.

The carrier included a preliminary estimate in its second-quarter unit cost outlook of an increase of 1 percent to 2 percent, also including some pressure from employee wage and benefit increases.

Southwest has sent $5,000 checks to passengers of the April 17 flight and cancelled dozens of other flights in an effort to voluntarily ramp up engine inspections. [nL1N1S1012]

As of Thursday, Southwest CEO Kelly said in an interview with CNBC, the airline had inspected more than 80 percent of its fleet. Kelly said the airline plans to conclude inspections by the end of May.

Before last week's episode, Southwest said it had inspected about 17,000 of its engine fan blades, and has since completed inspections of about 8,500 more.


COMPETING AGGRESSIVELY

Southwest's quarterly results reflect the impact of a fierce pricing battle it is embroiled in with rival U.S. carrier United Airlines <UAL.N> over primary control of some key hubs.

"We've been competing very aggressively and we will continue to do that," Southwest President Tom Nealon said on the carrier's first-quarter earnings call.

"We are well prepared to compete. And we will succeed financially."

In the first quarter, Southwest's average passenger fares fell by 4.9 percent to $146.33.

The Dow Jones U.S. Airlines Index <.DJUSAR> was down 2.18 percent on Thursday, hurt in part by Southwest's and competitor American Airlines's <LUV.N> results. The index has shed 11.31 percent this year.



(Reporting by Alana Wise in New York; Editing by Jeffrey Benkoe, Chizu Nomiyama and Susan Thomas)