Southwest Airlines says Delta variant is hurting its business

Carrier sees bookings slow and cancellations rise in August as Covid-19 surge continues

Southwest Airlines Co. LUV 1.43% said the recent surge in Covid-19 cases is causing bookings to slow and cancellations to rise, showing how quickly the Delta variant is denting economic activity.

The airline said Wednesday that while demand for the key Labor Day weekend remained healthy, the recent slowdown would make it difficult to turn a profit in the third quarter, excluding the impact of government payroll assistance. That is even after a fare sale designed to stoke the return of business traffic in the fall.

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Southwest’s move reverses airline executives’ bullish tone just a few weeks ago, with rising Delta-variant infections prompting the cancellation of festivals and trade events such as the New York Auto Show planned for later this month.

Some consumers are reconsidering activities like travel and eating at restaurants as the surge leads certain retailers and municipalities to reimpose mask mandates.

The weekly average number of seated diners tracked on restaurant reservation platform OpenTable was down 8% from 2019 levels for the week that ended Aug. 10, a reversal since late June, when dining activity surpassed 2019 levels. Credit-card spending tracked by Chase shows that air-travel purchases have slipped in recent weeks while restaurants spending has leveled off, J.P. Morgan analysts said in a note Tuesday.

Airline fares dropped slightly in July, according to the Labor Department, reversing the sharp rise in recent months as air travel demand recovered.

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The slowdown in travel demand after a period of rapid growth adds to the challenges airlines are facing. These include shortages of staff and aircraft spare parts that airlines have said, alongside bad weather, caused cancellations and delays.

Southwest said in a regulatory filing Wednesday that the recent slowdown meant it now expects operating revenue for the month to be 15% to 20% below 2019 levels. That compares with an earlier estimate for a decline of 12% to 17%. Southwest said September revenues could be down by as much as a quarter from 2019.

The parent of Frontier Airlines said last week that it had started to see an impact from the Delta variant. Mesa Air Group Inc. ––one of the largest regional carriers––said Monday it was concerned about the effect on fall demand, which relies more heavily than the summer on business traffic.

Southwest executives last week said they expected business traffic in September to be down 50% from pre-pandemic levels, compared with a 69% drop in June.

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Airlines have said office and school reopenings in the fall could lift business travel. However, the latest Covid-19 developments have created uncertainty about whether workers would return to offices as planned. Prominent companies such as Apple Inc. and Alphabet Inc.’s Google have decided to postpone calling employees back in.

"The most significant risk into the fall comes from the Delta variant continuing to restrict access to offices, further pushing to the right a meaningful return of corporate travel," said Jefferies Group LLC analyst Sheila Kahyaoglu in a client note.

Some carriers have reacted to rising Covid-19 cases with employee vaccination initiatives.

Ticker Security Last Change Change %
LUV SOUTHWEST AIRLINES CO. 49.15 -0.25 -0.51%
UAL UNITED AIRLINES HOLDINGS, INC. 45.99 -0.23 -0.50%
ULCC FRONTIER GROUP HOLDINGS 15.89 -0.07 -0.44%

United Airlines Holdings Inc. last week became the first to propose mandating staff vaccination, and Hawaiian Holdings Inc. said Monday it would follow suit. Frontier Group Holdings Inc. said workers would need to be vaccinated or submit to regular testing. United’s regional airline and international alliance partners haven’t said they would mandate vaccinations.

Other U.S. airlines have continued to encourage getting the shots to boost workforce vaccination rates that they said are higher than for the broader population.

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United Chief Executive Scott Kirby is due to appear later Wednesday at a virtual White House summit to promote vaccinations.

—Gwynn Guilford and Colin Kellaher contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com