Southwest Offers Live TV

Zacks Equity Research

The U.S. air carriers are expanding in-flight entertainment options and adding novel features to their services in order to distinguish themselves from their major rivals. Accordingly, the largest U.S. low-cost carrier Southwest Airlines Co. (LUV) plans to introduce wireless inflight entertainment services to its passengers onboard five aircraft.

Initially, the company will offer seven sports and news channels –– NBC Sports, MLB live games from MLB.com, NFL Network, CNBC, MSNBC, Fox News and Fox Business New through its onboard WiFi provider, Row 44. Then, it will gradually expand its offerings to 20 planes by mid-July. Southwest will charge $3–$8 during a trial period for the live TV service.

The latest facility will be an addition to the company’s WiFi offerings. Southwest is equipped with 250 WiFi The Boeing Company (BA) 737 jets out of its total 550 planes. The company expects to have 70% of its fleet equipped with WiFi by the end of the next year.

The move will boost its competitive position against its major rivals that have already started offering live TV services to their passengers onboard. One of the leading low-cost airlines JetBlue Airways Corporation (JBLU) offers 36 channels at no extra fee.  The largest U.S. airline United Continental Holdings Inc. (UAL) charges $6 for smaller fights say two hours, and $8 for longer time flights.

The second largest U.S. airline Delta Air Lines (DAL) is already the world's largest fleet of aircraft to be equipped with WiFi. The company expects to deploy its WiFi services to the international flights early next year.

Besides, Southwest is in the midst of a fleet modernization plan. The company is renovating in-flight cabins and redesigning interiors. We believe the overall fleet modernization plans will boost pre-tax income by about $70 million in 2012, $300 million in 2013 and $500 million in 2014.

However, revamping of in-flight cabins and interiors would increase maintenance expenses by $50 million this year, out of which $14 million is expected to be incurred in the second quarter.

We are currently maintaining our long-term Neutral rating on the stock. For the short term (1-3 months), the stock retains a Zacks # 2 (Buy) Rank.

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