Can Southwest Airlines' Capacity and Traffic Continue to Grow?
In 2015, Southwest Airlines’ (LUV) approach to prudent capacity growth resulted in a better utilization of capacity. Specifically, the airline’s utilization, or load factor, improved by more than 1.1 percentage points, from 82.5% in 2014 to 83.6% in 2015.
However, for February 2016, capacity growth exceeded traffic growth, and utilization declined by 1 percentage point. This trend can be detrimental to unit revenues if it continues.
Last year, or 2015, was a year of price wars in the airline industry. It was led by growing capacity and declining utilization. Notably, average fares for airlines declined by 5% in 4Q15 and by 3% for the entire year.
These lower airfares led to declining yields, or revenue per seat, for Southwest Airlines. The company’s 4Q15 revenues per available seat mile (or RASM) declined by 0.7%.
Airlines have hiked fares six times in the first two months of 2016. But these hikes have been for select routes and select travelers. According to FareCompare’s Rick Seaney, business travelers and travelers on less competitive routes will be affected the most.
Analysts forecast a further 15% YoY decline in airfares in 2016, which is bad news for airline yields.
LUV expects its 1Q16 RASM to remain flat and hopes to increase it throughout the rest of the year. JetBlue Airways (JBLU) is the only other carrier that seems to expect flat-positive unit revenues.
All other major players, including American Airlines Group (AAL), United Continental Holdings (UAL), Alaska Air Group (ALK), Spirit Airlines (SAVE), and Allegiant Travel (ALGT), are expecting declining unit revenues.
Southwest Airlines makes up approximately 0.5% of the total holdings of the iShares Russell Mid-Cap ETF (IWR).
Browse this series on Market Realist: