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Southwest Airlines Reduces 1Q17 Guidance: Here’s the Flight Plan

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Southwest Airlines Reduces 1Q17 Guidance: Here’s the Flight Plan PART 1 OF 5

Southwest Airlines’s Capacity Growth Slows Down

Capacity growth

In February 2017, Southwest Airlines’s (LUV) capacity grew 1.2% year-over-year (or YoY) to 11.0 billion miles. This is significantly lower than the previous month’s 6.2% YoY growth and also lower than its fiscal 2016 capacity growth of 4.8%.

In fiscal 2015, LUV’s capacity growth stood at 7.3% YoY. Year-to-date (or YTD) in February 2017, LUV’s capacity growth stood at 3.8%. An airline’s capacity is measured using available seat miles (or ASMs). ASM is calculated as the number of seats available multiplied by the number of miles flown.

Southwest Airlines’s Capacity Growth Slows Down

Southwest Airlines’s Capacity Growth Slows Down

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Outlook and the Buffett factor

After its prudent capacity expansion in 2015 and the first half of 2016, where its capacity growth closely matched its traffic growth, Southwest Airlines’s (LUV) capacity expansion in 2H16 and 2017 YTD has exceeded its traffic growth. This scenario has concerned investors, given the overcapacity fears in the airline industry. LUV’s traffic growth has been lagging its capacity growth for the past three months.

However, activist investor Warren Buffett invested ~$2.2 billion in the company by the end of 2016. He has also invested a similar amount in American Airlines (AAL) and United Continental (UAL), as well as ~$3 billion in Delta Air Lines (DAL).

During the February 27, 2017, edition of CNBC’s Squawk Box, Buffett noted, “It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope.” He added, “The hope is they will keep orders in reasonable relationship to potential demand.”

Investors can gain exposure to Southwest Airlines (LUV) by investing in the iShares S&P 500 Growth ETF (IVW), which invests 0.31% of its portfolio in the company.

We’ll discuss Southwest Airlines’s February 2017 traffic performance in our next article.

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