Why Southwest Airlines Cut Forecasts for Its 1Q17 Unit Revenues
The load factor is the most commonly used measure of an airline’s capacity utilization and is calculated by dividing the revenue passenger miles by available seat miles. A higher load factor indicates better utilization of aircraft capacity.
In February 2017, Southwest Airlines’s (LUV) traffic growth closely matched its capacity growth, and its utilization was flat at 79%. In February 2017 year-to-date (or YTD), LUV’s load factor fell 0.6% to 77.6%.
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In 2016, Southwest Airlines’s approach of prudent capacity growth resulted in improved utilization of its capacity. The airline’s utilization, or load factor, rose ~0.4% from 83.8% in 2015 to 84.2% in 2016.
As most airlines continue with their aggressive capacity expansion plans amid declining demand growth, their yields (revenue per seat) have been declining. Most airlines expect the trend to continue in 1Q17.
For 2016, Southwest Airlines’s (LUV) passenger yield fell 4.3% to 14.9 cents, which resulted in unit revenues falling 3.8% to 12.5 cents.
Southwest Airlines (LUV) noted that its February demand suffered due to heavy rainfall in California and a slowdown in last-minute bookings. As a result, LUV expects its 1Q17 revenue per available seat mile (or RASM) to fall 2%–3% YoY compared to its flat to -1% RASM that it previously expected. However, the company remains optimistic about its unit revenue trend beyond 1Q17.
Delta Air Lines (DAL) also cut the forecast for its 1Q17 unit revenues. Spirit Airlines (SAVE) also expects its unit revenues to decline. Although American Airlines (AAL) has also cut its forecast, it still expects unit revenues to rise 1.5%–3.5% compared to its earlier guidance of 2.5%–4.5%. United Continental Holdings (UAL) expects its unit revenues to range from -1%–1%.
Southwest Airlines makes up ~0.31% of the total holdings of the iShares Russell 1000 Growth ETF (IWF), which tracks the Russell Index.