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Southwest Airlines' 1Q17 Earnings: High Costs Prevent Takeoff

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Southwest Airlines' 1Q17 Earnings: High Costs Prevent Takeoff PART 3 OF 9

Can Southwest’s Revenues Continue to Rise at Fast Pace?

1Q17 performance

In 1Q17, Southwest Airline’s (LUV) revenue rose 1.2% year-over-year (or YoY) to $4.9 billion. A record $4.4 billion of these revenues came from passenger revenues. The growth in passenger revenues was, however, significantly lower than Southwest’s capacity growth for the period, as the company earned lower revenues per passenger.

Can Southwest&#8217;s Revenues Continue to Rise at Fast Pace?

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Unit revenues

Southwest Airlines 1Q17 revenue per available seat mile (or RASM) fell 2.8% year-over-year to 13.3 cents. This was in line with management’s guidance of a 2%–3% decline. According to the company, this was “due largely to the competitive fare environment and the shift in Easter travel demand.”

Outlook

For 2Q17, Southwest Airlines is expecting to report a slightly positive growth of 1%–2% in RASM. Though this is good news, it isn’t as good as investors expected, which added to the stock’s decline.

American Airlines (AAL) also expects to report positive unit revenues for 2Q17. Both Delta Air Lines (DAL) and United Continental (UAL) expect 2Q17 unit revenues to rise 1%–3%. JetBlue expects unit revenues to improve 3%–6% in 2Q17, while Alaska Air (ALK) hasn’t provided unit revenue guidance. Investors can gain exposure to Southwest Airlines by investing in the PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ), which holds 3% of its portfolio in the stock.

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