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Insight into Southwest’s Traffic and Capacity Growth for 2Q15

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Strong traffic growth

Southwest Airlines (LUV) saw a strong 7.9% year-over-year (or YoY) growth in traffic numbers over the corresponding quarter last year, as measured by revenue per mile (or RPM). This indicates strong growth in demand for the company’s services. The number of revenue passengers also increased by a strong 5.6% YoY. For the first half of 2015, the company has recorded strong 7.5% YoY growth in traffic.

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Capacity growth accompanied by better load factor

The hike in demand is met by either increasing the capacity of the fleet or by improving the utilization of the existing fleet. Southwest increased its capacity by 7% YoY from the corresponding quarter last year to back the growing demand. However, this growth in capacity was also accompanied by fuller planes. The load factor, which measures the capacity utilization, also improved to 84.6% for the quarter. For the first half of the year, the capacity has risen by 6.5% YoY and the load factor has improved by 0.8 points to 82.5%.

This is the second highest capacity increase among the six major airlines. Alaska Air Group (ALK) has increased its capacity by 10.7% in 2Q15, United Continental (UAL) increased its capacity by 2.3%, and Delta (DAL) increased its capacity by 6%. These airlines are part of many ETFs, including the iShares Transportation Average ETF (IYT), which has 16.85% of its holdings in airline stocks.

Capacity growth with improving load factors bode extremely well for the company’s future revenue growth. However, this is true as long as the capacity growth is coupled with demand growth.

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PRASM declines

The PRASM (or passenger revenue per available seat miles) is a measure of the unit revenue of the company. Southwest Airlines’ PRASM fell by 4.6% YoY during the quarter and 2.4% YoY for the first half of the year. This has been the case with most airlines in the industry since the sudden fall in oil prices led to losses due to aggressive hedging by the companies.

CASM improves

The company’s unit costs as measured by CASM improved by 11.1% YoY for the second quarter, primarily driven by a 33% YoY fall in the fuel cost per gallon. For the first half of the year, CASM fell by 12% YoY on a 34% fall in fuel costs per gallon.

Thus, a strong boost in traffic and capacity along with increased utilization helped the company post strong overall quarterly results.

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