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Can Southwest Airlines Continue Its Strong Operational Performance in 2016?

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Southwest’s strong traffic in 4Q15

In the fourth quarter of 2015, Southwest Airlines Company (LUV) saw a handsome 11.1% YoY (year-over-year) growth in traffic, and the airline gained 8.9% in revenue. For fiscal 2015, Southwest Airlines continued its trend of consistent execution, demonstrating its ability to perform under tough conditions.

The airline witnessed a strong year both operationally and financially. The airline saw an 8.8% YoY growth in its traffic numbers, which was boosted by strong demand for travel across the industry as the economy for last year has remained solid.

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Southwest’s stringent capacity growth

Southwest has been very stringent about its capacity growth, taking care to maintain capacity in line with demand. The airline grew its 4Q15 capacity by 8.3% YoY. For fiscal 2015, capacity growth stood at 7.2% YoY. Lower fuel prices provided the much-required boost for capacity expansion.

The company’s approach to stringent capacity growth resulted in a better utilization of its existing capacity. Specifically, the airline’s utilization, or load factor, improved by over two points from 82% in 4Q14 to a fourth quarter record of 84.1% in 4Q15.

Expectations for growth going forward

Southwest Airlines plans to continue expanding its capacity in 2016. However, like its peers Alaska Air Group (ALK), JetBlue Airways Corporation (JBLU), Delta Air Lines (DAL), and American Airlines Group (AAL), Southwest’s pace of capacity growth is expected to slow down this year. The company does plan to expand it capacity by 5–6% in 2016, its strategy being that if it continues to see strong traffic growth, the growing global economy will help provide the required tailwind.

Southwest Airlines makes up approximately 5% of the total holdings of the Dynamic Leisure & Entertainment Portfolio (PEJ).

Now it’s time to break down Southwest’s recent revenue growth.

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