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Can Southwest Airlines Continue Its Strong Revenue Growth?

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Jan. 28 2016, Updated 4:13 p.m. ET

Southwest’s best year in history

In 4Q15, Southwest Airlines Company’s (LUV) revenues grew by 7.5% on a YoY (year-over-year) basis to $5 billion. Of that $5 billion, a whopping and record-breaking $4.6 billion came from passenger revenues.

Calendar 2015 was the best year for earnings in the airline’s entire history as Southwest saw a very solid 6.5% YoY growth in revenues, reaching $19.8 billion, backed by strong operational performance, as we discussed previously in this series (see Parts 1 and 2).

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The year also marked the completion of Southwest’s AirTran acquisition and integration and the launch of an international terminal and international flights out of Houston. All this was made possible by strong economic conditions, which have helped the travel industry see strong demand throughout the year. (For more on this, read Market Realist’s series on Airline Industry Insights.)

Southwest’s declining unit revenues

Calendar 2015 was also a year of price wars in the airline industry, a trend led by growing capacity and declining utilization. Notably, average fares for airlines declined by 5% in 4Q15 and by 3% for the entire year. But these lower airfares led to declining yields for Southwest Airlines. The company’s 4Q15 revenues per available seat mile, or RASM, declined by 0.7%. Still, strong traffic growth helped offset unit revenue pressure, without which the company’s growth could have been much higher.

Outlook for Southwest in 2016

For the upcoming year, Southwest Airlines expects its first quarter 2016 RASM to be flat YoY, but it hopes to improve thereafter. This is much better than its peers American Airlines Group (AAL), United Continental Holdings (UAL), Alaska Air Group (ALK), Spirit Airlines (SAVE), and Allegiant Travel Company (ALGT).

Notably, JetBlue Airways Corporation (JBLU) is the only other peer of Southwest that is expecting flat-to-positive unit revenues for 2016. But growing demand on the back of global economic growth will likely help offset some of Southwest’s unit revenue weakness. Southwest Airlines makes up approximately 5% of the total holdings of the Dynamic Leisure & Entertainment Portfolio (PEJ).

Continue to the next part for our discussion of what the falling price of crude has meant—and could continue to mean—for the company.

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