Second quarter 2016 estimates
Analyst estimates serve as an effective proxy for gauging what’s priced into the market.
For 2Q16, analysts are estimating Southwest Airlines revenues to grow by 5.7% to $5400 million. For the next two quarters, though sales are expected to grow, the growth rate in expected to slow down from 5.7% in 2Q16 to 3.4% in 3Q16 and 4% in 4Q16.
For 2016, analysts expect a growth of 4.7%, albeit at the slower pace than 2015’s 6.5% revenue growth. Revenue growth is expected to decline further in 2017 and 2018.
Unit revenues may grow
However, unlike others in its peer group, Southwest Airlines (LUV) predicts its passenger revenue per available seat miles or PRASM to grow moderately in the second quarter of 2016. One of the reasons is unit revenue gains from the new credit card agreement and accounting change that will lapse in 3Q16.
However, the yield environment continues to remain weak, owing to the increased pressure on air fares, especially in LUV’s major markets. Unit revenues may thus decline in second half of 2016.
Demand growth to slow too
Passenger travel demand had a great start in 2016, growing approximately 7% year-over-year or YoY, the highest since 2012. However, International Air Transport Association or IATA suspects the industry might be at the end of the traffic boost phase provided by low oil prices. This suggests travel demand may slow down, which will adversely impact airlines.
For a complete analysis read, “Will Airline Industry Demand Rise for the Remainder of 2016?”
As a result, LUV’s 2016 demand growth as measured by revenue passenger miles or RPM is expected to be 6% significantly lower than 2015’s 9%.
Slower demand growth than the previous years and lower yields are the major factors contributing to a slowdown in revenue growth. We will next discuss how these assumptions are expected to impact Southwest’s bottom line.
Southwest forms 2.4% holding of the SPDR S&P Transportation ETF (XTN).