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LUV Plans to Stay on Track to Achieve Its Utilization Guidance

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Utilization crimps LUV’s plans to keep up with guidance

Load factor is the most commonly used measurement of an airline’s capacity utilization. It is calculated by dividing RPM (revenue passenger miles) by ASM (available seat miles). A higher load factor indicates better utilization of aircraft capacity.

In 2015, Southwest Airlines’ approach to prudent capacity growth resulted in better utilization of capacity. Specifically, the airline’s utilization or load factor improved from 82.5% in 2014 to 83.6% in 2015.

YTD (year-to-date) in 2016, LUV’s load factor has improved by 0.4 percent points to 83.7%. However, in July 2016, as capacity growth exceeded traffic growth, utilization declined by just under one percentage point to 86.9%. This trend could be detrimental to the unit’s revenues if it continues.

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Declining yields

As most airlines continue their aggressive capacity expansion plans amid declining demand growth, yields (revenue per seat) have been declining. Most airlines expect the trend to continue in 2016.

LUV also witnessed a technology outage on July 20, 2016, due to which it had to cancel more than 2,000 flights, which will also adversely impact yields for the quarter.

Outlook

LUV expects its 3Q16 RASM (revenue per available seat mile) to decline by 3.5%–4.5% YoY, as compared to its earlier guidance of a 3%–4% decline in RASM.

The other major industry players—American Airlines Group (AAL), United Continental Holdings (UAL), Alaska Air Group (ALK), JetBlue Airways (JBLU), and Allegiant Travel Company (ALGT)—are expecting declining unit revenues. Spirit Airlines (SAVE) is the only airline expecting unit revenues to improve.

Notably, Southwest Airlines makes up ~0.79% of the total holdings of the iShares US Consumer Services ETF (IYC).

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