In August, Southwest Airlines’ (LUV) utilization declined 0.6% YoY (year-over-year) to 84.3% as traffic growth lagged capacity growth. As we saw in Part 2 of this series, traffic growth has been lagging behind capacity for the past five months. As a result, LUV’s utilization has also been declining in the same period.
YTD (year-to-date) through August, Southwest Airlines’ utilization has remained flat at 83.7% as traffic growth matched capacity growth. Declining utilization would mean lower efficient use of capacity, which would adversely impact airline unit revenues.
Yields continue to decline
At the end of 2017, Southwest Airlines had guided for an improvement in yield environment. Passenger yields declined 0.5% in 2017. With strong passenger bookings in the first quarter of 2018, it guided for yield improvement.
However, stronger-than-expected competition and a sub-optimal flight schedule led to yields declining 2.8% YoY. A similar sub-optimal flight schedule and, more importantly, the negative impact of LUV’s Flight 1380 accident led to declining yields in the second quarter. Passenger yields recorded a 2.5% YoY decline in the past quarter.
Investors can gain exposure to Southwest Airlines by investing in the First Trust Industrial/Producer Durables AlphaDex ETF (FXR), which holds 2.1% of its portfolio in LUV.