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Southwest Airlines: Traffic Growth Lagged Capacity Growth

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Traffic growth lags capacity growth

Southwest Airlines’ (LUV) traffic or RPM (revenue passenger miles) growth has lagged the capacity or ASM (available seat miles) growth rate in the last two quarters. In the third quarter, the company’s RPM grew 2.7% year-over-year, which lagged the capacity growth rate of 3.9%. The company’s traffic growth has been lagging the capacity growth for the past six months.

To improve the productivity and bring down the CASM (cost available seat miles), Southwest Airlines has been retiring its older generation Boeing (BA) 737 Classic fleet and replacing the fleet with Boeing 737–800 and 700 MAX 8 models. The two models have a seating capacity of 175, which is way higher than the 737 Classics’ 125–143 seats. The new models are much more fuel efficient and produce 14% less CO2 emissions.

Replacing older aircraft with new aircraft has been increasing Southwest Airlines’ capacity. However, the company didn’t drive enough traffic to fully utilizing the increased capacity and boost its productivity to an optimal level.

Southwest Airlines expects the capacity or ASM to grow 6%–6.5% during the fourth quarter and ~4% in 2018.

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Peer comparison

Most of Southwest Airlines’ peers (IYT) have witnessed better capacity utilization in the third quarter. Delta Air Lines’ (DAL) traffic growth of 3.8% has almost matched its capacity growth of 3.9% in the third quarter.

As of September, regional player JetBlue Airways’ (JBLU) YTD traffic growth of 7.2% exceeded its capacity growth of 6.1%. Legacy player United Continental’s (UAL) demand growth exceeded its capacity growth for the same period. United Continental’s traffic has increased 6.2% YTD, while the capacity has increased 4.6%.

What’s ahead?

Lower airfares have been a key growth driver for Southwest Airlines’ traffic in the past two years. However, rising fuel costs are expected to lead to high input costs for the company, which will make lower airfares harder to obtain. Although the International Air Transport Association expects passenger travel demand to continue to grow in 2018, the growth is supposed to be less than last year as demand drivers slow down.

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