Raises unit revenue outlook
Southwest Airlines (LUV) raised its second-quarter unit revenue guidance on June 19. The company now anticipates revenue per available seat mile to increase between 6.5% and 7.5% YoY in the second quarter instead of its earlier guidance range of 5.5% to 7.5%. The strong unit revenue outlook reflects robust demand and a healthy passenger yield in the quarter.
Notably, major US carriers have raised their ticket fares twice in the year so far, which is driving their passenger yields. On June 13, J.P. Morgan Chase (JPM) stated that Southwest Airlines, American Airlines (AAL), and Hawaiian Holdings (HA) have recently raised ticket prices for the second time in less than six weeks, Bloomberg reported.
MAX grounding to raise costs
Southwest Airlines increased its second-quarter unit revenue outlook even though it faces massive flight cancelations due to the grounding of Boeing (BA) 737 MAX planes. Regulators around the world have banned 737 MAX jets from flying following two fatal 737 MAX crashes that killed 346 people.
Southwest Airlines currently owns 34 Boeing 737 MAX planes. The grounding of these 34 planes costs the company approximately 100 daily flight cancelations, which accounts for ~2.5% of its daily flights of over 4,000. It is still uncertain when Boeing 737 MAX planes will get regulatory approval to fly again. Therefore, Southwest Airlines announced extending 737 flight cancellations through September 2.
The airline anticipates operating costs per available seat mile (or CASM) to rise higher than it projected earlier due to MAX grounding and lower-than-expected capacity growth. The company now anticipates CASM to increase in the 11.5%–12.5% range, higher than its previous forecast of an increase between 10.5% and 12.5%.
Available seat mile or capacity is anticipated to decline 3.5% YoY in second-quarter. The company had earlier projected a decline of 2%–3%. Moreover, fuel efficiency is now forecasted to decrease 1%–2%, compared with its previous guidance of flat to down 1%. Southwest Airlines cited the removal of its most fuel-efficient 737 MAX jets from its scheduled flights as the main reason behind lower fuel efficiency.
Investors can gain exposure to the airline industry through investing in the iShares Transportation Average ETF (IYT), which has allocated 19.1% of its fund in the space. The ETF has returned 12.7%, underperforming the Dow Jones and the S&P 500 indexes, which are up 13.6% and 16.7%, respectively.