Back in October, Southwest Airlines (NYSE: LUV) reported solid earnings for the third quarter of 2018, including an increase of…
Back in October, Southwest Airlines (NYSE: LUV) reported solid earnings for the third quarter of 2018, including an increase of 16% of adjusted earnings per share. Nevertheless, the stocks kept after management warned investors that the cost of non-fuel costs is about to increase by at least 3% in 2019.
CEO Gary Kelly is cautiously optimistic that Southwest Airlines can increase unit revenue more than 3% next year, more than compensating for its cost inflation. But to do that, it must be avoided getting stuck in any ticket war. It’s good news for its biggest competitors: Delta Air Lines (NYSE: DAL) American Airlines (NASDAQ: AAL) and United Continental  .
The rise of extremely low cost airlines in the US means that Southwest Airlines often does not offer the lowest prices these days, as it usually did a few decades ago. Nevertheless, prices are quite low, especially in the most competitive markets. And given the Southwest massive scale (compared to most budget airlines), its popularity with its customers and its “airless” bags, the carrier is the most powerful force in the US aviation industry in keeping prices low.
For example, when a change in federal regulations allowed Southwest Airlines to significantly expand its footprints in Dallas a few years ago, the result was a sharp fall in prices.
In fact, prices for the Dallas-Fort Worth market as a whole went from 2.3% higher than the national average in the third quarter of 2014 to 8.5% lower than the national average a year later. This entails huge pressure on the unit’s revenues at American Airlines, which has its largest hub at Dallas-Fort Worth International Airport.
Southwest’s expansion at major airports in New York and Washington, D.C., has similarly lowered prices in these markets in recent years. And only last year, it played a major role in launching a farewell war in California.
While Southwest Airlines has proved to want to provoke war at times, it does not mean that it has no impact on its profitability.
In 2015, southwestern growth in Dallas, New York and Washington, DC contributed a decrease of 1.5% of its revenue per available seating environment (RASM). Recently, its competition measures have led to the fact that RASM is about flat in 2017 and down some years to date.
Southwest Airlines Management – and its shareholders – will not be pleased with that type of unit revenue trend in 2019. As a result, Southwest slows its growth, apart from the market, which is the most important short-term priority: Hawaii.
The carrier also launched a $ 2 to $ 5 ticket increase one-way recently. It was particularly remarkable because jet fuel prices have fallen by more than $ 0.40 per gallon since the second half, when most airlines gave their Q4 forecasts.
This is good news for US Airlines, Delta Air Lines and United Airlines. If Southwest focuses on increased revenue growth next year, it should lead to a relatively calm competitive environment. If an unexpected economic downturn, US, Delta and United, could achieve solid growth in such a scenario.
If oil prices are close to current levels, it would not take much in the way of unit sales growth to drive significant gains. Unlike Southwest Airlines, the older carriers have withdrawn from fuel fuses and enabled them to take full advantage of lower fuel prices.
Oil prices may of course remain volatile, but as it is currently, airline fuel bills would decrease in 2019. Given that US, Delta and Unique all expect to achieve lower cost costs for non-fuel costs than southwest southwest next year, this would allow them to deliver higher profits even without RASM growth. If revenue stays strong and oil prices do not bounce a lot, all three airlines should be able to improve their profit margins significantly next year. It can unlock huge profits for its shareholders.